Ameriquest Mortgage v. Alton

• Decision Date: 28 November 2006
• Docket Number: Docket No. 264213.,Docket No. 264214.
• Citation: 273 Mich. App. 84,731 N.W.2d 99
• Parties: AMERIQUEST MORTGAGE COMPANY, Plaintiff-Appellee, v. Arkan D. ALTON, Defendant-Appellant. Arkan D. Alton, Plaintiff-Appellant, v. Ameriquest Mortgage Company, Defendant-Appellee.
• Court: Court of Appeal of Michigan — District of US

731 N.W.2d 99

273 Mich. App. 84

AMERIQUEST MORTGAGE COMPANY, Plaintiff-Appellee, v. Arkan D. ALTON, Defendant-Appellant.

Arkan D. Alton, Plaintiff-Appellant, v. Ameriquest Mortgage Company, Defendant-Appellee.

Docket No. 264213.

Docket No. 264214.

Court of Appeals of Michigan.

Submitted September 29, 2006, at Lansing.

Decided November 28, 2006, at 9:05 a.m.

Released for Publication March 14, 2007.

Douglas A. Tull, P.C. (by Douglas A. Tull), Utica, for Arkan Alton.

Dykema Gossett P.L.L.C. (by Laura C. Baucus, Jill M. Wheaton, and Douglas J. Fryer), Bloomfield Hills, for Ameriquest Mortgage Company.

Before: FITZGERALD, P.J., and MURPHY, TALBOT, METER, FORT HOOD, SCHUETTE, and BORRELLO, JJ.

TALBOT, J.

Pursuant to MCR 7.215(J), this Court convened a special panel to resolve the purported conflict between this Court's ruling in the consolidated cases comprising Ameriquest Mortgage Co. v. Alton, 271 Mich.App. 660, 726 N.W.2d 424 (2006), vacated in part 271 Mich.App. 801 (2006), and Washington Mut. Bank, FA v. Shore-Bank Corp., 267 Mich.App. 111, 703 N.W.2d 486 (2005). This matter is being decided without oral argument pursuant to MCR 7.214(E). We conclude that Washington Mut. Bank was correctly decided and affirm the ruling in Ameriquest.

I. Ameriquest—Factual History and Holding

The consolidated cases in Ameriquest arise from competing claims to quiet title to residential property. Samir Yousif obtained a loan from Franklin Funding in exchange for a $255,000 mortgage on the subject property. This mortgage was recorded on March 11, 2002. Subsequently, Yousif obtained a separate loan from Arkan D. Alton in exchange for an $86,000 mortgage on the same property. Alton recorded his mortgage on March 21, 2003. Alton acknowledged he was aware of Franklin's preexisting mortgage on the property at the time of his loan to Yousif.

Shortly thereafter, falsely representing that no encumbrances other than the Franklin mortgage existed on the property, Yousif obtained a loan from Ameriquest in the amount of $294,300 secured by the property. The Ameriquest mortgage was recorded on May 1, 2003. The funds provided by Ameriquest were used to pay off the mortgage from Franklin Funding,¹ and a certificate of discharge of the Franklin mortgage was recorded on September 18, 2003. Although Ameriquest did perform a title search before providing the loan to Yousif and receiving a title commitment, the Alton mortgage was not discovered.

Yousif ultimately defaulted on both the Alton and Ameriquest mortgages. Alton foreclosed via advertisement. A sheriff's sale was conducted September 2, 2003, and Alton purchased the property for $92,863.42, recording the sheriff's deed on September 9, 2003. Appraisals of the subject property indicate valuations ranging from approximately $300,000 to $327,000. In June 2004, Alton and Ameriquest filed separate declaratory actions in the Oakland Circuit Court, which were later consolidated, to quiet title. Both Alton and Ameriquest filed motions for summary disposition. Ameriquest, asserting the applicability of the doctrine of equitable subrogation, argued that it was entitled to assume the priority position of Franklin Funding because its monies had been used to pay off the first mortgage. Ameriquest further argued that should Alton prevail, he would receive a windfall by gaining possession of a property valued at $300,000 or more for his loan of $86,000, and that Ameriquest would lose all the funds loaned to pay off the first priority mortgage previously held by Franklin Funding. Alton asserted that Ameriquest had acted as a volunteer in paying off the Franklin mortgage and that Ameriquest's mortgage was eliminated by the foreclosure proceedings. On July 19, 2005, the circuit court entered an order granting summary disposition in favor of Ameriquest and denying Alton's motion, determining that Ameriquest would be prejudiced if its claim were extinguished, but that granting relief to Ameriquest would not extinguish the title that Alton had received through the sheriff's sale.

On appeal, this Court, stating that it was compelled to follow the ruling in Washington Mut. Bank, reversed the decision of the trial court on the ground that Ameriquest's status as a volunteer precluded its entitlement to the benefit of equitable subrogation. Referencing Washington Mut. Bank, this Court stated, in relevant part: "[T]he doctrine of equitable subrogation does not apply to permit a new mortgage, granted as part of a generic refinancing transaction, to take the priority of the original mortgage, which is being paid off, thereby giving the new mortgage priority over intervening liens." Ameriquest, supra at 665, 726 N.W.2d 424. This Court indicated that, were it not constrained by the prior holding of Washington Mut. Bank, it would affirm the trial court's ruling and adopt the position of the Restatement of Property (Mortgages), 3d (the Restatement), which would permit the application of the doctrine of equitable subrogation in "circumstances of a refinanced mortgage." Ameriquest, supra at 661-662, 726 N.W.2d 424. Noting that the Restatement did not adopt a strict volunteer rule, the Court indicated that the Restatement rule, which views subrogation as an equitable remedy to avoid "unearned windfall[s] and `unjust enrichment,'" comprised "the better view." Id. at 667-668, 726 N.W.2d 424, quoting Restatement Property (Mortgages), 3d, § 7.6, comment a, pp. 508-509. The Court focused on the fact that Ameriquest, in paying off the Franklin mortgage, was following the instructions of Yousif and, thus, protecting its own security interest in the property. See Ameriquest, supra at 673, 726 N.W.2d 424. Reviewing the historical preclusion of subrogation in caselaw under the volunteer rule, the Court observed that the Restatement would permit the use of subrogation in the circumstances presented, opining:

Because the holding of Washington Mut. Bank establishes an inflexible rule precluding the application of equitable subrogation in mortgage refinancing, we find it contrary to the principles of equity the doctrine is intended to promote. Although Washington Mut. Bank recognizes the possibility of equitable subrogation if the replacement loan is provided by the holder of the old mortgage, or if the new lender first purchased the prior mortgage and then accepted the new mortgage, Washington Mut. Bank does not appear to permit an exception in this case despite the inequitable result. Existing Michigan law concerning equitable subrogation in the context of mortgage refinancing is confusing at best, and is contrary to logic, the Restatement of Property, and the view in many jurisdictions. These circumstances merit further consideration.

Should the volunteer rule of Washington Mut. Bank be found to be a proper interpretation of Lentz,[²] we urge the Michigan Supreme Court to review and reconsider this precedent in light of the prevailing modern view reflected in the Restatement. . . . Where the equities are in favor of the payor mortgagee, we believe this rule should prevail. Given the common practice of mortgage refinancing and the sheer volume of transactions undertaken, equitable subrogation is a proper and necessary mechanism for resolving priority disputes to avoid injustice. [Ameriquest, supra at 683-684, 726 N.W.2d 424 (internal citation omitted).]

II. Washington Mut. Bank—Factual History and Holding

Hanna and Jaklin Shina received a $392,000 loan secured by a mortgage in favor of Option One Mortgage on property they owned in West Bloomfield, Michigan. The Shinas refinanced this property by securing a mortgage from Washington Mutual Bank in the amount of $392,000, which they used to satisfy and discharge the mortgage held by Option One. However, Washington Mutual Bank was unaware that two additional mortgages had previously been recorded against the subject property: one by ShoreBank, in the amount of $200,000, and one by Standard Federal Bank, in the amount of $249,000. Washington Mut. Bank, supra at 112, 703 N.W.2d 486.

Following default by the Shinas, the property was placed in foreclosure. Washington Mutual Bank asserted its right to be equitably subrogated to the priority position of Option One because the proceeds of its loan had been used to satisfy and discharge the Option One mortgage. The trial court did not agree, and granted summary disposition in favor of Shore-Bank and Standard Federal Bank because Washington Mutual Bank had no legal obligation to pay off the Option One mortgage and, as a volunteer, lacked entitlement to equitable subrogation. Id. at 112-113, 703 N.W.2d 486.

On appeal, this Court reviewed Michigan law and determined that two prior Supreme Court cases, Lentz v. Stoflet, 280 Mich. 446, 273 N.W. 763 (1937), and Walker v. Bates, 244 Mich. 582, 222 N.W. 209 (1928), were irreconcilable. Although both Walker and Lentz involve the applicability of the doctrine of equitable subrogation and the status of a volunteer, their outcomes are viewed as inconsistent. In Walker, the plaintiffs, one of which was a real estate syndicate, were granted a lien on the subject property. Commonwealth Federal Bank had provided the homeowners a subsequent mortgage that had been used to discharge the senior mortgage. The Walker Court concurred that Commonwealth Federal Bank should be equitably subrogated to a priority position over plaintiffs' lien on the basis of their discharge of the senior mortgage. Walker, supra at 586-587, 222 N.W. 209. In contrast, in Lentz the plaintiffs were denied equitable subrogation on the basis of their volunteer status and a determination that they maintained no interest to protect. Lentz, supra at 451, 273 N.W. 763.

Citing its obligation to follow the most recent pronouncement by the Michigan Supreme Court, the Court in Washington Mut. Bank determined that its decision should be governed by Lentz, and stated:

The most recent pronouncement of the Supreme Court on this topic...