Matter of Dukes
| Decision Date | 04 November 1982 |
| Docket Number | Bankruptcy No. 81-00445,Adv. No. 81-0185. |
| Citation | 24 BR 404 |
| Parties | In the Matter of T.V. DUKES, Debtor. Larry PHILLIPS and Judy Phillips, Plaintiffs, v. T.V. DUKES, Defendant and Third Party Plaintiffs, v. SALEM MORTGAGE COMPANY and Roland A. Benge & Company, Third Party Defendants. |
| Court | U.S. Bankruptcy Court — Eastern District of Michigan |
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Brian I. Brown, Burton, Mich., for debtor.
Robert L. Shegos, Flint, Mich., for plaintiffs/Phillips.
Lee G. Ravitz, Southfield, Mich., for third party defendant/Roland A. Benge and Co.
Michael M. Grand, Birmingham, Mich., for third party defendant/Salem Mortg. Co.
I
Introduction
Debtor, an unmarried elderly man with a 4th grade education, was both untutored and naive. While in the hospital for a heart condition he viewed a television advertisement of Salem Mortgage, a mortgage broker who worked principally for Roland A. Benge & Co., a mortgage lender. Debtor answered the advertisement by calling Salem on a toll-free telephone number. Subsequent to his release from the hospital, debtor was visited by a representative of Salem Mortgage in his home, at which time he made a written loan application to Benge & Company. A loan was subsequently made to debtor in what the lender alleges to be a principal amount of $5,000.00, secured by a first mortgage on debtor's home, at an interest rate of 11% per annum. For its services in finding a willing lender, Salem Mortgage exacted a brokerage fee of $1,344.00, to be paid by debtor directly from the proceeds of the $5,000 loan.
An adversary action was filed by plaintiffs, assignees of the mortgage, to collect the amount owing under the mortgage by debtor; the mortgage broker and mortgagee were joined as third party defendants. This opinion deals primarily with the issues of overreaching by the broker and mortgagee, the exaction of broker's fees as a subterfuge for usurious conduct, alleged violations of the Federal Consumer Credit Protection Act, 15 U.S.C. §§ 1601 et seq., and alleged violations of the Michigan Consumer Protection Act, M.C.L.A. §§ 445.901 et seq.
1. Debtor, T.V. Dukes, filed a Chapter 13 petition April 22, 1981, and is an elderly man whose formal education extends only through grade 4.
Salem Mortgage advertised and sold its services as a mortgage broker to procure loans for borrowers, which loans were primarily for personal, family, or household purposes.
Roland A. Benge & Co., is an approved mortgage lender under the provisions of the National Housing Act.
2. In early 1978, while in a hospital for treatment of a heart condition, Dukes viewed a television advertisement of Salem Mortgage, and subsequently placed a phone call to Salem's toll-free number inquiring about obtaining a loan to enable him to visit an ailing uncle in Georgia.
3. In response to Duke's inquiry he was visited at his home by a representative of Salem on May 20, 1978, at which time Salem took a mortgage loan application and entered into a "broker's agreement" with Dukes to "attempt to find a lender" willing to loan Dukes $3,500.00, utilizing his equity in his home as security.
4. The mortgage loan application form was that utilized by Roland A. Benge & Co., the ultimate lender.
5. There is no testimony to contradict the fact that Salem did not engage in an active search for a lender; on the contrary, Salem had an on-going relationship with Benge & Company. A representative of Salem Mortgage conducted the initial interview, prepared all documents necessary to extend the loan, and conducted the closing of the loan at Duke's home on June 7, 1978.
6. Dukes had no contact whatsoever with Roland A. Benge & Co., other than through the representative Salem Mortgage. Salem Mortgage also made the payments required on the vendee's interest in a land contract from the proceeds of the loan in order to enable Roland A. Benge & Co. to acquire a first lien on Duke's home.
7. Salem Mortgage placed between 50 and 60 percent of its loan customers with Roland A. Benge & Company.
8. Mr. Dukes testified that he had hoped to clear at least $1,000.00 in proceeds from the loan after all necessary fees and payments on the land contract were made.
9. Salem, in its broker's agreement, did not state what its ultimate broker's fee would entail; but stated simply that Duke's was seeking a loan for $3,500.00. The full text of the broker's agreement is set forth infra. The ultimate broker's fee charged was $1,344.00.
10. Benge's disclosure statement indicates a total amount financed of $5,000.00. The disbursement sheet accounts for this amount as follows:
Land Contract Payoff as of 7/5/78 $1,710.77
City & County Taxes owing 608.85
Tax Escrow & Fire Ins. 255.00
Prepaid Interest (8 days) 12.24
6 Months Arrearage 510.00
Brokerage Fee 1,344.00
Closing Costs 156.00
Due Customer (Dukes) 403.14
_________
Total $5,000.00
11. Benge was on notice and had knowledge that a broker's fee was being charged in this transaction as it was dealing with a broker and paying that broker no compensation itself, it being clear that a broker does not work without compensation. Benge was on further notice due to its regular business dealings with Salem Mortgage Company.
12. Benge failed to disclose the broker's fee as a prepaid finance charge in its Truth in Lending disclosure statement, did not include the fee as a component of the finance charge, and did not include the fee as a component in computing the annual percentage rate.
13. If the broker's fee had been disclosed by Benge in computing the annual percentage rate, that rate would have been greater than the amount actually disclosed in Benge's statement.
14. We also incorporate herein those additional findings of fact made elsewhere in the body of this opinion.
A. Whether this court lacks jurisdiction because debtor has failed to exhaust all available administrative remedies.
B. Whether a vendee's interest in a land contract may be utilized as security in a loan transaction, thereby creating a valid mortgage between the vendee and the third party.
C. Whether the debtor is estopped to deny the existence and validity of the lender's first mortgage.
D. Whether the loan transaction violated the provisions of the Michigan Consumer Protection Act, M.C.L.A. §§ 445.901 et seq.
E. Whether the brokerage fee paid by the borrower in this transaction can be attributed to the mortgagee as interest, and if so, whether the effective rate of interest charged by the lender exceeded the lawful rate of interest in Michigan.
F. Whether the lender violated the Truth Lending Act by failing to properly disclose the broker's fee as required by Regulation Z.
Discussion of the Law
Third party defendants Salem Mortgage and Roland A. Benge & Co. argue in their joint brief that this court lacks jurisdiction in this matter because available administrative remedies have not been exhausted. Attorney General v. Diamond Mortgage Corp., 102 Mich.App. 322, 301 N.W.2d 523 (1980). The case cited is, however, inopposite to the present case, as it involved an action to deny, suspend, or revoke a license issued to a real estate broker, an action directly within the authority granted to the Michigan Department of Licensing and Regulation. M.C.L. § 451.213; M.S.A. § 19.803. The present action involves no matters which would require an exhaustion of available remedies pursuant to the Michigan Administrative Procedures Act, M.C.L. §§ 24.264, 24.301, M.S.A. §§ 3.560(164), 3.560(201), and constitutes a civil proceeding related to a case under title 11 of the United States Code so that the Bankruptcy Court possesses jurisdiction by virtue of 28 U.S.C. § 1471(b) and (c).
The initial issue presented in this matter is whether a vendee's interest in a land contract may be utilized as security in a loan transaction, thereby creating a valid mortgage between the vendee and a third party.
Defendant-debtor argues that the first mortgage granted to Benge & Co. was invalid ab inition for the reason that title remained in the vendor on the land contract because the vendor did not execute a release of his lien until some time after the present loan transaction took place. Therefore, debtor continues, lender in this transaction had only a second mortgage interest in the debtor's property for the reason that at the time the loan was executed, debtor had no interest in the property which could be mortgaged. This assertion is without foundation in debtor's brief, and, we believe, without foundation in the law.
By way of a general postulation regarding the mortgagability of a land contract vendee's interest, we quote the following passage from 55 Am.Jur.2d, Mortgages, § 111 p. 265:
The Courts regard as mortgagable both the interest of a vendor of land while the contract for the sale remains executory and no deed has passed and the interest of a vendee under a contract to purchase.
We view this as the proper statement of controlling law in Michigan.
The general rule as to what may properly constitute the subject matter of a mortgage is that in order to grant a valid mortgage in property, one must have present valid title, whether legal or equitable, or some other recognized property interest in the property sought to be mortgaged. See 16 M.L.P., Mortgages § 11 p. 313; Mead v. Pinyard, 154 U.S. 620, 14 S.Ct. 1205, 23 L.Ed. 501 (1894).
It is well settled that when land is sold on land contract that the legal title is retained by the vendor and an equitable interest or title is obtained by the vendee. Therefore when a...
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