Iowa Court Affirms Reformation of Inaccurate Warranty Deed

On May 12, 2021, the Iowa Court of Appeals ruled that a warranty deed was inaccurate due to a scrivener’s error and should be reformed to reflect the true intent of the parties.  

Background

Edward and Barbara Tomas owned 234 acres of farmland as joint tenants. Their son worked at LBR Enterprises LLC, a cattle feeding business, and had a close working relationship with the owner. After the son informed LBR that his parents were experiencing financial difficulties, LBR offered to purchase the farmland and use it to expand its operations.

The son, acting as an agent for his parents, negotiated a deal to sell the property to LBR so long as his parents could retain a life estate in the farmhouse. Although the fair market value of the property was $971,200, the Tomases agreed to sell the land for $655,200 to help their son buy the farm after he acquired ownership interest in LBR.

Both parties signed the purchase agreement granting the Tomases a life estate “in the house which they currently reside.” LBR soon secured a loan from a bank for $655,000. A title company prepared the warranty deed. However, in a complete rush, the title company executed the warranty deed retaining a life estate for the Tomases without the key language “in the house which they currently reside.” At that time, none of the parties realized the discrepancy existed.

In 2016, LBR defaulted on the bank loan. LBR attempted to sell the property, but the sale was blocked because the deed listed the Tomases as life tenants of the entire property. The bank, as mortgagee, petitioned the court to reform the deed, claiming that it did not reflect the true intent of the parties. The district granted relief to the bank, and the Tomases appealed.

Standing

On appeal, the Tomases argue that the bank did not have standing to request reformation. A two-prong test exists to determine whether a party has standing. See Godfrey v. State, 752 N.W.2d 413, 418 (Iowa 2008). First, the proponent must show it has specific personal or legal interest in the litigation. Privity with a party to a deed gives a legal interest in the litigation. Privity means “a mutual or successive relationship to the same rights of property.” In re Estate of Richardson, 93 N.W.2d 777, 781 (1958).

The Tomases argued that the bank did not have “privity of contract” with the parties solely because of its security interest. The court agreed with Tomases that the bank, as the mortgagee, was simply a lienholder. Yet, the court went on to determine that the bank still experienced a specific injury that was separate from the general population. The bank sought to recoup the debt LBR owed. If the Tomases had a life estate in the entire 234 acres, any sale or foreclosure would be subject to the life estate. Without any other remedies at law available, the bank had a specific legal interest thus satisfying the first element of standing.

The second prong requires the plaintiff show it has suffered an actual, rather than hypothetical, injury in fact. The Tomases do not argue that the bank has not experienced an injury but rather that the bank caused the injury. The court rejected this argument finding it “puts the cart before the horse.” Determining the extent of the Tomases’ life estate was the central issue. If the life estate existed on the entire property, the value of the bank’s interest would be reduced by over one-third. See Iowa Admin. Code r. 701-86.7(6) (using 2001 tables). That substantial difference in valuation injuriously affected the banks security interest, thus satisfying the second element.

Warranty Deed Reformation

After concluding that the bank had standing, the court went on to address whether the district court erred in granting the request for reformation of the warranty deed. Reformation of a deed can be a remedy if the document does not reflect the intent of the parties. The Tomases alleged that the bank did not meet its burden of proof to warrant reformation.

Scrivener’s Error

First, the Tomases claim that a scrivener’s error did not create the mistake in the deed. “A scrivener is (or, better, was) a transcriber of documents. In the literal sense, then, a ‘scrivener’s error’ is a mistake of transcription, which is to say a mismatch between original (e.g., spoken word, manuscript) and copy.” Goche v. WMG, L.C., No. 18-0793 (Iowa Ct. App. Mar. 6, 2019). If the proponent can show a scrivener’s error caused the written agreement to inaccurately reflect the parties’ intent, the document may be reformed.

In this case, the title company testified that it did not include the appropriate language from the purchase agreement. Because of this mistake, the bank asserts, the deed and the purchase agreement conflict. On the other hand, the Tomases claim that the purchase agreement was modified on purpose to grant a life estate in the entire property. However, the court found no evidence of the alleged modification. Without the limited life estate, LBR testified it would not have bought the property and the loan officer also testified it would not have financed the purchase. Therefore, due to the scrivener’s error, the court held that the deed did not reflect the agreement between the parties.

Intent of the Parties

Next, the court considered whether a reformed deed would capture the parties’ true intent. The Tomases conduct showed that they did not believe they had a life estate on the entire property. They did not pay taxes or insurance on the farm nor did they maintain it. Their actions, coupled with the language of the purchase agreement, showed the parties’ intent that the life estate include only the house on the farm. Therefore, reformation would allow the deed to reflect the true intent of the parties.

Merger Doctrine

Lastly, the Tomases argued that the purchase agreement merged into the deed, thus barring reformation. Under the merger doctrine, the details of a contract are deemed to have merged into the deed; therefore, the deed will prevail over the contract if a conflict occurs. However, if there is a mistake in the deed, the court may consider the original contract.

Because there was a scrivener’s error, the court could consider the purchase agreement when analyzing whether the parties agreed to modify the life estate to encompass the entire property. Without any written proof of a modification, the Court of Appeals deferred to the lower court’s finding that the parties intended for the Tomases to only retain a life estate in the house. The lower court found that Tomases were not credible witnesses. Additionally, the loan officer’s testimony bolstered the argument that the intent of the parties was to only include the house in the life estate. Because the deed was inaccurately written, the merger doctrine did not preclude reformation.