Washington Mut. Bank, FA v. ShoreBank Corp.

• Decision Date: 23 June 2005
• Docket Number: Docket No. 254338.
• Citation: 267 Mich. App. 111,703 N.W.2d 486
• Parties: WASHINGTON MUTUAL BANK, F.A., Plaintiff-Appellant, v. SHOREBANK CORPORATION and Standard Federal Bank, N.A., Defendants-Appellees, and Hanna Shina, a/k/a John Shina, and Jaklin Shina, Defendants.
• Court: Court of Appeal of Michigan — District of US

703 N.W.2d 486

267 Mich. App. 111

WASHINGTON MUTUAL BANK, F.A., Plaintiff-Appellant, v. SHOREBANK CORPORATION and Standard Federal Bank, N.A., Defendants-Appellees, and Hanna Shina, a/k/a John Shina, and Jaklin Shina, Defendants.

Docket No. 254338.

Court of Appeals of Michigan.

Submitted June 14, 2005, at Detroit.

Decided June 23, 2005, at 9:10 a.m.

Howard & Howard (by Lisa A. Robinson, Tanya M. Clark, and Robert J. Curtis), Detroit, and John M. Shureb, Plymouth, for Washington Mutual Bank, F.A.

Shaheen, Jacobs & Ross, P.C. (by Michael J. Thomas and William Huffman), Detroit, for ShoreBank Corporation.

Plunkett & Cooney, P.C. (by Jeffrey C. Gerish, Mary Massaron Ross, and Douglas C. Bernstein), Bloomfield Hills, for Standard Federal Bank, N.A.

Before: SAWYER, P.J., and MARKEY and MURRAY, JJ.

SAWYER, P.J.

Plaintiff appeals an order of the circuit court granting summary disposition for defendants on plaintiff's complaint seeking recovery on a loan secured by a mortgage. We affirm.

Plaintiff alleges that it made a $392,000 loan to Hanna and Jaklin Shina secured by a mortgage on property located in West Bloomfield. Most of the loan proceeds were used to satisfy and discharge a prior first mortgage on the property in favor of Option One Mortgage Corporation. According to plaintiff, it was unaware of the fact that, at the time it made the loan to the Shinas, there were two other mortgages recorded against the property: a $200,000 mortgage in favor of ShoreBank and a $249,000 mortgage in favor of Standard Federal Bank. Plaintiff alleges that the Shinas have defaulted on both those mortgages, which put the property into foreclosure. Although both those mortgages were recorded before the mortgage in favor of plaintiff, both were made after the Option One mortgage.

Plaintiff filed a multicount complaint. Count one claimed that, under the doctrine of equitable subrogation, the mortgage in favor of plaintiff should be superior to, and have priority over, the mortgages in favor of ShoreBank and Standard Federal. That is, the Washington Mutual mortgage should stand in the place of the Option One mortgage. The trial court granted summary disposition in favor of defendants, concluding that plaintiff had no legal obligation to pay off the Option One Mortgage and, therefore, it was a volunteer not entitled to equitable subrogation. The trial court also referenced plaintiff's ability to recover under a title insurance policy. Plaintiff's claims against ShoreBank and Standard Federal are the only ones at issue in this appeal. We review de novo the grant of summary disposition. Beaudrie v. Henderson.¹

Subrogation comes in two forms described by the Supreme Court in French v. Grand Beach Co.² as follows:

The doctrine of subrogation rests upon the equitable principle that one who, in order to protect a security held by him, is compelled to pay a debt for which another is primarily liable, is entitled to be substituted in the place of and to be vested with the rights of the person to whom such payment is made, without agreement to that effect. This doctrine is sometimes spoken of as "legal subrogation," and has long been applied by courts of equity. Stroh v. O'Hearn, 176 Mich. 164, 177 [142 N.W. 865 (1913)]. There is also what is known as "conventional subrogation." It arises from an agreement between the debtor and a third person whereby the latter, in consideration that the security of the creditor and all his rights thereunder be vested in him, agrees to make payment of the debt in order to relieve the debtor from a sacrifice of his property due to an enforced sale thereof. It is wholly independent of any interest in the property which the lender may have to protect. It does not, however, inure to a mere volunteer who has no equities which appeal to the conscience of the court.

In Stroh v. O'Hearn,³ the Court noted that the equitable principle of subrogation is not available to volunteers:

Subrogation is an equitable doctrine depending upon no contract or privity, and proper to apply whenever persons other than mere volunteers pay a debt or demand which in equity and good conscience should have been satisfied by another. It is proper in all cases to allow it where injustice would follow its denial, and in allowing it all injustice should be guarded against so far as possible.

The principle that subrogation is not available to a mere volunteer was again applied in Lentz v. Stoflet.⁴ Indeed, even in Walker v. Bates,⁵ a case that cannot be reconciled with Lentz, the Court acknowledged that subrogation is not available to a mere volunteer. See also Hartford Accident & Indemnity Co. v. Used Car Factory, Inc.,⁶ and Beaty v. Hertzberg & Golden, PC.⁷

Thus, the question becomes whether plaintiff is properly categorized as a "mere volunteer." Not surprisingly, plaintiff relies on Walker in its argument that it was not a volunteer in paying off the Option One mortgage. The relevant transaction history in Walker is this.

(1) The Hannas purchased the property at issue and granted a mortgage to Highland Park State Bank.

(2) The plaintiffs sued Henry and Frances Bates, claiming that the Bateses had fraudulently purchased the property with the plaintiffs' money.

(3) Frances Bates contracted to sell the property to Charles Derr and his wife.

(4) The Derrs contracted to sell the property to the Howeses, with the Howes assuming the mortgage given to Highland Park State Bank.

(5) A lis pendens was filed related to the plaintiffs' suit against the Bateses.

(6) Frances Bates mortgaged the property to Commonwealth-Federal Savings Bank, with the Hannas' mortgage to Highland Park State Bank being paid and discharged.

(7) Frances Bates conveyed the property by warranty deed to the Howeses.

(8) A judgment was rendered in favor of the plaintiffs and a lien was placed on the property.

(9) An action was commenced to foreclose on the lien.

In the litigation to foreclose the lien, Commonwealth-Federal claimed that it was entitled to be subrogated to the rights of Highland Park State Bank as mortgagee. The analysis by the majority in Walker, however, is scant. It essentially consists of quoting much of the same material from French that we did above, and then making the following statement.

The first mortgage was upon the property when the notice of lis pendens was filed. No injustice results from subjecting plaintiffs' rights thereto. Their interest in the property is charged with the payment of a mortgage lien of the same amount as that which was on it when the lis pendens was filed. The trial court very aptly said:

"It is immaterial to the plaintiff and wasn't wronging him any, to just simply change from the Highland Park Bank to the Commonwealth Bank."[⁸]

In short, although the Walker majority acknowledged the "mere volunteer" rule by quoting from French, it did not engage in any meaningful analysis of the point. Rather, the extent of its analysis rested upon its conclusion that applying the doctrine would not create any injustice to the holder of the lis pendens because the holder was in no worse position than it was before the remortgaging.

While the majority in Walker ignored the volunteer rule, the dissent did not, making the following observation:

A stranger to the title cannot, by payment of the whole or any portion of a mortgage, become subrogated to the rights of the mortgagee. The Commonwealth-Federal Savings Bank was a stranger to the parties and the title, a volunteer, with no interest in or claim against the parties or the premises which it was in equity entitled to have protected. Under such circumstances, it is not entitled to subrogation to the prejudice of plaintiffs' lien.⁹

Were Walker the last word on the subject, we might have to agree with plaintiff that Walker compels a conclusion that an entity in plaintiff's position is not a volunteer, though such a conclusion would arise more from the implications of Walker than its express holding or analysis. But Walker is not the final word on the subject. Rather, it appears that the Supreme Court's opinion nine years later in Lentz is the Supreme Court's latest word on the topic of equitable subrogation in the context of mortgages. Lentz, like Walker, was written by Justice Sharpe. Lentz, however, reached the opposite result as Walker, despite a similarity in facts.

Specifically, the transactions at issue in Lentz were these.

(1) William Mexico and his wife gave a mortgage in the amount of $4,000 to Rockwood State Bank over a 94.72 acre tract of land.

(2) The Mexicos conveyed the property to the Stoflets.

(3) The Stoflets mortgaged 68.49 acres of the property to Rockwood State Bank.

(4) Rockwood State Bank foreclosed on both mortgages and acquired title to the property.

(5) The Stoflets mortgaged the 68.49 acre tract to the State Savings Bank of Carleton.

(6) Rockwood State Bank discharged the mortgages it held and conveyed the property to the Stoflets.

(7) The next day, the Stoflets made payment to Rockwood State Bank with money loaned to them by an agent of the plaintiffs, with a mortgage being granted to the plaintiffs covering the 68.49 acre tract of land as well as two other parcels.

(8) The plaintiffs commenced foreclosure on the mortgage and sought a determination that their mortgage be given priority over the mortgage to the State Savings Bank of Carleton on the basis that the plaintiffs' rights should be subrogated to the rights of Rockwood State Bank and its two mortgages on the property under a theory of equitable subrogation.

In his analysis, Justice Sharpe again quoted from French, as well as three other sources discussing the volunteer rule. The analysis began with a discussion of the fact that the new mortgage was in a greater amount and covered additional land, with the ability of the State Savings Bank to recover any deficiency being reduced. The majority then made the following observations:

When plaintiffs loaned the money they had no

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