February 2012 Legal Update by Don Ethridge
First National Bank, USA v. DDS Construction, LLC, 2011-1418 (La. 1/24/2012).
In this case, the Supreme Court of Louisiana addresses the use of an instrument frequently utilized to correct errors in recorded documents: the notarial act (or affidavit) of correction.
A construction company granted a mortgage to a bank on subdivision lots it was seeking to develop. The company sold one of the lots, “Lot 8,” but failed to use the funds to pay off its loan. The purchaser of Lot 8 granted a mortgage to a second bank to finance its purchase. The bank holding the first mortgage sought foreclosure. Later, as a result of the construction company paying off part of its debt as to other lots, the bank recorded a request to cancel the first mortgage as to certain property, but erroneously listed Lot 8 among those to be released.
Thereafter, the bank recorded an Act of Correction to remove Lot 8 from the Request for Cancellation. This act was executed by the bank’s vice-president, but not by the notary who passed the request. Later, the bank filed a second Act of Correction, seeking to fix the same mistake, but, this time, the correction was executed by the notary.
The bank that held the second mortgage then sought to have its mortgage ranked superior to all others, arguing that the first bank canceled its mortgage by the filing of its Request for Cancellation (which erroneously included “Lot 8”) and that the Act of Correction could not reinstate it. The dispute wound up the in the Louisiana Supreme Court. The primary issue before the Court was whether a notarial affidavit of correction can affect a mortgage that was previously canceled.
The Court decided the case by first examining the notarial act correction statute at issue, La. R.S. 35:2.1, which provides, in pertinent part:
A. A clerical error in a notarial act affecting movable or immovable property or any other rights, corporeal or incorporeal, may be corrected by an act of correction executed by the notary or one of the notaries before whom the act was passed, or by the notary who actually prepared the act containing the error. The act of correction shall be executed by the notary before two witnesses and another notary public.
B. The act of correction executed in compliance with this Section shall be given retroactive effect to the date of recordation of the original act. However, the act of correction shall not prejudice the rights acquired by any third person before the act of correction is recorded where the third person reasonably relied on the original act. The act of correction shall not alter the true agreement and intent of the parties.
The Court found no limitation in the language of the statute to prevent its application to mortgages. Next, the Court considered whether the inclusion of Lot 8 in the list of released properties can be considered a “clerical error” under the statute. The Court stated that it “hold[s] that including, or failing to include, a number in a series of numbers is just one of the almost limitless examples of clerical errors.”
However, the Court found that the first Act of Correction did not comply with the statute. La. R.S. 35:2.1 requires that the correction be executed by the notary before whom the act was passed or the notary who actually prepared the act containing the error. The first Act of Correction was executed by a company vice-president, not a notary. The Court found that the second Act of Correction, which was executed by the proper notary, complied with the statute.
Further, the Court held that, in accordance with paragraph B of the statute, the corrections can be given retroactive effect to the date of the filing of the Request for Cancellation. The Court states that:
The effect of making the correction to the Request for Cancellation retroactive deletes the reference to Lot 8 as though it was never there; [the mortgage] was never cancelled from Lot 8 and the [the first mortgage] continued to prime the [second mortgage]. We find the holders of the [second mortgage] suffered no prejudice as contemplated by the statute as a result of the filing of the Act of Correction. . . .
The bank holding the second mortgage argued that a mortgage may only by reinstated by a court and that private parties may not use La. R.S. 35:2.1 to revive the mortgage. The Court rejected this argument, reasoning that prior cases holding that only a court may reinstate a mortgage pre-date the enactment of La. R.S. 35:2.1 in its present form and, in any event, “the present facts do not constitute the reinstatement of a mortgage. Here, by operation of the statute, the mortgage was never cancelled as to Lot 8, so there is no mortgage that would need to be reinstated.”
The Court also looked at the specific facts of the case and determined that the correction served the true intent of the bank in the Request for Cancellation, which was to release certain properties other than Lot 8 from its mortgage.
This case raises a few issues worth discussing. First, the statute requires some very specific formalities. For example, it only applies to “notarial acts,” which the Supreme Court notes are also referred to as authentic acts, which are instruments executed in the presence of two witnesses and a notary. Thus, the statute does not appear to apply to an instrument that contains only a direct or witness acknowledgement, in which the signing party or a witness later acknowledges the signature in the presence of a notary. Further, the act of correction, itself, must be executed before two witnesses and another notary public. As a result, both the original act and the act of correction should be in authentic form.
The act of correction must be executed by (1) the notary (or one of the notaries) before whom the act was passed, or (2) by the notary who actually prepared the act containing the error. This requirement can lead to some difficulties for landmen and title examiners where the act of correction is executed in the second case, that is, by a notary other than one who passed it. In that scenario, it may be impossible to determine whether the act complies with the statute because one may not be able to ascertain or verify whether the notary signing is the one who actually prepared the original document.
Greater challenge may lie in determining whether the correction “alter[s] the true agreement and intent of the parties” (La. R.S. 35:2.1(B)). For example, where a correction inserts the middle name of a party (changing “Jane N. Smith” to “Jane Nancy Smith”), it is unlikely that the state of mind of the parties will be called into question. However, what about where the description of property in a sale is changed because of a purported typographic error – say, “the SW of SE of Section 12” amended by a notarial act of correction to “the SW of SW of Section 12”? Or, where the notarial correction inserts a mineral reservation into a sale that originally contained no such reservation? How would a third party looking only at the public records know that the corrections comport with the true intent of the parties? Courts can look at evidence and testimony pertaining to the intent of the parties; a landman or title examiner looking only at the public records does not have that luxury.
In short, be wary when you come across a notarial act of correction because of both the stringent formalities required by La. R.S. 35:2.1 and the difficulty of determining whether the correction conforms with the subjective intent of the parties to the original act.
Adams v. Chesapeake Operating, Inc., 2011 WL 6370512 (W.D. La. 2011).
In this case, an unleased owner of land within a unit sent Chesapeake Operating, Inc., the operator of a unit well, a letter demanding “production payments” within thirty days of receipt of the letter. The property owner thereafter filed suit claiming payments for his share of production, as well as “a penalty up to twice that amount and interest . . . as well as attorney’s fees,” citing Sections 212.21 to 212.23 of the Mineral Code. These statutes provide:
§ 212.21. Nonpayment of production payment or royalties; notice prerequisite to judicial demand
If the owner of a mineral production payment or a royalty owner other than a mineral lessor seeks relief for the failure of a mineral lessee to make timely or proper payment of royalties or the production payment, he must give his obligor written notice of such failure as a prerequisite to a judicial demand for damages.
§ 212.22. Required response of obligor to notice
The obligor shall have thirty days after receipt of the required notice within which to pay the royalties or production payments due or to respond by stating in writing a reasonable cause for nonpayment. The payment or nonpayment of the sums due or stating or failing to state a reasonable cause for nonpayment within this period has the following effect.
§ 212.23. Effects of payment or nonpayment with or without stating reasonable cause therefor; division order
A. If the obligor pays the royalties or production payments due plus the legal interest applicable from the date payment was due, the owner shall have no further claim with respect to those payments.
B. If the obligor fails to pay within the thirty days from notice but states a reasonable cause for nonpayment, then damages shall be limited to legal interest on the amounts due from the date due.
C. If the obligor fails to pay and fails to state a reasonable cause for failure to pay in response to the notice, the court may award as damages double the amount due, legal interest on that sum from the date due, and a reasonable attorney’s fee regardless of the cause for the original failure to pay.
Chesapeake claimed that the landowner could not recover the “double damages” penalty under these provisions because an unleased mineral owner is not a royalty owner and is not entitled to a “production payment”. The landowner argued that payments due to an unleased owner are a type of “production payment”.
The court agreed with Chesapeake. Without making a determination as to the exact definition of “production payments,” the court reasoned that these statutes apply to parties “connected, in some form, whether directly or indirectly, by a mineral lease or some type of contract or agreement.” Section 212.21, for example, refers to the “failure of a mineral lessee,” and the title of the law that enacted these statutes referenced its purpose as providing for remedies for “the purchaser of a mineral production payment.” Because the unleased landowner was not a purchaser of mineral production payments and because there was no lease connecting the parties, the “double damages” penalty provisions of Sections 212.21 to 212.23 were not available to him.