Correction Instrument Legislation Texas Property Code Sections 5.027, .028, .029, .030, .031

G. Roland Love Winstead PC 1201 Elm Street, Suite 5400 Dallas, Texas 75270 214.745.5400 rlove@winstead.com

Corrections Anyone?

Why did we need this new law?

CORRECTION INSTRUMENTS AFTER MYRAD PROPERTIES v LASALLE BANK (TEX. 2009) AND S.B. 1496 (82ND TEXAS LEGISLATURE, REGULAR SESSION)

• Ambiguities and errors in recorded real property conveyance instruments are inevitable.

• Myrad Properties, Inc. v LaSalle Bank National Association, 300 S.W.3d 746 (Tex. 2009), a recent Texas Supreme Court opinion involving an attempted use of a correction deed to add a tract of land that had been omitted from the original recorded substitute trustee’s non-judicial foreclosure deed

Myrad Properties, Inc. (“Myrad”)

• Myrad financed two separate apartment complexes located in Killeen, Texas. The apartment complexes were constructed on two, non-contiguous tracts of land located a mile apart. Myrad executed a promissory note in favor of the original lender secured by a deed of trust lien on both tracts of land.

• The substitute trustee posted a sale notice. The sale notice referred both to the note and the recorded deed of trust. The property description in the sale notice referred to an “Exhibit A,” the only exhibit to the sale notice, and that exhibit listed only one of the two tracts of land described in the deed of trust.

Myrad

• At the foreclosure sale the substitute trustee read only the legal description described on Exhibit A to the sale notice, but the substitute trustee did generally refer to the property described in the deed of trust. The bid amount was almost, but not quite, equal to the debt that Myrad owed LaSalle, and it was also near the combined values of the two real properties.

• The substitute trustee’s foreclosure deed conveyed the “Property” to LaSalle, defining the “Property” as “(T)he real property described in Exhibit A attached hereto and made a part hereof for all purposes, together with all improvements and personal property described in the Deed of Trust.” Exhibit A to the deed only described the one tract of land that was described in Exhibit A to the sale notice.

The Litigation

• LaSalle recorded a correction deed that included a description of both tracts of land. Myrad then sought to quiet title, seeking a declaration that LaSalle owned only the one tract of land described in Exhibit A to the original substitute trustee’s foreclosure deed, and that Myrad owned the second tract of land described in the deed of trust free from encumbrances.

• The trial court declared that the foreclosure sale had conveyed title to both tracts of land to LaSalle, and declaring that the correction substitute trustee’s foreclosure deed vested LaSalle with title to both tracts of land. The Court of Appeals affirmed the trial court’s decision.

• The Texas Supreme court reversed the lower court holdings that declared the correction substitute trustees’ foreclosure deed had vested LaSalle with title to both tracts of land, holding that LaSalle’s correction substitute trustees’ foreclosure deed purporting to convey both properties was void as a matter of law.

The Supreme Court

• The Texas Supreme Court determined that a correction deed could not be used to correct a mistake omitting an entire second property.

• The Texas Supreme Court noted that correction deeds were appropriate among agreeable parties to correct:

• facial imperfections in title

• recitation of inaccurate metes and bounds,

• a defective description in a grantor’s capacity.

The Supreme Court laid out in the case the kinds of corrections that were allowed and the kinds that were not allowed

• Allowed: Correcting defects and imperfections • Defective legal descriptions, such as errors in a metes and bounds

description

• Although the court does not specifically mention it, it is a reasonable assumption that an error in the name of the Subdivision or recording information may be repaired by a correction deed.

• Incorrect acreage designation

• Defective description of a party’s capacity

• Correcting from administrator to executor

• Not allowed: • Adding another parcel

• Adding mineral interests

• Changing a mineral interest

• Changing the nature of a mineral interest

The Supreme Court

• According to the Court, allowing “correction deeds to convey additional, separate properties not described in the original deed would “introduce unwarranted and unnecessary confusion, distrust and expense into the Texas real property records system. For example, it could require those who must rely on such records to look beyond the deed and research the circumstances of ownership to make sure that no conveyance mistake such as that before us in this case was made, undermining the entire purpose of record notice.”

The Supreme Court

• However, the Texas Supreme Court concluded that Myrad would be unjustly enriched if the original substitute trustees’ foreclosure deed were enforced, holding in favor of LaSalle, and rendering judgment on LaSalle’s rescission claim.

• The entire matter was sent back to the trial court.

14

The Texas Legislature to the Rescue

• The Texas Legislature, during its 82nd Regular Session (2011), reacting to the Myrad decision, passed, and Governor Rick Perry signed into law, S.B. No. 1496 (“SB1496"), governing the scope and validity of corrections to instruments that convey real property or an interest in real property. SB1496, effective on September 1, 2011, adds Sections 5.027 through 5.031 to the Texas Property Code (“Code”).

• A correction instrument recorded before September 1, 2011, that substantially complies with the requirements of SB 1496 is also effective to the same extent as a correction instrument recorded after September 1, 2011, unless a court of competent jurisdiction renders a final judgment determining that the correction instrument does not substantially comply with SB 1496.

• The bill analysis on SB1496 prepared by the Senate Research Center included the following statements: It has been the practice in Texas that correction instruments may be filed in order to correct certain non substantive errors. The Texas Supreme Court in Myrad Properties, Inc. v. LaSalle Bank National Association, included language in the opinion which could suggest that certain correction instruments may be void. This is particularly so if additional property is included with the correction instrument. The Myrad decision thus created uncertainty within the real estate industry as to the validity of correction documents. S.B. 1496 amends current law relating to the scope and validity of correction instruments in the conveyance of real property.

Where did it come from?

Other states that have correction legislation:

• Arkansas

• California

• Florida

• Kansas

• Iowa

• Maine

• Minnesota

• New Mexico

• Ohio

• Oklahoma

• South Dakota

• Washington D.C.

• West Virginia

Wisconsin

• Historically, affidavits of correction were commonly used to correct minor errors, but after the 2007 decision in Smiljanic v. Niedermeyer, the validity of those affidavits came into question.

• Wisconsin study groups, found the laws around the country to be varied and mostly archaic. This could be a good model for other states in which title people would like to simplify the curing of minor conveyancing errors.

“My people will get back with your people.”

• The alternative would be to require a party to go to court, which is costly, lengthy, uncertain, and a waste of judge’s time when there are more important things to ask them to decide.

Senate Bill 1496

• This bill amended the Property Code, adding Sections 5.027-5.031

• The bill was submitted by the Texas Land Title Association and sponsored by Senator Uresti

• HB 2254 is the companion bill sponsored by Representative Anderson

• A subcommittee of the of the TLTA Legislative Committee, John Cook, Bryon Jay Lewis, Roland Love, Alan Monroe, and John Rothermel submitted a first draft to legislative counsel for the State of Texas.

• The draft was largely based on Wisconsin Stat. Section 706.085, adopted in May 2010 to address a Wisconsin court decision invalidating a recorded affidavit of correction because there was no statutory authority

• The Texas bill was modified to recognize the case holding of Myrad in a foreclosure context and to conform to Texas' strong bona fide purchaser doctrine.

Section 5.027(a)

• Provides, generally, that if it complies with Section 5.028 or 5.029 a correction instrument “…may correct an ambiguity or error in a recorded original instrument of conveyance to transfer real property or an interest in real property, including an ambiguity or error that relates to the description of or extent of the interest conveyed.”

• In most cases, the settlement agent or the person who drafted the conveyance can sign the corrective instrument-

• BUT NOT IF THE ERROR IS MATERIAL.

• This requires participation and execution by all parties to the original instrument

• Also generally ineffective is the practice of making corrections to a certified copy of the original recorded document unless the corrections are initialed by the parties and a statement as to why the corrections are being made is signed by the parties.

• That said, it is important to remember that all corrections must be made as soon as they are discovered. Failure to promptly record a document as well as failure to make corrections can cause large claims and losses.

• In particular, many documents are recorded without the referenced attached legal description. These need to be corrected immediately to preserve priority.

• Note that Section 5.027 utilizes the phrase “instrument of conveyance to transfer real property or an interest in real property.” Thus, the statute primarily addresses real property deeds and deeds of trust, but could also include releases, leases, assignments, and other documents acting as a conveyance of a real property interest.

Foreclosure

Section 5.027(b)

• Prohibits a correction instrument under a Chapter 51 power of sale “unless the conveyance otherwise complies with all requirements of Chapter 51.”

Use of, and Limitations on, Correction Instruments After S.B. 1496

• SB1496 authorizes correction instruments to remedy material and nonmaterial errors or ambiguities in recorded conveyance instruments that transfer real property or an interest in real property, including ambiguities or errors in the description or the extent of the interest conveyed.

• A correction instrument, however, may not be used to correct an ambiguity or error in a recorded non-judicial foreclosure deed involving the exercise of a power of sale under Chapter 51 of the Code unless the conveyance also complies with Chapter 51 of the Code.

• In other words, if the only thing wrong with the foreclosure is the preparation of the Trustee's Deed, that can be corrected.

• Of course, Myrad and SB 1496 implicitly recognize the ability to unilaterally rescinded a foreclosure sale that has error. There are those, particularly the IRS or a third party purchaser, that will argue to the contrary.

Effect of a Correction Instrument Complying with S.B. 1496

• A correction instrument that complies with SB1496's requirements is: (i) effective as of the effective date of the recorded original conveyance instrument; (ii) prima facie evidence of the facts stated in the correction instrument; (iii) presumed to be true, but subject to rebuttal; and (iv) notice to a subsequent buyer of the facts stated in the correction instrument.

• A bona fide purchaser of real property subject to a correction instrument may rely on the correction instrument against any person making an adverse or inconsistent claim, but a correction instrument is void as to a creditor or to a subsequent purchaser for a valuable consideration without notice unless the correction instrument has been acknowledged, sworn to, or proved and filed for record as required by law.

Effect of a Correction Instrument Complying with S.B. 1496

• However, an unrecorded correction instrument is binding on the parties to the correction instrument, on the parties’ heirs, and on a subsequent purchaser who does not pay a valuable consideration or who has notice of the correction instrument.

Section 5.027(c)

• States a correction instrument is subject to Section 13.001.

• That section states the instrument is not notice until it has been filed, so a bona fide purchaser (BFP) could take without notice based on the incorrect instrument of record and not lose because of a later filed correction document that added the legal description that the BFP had acquired, that had been missing originally.

• This makes it very clear you must be careful to have a correct legal description in every document you file, or a BFP could acquire an interest before you file a correction instrument in the real property records.

When is a correction nonmaterial or material?

Section 5.028- Nonmaterial Corrections

• (a) A person who has personal knowledge of facts relevant to the correction of a recorded original instrument of conveyance may execute a correction instrument to make a nonmaterial change that results from a clerical error, including: • (1) A correction of an inaccurate or incorrect element in a legal

description, such as a distance, angle, direction, bearing or chord, a lot, block, unit, building designation, or section number, an appurtenant easement, a township name or number, a municipality, county, or state name, a range number or meridian, a certified survey may number, or a subdivision or condominium name, or

Section 5.028- Nonmaterial Corrections

• (2) An addition, correction, or clarification of:

• (A) A party’s name, including the spelling of a name, a first or middle name or initial, a suffix, an alternate name by which a party is known, or a description of an entity as a corporation, company, or other type of organization;

• (B) A party’s marital status;

• (C) The date on which the conveyance was executed;

• (D) The recording data for an instrument referenced in the correction instrument, or,

• (E) A fact relating to the acknowledgement, or authentication.

Section 5.028- Nonmaterial Corrections

• (b) You may also add an acknowledgement or authentication that was not included in the recorded original instrument of conveyance.

Section 5.028- Nonmaterial Corrections

• (c) A person who executes a correction instrument under this section shall disclose in the instrument the basis for the person’s personal knowledge of the facts relevant to the correction of the recorded original instrument of conveyance.

Section 5.028- Nonmaterial Corrections

• (d) A person who executes a correction instrument under this section shall:

• (1) Record the instrument in each county where the original was recorded;

• (2) If the correction instrument is not signed by each party to the recorded original instrument, send a copy of the correction instrument and notice by first class mail, e-mail, or other reasonable means to each party to the original instrument of conveyance, and, if applicable, to the party’s heirs, successors, or assigns.

Section 5.029- Correction Instruments: Material Corrections

• You may have the parties correct their mistakes by having them execute correction documents.

MATERIAL ERRORS UNDER S.B.1496.

• Material errors include:

• (i) adding: • (a) a buyer's disclaimer of an interest in the real property that is the

subject of the original instrument of conveyance;

• (b) a mortgagee's consent or subordination to a recorded document executed by the mortgagee or an heir, successor, or assign of the mortgagee; or

• (c) real property to a conveyance that correctly conveys other real property;

• (ii) removing real property from a conveyance that correctly conveys other real property; or

• (iii) accurately identifying a lot or unit number or letter of real property owned by a grantor that was inaccurately identified as another lot or unit number or letter of real property owned by a grantor in the recorded original instrument.

• Both sections 5.028 and 5.029 list errors as examples by the use of the term “including.” The lists are not exclusive. However those errors listed will obviously be treated as nonmaterial or material according to the section of listing.

• Unlisted errors will require a judgment call.

Section 5.030 Correction Instrument: Effect

• Gives presumptions of relating back to the effective date of the original instrument if it complies with 5.028 or 5.029.

• If you are asked to update a title policy by virtue of a corrective deed or mortgage, you should check title to date, and if there are intervening equities or liens, show them as exceptions in Schedule B or dispose of them prior to issuance. Remember, under the instructions for the T-3 endorsement, only changes are to be made to correct a set of facts existing at the policy date.

Section 5.031 Correction Instruments Recorded before September 1, 2011

• If a correction instrument is filed before the law is effective but complies with 5.028 or 5.029, it is effective to the same extent provided by 5.030, unless a court renders a final judgment determining that the correction instrument does not substantially comply with Section 5.028 or 5.029.

Who is permitted to prepare them?

Persons Authorized to Execute Correction Instruments After S.B. 1496

• A person who has personal knowledge of the relevant facts is authorized, without the joinder of the original parties to the conveyance, or their heirs, successors, or assigns, to execute correction instruments involving nonmaterial clerical errors, but that person must:

• (i) disclose in the correction instrument the basis for the person’s knowledge of the relevant facts, and

• (ii) send a copy of the correction instrument and notice by first class mail, e-mail or other reasonable means to all parties to the original instrument, and, if applicable, a party’s heirs, successors or assigns.

Persons Authorized to Execute Correction Instruments After S.B. 1496

• Instruments correcting material errors must be, and instruments correcting nonmaterial errors may be, executed by each party to the conveyance (or, if applicable, a party's heirs, successors, or assigns), and both material and nonmaterial correction instruments must be recorded in every county where the original instrument is recorded.

Trouble in River City

• There is no language in the new statute that suggests a correction instrument that corrects a material error can be prepared by anyone but an attorney.

• The statute only addresses who may "execute" the instruments.

The "Practice of Law" Includes the Preparation of Instruments Affecting Title

• The “practice of law” is defined to include “the giving of advice or the rendering of any service requiring the use of legal skill or knowledge, such as preparing a will, contract, or other instrument, the legal effect of which under the facts and conclusions involved must be carefully determined.

• Preparing and filing mechanic’s liens or lien affidavits constitutes the unauthorized practice of law when done by a person not licensed as an attorney. Drafting conveyances of real property, or the releases of liens or contracts for sale relating to such property, constitutes the practice of law and must be accomplished by a licensed attorney.

• The preparation of all types of legal instruments constitutes the practice of law. Legal instruments include deeds and deeds of trust.

• Courts generally include as a "legal instruments" any and all documents and instruments affecting title to real estate.

• More recently in 2008, the Texas Supreme Court decided Unauthorized Practice of Law Committee v. American Home Assurance Co., Inc., which it laid out three factors to consider when determining whether a corporation has engaged in the practice of law when its staff employees provided legal services to someone other than the corporation. These three factors are: (i) whether the company’s interest being served by the rendition of legal services is existing, or prospective only; (ii) whether the company has a direct, substantial inters tint he matter for which it provides legal services; and (iii) whether the company’s interest is aligned with the interest of the person to whom the company is providing legal services.

• The Court evaluated its earlier decision in Hexter Title & Abstract Co. v. Grievance Committee. Hexter Title & Abstract Co. was a title insurance agent that had its employee-attorneys prepare title opinions on the title being insured and draft corrective instruments to cure any defects found. The service was rendered at no cost in order to attract business and so title defects could be cured before insurance was purchased.

Hexter Title & Abstract Co. v. Grievance Committee (1944)

• Title insurance agent's interest was prospective because the curative work was done for the purpose of placing good title in the grantee.

• Hexter Title's interest in providing legal services was to attract business, an interest distinct from that of its customers.

• The company's interest is aligned with that of the third party to whom it is providing legal services.

• Only the parties, or their attorneys, can make material changes.

• Texas case law holds a corporation cannot employ attorneys to represent third party interests.

• A corporation does not engage in the practice of law when its in-house attorneys provide legal advice regarding the corporation's own affairs or represent others with identical interests. It would probably be seen as representing the parties to the underlying transaction rather than the company.

But What About Nonmaterial Correction Instruments ? • Section 311.023 of the Government Code provides that in

“construing a statute, whether or not the statue is considered ambiguous on its face, a court may consider among other matters the: (1) object sought to be attained; (2) circumstances under which the statute was enacted; [and] (3) legislative history.”

• Legislative history supports reaffirming the long time established practice of escrow personnel preparation of scrivener’s affidavits to correct nonmaterial errors.

• These persons clearly need to have knowledge of the facts.

Persons executing correction instruments should do the following:

• Determine who may sign the correction instrument. • Identify the basis for a person’s personal knowledge.

• "I have reviewed prior conveyances of this parcel. The prior conveyances are consistent in stating that the initial call number is for 15 feet whereas the deed that I drafted states the initial call number is 14 feet, and therefore, I have deduced that the document I drafted contains an error."

• Clearly define the Error • "The lot number was incorrect on the above stated warranty deed.

The lot being conveyed should have been Lot 14 instead of Lot 15."

• Attach the Complete Legal Description • Notify the parties to the original agreement.

• Proof of notice should be included with the correction instrument for recording.

• An affidavit of mailing or certification indicating to whom and where the notice was sent should suffice. Remember Texas allows email.

• Use plain language

How do you prepare correction instruments?

Escrow Guidelines -Recording a Certified Copy of a Document: Instances where a certified copy can simply be filed of record.

• Original document(s) recorded in the wrong county can be recorded by obtaining a certified copy of said document and recording “as is” in the correct county.

• A court certified document such as a divorce decree or probate filed in any Texas county that references the subject property can be filed for record.

• A certified copy of a divorce decree or probate filed in another state that references the subject property can be filed for record.

DON’T FORGET Escrow Guidelines – Correcting or Amending an Original Executed Document Prior to Recording.

• A document containing a typographical mistake that is corrected at

the time of execution or prior to recording is an example of an allowable correction and/or amendment. However, the documents must be initialed by all parties to the document, prior to recording.

• A correction and/or amendment to any lender document at the time of execution or prior to recording must be approved in writing by the lender funding the transaction and initialed by all parties signing the document.

• A correction and/or amendment to an original document at the time of execution or prior to recording CANNOT change the terms of the document i.e., a mineral reservation cannot be added to the document, an additional grantee cannot be added to the document, etc. If a correction or amendment would change the terms of the original document, then a correction instrument is required and must be executed by all parties to the document.

Notice of Correction • [Insert date}

• (Address of each party to the transaction should be inserted)

• Re: (insert file number)

• This letter serves as notice that at the time of the recording of the (insert name of original document with nonmaterial error), a nonmaterial error as defined in Section 5.028 of the Texas Property Code was made. Pursuant to the requirements contained therein, the attached Correction instrument and this Notice of Correction will be filed for record to correct that error.

State Bar of Texas Forms

• The suggested wording from Clause 12-9-4 and Clause 12-9-5, Volume 1 of the Texas Real Estate Forms Manual, Second Addition (Real Estate Forms Committee of the State Bar of Texas, Austin 2011) represent examples of wording that may be used in correction instruments if the correction is either placed on the original instrument, and re-recorded, or placed in a new instrument signed by the original parties to the conveyance or, by a party’s heirs, successors, or assigns.

Clause 12-9-4

• NOTE CONCERNING CORRECTION: This deed is being filed again for record as a correction deed to correct certain incorrect information and to substitute for the deed as originally recorded. The following incorrect information is being corrected: [state the incorrect information and the correction[s], e.g., when this deed was first recorded, the legal description incorrectly stated the acreage as “32 acres,” when it should have stated the acreage as “23 acres”]. Other than the stated correction, no changes were made in the deed as originally recorded, and the effective date of this correction deed relates back to the effective date of the deed being corrected.

Clause 12-9-5

• This deed is made as a correction deed in substitution of the deed titled “[title of original deed]” (“Corrected Deed”) dated [date] and recorded in [recording data] of the real property records of [county] County, Texas, to correct the following incorrect information: [state the incorrect information and the correction[s], e.g., the legal description incorrectly stated the acreage as “32 acres,” when it should have stated the acreage as “23 acres”]. Other than the stated correction, this deed is intended to restate in all respects the Corrected Deed, and the effective date of this correction deed relates back to the effective date of the Corrected Deed.

• An example follows of a draft form approved by the Real Estate Forms Committee of the State Bar of Texas as a correction instrument executed by a person who has personal knowledge of relevant facts that is scheduled to be included in the 2012 supplement of the Texas Real Estate Forms Manual.

State Bar of Texas

A Convoluted Example

Ode to the Spell Checker Eye have a spelling chequer, It came with my pea sea. It plainly marques four my revue Miss Steaks eye kin knot sea. Eye strike a key and type a word and weight four it two say Weather Eye am wrong oar write It shows me strait a weigh. As soon as a mist ache is maid, It nose bee fore two long, And Eye can put the error rite— Its rare lea ever wrong. Eye have run this poem threw it I am shore your pleased two no, Its letter perfect awl the weigh. My spell chequer tolled me sew.