MARRIAGE AND MORTGAGES: IDENTIFYING AND RESOLVING ISSUES WITH MINNESOTA S REAL ESTATE SPOUSAL SIGNATURE REQUIREMENT

MARRIAGE AND MORTGAGES: IDENTIFYING AND RESOLVING ISSUES WITH MINNESOTA S REAL ESTATE SPOUSAL SIGNATURE REQUIREMENT May 26, 2016 Prepared by: John F. Nielsen BEISEL & DUNLEVY, P.A. 730 Second Avenue South, Suite 282 Minneapolis, Minnesota 55402-2444 Phone: (612) 767-4839 Fax: (612) 338-6600 johnn@bdmnlaw.com www.bdmnlaw.com 1

TABLE OF CONTENTS I. The Statute: Minn. Stat. 507.02...3 II. When Is A Mortgagor Married?...4 Page III. What is the Homestead?...5 IV. Waiver of Homestead Interest...5 V. Purchase Money Mortgage Exception...5 VI. Non-Joinder of Titled Spouse...6 VII. Non-Litigation Remedies...6 VIII. Litigation: Estoppel and Ratification...7 2

I. THE STATUTE: MINN. STAT. 507.02. Minnesota law requires that both spouses join in a conveyance of homestead property. Minn. Stat. 507.02. The relevant portion of the statute reads: If the owner is married, no conveyance of the homestead, except a mortgage for purchase money under section 507.03, a conveyance between spouses pursuant to section 500.19, subdivision 4, or a severance of a joint tenancy pursuant to section 500.19, subdivision 5, shall be valid without the signatures of both spouses. A spouse's signature may be made by the spouse's duly appointed attorney-in-fact. This requirement applies to mortgages as well as deeds and other conveyances. Minn Stat. 507.01 states: The word conveyance, as so used, includes every instrument in writing whereby any interest in real estate is created, aliened, mortgaged, or assigned or by which the title thereto may be affected in law or in equity, except wills, leases for a term not exceeding three years, and powers of attorney. Mortgages fall under the definition of conveyance as used in Minn. Stat. 507.02, and therefore are subject to the statute s requirements. Compliance with this statute is important as failure to obtain the signature of both spouses on a conveyance renders that conveyance void unless the purchase money mortgage exception applies. Some version of this spousal signature requirement has existed since the 1800s. See Yager v. Merkle, 26 Minn. 429, 4 N.W. 819 (1880). The public policy behind this statute is to ensure that the family homestead remains secure by protecting against conveyances made without the knowledge of the non-signing spouse. See Larson v. Wells Fargo Bank, N.A., 799 F.Supp.2d 961 (D.Minn. 2011); HSBC Mortg. Services, Inc. v. Graikowski, 812 N.W.2d 845 (Minn.App. 2012), review denied; National City Bank v. Engler, 777 N.W.2d 762 (Minn.App. 2010), review denied. The statute s purpose is to protect the non-signing spouse from an unknowing conveyance of his or her interest in the homestead. Engler, 777 N.W.2d at 766. The failure to obtain a spouse s signature on a conveyance often arises where there is a refinance mortgage loan applied for by only one of the spouses, often because the other spouse has poor credit. In such a situation, only one spouse is personally liable for the loan itself and therefore only that spouse signs the note. However, regardless of whether only one spouse is personally liable for the loan, both spouses must sign the mortgage in order for the instrument to comply with Minn. Stat. 507.02. If the both spouses signatures are not obtained, the mortgage may be void. Borrowers often believe that having their spouse sign a mortgage will make that spouse personally liable for the loan. Thus, where only one spouse applied for the loan and is signing the note, some explanation may be necessary in order to obtain the other spouse s signature. This may present issues for a closer who should be cautious not to provide legal advice or explain the meaning of documents at the closing table so as not to make representations which might incur liability. This issue may arise not only where a spouse is simply omitted from the mortgage, but 3

also where the signature of one the spouses is potentially ineffective for any number of reasons, including a forgery or a defective power of attorney. See In re Holmes, 403 B.R. 634 (Bky.D.Minn. 2009); see also CitiMortgage, Inc. v. Akers, 858 N.W.2d 788 (2014). The fact that the lender did not know a spouse s signature was a forgery will not prevent the statute from rendering the mortgage void. See Gores v. Schultz, 777 N.W.2d 522 (Minn.App. 2009), review denied. Note that other mortgage lenders that hold mortgages on the property do not lack standing to challenge validity of a lender s competing mortgage due to lack of signature by mortgagor s spouse on the mortgage. See id. Thus, although a borrower and his or her spouse may not attempt to invalid a mortgage, a junior lender seeking to obtain a better priority position may make argue another mortgage is void based on Minn. Stat. 507.02. II. WHEN IS A MORTGAGOR MARRIED? The first step in determining whether a mortgage must include a spouse s signature is to determine whether the mortgagor is married or was when the mortgage is executed. This is not always as easy as it sounds. Minnesota has a searchable online database for marriages entered into in this state (Minnesota Official Marriage System, https://moms.mn.gov/). However, a mortgagor may have married in another state or country, and the statute applies regardless of where the marriage occurred. Many states do not maintain searchable marriage databases, and finding such information for a marriage in a different country is even more difficult. Most states provide a searchable online database of recent court cases which may tell you whether a party has been divorced. Asking the mortgagor for records concerning their marriage or divorce records may be wise if the person s marital status is unclear. Taking the mortgagor s word has its risks but may be your only option if you are preparing for an upcoming closing. There is no document that will demonstrate that a person is not married. Some couples believe they are married and are not, but there is little risk (least as to a Minn. Stat. 507.02) in having obtained an unnecessary signature. Others who have been separated from their spouse for a long period of time do not consider themselves married any longer, and may fill out a mortgage application as such. However, the mere fact that the spouses are separated or that it would be very difficult to obtain the signature of the spouse is not an exception to the statutory requirement. See Wells Fargo Home Mortg., Inc. v. Newton, 646 N.W.2d 888 (Minn.App. 2002) (statute applied where husband and wife estranged for twenty years but not divorced; husband indicated he was single on loan application); Renneke v. Shandorf, 371 N.W.2d 12 (Minn.App. 1985) (where debtor resides at property, it is determined by implication to be the homestead of his family); In re Holmes, 403 B.R. 634 (Bky.D.Minn. 2009) (mortgage void where signature of husband in prison was not obtained). The fact that the husband and wife are subsequently divorced will not validate a mortgage of the homestead executed by the husband alone. See Alt v. Banholzer, 39 Minn. 511, 40 N.W. 830 (1888). 4

III. WHAT IS THE HOMESTEAD? The protections of Minn. Stat. 507.02 apply only to conveyances of homestead property. The definition of homestead comes from Minn. Stat. 510.01, which states: The house owned and occupied by a debtor as the debtor's dwelling place, together with the land upon which it is situated to the amount of area and value hereinafter limited and defined, shall constitute the homestead of such debtor and the debtor's family Both spouses must sign a conveyance even where the property is the homestead of only one spouse. See Wells Fargo Home Mortg., Inc. v. Newton, 646 N.W.2d 888 (Minn.App. 2002); Renneke v. Shandorf, 371 N.W.2d 12 (Minn.App. 1985). Even when only the signing party lives at the property, both spouses must sign. See Wells Fargo Home Mortg., Inc. v. Newton, 646 N.W.2d 888 (Minn.App. 2002) (property still wife s homestead for purposes of the statute even though wife and husband separated for twenty years). Nonetheless, a conveyance by a husband or wife without the spouse joining is void as to the homestead though it may be valid as to other property included therein. See Graham v. National Sur. Co., 244 F. 914 (8th Cir. 1917). A conveyance of the homestead void for lack of spouse s signature does not become valid upon the property ceasing to be the parties homestead. See Law v. Butler, 44 Minn. 482, 47 N.W. 53 (1890). IV. WAIVER OF THE HOMESTEAD INTEREST The non-signing spouse can waive the homestead interest. However, the waiver must include explicit language waiving the spouse s homestead interest. Marine Credit Union v. Detlefson-Delano, 813 N.W.2d 429 (Minn. 2012). A quit claim deed or some other instrument which does not clearly set out the waiver will not be sufficient. See id. The marital homestead interest is not a title interest to be conveyed by a deed and thus a quit claim deed is not the appropriate document. See id. Although it may be useful evidence in an action seeking to estop the spouse from denying the validity of the mortgage (discussed below), a waiver of his or her homestead interest, a consent to mortgage, or a corrective mortgage signed by the omitted spouse after the execution of the mortgage will not make the mortgage compliant with 507.02. See id; Inglett v. Volkswagen Bank USA, 2009 WL 1587258 (Minn.App. 2008) (unpublished). Thus, the waiver should be executed before or contemporaneously with the conveyance. If executed before, it would be best if the waiver described the future conveyance for which the spouse is waiving his or her rights. Also, an oral waiver is unlikely to be effective, and will obviously not be reflected in the land records. See Kingery v. Kingery, 185 Minn. 467, 241 N.W. 583 (1932) (oral agreement by one spouse, where both were living, to mortgage family homestead, was wholly void). V. THE PURCHASE MONEY MORTGAGE EXCEPTION Minn. Stat. 507.02 includes an exception to the signature requirement for purchase money mortgages. See Minn. Stat. 507.02, 507.03. The statute defines purchase money mortgage as a mortgage in which any part of the proceeds were used toward the purchase price. Minn. Stat. 507.03; Newton, 646 N.W.2d at 893 ( purchase-money 5

mortgage is one given to secure unpaid purchase money). Where the mortgage itself states This is a purchase-money mortgage, that is prima facie evidence of that fact. Minn. Stat. 507.03. For a mortgage to be a purchase-money mortgage so as to come within the exception, the mortgage and deed of purchase do not need to be executed on the same day, but they both must be part of one continuous transaction and intended to be given with contemporaneous operation. Gores, 777 N.W.2d at 528. A mortgage used to refinance a contract for deed can be a purchase-money mortgage. Newton, 646 N.W.2d at 894. VI. NON-JOINDER OF TITLED SPOUSE. The purchase money exception in Minn. Stat. 507.02 can cause confusion by making a closer or drafter believe that a spouse s signature is never necessary on a purchase money mortgage. That is not the case. A mortgage only encumbers the interest held by those who sign it. Although the failure of a spouse to join in a purchase money mortgage will not invalidate that mortgage under Minn. Stat. 507.02, where both spouses are title owners of the property a mortgage executed by one of them will only encumber the signing spouse s ownership interest in the property. If you are working on a closing for a purchase money mortgage or examining a mortgage transaction, ensure that the vesting deed to married persons and the mortgage agree: one spouse as the grantee on the deed to the property and that one spouse signing the mortgage, or both spouses going into title and both signing the mortgage. Do not assume that because the mortgage is a purchase money mortgage, the signature of a non-borrower spouse is unnecessary. This is only the case where only one spouse will be the title owner. If only one spouse is liable on the loan but the borrower and his or her spouse want to go into title together, then both spouses must sign the mortgage to ensure both of their ownership interests are encumbered. VII. NON-LITIGATION REMEDIES There are ways in which the above-described issues can be resolved outside of litigation. Which remedy you employ depends on the scenario. The facts of each situation should be examined closely to determine whether you are dealing with a void mortgage, or perhaps a valid purchase money mortgage which does not include all of the owners of the property and therefore encumbers only part of the ownership interest. Title Standard No. 7 states that After a conveyance has been of record for 15 years, failure of a spouse to join therein shall not be an objection, unless an action in regard thereto is commenced and notice of the same filed during the 15 year period. Title Standards Nos. 8 through 12 address marital status. Although the Minnesota Title Standards are not statutory and do not have the power to validate an otherwise void mortgage, they are the standard by which many title examiners use to determine whether a particular title issue must be addressed or can be disregarded. If sufficient time has passed, the Title Standards indicate that a non-signing spouse issue can be ignored. Where the mortgage is void under Minn. Stat. 507.02, one option is to obtain a 6

replacement mortgage properly signed by both spouses. Obtaining a new replacement mortgage is necessary because the mortgage instrument is void under the statute. A void instrument cannot be amended, and therefore an amendment, consent, or modification is not appropriate. When considering whether to obtain a replacement mortgage, determine whether there are any conveyances or liens recorded or attaching prior to when the replacement mortgage is recorded. These liens will likely have priority over the laterrecorded replacement mortgage. For this reason, obtaining a replacement mortgage may not be an appropriate option. Where a titled spouse fails to join in a purchase money mortgage, the exception to the Minn. Stat. 507.02 requirements applies and the mortgage instrument is not void. Because the mortgage is not void, it can be amended to encumber the non-signing spouse s interest. This will obviously require the cooperation of the omitted party, who may not be willing to mortgage his or her interest. Obtaining an amendment can cause priority problems if there is an intervening lien against the omitted party. For example, if an omitted spouse has a judgment entered against her (in the county of the property) and then executes an amendment to the mortgage, the judgment lien holder may argue that it has priority over the mortgage as to that spouse s interest. The same may be true a second mortgage or other lien arising after execution of the original mortgage. An amendment should be signed by the holder of the mortgage, the mortgagor, and the mortgagor s spouse. Another option is to obtain a consent to the mortgage in which the non-signing spouse joins in the mortgage conveyance and acknowledges that his or her interest is encumbered by the mortgage. A consent can be signed by only the omitted spouse. However, before preparing and obtaining one of these documents, the lender should be consulted as to their preference. VIII. LITIGATION AND ESTOPPEL In the event a mortgage on homestead property does not include signature of a spouse and is not a purchase money mortgage, a declaratory judgment action may be the only option. There are various claims that can be asserted in such an action, but perhaps the most effective and with the most developed case law is estoppel. Courts have found that even though great importance is attached to the homestead right, under certain circumstances a non-signing spouse may be estopped from denying a sale of the homestead even if the statutory requirements are not met. HSBC Mortg. Services, Inc. v. Graikowski, 812 N.W.2d at 848; Dvorak v. Maring, 285 N.W.2d 675, 677-678 (1979). Estoppel is applied to prevent non-signing spouses from challenging conveyances when the purpose of 507.02 is not at risk. Karnitz v. Wells Fargo Bank, N.A., 572 F.3d 572, 574 (8th Cir. 2009) (explaining that In certain circumstances when the purpose of the statute is not at risk, the Minnesota courts have applied estoppel to prevent a party from challenging the validity of a conveyance of homestead ); Engler, 777 N.W.2d at 766 (explaining that Although a mortgage conveyance of a homestead is generally void under Minn. Stat. 507.02 if both spouses do not sign the conveyance, when the nonsigning spouse actively and knowingly participates in the transaction and waives his or her homestead rights, the purpose of the statute is fulfilled and the mortgage may be enforced ). 7

A married person at the time of execution of a mortgage is estopped from asserting the protections of Minn. Stat. 507.02 to void a conveyance made solely by their spouse where: (a) The non-signing spouse consents to and has prior knowledge of the transaction, (b) the non-signing spouse retains the benefits of the transaction, and (c) the party seeking to invoke estoppel has sufficiently changed its position to invoke the equities of estoppel. See Karnitz, 572 F.3d at 574-75 (citing Dvorak, 285 N.W.2d at 677-78 (Minn. 1979)). As to the first element, there is the possibility that the non-signing spouse had no knowledge of the mortgage transaction or actively withheld their consent. However, in many cases the non-signing spouse knew their spouse was obtaining a mortgage. This knowledge and consent may be shown through documents signed by the non-signing spouse at or before closing. Depositions may also reveal that there were discussions between the spouses regarding the mortgage, or perhaps between the non-signing spouse and the lender, mortgage broker, or closer showing the non-signing spouse knew of the transaction. The non-signing spouse may have attended the closing. It is also not uncommon that the non-signing spouse participates in the act of making payments on the mortgage loan or that the non-signing spouse s funds are knowingly used to make those payments, demonstrating that spouse s knowledge and consent to the mortgage loan. As to the second element, the non-signing spouse may have retained the benefits of the transaction by having their debts paid off with the mortgage funds, including prior mortgages securing debt owed by the non-signing spouse. Paying off a prior mortgage also allows the spouse to continue to residing at the property. Funds from the mortgage transaction may have been used to improve the home that the non-signing spouse occupies. Funds may have been deposited into a joint bank account used by both spouses. One case suggests that the benefit received by the non-signing (payoff of prior debt, expense of activities with signing spouse) will not create an estoppel where that spouse did not know of the mortgage transaction and was therefore not in a position to accept or reject the loan proceeds. See CitiMortgage, Inc. v. Akers, 858 N.W.2d 788 (2014). As to the third element, if the mortgage lender dispersed the mortgage funds, it obviously did so in reliance on the validity of the security instrument. The mortgagee may have taken other action in reliance on the participation of the non-signing spouse in the mortgage before, during, or after closing. As discussed above, a signing spouse, who obviously knowingly participates in the mortgage transaction, is the not the party intended to be protected by Minn. Stat. 507.02. One case has specifically addressed a signing spouse who claimed the mortgage was defective for lack of her spouse s signature. In that case, the court stated that the signing spouse, is estopped from challenging the validity of his mortgage because (1) he procured the conveyance through an intentional or negligent misrepresentation of fact, (2) the lender relied on the misrepresentation to its detriment, and (3) he retained the benefits. CitiMortgage, Inc. v. Roback, 2013 WL 6725824, 3 (Minn.App. 2013) 8

(unpublished) (quoting Graikowski, 812 N.W.2d at 848 49). Cases applying the equitable estoppel doctrine in the specific context of the homestead signature requirement of 507.02 have found... a culpability requirement satisfied by the nonsigning spouse s prior knowledge and agreement of the conveyance coupled with the retention of the benefits of the conveyance. Id. (citing Karnitz, 573 F.3d at 576). Thus, where a borrower represents to the lender that he or she is unmarried, that borrower is estopped from denying the validity of the mortgage based on the lack of his or her spouse s signature. See id; see also Bozich v. First State Bank of Buhl, 150 Minn. 241, 184 N.W. 1021 (1921) (a mortgage by a married man upon his homestead is void unless his wife joins; but when the husband falsely and fraudulently represents that he is unmarried and thereby gets a loan upon a mortgage without his wife joining, he will not be heard in a court of equity, after the death of his wife, to assert its invalidity, but will be held estopped by his misrepresentation). If you are able to demonstrate that the omission of the spouse was a mistake and that the parties to the mortgage intended the non-signing spouse to be included as a mortgagor, you may have a claim for reformation of the mortgage to include both spouses. However, even if a mortgage can be reformed, intervening lienholders whose liens included the signature of that omitted owner may claim priority of their liens as to that owner s interest. In such a case, you may need to obtain a subordination agreement (or other corrective instrument) or demonstrate that the intervening lienholder had notice that the omitted owner s interest was intended to be encumbered by your conveyance. There may also be a evidence supporting a claim that the spouse waived their homestead right (such as an executed waiver of homestead rights or consent to mortgage, ineffective in its own right but tending to show that spouse s intent to waive his or her rights under 507.02). Other alternative claims may include unjust enrichment, equitable lien, equitable subrogation (if the potentially void mortgage paid off a valid mortgage). If the property was not the homestead of either spouse at the time the mortgage was executed, the statute does not apply. In these cases, the holder of the mortgage should obtain a court order finding that the property was not the homestead, and therefore the spouse s signature is not required because 507.02 is inapplicable. Occupancy of the kind needed under Minnesota homestead exemption statute 510.01, requires a determination of legal, not merely factual, right of occupancy and possession; Minnesota law requires legal right to occupancy and possession of parcel of real estate for which homestead exemption is claimed. In re Stenzel, 259 B.R. 141 (2001), reversed 301 F.3d 945, rehearing and rehearing en banc denied, vacated and remanded. A conveyance by a husband or wife without the spouse joining is void as to the homestead though it may be valid as to other property included therein. Graham v. National Sur. Co., 244 F. 914 (8th Cir. 1917). In the case of a purchase money mortgage which omits a title owner spouse, ratification is the appropriate cause of action where the non-signing party took actions showing it somehow approved or sanctioned the conveyance. A mortgage is a conveyance that can be ratified, and [r]atification occurs when a person with full knowledge of all the 9

material facts, confirms, approves, or sanctions, by affirmative act or acquiescence, the originally unauthorized act of another. Wells Fargo Home Mortgage, Inc. v. Chojnacki, 668 N.W.2d 1, 5 (Minn. Ct. App. 2003) (quoting Anderson v. First Nat l Bank of Pine City, 303 Minn. 408, 410, 228 N.W.2d 257, 259 (1975) and explaining estoppel by ratification). Ratification will be found where a person receives and retains the proceeds or benefits of the unauthorized act. Chojnacki, 668 N.W.2d at 5. If a person acquiesces to a transaction and receives and retains the benefits of the transaction, as through ratification, his own conduct creates an estoppel that prevents him from denying the validity of the transaction. See Fuller v. Johnson, 139 Minn. 110, 114, 165 N.W. 874, 875 (1917) (explaining that by receiving and retaining the benefits of a transaction, with full knowledge of the facts when the party may accept or reject without serious inconvenience, an estoppel is created, and holding that wife whose name was signed on a property conveyance by her husband was estopped from denying the validity of the conveyance where she acquiesced in the transaction, never protested the conveyance, and retained the benefits of the transaction). In a case argued by our firm, the Court of Appeals recently affirmed the application of ratification to a borrower s spouse who went into title but did not sign the purchase money mortgage. Wildung v. Bank of New York Mellon, 2014 WL 1758305 (Minn. Ct. App. May 5, 2014). In that case, the court upheld a summary judgment decision that the spouse ratified the mortgage transaction and was estopped from denying that her interest was subject to the mortgage. Id. 1 It should be noted that although estoppel is the term for the three element claim discussed in these materials, some cases appear to refer to estoppel and ratification as the same claim. See Engler, 777 N.W.2d at 766. Another case uses the phrase estoppel by ratification. See Chojnacki, 668 N.W.2d at 5, 6. While some cases seem to suggest that a mortgage void under Minn. Stat. 507.02 cannot be ratified (see Engler, 777 N.W.2d at 766; Anderson, 303 Minn. 412, 228 N.W.2d at 259-260), others note that ratification is an exception to the statute (see Gores, 777 N.W.2d 527-528) or refer to adoption and confirmation (see Marr v. Bradley, 239 Minn. 503, 59 N.W.2d 331 (1953)). Thus, there is some question as to whether the term ratification should be used as to this statute, and perhaps whether there is more than one theory by which the harsh results of Minn. Stat. 507.02 can be avoided. Nonetheless, estoppel appears to be the more developed and accepted framework for addressing a potentially void mortgage where there is conduct by the non-signing spouse suggesting the mortgage should be enforced. 1 When researching the non-joinder issues, bear in mind that some courts use language making it easy to confuse whether a mortgage is valid or void (under 507.02) and whether a valid mortgage encumbers all the title owners interests in the property (i.e., a purchase money mortgage failing within the exception for 507.02). In describing the latter scenario, rather than use encumbered or some similar term, some will say void against the party s interest. Because omitting an owner from a mortgage is easy to confuse with omitting a spouse under 507.02, it is best to talk in terms of whether the mortgage lien encumbers a particular ownership interest rather than using the term void when validity under 507.02 is not at issue. 10