In re Atlantic Mortg. Corp.

• Citation: 69 BR 321
• Decision Date: 13 January 1987
• Docket Number: Bankruptcy No. 84-01814-R,Adv. No. 85-1184-R.
• Parties: In re ATLANTIC MORTGAGE CORPORATION, Debtor. James V. McTEVIA, Operating Trustee, Atlantic Mortgage Corporation, a Michigan corporation, Plaintiffs, v. Marie ADAMO, et al., Defendants.
• Court: United States Bankruptcy Courts. Tenth Circuit. U.S. Bankruptcy Court — Eastern District of Michigan

69 B.R. 321 (1987)

In re ATLANTIC MORTGAGE CORPORATION, Debtor James V. McTEVIA, Operating Trustee, Atlantic Mortgage Corporation, a Michigan corporation, Plaintiffs, v. Marie ADAMO, et al., Defendants.

Bankruptcy No. 84-01814-R, Adv. No. 85-1184-R.

United States Bankruptcy Court, E.D. Michigan, S.D.

January 13, 1987.

Peter Nathan, Detroit, Mich., for plaintiff.

ORDER GRANTING IN PART AND DENYING IN PART TRUSTEE'S MOTION FOR SUMMARY JUDGMENT

STEVEN W. RHODES, Bankruptcy Judge.

This adversary proceeding is before the Court on the trustee's motion for summary judgment on his complaint to avoid the real estate liens claimed by the debtor's investors. The trustee contends that as a matter of law, his strong arm powers under 11 U.S.C. § 544(a)(1) defeat the investors' claims arising from mortgages and underlying promissory notes that the debtor had assigned to them.

The trustee has no objection to a summary judgment in favor of any investor who has possession of an original underlying promissory note. The Court denies the trustee's motion for summary judgment as to nine defendants who have demonstrated the existence of genuine issues of material fact under Bankruptcy Rule 7056. However, the Court grants summary judgment in favor of the trustee as to the remaining defendants.

I. The Facts

The debtor, Atlantic Mortgage Corporation, was a mortgage lender. Atlantic's business is summarized in the affidavit of Michael Anspach, the former president of Atlantic. Anspach indicated that Atlantic lent money to borrowers in exchange for promissory notes (hereinafter "underlying notes") secured by first, second, or wraparound mortgages on real estate. For operating funds, Atlantic borrowed from investors, some 200 of whom are the defendants in this case.

In a transaction with an investor, Atlantic generally assigned a mortgage and an underlying note, which were intended as security for the loan. In some cases, the value of the underlying note and mortgage equalled the amount of the loan from the investor to Atlantic; in other cases, the value of the collateral did not equal the loan amount. Some investors also received personal guarantees from Anspach or other principals of Atlantic. It was generally intended that Atlantic would make monthly payments to an investor regardless of whether it had collected from the underlying borrower.

To document the transaction, Atlantic generally delivered to an investor its own promissory note and an assignment document, assigning its interest in a specific mortgage and its interest in the mortgagor's underlying note. Many investors recorded these documents in the appropriate real estate filing offices.

In addition, Anspach stated in his affidavit that "with respect to certain investors, Atlantic . . . intended to deliver the underlying borrower's note." Atlantic did not follow any regular practice in effectuating this intent, however. The original underlying note was delivered in some cases, but not in others; some investors received a copy of the underlying note. A few investors received a duplicate original of the underlying note.

II. The Parties' Contentions

The trustee argues that his "strong-arm" power under 11 U.S.C. § 544(a)(1) defeats an investor's unperfected security interest in the underlying promissory note. The trustee's power to avoid liens is set forth in 11 U.S.C. § 544:

(a) The trustee shall have, as of the commencement of the case, and without regard to any knowledge of the trustee or of any creditor, the rights and powers of, or may avoid any transfer of property of the debtor or any obligation incurred by the debtor that is voidable by —

(1) a creditor that extends credit to the debtor at the time of the commencement of the case, and that obtains, at such time and with respect to such credit, a judicial lien on all property on which a creditor on a simple contract could have obtained such a judicial lien, whether or not such a creditor exists.

The trustee contends that the security interest of an investor who does not have actual possession of an underlying note remains unperfected, because a security interest in a negotiable note is perfected only by possession under M.C.L.A. § 440.9304(1):

A security interest in chattel paper or negotiable documents may be perfected by filing. A security interest in instruments (other than instruments which constitute part of chattel paper) can be perfected only by the secured party\'s taking possession, except as provided in subsections (4) and (5).¹

The investors respond with several alternative arguments. First, they contend that a pledge of a promissory note together with a mortgage is a real estate transaction; therefore the investors perfected their security interests by the appropriate real estate filings. This contention is discussed in Part III, below.

Second, the investors contend that circumstances of misrepresentation, mistake, fraud, and the like make Atlantic a constructive trustee of the promissory notes for them; therefore this property is not included in the bankruptcy estate, and the investors' claims are prior to the trustee's. This argument is discussed in Part IV of this opinion.

Third, the investors contend that certain transactions involved sales, not assignments for security; therefore Atlantic had no equitable title to pass to the bankruptcy estate. This argument is discussed in Part V of this opinion.

III. The Investors' Security Interests

A. The Uniform Commercial Code Provisions

The investors argue that real estate law, not the Uniform Commercial Code, applies to these transactions. In support, the investors cite M.C.L.A. § 440.9104(j), which provides:

This article does not apply:

* * * * * *

(j) except to the extent that provision is made for fixtures in section 9313, to the creation or transfer of an interest in or lien on real estate, including a lease or rents thereunder.

In response, the trustee contends that a security interest in an underlying note is governed by Article 9 of the Uniform Commercial Code, regardless of its relationship to real estate collateral. The trustee cites M.C.L.A. § 440.9102(3), which provides:

The application of this article Article 9 to a security interest in a secured obligation is not affected by the fact that the obligation is itself secured by a transaction or interest to which this article does not apply.

Thus, M.C.L.A. §§ 440.9102(3) and 440.9104(j) present an apparent conflict in their application to these facts.

B. The Maryville Case

In Peoples Bank of Polk County v. McDonald, (In re Maryville Savings & Loan Corp.), 743 F.2d 413 (6th Cir.1984), supplemented, 760 F.2d 119 (6th Cir.1985), the court addressed this issue. There, the Maryville Savings & Loan had assigned, as collateral for a loan from Peoples Bank, certain promissory notes secured by deeds of trust encumbering real property. Peoples Bank recorded the assignment in the appropriate real estate filing office, but did not take possession of the underlying promissory notes. After Maryville filed for bankruptcy, the trustee asserted that the bank's security interest was unperfected, because the bank had not taken possession of the underlying notes.

The court held that choosing between either real estate law or the Uniform Commercial Code,

failed to give meaningful scope, depending on the result reached, either to § 9-102 or § 9-104(j). . . . We are persuaded that §§ 9-102(3) and 9-104(j) may be reconciled by holding in this case that article nine be applied in regard to the promissory notes but not in regard to the deeds of trust. 743 F.2d at 415-16.²

The court concluded from Official Comment 4 to § 9-102 that the security interest in the underlying notes should be analyzed separately from the interest in the deeds of trust:

The owner of Blackacre borrows $10,000 from his neighbor, and secures his note by a mortgage of Blackacre. This Article Chapter is not applicable to the creation of the real estate mortgage. However, when the mortgagee in turn pledges this note and mortgage to secure his own obligation to X, this Article Chapter is applicable to the security interest thus created in the note and the mortgage. Whether the transfer of the collateral for the note, i.e., the mortgagee\'s interest in Blackacre requires further action (such as recording an assignment of the mortgagee\'s interest) is left to real estate law. See Section 9-104(j).

Tenn.Code Ann. § 47-9-102 comment 4 (emphasis added).

Id. at 415.

Due to a 1966 amendment, Official Comment 4 as adopted in Michigan law differs from the Tennessee version on which the court relied in Maryville. The Michigan amended version, however, supports the result reached in Maryville even more clearly. It provides:

4. An illustration of subsection (3) is as follows:

The owner of Blackacre borrows $10,000 from his neighbor, and secures his note by a mortgage on Blackacre. This Article is not applicable to the creation of the real estate mortgage. Nor is it applicable to a sale of the note by the mortgagee, even though the mortgage continues to secure the note. However, when the mortgagee pledges the note to secure his own obligation to X, this Article applies to the security interest thus created, which is a security interest in an instrument even though the instrument is secured by a real estate mortgage. This Article leaves to other law the question of the effect on rights under the mortgage of delivery or non-delivery of the mortgage or of recording or non-recording of an assignment of the mortgagee\'s interest. See Section 9-104(j). But under Section 3-304(5) recording of the assignment does not of itself prevent X from holding the note in due course. MCLA § 440.9102, Comment 4.

See also Maryville, 743 F.2d at 416, n. 1.

Accordingly, the Court concludes that an investor's interest in a mortgage assigned to him must be analyzed separately from that investor's interest in the corresponding underlying note.

C. An Investor's...