In re First Mortg. Fund, Inc.

• Decision Date: 30 August 2013
• Docket Number: No. 12–14733.,12–14733.
• Citation: 498 B.R. 180
• Parties: In re FIRST MORTGAGE FUND, INC., Debtor.
• Court: U.S. District Court — Eastern District of Michigan

498 B.R. 180

In re FIRST MORTGAGE FUND, INC., Debtor.

No. 12–14733.

United States District Court,

E.D. Michigan,

Southern Division.

Aug. 30, 2013.

Jeffrey H. Bigelman, William C. Blasses, Osipov Bigelman, P.C., Louis P. Rochkind, Paul R. Hage, Jaffe, Raitt, Southfield, MI, for Appellant.

Mark H. Shapiro, Steinberg, Shapiro, Tracy M. Clark, Steinberg Shapiro & Clark, Southfield, MI, for Appellee.

ORDER AFFIRMING DECISION OF BANKRUPTCY COURT

STEPHEN J. MURPHY, III, District Judge.

The matter before the Court is an appeal by Stavenkan Fund, Inc. (“Stavenkan”) from an order of the bankruptcy court in favor of the Chapter 7 trustee. For the following reasons, the Court will affirm the decision of the bankruptcy court.

BACKGROUND

The present dispute arises from Stavenkan's assertion of interest in four parcels of property located in Flint, Michigan (the “Flint properties”) to which the Debtor, First Mortgage Fund, Inc. (“First Mortgage”) holds record title. The relevant facts are undisputed.

On February 24, 2005, Samuel A. Ragone purchased the Flint properties. Halls Mortgage, Inc. (“Halls”) financed the purchase. Ragone executed a balloon note (“Note”) in the sum of $1,531,000 in favor of Halls, and the note was secured by mortgages on the properties. Halls assigned the note and the mortgages to First Mortgage. The mortgages and the assignments were recorded with the Genesee Country Register of Deeds.

On May 23, 2005, First Mortgage assigned its entire interest in the note and mortgages to Stavenkan. It is undisputed that the assignment from First Mortgage to Stavenkan was never recorded. Accordingly, First Mortgage remained the mortgagee of record and no recorded evidence of Stavenkan's interest in the properties existed.

Approximately three years later, First Mortgage, as mortgagee of record, foreclosed on the Flint properties, and then purchased the properties in a credit bid at the foreclosure sale. On March 5, 2008, the sheriff deeds for the properties were recorded with the Genesee County Register of Deeds in favor of First Mortgage.

After another three years, in March 2011, First Mortgage filed for bankruptcy. After First Mortgage filed for bankruptcy, Stavenkan—whose owner and operator Michael Stacey was also the majority shareholder and president of First Mortgage—for the first time sought to assert its interest in the properties by filing a motion to lift the bankruptcy stay. On June 26, 2012, the Trustee filed an adversary action, seeking to avoid the transfer of First Mortgage's interest in the properties pursuant to 11 U.S.C. § 544(a). See Adversary Compl. to Avoid Transfers, ECF No. 2 at 6. On July 10, 2012, Stavenkan filed a counter complaint, raising claims for (1) quiet title; (2) specific performance; and (3) constructive trust. The trustee and Stavenkan filed cross motions for judgment. See Trustee's Mot. for Summ. J., ECF No. 2. at 93; Stavenkan's Mot. for Summ. J., ECF No. 2 at 181. On September 11, 2012, the bankruptcy court held a hearing on the motions and issued an order on the record granting the trustee's motion and denying Stavenkan's. See Hr'g Tr., ECF No. 2 at 283–292; Order, ECF No. 2 at 263. Stavenkan appeals that order.

DISCUSSION

This Court has jurisdiction to hear this appeal pursuant to 28 U.S.C. § 158(a). The Court reviews a bankruptcy court's findings of fact for clear error and its conclusions of law de novo. AMC Mortg. Co. v. Tenn. Dep't of Revenue (In re AMC Mortg. Co.), 213 F.3d 917, 920 (6th Cir.2000).

Section 544(a), known as the Bankruptcy Code's “strong arm” provision, allows the bankruptcy trustee “the power to avoid transfers of property that would be avoidable by certain hypothetical parties.” Simon v. Chase Manhattan Bank (In re Zaptocky), 250 F.3d 1020, 1023 (6th Cir.2001). Here, the trustee asserts the rights of a bona fide purchaser under § 544(a)(3). Under that provision, the trustee may avoid the transfer of any property of the debtor's that would be voidable by “a bona fide purchaser of real property ... from the debtor ... that obtains the status of a bona fide purchaser at the time of the commencement of the case....” 11 U.S.C. § 544(a)(3). In other words, the provision “assumes a transfer from the debtor to a bona fide purchaser on the date of filing. The trustee is then clothed with whatever legal rights the bona fide purchaser would possess.” Geygan v. World Sav. Bank, FSB (In re Nolan), 383 B.R. 391, 397 (6th Cir. BAP 2008). The law of the state in which the property is located determines the scope of the trustee's rights as a bona fide purchaser. Owen–Ames–Kimball Co. v. Mich. Lithographing Co. (In re Mich. Lithographing Co.), 997 F.2d 1158, 1159 (6th Cir.1993) (“State law governs who may be a bona fide purchaser.”), aff'd,250 F.3d 1020 (6th Cir.2001). In Michigan, a bona fide purchaser for value takes free of prior unrecorded interests. Mich. Comp. Laws § 565.29. Here, the trustee argues, and the bankruptcy court found, that occupying the legal status of bona fide purchaser for value, the trustee took the four Flint properties free of Stavenkan's interest in the properties because Stavenkan's interest was unrecorded.

Stavenkan makes several interrelated arguments in response. First, Stavenkan argues that the foreclosure was void because First Mortgage foreclosed despite having already assigned its interest to Stavenkan. Consequently, Stavenkan argues, First Mortgage did not take valid title to the properties at that time, and the only way it could gain valid title under Michigan law would be to take adverse possession of it under Mich. Comp. Laws § 600.5801(1), which provides a five-year statute of limitations to challenge a claim of title through foreclosure sale. First Mortgage has not taken, and cannot take, through adverse possession, Stavenkan argues, because Stavenkan filed this action within the five-year statutory period. But this argument fails because Stavenkan's unrecorded interest does not render the foreclosure void.

Under Michigan law, a party is entitled to foreclose by advertisement if it can show record chain of title, i.e., a clear chain of title from the original mortgagee to the foreclosing party. Mich. Comp. Laws § 600.3204(3) (“If the party foreclosing a mortgage by advertisement is not the original mortgagee, a record chain of title shall exist prior to the date of sale ... evidencing the assignment of the mortgage to the party foreclosing the mortgage.”); see also Livonia Properties Holdings, LLC v. 12840–12976 Farmington Rd. Holdings, LLC, 399 Fed.Appx. 97, 100 (6th Cir.2010) (rejecting plaintiff's assertion that “a Michigan mortgage may only be foreclosed by advertisement if every interim assignment between the original lender and the foreclosing party is revealed by the public record”); Arnold v. DMR Financial Services, Inc., 448 Mich. 671, 671, 532 N.W.2d 852 (1995) (“[T]he recordholder of the mortgage [can] foreclose by advertisement, and [the] mortgage is not affected by the fact that others had an unrecorded interest in the mortgage.”). As the record holder of the mortgage at the time of the foreclosure, First Mortgage met the requirements of Mich. Comp. Laws § 600.3204(3), despite Stavenkan's unrecorded, and unasserted, interest.

Moreover, the existence of Stavenkan's unrecorded interest does not, as Stavenkan argues, render the foreclosure void ab initio. It renders it voidable.¹ Stavenkan cites Davenport v. HSBC Bank USA, 275 Mich.App. 344, 739 N.W.2d 383 (2007) to support its argument that the foreclosure is void ab initio, but Davenport is no longer good law. As described by the Michigan Supreme Court when overruling the decision, Davenport “held that the defendant's failure to comply with MCL 600.3204(1)(d), which requires that a party own some or all of the indebtedness before foreclosing by advertisement, rendered the foreclosure proceedings void ab initio.” Kim v. JPMorgan Chase Bank, N.A., 493 Mich. 98, 114, 825 N.W.2d 329 (2012)reh'g denied,493 Mich. 962, 828 N.W.2d 678 (2013). The Kim court rejected that holding, and stated that, “ Davenport 's holding was contrary to the established precedent of this Court. We have long held that defective mortgage foreclosures are voidable.” Kim, 493 Mich. at 114, 825 N.W.2d 329 (emphasis added); see also Spadafore v. Aurora Loan Servs., LLC, No. 12–10532, 2013 WL 2156047 (E.D.Mich. May 17, 2013)( “Kim makes clear that, under Michigan law, ‘failure to comply with the conditions set forth in Michigan's foreclosure-by-advertisement statute does not render flawed foreclosures void (i.e., void ab initio ) but merely voidable.’ ”) (quoting Conlin v. Mortgage Elec. Registration Sys., Inc., 714 F.3d 355, 361 (6th Cir.2013)).² Accordingly, at the time it occurred,and absent any challenge from Stavenkan, the foreclosure was valid. Because Stavenkan had not asserted its interest before First Mortgage filed for bankruptcy, First Mortgage had valid, record title to the properties at the time the petition was filed.

To the extent that Stavenkan seeks to invalidate the foreclosure in this proceeding, the attempt cannot succeed.³ In Michigan, “because the foreclosure statutes are intended to create finality and certainty in property rights, an action challenging foreclosure must be brought ‘promptly and without delay.’ ” El–Seblani v. IndyMac Mortgage Servs., 510 Fed.Appx. 425, 429 (6th Cir.2013) (quoting Richard v. Schneiderman & Sherman, PC, 294 Mich.App. 37, 818 N.W.2d 334 (2011), rev'd on other grounds,––– Mich. ––––, 807 N.W.2d 325 (2012)); see also United States v. Garno, 974 F.Supp. 628, 633 (E.D.Mich.1997) (“Michigan courts agree that disgruntled mortgagors must act promptly and without delay, having estopped attacks on foreclosure sales due to irregularities in the sale which were brought only two years or even less after a sale.”). Stavenkan did not act “promptly and without delay” to protect its interests. It filed this challenge three years after the...