ARKAN D ALTON V AMERIQUEST MORTGAGE CO
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STATE OF MICHIGAN
COURT OF APPEALS
AMERIQUEST MORTGAGE COMPANY,
FOR PUBLICATION
November 28, 2006
9:05 a.m.
Plaintiff-Appellee,
v
No. 264213
Oakland Circuit Court
LC No. 04-058731-CH
ARKAN D. ALTON,
Defendant-Appellant.
ARKAN D. ALTON,
Plaintiff-Appellant,
v
No. 264214
Oakland Circuit Court
LC No. 04-058944-CH
AMERIQUEST MORTGAGE COMPANY,
Defendant-Appellee.
Before: Fitzgerald, P.J., and Murphy, Talbot, Meter, Fort Hood, Schuette, and Borrello, JJ.
TALBOT, J.
Pursuant to MCR 7.215(J), this Court convened a special panel to resolve the purported
conflict between this Court’s ruling in the consolidated cases comprising Ameriquest Mortgage
Co v Arkan D Alton, 271 Mich App 660; ___ NW2d ___ (2006), vacated in part 271 Mich App
801; ___ NW2d ___ (2006) and Washington Mut Bank, FA v ShoreBank Corp, 267 Mich App
111; 703 NW2d 486 (2005). This matter is being decided without oral argument pursuant to
MCR 7.214(E). We conclude that Washington Mut Bank was correctly decided and affirm the
ruling in Ameriquest.
I. Ameriquest – Factual History and Holding
The consolidated cases in Ameriquest arise from competing claims to quiet title to
residential property. Samir Yousif obtained a loan from Franklin Funding in exchange for a
$255,000 mortgage on the subject property. This mortgage was recorded on March 11, 2002.
Subsequently, Yousif obtained a separate loan from Arkan D. Alton in exchange for an $86,000
mortgage on the same property. Alton recorded his mortgage on March 21, 2003. Alton
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acknowledged he was aware of Franklin’s pre-existing mortgage on the property at the time of
his loan to Yousif.
Shortly thereafter, falsely representing that no encumbrances other than the Franklin
mortgage existed on the property, Yousif obtained a loan from Ameriquest in the amount of
$294,300 secured by the property. The Ameriquest mortgage was recorded on May 1, 2003.
The funds provided by Ameriquest were used to pay off the mortgage from Franklin Funding,1
and a certificate of discharge of the Franklin mortgage was recorded on September 18, 2003.
Although Ameriquest did perform a title search before providing the loan to Yousif and
receiving a title commitment, the Alton mortgage was not discovered.
Yousif ultimately defaulted on both the Alton and Ameriquest mortgages. Alton
foreclosed via advertisement. A sheriff’s sale was conducted September 2, 2003, and Alton
purchased the property for $92,863.42, recording the sheriff’s deed on September 9, 2003.
Appraisals of the subject property indicate valuations ranging from approximately $300,000 to
$327,000. In June of 2004, Alton and Ameriquest filed separate declaratory actions in the
Oakland Circuit Court, which were later consolidated, to quiet title. Both Alton and Ameriquest
filed motions for summary disposition. Ameriquest, asserting the applicability of the doctrine of
equitable subrogation, argued it was entitled to assume the priority position of Franklin Funding
because its monies had been used to pay off the first mortgage. Ameriquest further argued that
should Alton prevail, he would receive a windfall by gaining possession of a property valued at
$300,000, or above, for his loan of $86,000 and that Ameriquest would lose all the funds loaned
to pay off the first priority mortgage previously held by Franklin Funding. Alton asserted that
Ameriquest had acted as a volunteer in paying off the Franklin mortgage and that Ameriquest’s
mortgage was eliminated by the foreclosure proceedings. On July 19, 2005, the circuit court
entered an order granting summary disposition in favor of Ameriquest and denying Alton’s
motion, determining that Ameriquest would be prejudiced if its claim were extinguished, but that
granting relief to Ameriquest would not extinguish the title that Alton had received through the
sheriff’s sale.
On appeal, this Court, finding it was compelled to follow the ruling in Washington Mut
Bank, reversed the decision of the trial court based on its finding that Ameriquest’s status as a
volunteer precluded its entitlement to the benefit of equitable subrogation. Referencing
Washington Mut Bank, this Court stated, in relevant part:
[T]he doctrine of equitable subrogation does not apply to permit a new mortgage,
granted as part of a generic refinancing transaction, to take the priority of the
original mortgage, which is being paid off, thereby giving the new mortgage
priority over intervening liens. [Ameriquest, supra at 665.]
1
The Franklin mortgage was, at some point, assigned to Popular Financial Services, being
serviced by Equity One. The payoff amount remitted by Ameriquest to Equity One on March
24, 2003, totaled $241,337.51.
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This Court indicated, were it not constrained by the prior holding of Washington Mut Bank, it
would affirm the trial court’s ruling and adopt the position of the Restatement of Property, which
would permit the application of the doctrine of equitable subrogation in “circumstances of a
refinanced mortgage.” Ameriquest, supra at 662. Noting the Restatement did not adopt a strict
volunteer rule, the Court indicated the Restatement rule, viewing subrogation as an equitable
remedy to avoid “unearned windfalls” and “unjust enrichment” comprised “the better view.”
The Court focused on the fact that Ameriquest, in paying off the Franklin mortgage, was
following the instructions of Yousif, and, thus, protecting its own security interest in the
property. Reviewing the historical preclusion of subrogation in case law based on the
application of the volunteer rule, the Court observed that the Restatement would permit the use
of subrogation in the circumstances presented, opining:
Because the holding of Washington Mut Bank establishes an inflexible
rule precluding the application of equitable subrogation in mortgage refinancing,
we find it contrary to the principles of equity the doctrine is intended to promote.
Although Washington Mut Bank recognizes the possibility of equitable
subrogation if the replacement loan is provided by the holder of the old mortgage,
or if the new lender first purchased the prior mortgage and then accepted the new
mortgage, Washington Mut Bank does not appear to permit an exception in this
case despite the inequitable result. Existing Michigan law concerning equitable
subrogation in the context of mortgage refinancing is confusing at best, and is
contrary to logic, the Restatement of Property, and the view in many jurisdictions.
These circumstances merit further consideration.
Should the volunteer rule of Washington Mut Bank be found to be a proper
interpretation of Lentz,2 we urge the Michigan Supreme Court to review and
reconsider this precedent in light of the prevailing modern view reflected in the
Restatement . . . . Where the equities are in favor of the payor mortgagee, we
believe this rule should prevail. Given the common practice of mortgage
refinancing and the sheer volume of transactions undertaken, equitable
subrogation is a proper and necessary mechanism for resolving priority disputes
to avoid injustice. [Ameriquest, supra at 683-684 (internal citation omitted,
footnote added).]
II. Washington Mut Bank – Factual History and Holding
Hanna and Jaklin Shina (the “Shinas”) received a $392,000 loan secured by a mortgage
in favor of Option One Mortgage on their home in West Bloomfield, Michigan. The Shinas
refinanced their home by securing a mortgage from Washington Mutual Bank, in the amount of
$392,000, and used these funds to satisfy and discharge the mortgage held by Option One.
However, Washington Mutual Bank was unaware that two additional mortgages had previously
2
Lentz v Stoflet, 280 Mich 446; 273 NW 763 (1973).
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been recorded against the subject property by ShoreBank, in the amount of $200,000, and
Standard Federal Bank, in the amount of $249,000. Washington Mut Bank, supra at 112.
Following default by the Shinas, the property was placed in foreclosure. Washington
Mutual Bank asserted its right to be equitably subrogated to the priority position of Option One,
based on the proceeds of its loan having been used to satisfy and discharge the Option One
mortgage. The trial court did not concur and granted summary disposition in favor of ShoreBank
and Standard Federal Bank based on Washington Mutual Bank’s status as a volunteer having no
legal obligation to pay off the Option One mortgage and, therefore, lacking entitlement to
equitable subrogation. Washington Mut Bank, supra at 113.
On appeal, this Court reviewed Michigan law and determined that two prior Supreme
Court cases, Lentz v Stoflet, 280 Mich 446; 273 NW 763 (1973) and Walker v Bates, 244 Mich
582; 222 NW 209 (1928), were irreconcilable. Although both Walker and Lentz involve the
applicability of the doctrine of equitable subrogation and the status of a volunteer, their outcomes
are viewed as inconsistent. In Walker, the plaintiffs, a real estate syndicate, were granted a lien
on the subject property. Commonwealth Federal Bank had provided the homeowners a
subsequent mortgage that had been used to discharge the senior mortgage. The Walker Court
concurred that Commonwealth Federal Bank should be equitably subrogated to a priority
position, based on their discharge of the senior mortgage, over plaintiffs’ lien. Walker, supra at
586-587. In contrast, in Lentz the plaintiffs were denied equitable subrogation based on their
volunteer status and a determination that they maintained no interest to protect. Lentz, supra at
451.
Citing its obligation to follow the most recent pronouncement by the Michigan Supreme
Court, the Court in Washington Mut Bank determined its decision should be governed by Lentz
and stated:
The most recent pronouncement of the Supreme Court on this topic would
certainly seem to be that the doctrine of equitable subrogation does not allow a
new mortgagee to take the priority of the older mortgagee merely because the
proceeds of the new mortgage were used to pay off the indebtedness secured by
the old mortgage. It is clear to us that, under Lentz, plaintiff is a mere volunteer
and, therefore, is not entitled to equitable subrogation. [Washington Mut Bank,
supra at 119-120 (footnote omitted).]
Viewing Walker as an anomaly, the Court ruled in relevant part:
[W]e are unaware of any authority regarding the application of the doctrine of
equitable subrogation to support the general proposition that a new mortgage,
granted as part of a generic refinancing transaction, can take the priority of the
original mortgage, which is being paid off, giving it priority over intervening liens
. . . . Such bolstering of priority may be applicable where the new mortgagee is
the holder of the mortgage being paid off or where the proceeds of the new
mortgage are necessary to preserve the property from foreclosure or another
action that would cause the intervening lien holders to lose their security interests.
[Washington Mut Bank, supra at 128.]
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Based on the absence of such factual predicates in the circumstances presented, the Court
determined the plaintiff was not entitled to subrogation of the original mortgage and, thus, should
not “receive priority over the intervening lienholders.” Id.
III. Statement of the Issue and Standard of Review
The conflict presented concerns whether the doctrine of equitable subrogation may be
applied to grant the priority lien position of a prior lender to a mortgagee that loans money to
finance a subsequent mortgage on real property, thereby giving the mortgagee a position superior
to that held by an intervening junior mortgagee. This Court reviews equitable actions to quiet
title de novo. Burkhardt v Bailey, 260 Mich App 636, 646-647; 680 NW2d 453 (2004). A trial
court’s determination pertaining to a motion for summary disposition is also reviewed de novo.
MacDonald v PKT, Inc, 464 Mich 322, 332; 628 NW2d 33 (2001). Finally, this court reviews
the underlying issue of statutory construction de novo, Eggleston v Bio-Medical Applications of
Detroit, Inc, 468 Mich 29, 32; 658 NW2d 139 (2003), because it involves the application of the
law, i.e., the race/notice statutes, to undisputed facts regarding the recordation of mortgages,
Steward v Panek, 251 Mich App 546, 554; 652 NW2d 232 (2002).
IV. Analysis
Michigan is a recording priority jurisdiction.3 A mortgage is clearly a conveyance within
the meaning of the recording acts. MCL 565.35; Stover v Bryant & Detwiler Improvement Corp
of Detroit, 329 Mich 482, 484; 45 NW2d 364 (1951). Accordingly, MCL 565.25 provides, in
relevant part:
(1) In the entry book of mortgages the register shall enter all mortgages
and other deeds intended as securities, and all assignments of any mortgages or
securities.
***
(4) The instrument shall be considered as recorded at the time so noted
and shall be notice to all persons except the recorded landowner subject to
subsection (2), of the liens, rights, and interests acquired by or involved in the
proceedings. All subsequent owners or encumbrances shall take subject to the
perfected liens, rights, or interests.
In conformity with the above-cited statutory language, “[m]ortgages are subjected to the
satisfaction of the obligation on the mortgage note in the order in which they are recorded.”
Mitchell v United States Mut Real Estate Investment Trust, 144 Mich App 302, 314; 375 NW2d
424 (1985). The recordation of a mortgage constitutes constructive notice to all subsequent lien
3
Michigan’s status as a recording priority jurisdiction has existed since, at least, CL 1897,
§ 8980.
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holders regarding both the existence of the mortgage and the amount of indebtedness that is
secured. McMurtry v Smith, 320 Mich 304, 306-307; 30 NW2d 880 (1948).
If statutory language is unambiguous, appellate courts must presume that the Legislature
intended the plainly expressed meaning precluding any further judicial construction.
DiBenedetto v West Shore Hosp, 461 Mich 394, 402; 605 NW2d 300 (2000). The mandate
expressed in MCL 565.25(4) is clear: recordation of a mortgage charges third parties with
constructive notice and serves to determine lien priority. As such, a properly recorded mortgage
is notice to all subsequent purchasers that they take subject to any lien the mortgagor may have
on the property whether the record has been examined or not. Piech v Beaty, 298 Mich 535, 538;
299 NW 705 (1941). There can be no dispute, based simply on the statutory language, that
Alton’s mortgage, having been first recorded, has priority over Ameriquest’s mortgage. Failure
of Ameriquest’s title insurance commitment to discover the duly recorded prior mortgage by
Alton does not serve to nullify the constructive notice provided by the recordation or to alter the
priority status of Alton’s mortgage. Lewis v Hook, 18 Mich App 405, 409; 171 NW2d 221
(1969).
Despite the mandate of MCL 565.25(4), Ameriquest contends that its mortgage is entitled
to priority over Alton based on the doctrine of equitable subrogation. Ameriquest asserts that it
is entitled to the rights of the prior mortgagee, Franklin Funding, because its loan was used to
discharge this first mortgage. The Michigan Supreme Court has defined equitable subrogation as
“a legal fiction through which a person who pays a debt for which another is primarily
responsible is substituted or subrogated to all the rights and remedies of the other.” Hartford
Accident & Indemnity Co v Used Car Factory, Inc, 461 Mich 210, 215; 600 NW2d 630 (1999),
citing Smith v Sprague, 244 Mich 577, 579-580; 222 NW 207 (1928). In accordance with the
tenets of this doctrine, a subrogee can acquire no greater rights than those possessed by the
subrogor, and the subrogee may not be a “mere volunteer.” Hartford Accident & Indemnity Co,
supra at 215; Lentz, supra at 449-450. In order to be entitled to subrogation, a subrogee cannot
voluntarily have made payment, but rather must have done so in order to fulfill a legal or
equitable duty owed to the subrogor. Beaty v Herzberg & Golden, 456 Mich 247, 254-255, 258;
571 NW2d 716 (1997).
Equitable subrogation has been further described as “a flexible, elastic doctrine of equity”
requiring that “its application should and must proceed on the case-by-case analysis
characteristic of equity jurisprudence.” Hartford Accident & Indemnity Co, supra at 215. A
proviso exists such that equitable subrogation “will not be enforced where it will work an
injustice to the rights of those having equal equities.” Bd of Co Rd Comm’rs of Calhoun Co v
Southern Surety Co, 216 Mich 528, 533; 185 NW 755 (1921) (citation omitted). It is also well
established that an equitable doctrine “cannot be used to avoid the dictates of a statute, absent
fraud, accident or mistake.” Burkhardt, supra at 659.
Subrogation has been described as taking two distinct forms:
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
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subrogation,’ and has long been applied by courts of equity. Stroh v O’Hearn,
176 Mich 164, 177; 142 NW 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. [French v Grand
Beach Co, 239 Mich 575, 580-581; 215 NW 13 (1927).]
Historically, a “mere volunteer” has consistently been precluded from invoking the doctrine to
attain a more favorable position of priority than that afforded in accordance with the recordation
of their instrument or mortgage. Very early, the Michigan Supreme Court opined that payment
of a debt by a third party, standing alone, “could hardly constitute an interest in the real estate;
the right of a mere volunteer, showing no interest in the land, to pay off the mortgage, could
hardly be deemed a valuable right.” Smith v Austin, 9 Mich 465, 482 (1862). This standard was
repeated in Kelly v Kelly, 54 Mich 30, 47; 19 NW 580 (1884), wherein, because of the
defendant’s lack of a relationship to the subject property, defendant was deemed a stranger to the
title and, therefore, could not, by the payment of either the entirety or a portion of the mortgage,
become subrogated to the rights of the mortgagee. This concept was again adopted in Desot v
Ross, 95 Mich 81; 54 NW 694 (1893), when the Court stated:
It is only in cases where a person advancing money to pay the debt of a third
person stands in the situation of a surety, or is compelled to pay it to protect his
own rights, that a court of equity substitutes him in the place of the creditor as a
matter of course, without any agreement to that effect. In other cases the demand
of a creditor which is paid with the money of a third person, and without any
agreement that the security shall be assigned to kept on foot for the benefit of
such third person, is absolutely extinguished. [Id. at 83-84 (citation omitted).]
This long-standing precedent continued in Lentz, supra at 450, where the Court opined,
“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.” This distinction, that a “mere volunteer” is
not entitled to equitable subrogation, has continued to be recognized and consistently applied
through subsequent cases, including Washington Mut Bank, supra at 128, wherein this Court,
impliedly deferring to the statutory mandate for lien priority, stated:
[W]e are unaware of any authority regarding the application of the doctrine of
equitable subrogation to support the general proposition that a new mortgage,
granted as part of a generic refinancing transaction, can take the priority of the
original mortgage, which is being paid off, giving it priority over intervening
liens. . . . Such bolstering of priority may be applicable where the new mortgagee
is the holder of the mortgage being paid off or where the proceeds of the new
mortgage are necessary to preserve the property from foreclosure or another
action that would cause the intervening lien holders to lose their security interests.
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Hence in this case, consistent with both long-standing precedent and the strictures
imposed by statute, there exist no conditions or circumstances to warrant application of the
equitable subrogation doctrine permitting Ameriquest to circumvent the established priority of
Alton’s mortgage, based on its earlier recordation, and to assume the position of the prior
recorded lien of Franklin Funding. Ameriquest’s status as a volunteer is based on its lack of a
preexisting interest in the property and the absence of any attempt to continue protection of their
interest in the property or to revive or obtain an assignment of the original first mortgage. See
Shanite v Plymouth United Savings Bank, 277 Mich 33; 268 NW 801 (1937). As such,
Ameriquest was under no legal or equitable duty to Yousif to undertake the refinancing.
More importantly, “[i]t is only to prevent fraud and subserve justice that equity ingrafts
the wholesome provisions of subrogation or of equitable lien upon a transaction . . . .” Kelly,
supra at 47. Although Ameriquest contends the owner of the subject property, Yousif, falsely
informed it that no liens existed other than that belonging to Franklin Funding at the time of its
grant of a mortgage, Ameriquest has not alleged any wrongdoing on the part of Alton to support
the intervention of equity. Further, because Ameriquest is charged with constructive notice of
the existence of Alton’s earlier recorded mortgage, it is not entitled to equitable subrogation.
Finally, the Ameriquest Court suggests that the application of the doctrine of equitable
subrogation advocated by the Restatement of Property, to preclude “an unearned windfall”
constitutes the “better view.” Ameriquest, supra at 667-668, citing Restatement Property
(Mortgages), 3d, § 7.6, comment a. Acknowledging, “the rules of the Restatement are not
necessarily coincident with the law of this State,” the Court sought to reconcile “the extent to
which the Restatement view is reflective of our state’s jurisprudence.” Following a review of
prior case law, the Court opined that consistent with rulings in other jurisdictions and the
adoption by the Restatement of a more encompassing and less constrained definition of the term
“volunteer” that the equities favored Ameriquest’s substitution in priority. In addition, the Court
opined that Ameriquest’s lack of “actual notice” regarding the existence of Alton’s mortgage,
supported the imposition of equity and served to distinguish it from the result in Washington Mut
Bank, stating:
We note only that the absence of actual notice of a mortgage recorded 3 days
before the closing on the Ameriquest loan clearly distinguishes the equities herein
from those in Washington Mut Bank, in which the refinancing mortgagee
neglected to discover the intervening recorded mortgages. In this regard, the
result in Washington Mut Bank is more properly reached on a consideration of the
equities, and particularly the issue of notice, rather than on the basis of a per se
rule that equitable subrogation is inapplicable. [Ameriquest, supra at 682.]
The Court concluded that the ruling in Washington Mut Bank should be rejected because it
“establishes an inflexible rule precluding the application of equitable subrogation in mortgage
refinancing” that is “contrary to the principles of equity the doctrine is intended to promote.”
Ameriquest, supra at 683. As such, Ameriquest urges the rejection of the purported
establishment of a bright line or per se rule by Washington Mut Bank regarding the applicability
of equitable subrogation.
The difficulty with this assertion is that the result of Washington Mut Bank is not the
designation of an intractable rule regarding equitable subrogation, but rather encompasses both
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the recognition of the controlling statutory mandate contained in MCL 565.25(4) and the
acknowledged constraints pertaining to the use of equitable powers by courts. “Although courts
undoubtedly possess equitable power, such power has traditionally been reserved for ‘unusual
circumstances’ such as fraud or mutual mistake. A court’s equitable power is not an unrestricted
license for the court to engage in wholesale policymaking . . . .” Devillers v Auto Club Ins Ass’n,
473 Mich 562, 590; 702 NW2d 539 (2005) (footnotes omitted). Because MCL 565.25(4) plainly
provides for priority designation based on date of recordation, and there has been no allegation of
fraud, mutual mistake, or any other “unusual circumstance” by Ameriquest in reference to Alton,
there exists no basis for this Court to invoke its equitable powers.
Affirmed.
/s/ Michael J. Talbot
/s/ E. Thomas Fitzgerald
/s/ Patrick M. Meter
/s/ Karen M. Fort Hood
/s/ Bill Schuette
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