This issue arose in the recent Massachusetts Appellate case Salem Five Mortgage Company, LLC v. Lester. In that case, a mortgage company lent a borrower $300,000 for the purchase of a home on Nantucket. After the mortgage company approved the loan, but before the closing date, the borrower requested that his wife be added to the deed as a tenant by the entirety. However, the wife's name was not added to the mortgage, which remained solely in the name of the borrower. As a result, the mortgage company received a security interest only in the borrower's undivided interest in the property. The closing attorney, who represented both the mortgage company and the borrower, was aware of way in which the title was worded and told the seller of the property that the borrower and his wife would take title as tenants by the entirety. The mortgage eventually went into default, at which time the mortgage company discovered the mistake and sued for reformation of either the deed or the mortgage.
A reformation of a mortgage can be justified where one party made a mistake which was known to the other party and the party who knows of the mistake fails to alert the other party to that mistake. A party seeking recovery for a unilateral mistake must present full, clear, and decisive proof that a mistake occurred and that the other party knew or had reason to know of that mistake.
After a bench trial, a Land Court judge reformed the mortgage to add the wife as an additional borrower. The borrower appealed, arguing in part that the trial judge should have found that the mortgage company was bound by the knowledge of its closing attorney.
The Appeals Court affirmed the trial court's decision and rejected the borrower's argument that the mortgage company should have been bound by the knowledge or actions of its closing attorney. At trial, the closing attorney testified that the mortgage company did not authorize him to accept only the borrower's interest as collateral for the loan and that, generally, a closing attorney is not authorized to make lending decisions. The Appeals Court found that the attorney was not authorized to assent to the modification of the original agreement between the mortgage company and the borrower that through mistake found its way into the transaction by virtue of the non-matching mortgage and deed.
The Appeals Court acknowledged that usually the knowledge of an agent may be imputed to the agent's principal. However, the court's broad power to reform instruments is equitable and the general rule of notice to agents did not account for the equities in this case, where the evidence showed that one party was aware of a mistake and benefited from it, while the other party was not aware of the mistake and did not benefit. The Court stated that to hold otherwise in this case would effectively grant the closing attorney more authority than the mortgage company ever intended, essentially the power to substantively change the deal to which the mortgage company and borrower had agreed.