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Issue  276
Published:  12/1/2021

Wells Fargo Bank, N.A. v. Stocks (2021-NCSC-90) 8/13/2021
Statute of Limitations for Reformation of Deed

Chris Burti, Vice President and Senior Legal Counsel

In 2019 we reported on this opinion from a divided North Carolina Court of Appeals. The Court of Appeals applied the ten-year statute of limitations of N.C.G.S. Section 1-47(2) to an action reformation of a deed of trust. The land described in a deed of trust securing a note for the balance of the purchase price was titled in a daughter's name, but the note was in the name of the daughter and her father. In a refinance transaction, the daughter was not named as a borrower on the note, but signed a deed of trust in January of 2005 that indicated that she was the borrower whose note was being secured. As a result, the deed of trust was unenforceable under the doctrine set out in Putnam v. Ferguson, 130 N.C. App. 95, (1998).

The lender sought reformation of the deed of trust and argued to the trial court that the application of the three-year statute of limitations set out in N.C.G.S. Section 1-52(9) applied because the limitations period under that statute does not begin to run until the claimant "actually learns of the mistake's existence or should have discovered the mistake in the exercise of due diligence". The trial court accepted this argument and the issue of when the lender should have discovered the error was found in the lender's favor.

After the trial court in this appeal granted summary judgment in favor of the lender, the Court of Appeals issued its opinion in Nationstar Mortgage, LLC v. Dean, ___ N.C. App. ___, (2018), holding that a claim to reform a deed of trust on grounds of mistake is subject to the ten-year statute of limitations found in N.C.G.S. Section 1-47(2), not N.C.G.S. Section 1-52(9). The court proceeded to then analyze when the statute accrues and observed that at common law it accrues when the claim arises. The Court then acknowledged that this common law rule may be modified by express statutory language delaying accrual until the party discovers or reasonably should discover the injury or mistake giving rise to the cause of action. The opinion concludes, however, that although N.C.G.S. Section 1-52(9) contains language modifying the common law accrual rule, N.C.G.S. Section 1-47(2) does not and thus, the common law rule applies to reformation actions governed by the latter Section and actions accrue at the time of execution of the deed of trust at issue.

Since the deed of trust was executed in 2005 and the action filed in 2017. The Court reversed the trial court on this issue. Because the debt was unenforceable, the order for judicial foreclosure by the trial court was likewise reversed.

The dissenting Judge took issue with the decision on both technical and substantive grounds. The dissenting opinion argued that the defendant borrower had failed to properly raise her argument in her brief and that N.C.G.S. Section 1-52(9) contains language modifying the common law accrual rule and while N.C.G.S. Section 1-47(2) does not; "it is problematic to determine that claims cannot be brought under N.C. Gen. Stat. § 1-52(9) in actions arising out of a sealed instrument or an instrument of conveyance of an interest in real property, against the principal thereto."..."do not believe this result was the intent of N.C. Gen. Stat. § 1-47(2), where both our General Assembly and judiciary have emphasized the importance of protecting defrauded parties, or those injured by a mistake, by holding that a cause of action for these injuries accrue until the discovery of the fraud or mistake in the exercise of reasonable diligence. After all, determining "[w]hen plaintiff should, in the exercise of reasonable care and due diligence, have discovered the fraud is" not a matter of law, but, rather, 'a question of fact to be resolved by the jury.'" Citation omitted)

The majority addressed the issue briefly, and erroneously in a footnote:

"We read Nationstar Mortgage to hold that Section 1-47(2) applies to the exclusion of 1-52(9) with respect to claims for reforming a sealed instrument based on mistake. The parties do not identify, and we have not found, any cases holding that more than one statute of limitations can apply to a claim. Nor have we located any decisions holding that where one statute of limitations-established by law as applicable to the action-has run on a claim, a different statute of limitations may step in and save the cause of action."

This statement is simply wrong. While not necessarily changing the result, the North Carolina Supreme Court in Fowler v. Valencourt 334 N.C. 345, 435 S.E.2d 530 (1993) held "[w]here one of two statutes might apply to the same situation, the statute which deals more directly and specifically with the situation controls over the statute of more general applicability." Applying this rule in Duke Energy Carolinas, LLC v. Bruton Cable Serv., Inc., (13-686, COA 2014) the Court of Appeals opinion stated in comparing two different statute of limitations applicable to surveyors' liability: "With virtually identical language there is doubt as to which statute is applicable and in such a case the opinion notes that "'the rule is that the longer statute is to be selected.' Id. at 350, 435 S.E.2d at 533 (citation omitted). Therefore, the ten-year limitation period applies."

The North Carolina Supreme Court corrected this erroneous interpretation in this 2021 opinion reversing the Court of Appeals. The Supreme Court stated:

To determine which statute of limitations applies, we must look to the purpose of the cause of action. If the purpose is to enforce a sealed instrument, then N.C.G.S. § 1-47(2) applies. But when, as here, the action is to reform an instrument because of fraud or mistake, N.C.G.S. § 1-52(9) applies. In Nationstar, the Court of Appeals cited the correct principle that the more specific statute controls over the more general statute of limitations. Nationstar, 261 N.C. App. at 383, 820 S.E.2d at 860 (citing Fowler, 334 N.C. at 349, 435 S.E.2d at 532). Nonetheless, it failed to examine the nature of the cause of action. Nationstar, 261 N.C. App. at 384, 820 S.E.2d at 860. Thus, the Court of Appeals' decision in Nationstar is overruled.

Under N.C.G.S. § 1-52(9), a "cause of action shall not be deemed to have accrued until the discovery by the aggrieved party of the facts constituting the fraud or mistake." N.C.G.S. § 1-52(9). A party "discovers" the mistake when the "mistake was known or should have been discovered in the exercise of ordinary diligence." Peacock v. Barnes, 142 N.C. 215, 218, 55 S.E. 99, 100 (1906). A mistake in the drafting process alone is insufficient to place the drafting party on inquiry notice. See Pelletier v. Interstate Cooperage Co., 158 N.C. 403, 407-08, 74 S.E. 112, 113-14 (1912) (citations omitted) (holding "that a party will not be affected with notice of a mistake existent in the deed" that is due to the "mistake of the draughtsman"); Modlin v. Roanoke R. & Lumber Co., 145 N.C. 218, 227, 58 S.E. 1075, 1078 (1907) (citations omitted) (stating "that the registration of the deed, or knowledge of its existence . . . [is] not of itself sufficient notice of" a mistake); Peacock, 142 N.C. at 217, 55 S.E. at 101 (holding that erroneous description of land in a recorded deed was insufficient, without more, to put a party on inquiry notice). If an original drafting error were sufficient to place the drafter on notice, the discovery rule would be unnecessary because the statute of limitations would always begin to run on the date of the original error. See id. Rather, "there must be facts and circumstances sufficient to put the [drafting party] on inquiry which, if pursued, would lead to the discovery of the facts constituting the [mistake]." Vail v. Vail, 233 N.C. 109, 117, 63 S.E.2d 202, 208 (1951) (citations omitted).

Here the cause of action accrued when plaintiff should have discovered the error in the loan documents. The mistake itself, that the Second Deed of Trust refers to defendant as the borrower under the Second Note instead of Lewis Stocks, was a drafting error. Defendant argues the unusual circumstances surrounding the execution of the Second Deed of Trust should have put plaintiff on inquiry notice. Defendant notes that she executed the Second Deed of Trust one week after Lewis Stocks executed the Second Note, in Lewis Stocks' office at his direction, and without a representative from plaintiff present. Moreover, plaintiff drafted other documents that properly differentiated between Lewis Stocks as the borrower and defendant as the Property owner.

These circumstances may have raised a question regarding the execution of the documents. They do not, however, raise a question regarding the drafting. Had plaintiff reviewed the documents after they were executed, as defendant argues plaintiff should have, plaintiff would have found the execution was without error. In other words, since the signature matched the defined borrower on the face of the document, there was no reason to question the drafting of the Second Deed of Trust. As such, these facts and circumstances are insufficient to place plaintiff on inquiry notice of the drafting error.

As a result, the Supreme Court ruled that the trial court properly granted summary judgment for plaintiff on its claims for reformation and judicial foreclosure and reversed the decision of the Court of Appeals.

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