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A Light at the End of Ethridge's Tunnel…

A Light at the End of Ethridge’s Tunnel

Written by: Scott B. Mueller, Special Counsel, with Galloway, Johnson, Tompkins, Burr and Smith’s  St. Louis office

The 2007 Missouri Supreme Court case of Tier One v. Ethridge, 226 S.W.3d 127 (Mo. 2007) sent shock waves through the real estate lending and title industries.  Its holding sent lenders scurrying to review any loan document which memorialized a loan agreement or security instrument made between that lender and a married individual.  This was especially true for those loans which utilized the ubiquitous “marital waiver” or “assent to execution” rider which allowed non-borrowing spouses to waive their interest in their jointly owned real property so that their counterpart could pledge it as collateral for a loan for which only he or she stood responsible.  These situations were prevalent, not to mention those deeds of trusts which included a spouse’s signature along with some type of qualifying language.

Ethridge, in a nutshell, concluded that since a non-borrowing spouse was not labeled as a “borrower” or “grantor” on the face of a deed of trust securing a husband’s loan used to refinance jointly owned real property, the lender could not enforce the security interest against that spouse’s interest, whether marital or fee or joint.  This was true regardless of the fact that the non-borrowing spouse signed and initialed the deed of trust and the loan in question might have been used to directly satisfy earlier joint debts or if the funds were otherwise directly traceable to the non-signing spouse’s benefit.  This strict constructionist viewpoint ignored the equitable interpretations of what the borrowers’ intent was and looked at the four corners of the security agreement (often formed directly from the FHA or HUD parameters) to determine what the parties’ final intent was.  The practical ramifications, though, were legion.  Thousands of home loans suddenly became unsecured overnight and the cost of doing business in Missouri increased dramatically since lenders or their insurers were forced to resolve any discrepancies in the signatures of mortgages on property owned by married couples.

When other loan documentation (applications, surveys, appraisals, etc.) or the parties’ own admissions showed the true intent to encumber the couple’s entire fee interest, lenders can obtain reformation of the deed of trust or mortgage in question through the proper judicial channels.  But even straightforward litigation adds months and thousands of dollars of cost to collect on a delinquent loan signed by only one of both spouses, no matter how obvious the intent to encumber the full interest.

Absent reformation options, lenders also tried to circumscribe Ethridge with alternative remedies such as unjust enrichment or equitable subrogation, but with limited success.  In US Bank Nat. Ass’n v. Cox, 341 S.W.3d 846 (Mo. App. W.D.2011), the Western District ruled that unjust enrichment was unavailable to reimburse a lender who satisfied a non-borrowing spouse’s prior debt since he never signed the promissory note evidencing an intent to repay the loan.  Reformation was also denied by the Cox court, although U.S. Bank sought to reform the description of the intended collateral, not the manner of the owners’ execution.

In re Suhrheinrich, 2009 WL 3335027, Bkrtcy.W.D.Mo., October 14, 2009 (NO. 08-30823, ADV 08-3048) though, provides another distinguishing analysis of a one-spouse-borrower deed of trust and held in favor of the secured lender by looking at facts both within and outside the face of the deed of trust itself.  In In re Suhrheinrich, one spouse failed to execute a deed of trust intended to encumber her and her husband’s tenancy by the entireties, even though her name, replete with the designation “borrower” appeared on the instrument.  The United States Bankruptcy Court for the Western District of Missouri looked beyond the lack of execution on the face of the document and considered the testimony of the non-signing spouse to collectively show the intent of the borrower to encumber the full ownership interest of the property.

So, it appears as though the Ethridge decision might not provide the last word on determining borrowers’ intent by the face of a document alone.  In this respect, In re Suhrheinrich may inject some common-sense and equitable treatment to a wide-spread and costly problem for lenders in Missouri.