Graves v. AMERICAN ACCEPTANCE MORTG. CORP.

• Citation: 246 Mich. App. 1,630 N.W.2d 383
• Decision Date: 31 July 2001
• Docket Number: Docket No. 215141.
• Parties: Eileen V. GRAVES, Plaintiff/Counterdefendant-Appellee, v. AMERICAN ACCEPTANCE MORTGAGE CORPORATION, Defendant-Appellant, and Boulder Escrow, Inc., Defendant/Counterplaintiff-Appellant, and Steve A. Diaz, Defendant.
• Court: Court of Appeal of Michigan (US)

630 N.W.2d 383

246 Mich. App. 1

Eileen V. GRAVES, Plaintiff/Counterdefendant-Appellee, v. AMERICAN ACCEPTANCE MORTGAGE CORPORATION, Defendant-Appellant, and Boulder Escrow, Inc., Defendant/Counterplaintiff-Appellant, and Steve A. Diaz, Defendant.

Docket No. 215141.

Court of Appeals of Michigan.

Submitted December 8, 2000, at Detroit.

Decided May 15, 2001, at 9:00 a.m.

Released for Publication July 31, 2001.

Barron and Rosenberg, P.C., (by Ronald W. Barron and Andrew W. Mayoras), Bloomfield Hills, for Eileen V. Graves.

Michael J. Hagerty, Howell, for American Acceptance Mortgage Corporation and Boulder Escrow, Inc.

Before SAWYER, P.J., and JANSEN and GAGE, JJ.

GAGE, Judge.

This case involves a priority dispute between a lienholder and a mortgagee. Defendants appeal as of right from an order granting plaintiff summary disposition pursuant to MCR 2.116(C)(10). We reverse and remand.

I

In 1987, plaintiff Eileen V. Graves and her husband, defendant Steve A. Diaz, executed a land contract for the purchase of 72 West End in Waterford. Plaintiff and Diaz divorced in 1994. The June 9, 1994, judgment of divorce ordered the following with respect to 72 West End:

[T]he real property located at 72 West End, Waterford, Michigan, shall be awarded to the Plaintiff [Diaz] subject to a lien in favor of the Defendant [Graves] in the amount of seven (7 %) percent interest per annum payable within one year from March 30, 1994, for the following debts which Plaintiff owes to the Defendant: 1) Any child support arrearages; 2) Rental arrearages in the amount of Nine Hundred ($900.00) Dollars relative to the property at 1048 La Salle, Waterford, Michigan; 3) Any arrearages owed on the land contract relative to 1048 LaSalle, Waterford, Michigan, as of March 31, 1994. These arrearages amount to Seven Thousand Five Hundred Four ($7,504.00) Dollars. That the Plaintiff shall assume any outstanding obligation thereon and hold the Defendant harmless therefrom.

At 8:54 a.m. on September 7, 1994, plaintiff recorded her lien.

Later on September 7, 1994, Diaz entered a mortgage agreement with defendant-appellant American Acceptance Mortgage Corporation. With the mortgage proceeds, Diaz, who had defaulted on his payments under the 1987 land contract, paid off the amount due under the contract, thus obtaining legal title to 72 West End. A warranty deed transferred the property to Diaz "subject to acts or admissions of grantee since 8-25-87 being the date of a certain land contract in fulfillment of which this deed is given."¹ American Acceptance recorded Diaz' mortgage on October 5, 1994, and later assigned the mortgage to defendant/counterplaintiff-appellant Boulder Escrow, Inc., which recorded the assignment on April 13, 1995.

On January 12, 1996, plaintiff filed a complaint against Diaz, American Acceptance, and Boulder to foreclose on her judgment lien, alleging that Diaz owed her more than $15,000.² On July 17, 1996, Boulder filed a cross-claim against Diaz for defaulting on his mortgage obligation,³ and a counterclaim against plaintiff asserting the priority of its mortgage interest over plaintiff's judgment lien. Plaintiff moved for summary disposition. American Acceptance and Boulder (hereinafter referred to collectively as "defendants") also moved for summary disposition.

The trial court found that as a matter of law plaintiff's lien had priority because plaintiff recorded her lien before the mortgage was recorded, thereby giving defendants constructive notice of the lien.⁴ Accordingly, the trial court granted plaintiff summary disposition pursuant to MCR 2.116(C)(10) and denied defendants' motion.

II

Defendants contend that the trial court erred in granting plaintiff summary disposition because their purchase money mortgage has priority over plaintiff's prior divorce judgment lien, irrespective of who filed first. We review de novo a trial court's summary disposition ruling. Spiek v. Dep't of Transportation, 456 Mich. 331, 337, 572 N.W.2d 201 (1998). In reviewing a motion granted under MCR 2.116(C)(10), we consider the entire lower court record in the light most favorable to the nonmoving party to determine whether any genuine issue of material fact exists, or whether the moving party is entitled to judgment as a matter of law. Smith v. Globe Life Ins. Co., 460 Mich. 446, 454-455, 597 N.W.2d 28 (1999). In this case, the material facts appear uncontested. Accordingly, we must determine as a matter of law whether plaintiff's lien on Diaz' interest in the land contract has priority over defendants' mortgage interest.

III

A holder of an interest in real estate who first records his interest generally has priority over subsequent purchasers. See M.C.L. § 565.29, which provides in relevant part as follows:

Every conveyance⁵ of real estate within the state hereafter made, which shall not be recorded as provided in this chapter, shall be void as against any subsequent purchaser in good faith and for a valuable consideration, of the same real estate or any portion thereof, whose conveyance shall be first duly recorded.

See also M.C.L. § 565.25(4) (providing that "[a]ll subsequent owners or encumbrances shall take subject to the perfected liens, rights, or interests"). It is well established, however, that a promptly recorded purchase money mortgage takes priority over earlier creditors' interests, notwithstanding that the earlier interests were duly recorded. Fecteau v. Fries, 253 Mich. 51, 53-54, 234 N.W. 113 (1931).⁶

A purchase money mortgage, whether or not recorded has priority over any mortgage, lien,⁷ or other claim that attaches to the real estate but is created by or arises against the purchaser-mortgagor prior to the purchaser-mortgagor's acquisition of title to the real estate. [Restatement Property, Mortgages, 3d, § 7.2(b), p 458.]

Under this section the vendor's purchase money mortgage is senior to any previous judgment liens that arise against the purchaser-mortgagor. This is true even though a judgment attaches as a lien to the judgment debtor's afteracquired real estate and the vendor takes the mortgage with actual knowledge of the judgment.... This rule applies even if the mortgage is not executed simultaneously with the deed to the mortgagor, so long as the mortgage and the conveyance of title are intended to be part of one transaction.... Moreover, although the purchase money mortgage must be recorded in order to protect the mortgagee against subsequent interests that arise through the purchaser-mortgagor, such recording is unnecessary to protect against claims against mortgagor that antedate the purchase money mortgage.

Because this long-established rule makes it unnecessary for a purchase money lender to examine for preexisting judgments and other liens against the purchaser-mortgagor, it reduces title risk in connection with such transactions and thus encourages purchase money financing by vendors. [Restatement Property, Mortgages, 3d, § 7.2, comment b, p 459 (emphasis in original).]⁸

A purchase money mortgage constitutes a mortgage "that a buyer gives the seller, when the property is conveyed, to secure the unpaid balance of the purchase price." Black's Law Dictionary (7th ed), p 1028. Michigan courts have regarded any mortgage whose proceeds were used to acquire title to property as a purchase money mortgage, regardless of whether the vendor or a third party such as a financial institution is the mortgagee. Van Stee v. Ransford, 346 Mich. 116, 119, 77 N.W.2d 346 (1956); Rossman v. Marsh, 287 Mich. 580, 582, 283 N.W. 696 (1939), aff'd. on reh 287 Mich. 720, 286 N.W. 83 (1939). See also Restatement Property, Mortgages, 3d, § 7.2, p 458, defining "purchase money mortgage" as including "a mortgage given to a vendor of the real estate or to a third party lender to the extent that the proceeds of the loan are used to ... acquire title to the real estate."

In this case, the June 1994 judgment of divorce granted plaintiff a lien on 72 West End to the extent of Diaz' then existing interest in the property. At the time of the judgment lien's creation, Diaz, the land contract vendee, possessed equitable title in 72 West End. Bowen v. Lansing, 129 Mich. 117, 118-119, 88 N.W. 384 (1901); Tidwell v. Dasher, 152 Mich.App. 379, 386, 393 N.W.2d 644 (1986). Thus, plaintiff had a lien to the extent of Diaz' equitable interest in the property. Diaz did not obtain legal title to 72 West End until 1996 when he satisfied his obligation under the land contract. The mortgage Diaz granted American Acceptance constituted a purchase money mortgage because Diaz, who had defaulted on his land contract payments, utilized the proceeds of this mortgage to obtain legal title to 72 West End by paying off his land contract vendors. Accordingly, notwithstanding that plaintiff filed her judgment lien before execution of the Diaz-American Acceptance mortgage, the purchase money mortgage, pursuant to which Diaz secured legal title to the property, obtains priority over plaintiff's previously filed judgment lien, which "ar[o]se[ ] against the purchaser-mortgagor [Diaz] prior to the purchaser-mortgagor's acquisition of title to the real estate." Plaintiff's judgment lien "could not insert itself between the deed to [Diaz] and the purchase-money mortgage by [Diaz] to [American Acceptance]."⁹ Fecteau, supra at 53, 234 N.W. 113.

IV

While no published Michigan case has addressed the priority of a purchase money mortgage under circumstances identical or similar to those here involved, i.e., where a prior judgment lien already has attached to the purchase money mortgagor's equitable interest in the property at the time the purchase money mortgage proceeds were utilized to secure legal title to the involved property, we note the following cases from other jurisdictions that echo the logic behind our reasoning in this case.

Wermes v. McCowan, 286 IlI.App. 381, 3 N.E.2d 720 (1936), involved a dispute between a prior lienholder and a...