CitiMortgage, Inc. v. Mortg. Elec. Registration Sys., Inc.

• Decision Date: 15 December 2011
• Docket Number: Docket No. 298004.
• Parties: CITIMORTGAGE, INC. v. MORTGAGE ELECTRONIC REGISTRATION SYSTEMS, INC.
• Court: Court of Appeal of Michigan — District of US

295 Mich.App. 72

813 N.W.2d 332

CITIMORTGAGE, INC.

v.MORTGAGE ELECTRONIC REGISTRATION SYSTEMS, INC.

Docket No. 298004.

Court of Appeals of Michigan.

Submitted Nov. 9, 2011, at Detroit.

Decided Dec. 15, 2011, at 9:00 a.m.

Clark Hill PLC (by Richard A. Sundquist and Matthew W. Heron), Detroit, for CitiMortgage, Inc., and Federal Home Loan Mortgage Corporation.

Schneiderman & Sherman, P.C. (by Erin R. Katz and Andrew J. Hubbs), Farmington Hills, for Mortgage Electronic Registration Systems, Inc.

Before: MURPHY, C.J., and BECKERING and RONAYNE KRAUSE, JJ.

PER CURIAM.

Plaintiffs appeal as of right from the trial court's order denying plaintiffs' motion for summary disposition and granting defendant's ¹ motion for summary disposition. We reverse and remand for further proceedings.

The facts of this case are not in dispute. On September 6, 2000, Sheryll D. Catton and Gregory J. Catton (the Cattons) purchased property in Wayne County with a mortgage granted to ABN AMRO Mortgage Group, Inc. On May 4, 2001, the Cattons refinanced their loan, discharging the original mortgage in favor of a new mortgage also granted to ABN AMRO. On July 11, 2002, the Cattons obtained a home-equity loan from GMAC Mortgage, L.L.C., granting Mortgage Electronic Registration Systems, Inc. (MERS), as nominee for GMAC, a second mortgage on the property. On November 25, 2002, the Cattons refinanced their 2001 loan, discharging the 2001 ABN AMRO mortgage in favor of another mortgage granted to ABN AMRO. There is no dispute that ABN AMRO was unaware of the MERS mortgage at the time it took the new mortgage even though MERS's mortgage had been recorded. On August 22, 2005, the Cattons filed for bankruptcy and their property was subsequently sold at a foreclosure sale to Federal Home Loan Mortgage Corporation (FHLMC). FHLMC sued, along with ABN AMRO's successor in interest, CitiMortgage, Inc., to quiet title.

The issue in this matter is whether, as between the two lienholders, which of the two mortgage liens is superior. CitiMortgage holds the refinanced mortgage lien, and defendant holds the second mortgage, which would have been the junior lien but for the subsequent refinancing. More specifically, the issue is whether CitiMortgage can place its lien in first priority over defendant's lien through application of the doctrine of equitable subrogation. The trial court concluded that CitiMortgage could not, and this appeal followed. We review motions for summary disposition and questions of law de novo. Maiden v. Rozwood, 461 Mich. 109, 118, 597 N.W.2d 817 (1999); Chapdelaine v. Sochocki, 247 Mich.App. 167, 169, 635 N.W.2d 339 (2001).

Under Michigan's former race-notice recording statute, MCL 565.25(1) and (4), as amended by 1996 PA 526, a first-recorded mortgage had priority over a later-recorded mortgage, and equity—and therefore equitable subrogation—was used by the courts to overcome the plain language of the statute only in the presence of “ ‘ “unusual circumstances” such as fraud or mutual mistake.’ ” Ameriquest Mtg. Co. v. Alton, 273 Mich.App. 84, 93–94, 99–100, 731 N.W.2d 99 (2006), quoting Devillers v. Auto Club Ins. Ass'n, 473 Mich. 562, 590, 702 N.W.2d 539 (2005). See also Ameriquest, 273 Mich.App. at 100, 731 N.W.2d 99 (Murphy, J., concurring). Other “unusual circumstances” that might have supported the use of equitable relief included a “preexisting jumble of convoluted case law through which the plaintiff was forced to navigate” and misconduct by another party. Devillers, 473 Mich. at 590 n. 64, n. 65, 702 N.W.2d 539. However, Michigan's recording statute was amended by 2008 PA 357, eliminating the former MCL 565.25(1) and (4). Because the analysis in Ameriquest relied on those former subsections, Ameriquest is no longer controlling.

That being the case, we conclude that the caselaw on point in Michigan is consistent with Restatement Property, 3d, Mortgages, § 7.3, pp. 472–473, which provides as follows:

(a) If a senior mortgage is released of record and, as part of the same transaction, is replaced with a new mortgage, the latter mortgage retains the same priority as its predecessor, except

(1) to the extent that any change in the terms of the mortgage or the obligation it secures is materially prejudicial to the holder of a junior interest in the real estate, or

(2) to the extent that one who is protected by the recording act acquires an interest in the real estate at a time that the senior mortgage is not of record.

(b) If a senior mortgage or the obligation it secures is modified by the parties, the mortgage as modified retains priority as against junior interests in the real estate, except to the extent that the modification is materially prejudicial to the holders of such interests and is not within the scope of a reservation of right to modify as provided in Subsection (c).

(c) If the mortgagor and mortgagee reserve the right in a mortgage to modify the mortgage or the obligation it secures, the mortgage as modified retains priority even if the modification is materially prejudicial to the holders of junior interests in the real estate, except as provided in Subsection (d).

(d) If a mortgage contains a reservation of the right to modify the mortgage or the obligation as described in Subsection (c), the mortgagor may issue a notice to the mortgagee terminating that right. Upon receipt of the notice by the mortgagee, the right to modify with retention of priority under Subsection (c) becomes ineffective against persons taking any subsequent interests in the mortgaged real estate, and any subsequent modifications are governed by Subsection (b). Upon receipt of the notice, the mortgagee must provide the mortgagor with a certificate in recordable form stating that the notice has been received.

Of particular note, comment b to this section of the Restatement provides that “[u]nder § 7.3(a) a senior mortgagee that discharges its mortgage of record and records a replacement mortgage does not lose its priority as against the holder of an intervening interest unless that holder suffers material prejudice.” Id. at p. 474. The associated Reporters' Note, voluminously citing to many cases from other jurisdictions, explains that “ [c]ourts routinely adhere to the principle that a senior mortgagee who discharges its mortgage of record and takes and records a replacement mortgage, retains the predecessor's seniority as against intervening lienors unless the mortgagee intended a subordination of its mortgage or ‘paramount equities' exist.” Id. at p. 483.

For the reasons we discuss later in this opinion, we conclude that § 7.3 of the Restatement, limited to the situations described by the quoted commentary—specifically, cases in which the senior mortgagee discharges its mortgage of record and contemporaneously takes a replacement mortgage, as often occurs in the context of refinancing—is consistent with Michigan precedent. Thus limited, because§ 7.3 of the Restatement reflects the present state of the law in Michigan, we hereby adopt it. We caution, however, that the lending mortgagee seeking subrogation and priority over an intervening interest relative to its newly recorded mortgage must be the same lender that held the original mortgage before the intervening interest arose; and, furthermore, any application of equitable subrogation is subject to a careful examination of the equities of all parties and potential prejudice to the intervening lienholder.

Our Supreme Court discussed what it called the doctrine of equitable mistake in Schanhite v. Plymouth United Savings Bank, 277 Mich. 33, 39, 268 N.W. 801 (1936), stating:

It is a general rule that the cancellation of a mortgage on the record is not conclusive as to its discharge, or as to the payment of the indebtedness secured thereby. And where the holder of a senior mortgage discharges it of record, and contemporaneously therewith takes a new mortgage, he will not, in the absence of paramount equities, be held to have subordinated his security to an intervening lien unless the circumstances of the transaction indicate this to have been his intention, or such intention upon his part is shown by extrinsic evidence. [Quotation marks and citation omitted.]

This reflects “the well-settled rule that the acceptance by a mortgagee of a new mortgage and his cancellation of the old mortgage do not deprive the mortgagee of priority over intervening liens.” Washington Mut. Bank v. ShoreBank Corp., 267 Mich.App. 111, 126, 703 N.W.2d 486 (2005).

In Washington Mut. Bank, this Court rejected an equitable-subrogation argument made by the plaintiff bank. The plaintiff had provided refinancing on real property that had earlier been encumbered by a first mortgage, which was paid off with the proceeds from the refinancing. However, the property had also been encumbered by two intervening mortgages in favor of other banks before the refinancing. Importantly, and distinguishable from the facts here, the plaintiff was not the original lender-mortgagee.²Id. at 112, 703 N.W.2d 486. After an exhaustive examination of the caselaw regarding equitablesubrogation and citing the “well-settled rule” from Schanhite, the Court stated:

[I]n this case, we are not presented with a new mortgage being accepted by the holder of the old mortgage. That is, had the new mortgage been given to Option One...