On one or more occasions, your heart may have skipped a beat when you came across a deed of trust, a promissory note, another security instrument or an assignment thereof, with the grantor's or grantee's name misspelled or written incorrectly. You may even have been the party responsible for drafting it.
So, the question is, if a security instrument secures a grantee's interest in certain collateral, what happens to that interest and the priority it has if the grantor's or grantee's name is written incorrectly? Fortunately, Utah jurisprudence provides some encouraging answers.
The Misnomer Doctrine
In Morris v. Off-Piste Capital LLC, 2018 UT App 7, 418 P.3d 66 (Utah Ct. App. 2018), multiple parties claimed to be in first position with priority to certain real property secured by trust deeds that each party held. One party argued that competing party Short-Sale Services, LLC (Short-Sale) had no security interest because the assignment whereby Short-Sale received its interest was made to "SS Services," not "Short-Sale Services, LLC". The Court of Appeals of Utah turned to the misnomer doctrine to reject this argument.
After conceding that "SS Services" could conceivably reference any number of entities, the court ultimately concluded that it referred to Short-Sale because the misnomer doctrine leads Utah courts to treat misnomers as immaterial and to interpret them in accordance with the parties'—and especially the grantor's—intentions if the "identity of the [misnamed] corporation is reasonably clear or can be ascertained by sufficient evidence" (citing Kelly v. Hard Money Funding, Inc., 2004 UT App 44, 87 P.3d 734 (Utah Ct. App. 2004)). The court held that Short-Sale's identity was reasonably clear because Short-Sale's business address was listed in the assignment instrument and the circumstances of the assignment transaction clearly indicated that Short-Sale was the intended assignee. As a result, the court considered the failure to write Short-Sale's actual name to be immaterial and interpreted Short-Sale to be the intended assignee of the assignment instrument.
In this case, the use of "SS Services" in lieu of Short-Sale's actual name did not prevent Short-Sale from acceding to the security interest in the real property granted in the assigned trust deed. This case reveals that courts will interpret security instruments in accordance with the parties' intent if circumstances permit.
The Doctrine of Reformation
In F.D.I.C. v. Taylor et. (2011 UT App 416, 267 P.3d 949 (Utah Ct. App. 2012)), the Court of Appeals of Utah addressed a dispute between two lenders who each claimed to be in first position with priority to certain real property secured by recorded trust deeds. Problematically, the trust deed held by one of the lenders, a bank, was deemed ineffective because it was executed by a controlling member of the borrower in that member's individual capacity, and the borrower did not convey the real property to said member until six months after the bank loan transaction. See WDIS, LLC as Trustee of the MDMG Trust dated April 25, 2016 v. Hi-Country Estates HOA, 2022 UT 33, 515 P.3d 432, fn. 58 (Utah 2022) (a trustor cannot convey in trust an asset in which it has no interest). The bank's trust deed was granted and recorded on the same day. During the six months between the bank recording its ineffective trust deed and the borrower conveying the real property to its controlling member, an individual lender recorded two trust deeds securing an interest in the same real property—the first trust deed was ineffective like the bank's trust deed, having been granted by the member in his individual capacity, but the second one was effective, having been granted by the borrower itself. The individual lender had the first trust deed recorded without knowledge of the bank's interest in the real property.
Asserting its priority over the individual lender, the bank argued that the doctrine of reformation allowed the court to reform the loan documentation in a way that validated the bank's recorded, yet ineffective, trust deed because the parties intended to convey the real property to the member at the time of the bank loan transaction, but the borrower merely failed to do so. Accordingly, the court should construe the trust deed as if the member had an interest in the real property on the date it was granted and recorded, effectively restoring the bank's security interest as of that date.
The court assessed this argument. After sidestepping the question of whether the doctrine of reformation can apply to omitted pieces of paper, i.e., the instrument conveying the real estate to the member, the court affirmed that the doctrine of reformation can apply when the terms of a written instrument do not show the parties' true intent because of a mutual mistake or fraud by one of them. The court also explained that the party alleging the mutual mistake must show by clear and convincing evidence that such mistake occurred (see Hatch v. Bastian, 567 P.2d 1100, 1102 (Utah 1977)), and that the doctrine of reformation cannot apply retroactively if doing so would prejudice an innocent party. The court's explanation of the doctrine of reformation has been upheld in subsequent Utah cases (see, e.g., Wells Fargo Bank NA v. Noerring, No. 20160837-CA (Utah Ct. App. 2018)).
The court then concluded that the doctrine of reformation did not apply because the bank failed to prove by clear and convincing evidence that the omission of the warranty deed was caused by mutual mistake of the parties. The court also refused to apply the doctrine on the grounds that, if applied, it would apply retroactively and harm an innocent party since the individual lender would be deprived of his interest in the real property, despite having recorded it without knowledge of the bank's interest.
In this case, rather than conclude that the bank's omission (of the conveyance instrument) was fatal to the bank having priority over the individual lender, the court assessed whether the doctrine of reformation applied. If it did, the bank still could have been in first position with priority to the real property. The court's analysis suggests that a misspelled or incorrect party name—and possibly even the wrong party to an agreement—does not necessarily affect priority, if the doctrine of reformation can apply to correct it.
Utah Code Annotated § 57-3-106(9)
If parties are seeking assurance that an incorrect party name won't void their interest or lower its priority, Utah Code Annotated § 57-3-106(9) provides a remedy when the secured interest is in real property. Under that section, a party is authorized to execute and record an affidavit or other appropriate instrument to correct minor typographical or clerical errors so long as the recorded instrument includes a notice containing the name and address to which real property valuation and tax notices can be mailed (§ 57-3-106(10)(b)). With some exceptions (see § 57-3-106(a)), compliance with Utah Code Annotated §§ 57-3-106(9) & (10)(b) can ensure that an incorrect party name in a security instrument does not void or lower the priority of the real property interest secured therein.
Coming across a misspelled or incorrect party name in a security agreement is hardly ever a pleasant experience. However, Utah case law and legislation provides at least three helpful solutions. First, the Misnomer Doctrine will lead Utah courts to treat misnomers as immaterial and to interpret party names in an agreement in accordance with the parties' intentions as long as the identity of the misnamed party is reasonably clear or ascertainable. Second, the doctrine of reformation allows courts to reform incorrect party names to align with the parties' intentions, when the error was caused by mutual mistake or fraud, as long as reforming the agreement does not retroactively harm an innocent party. Third and lastly, if parties want additional assurance that an incorrect party name will not void a security interest or lower the priority thereof, they can correct typographical or clerical errors in accordance with Utah Code Annotated § 57-3-106, when the interest is in real property.
If you ever come across a security instrument with a misspelled or incorrect party name and question the impact it will have on you or your client, you can take comfort in knowing that Utah jurisprudence offers some reassuring responses.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.