An execution mistake by borrowers almost left Deutsche Bank without recourse on a commercial property - but the court had other plans
The Rhode Island Supreme Court has ruled in favor of Deutsche Bank National Trust Company in a case involving a flawed commercial mortgage, holding that the lender may reform the mortgage despite a key execution error that had initially rendered it unenforceable. The decision, issued on April 17, clears the way for Deutsche Bank to secure a property in Providence, Rhode Island, as collateral for a loan that had long been in dispute.
The case stems from a 2005 transaction in which Carmela Natale and Walter Potenza, the owners of Alebia, Inc., signed a promissory note and mortgage with Equity One Mortgage Company. While the loan was clearly intended to be secured by commercial property owned by Alebia, the mortgage was signed by Natale and Potenza in their personal capacities. The document also omitted a legal description of the property.
The mistake remained unnoticed for years as the loan changed hands and Deutsche Bank became the holder of the note. In 2007, Natale and Potenza signed a loan modification agreement, again referencing the property as collateral. But when Deutsche Bank later sought to enforce the mortgage following a default, the court found that the document’s flaws prevented the bank from taking action against the property itself.
Deutsche Bank obtained a personal judgment against the borrowers in 2017 but was left without recourse to the underlying asset. In 2021, it filed a motion in Superior Court seeking equitable reformation of the mortgage to reflect that the parties had intended the corporation, not the individuals, to serve as the mortgagor. The motion was granted in 2022, but Alebia, Inc. appealed, arguing that both the mortgage and the note should have been rewritten - and that procedural errors in the evidentiary hearings warranted reversal.
The Supreme Court, in a unanimous opinion authored by Chief Justice Paul A. Suttell, rejected those arguments. The justices found that the lower court had acted properly in reforming the mortgage alone, noting that a mortgage can legally secure another party’s debt and that the intent of the transaction had been thoroughly documented.
“The parties to the instant transaction understood and intended for [the lender] to have a first priority mortgage on the property to secure Natale and Potenza’s obligations,” Chief Justice Suttell wrote.
Alebia’s other objections were also dismissed. The company challenged the remote nature of the hearings, which were held online in 2021 and 2022. Under pandemic-era administrative orders, bench trials required consent from all parties if held remotely. The Supreme Court agreed that the hearings should not have proceeded without Alebia’s approval, but concluded that the error did not affect the fairness or outcome of the proceedings.
“The remote nature of the hearings did not affect the outcome of the proceedings,” the Court wrote, calling the error “harmless.”
The company had also objected to the admission of a photocopy of the promissory note, arguing that it was not properly authenticated and that its own expert had not been allowed to inspect the original. The Court disagreed, citing testimony from the managing paralegal of the firm handling the note and a senior loan analyst familiar with the records. The authentication process, the justices said, met the standard required by Rhode Island law.
The case offers a pointed reminder of how small execution errors in commercial loan documents can have significant consequences. In this instance, the mistake resulted in over a decade of litigation and complicated Deutsche Bank’s ability to recover on a loan that all parties had believed was properly secured.
For mortgage brokers, lenders and closing attorneys, the ruling reinforces the importance of verifying that corporate borrowers sign in the correct capacity - and that legal descriptions of property are complete and accurate at the time of closing.
It also highlights the role of equitable remedies in correcting such mistakes, particularly when supported by consistent documentation and a clear record of the parties’ intent.
Though Deutsche Bank ultimately prevailed, the court’s ruling is a cautionary tale: even in cases where the facts are on the lender’s side, judicial relief is not guaranteed without a meticulous evidentiary process.
