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Wells Fargo Bank, N.A. v. SBC IV REO, LLC

Court of Appeals of Michigan

November 29, 2016

SBC IV REO, LLC, and CAPITOL NATIONAL BANK, Defendants-Appellees.

         Mackinac Circuit Court LC No. 2014-007577-CH

          Before: Markey, P.J., and Murphy and Ronayne Krause, JJ.

          MURPHY, J.

         This case primarily concerns a purported discharge of mortgage and the doctrine of equitable subrogation, which "is available to place a new mortgage in the same priority as a discharged mortgage if the new mortgagee was the original mortgagee and the holders of any junior liens are not prejudiced as a consequence." CitiMortgage, Inc v Mtg Electronic Registration Sys, Inc, 295 Mich.App. 72, 81; 813 N.W.2d 332 (2011). The loan obtained by the mortgagors and secured by the "new" mortgage at issue in this lawsuit was used, in part, to fully satisfy and discharge the original mortgage, with both mortgages being held by the same mortgagee. A second and different mortgagee had recorded its mortgage relative to the same real property during the interim, making it a junior lienholder at the time of recordation. The loan secured by the new mortgage exceeded the amount due under the original note, and the mortgagors, for the most part, pocketed the remaining loan proceeds. Thus, the new loan and mortgage involved more than a mere refinancing transaction; there was an increase in the principal amount. The closing on the new mortgage entailed a faxed discharge of mortgage from the junior lienholder that was ultimately never recorded, given that, according to the junior lienholder, the discharge was conditioned on no new money being lent and on the preparation and recording of a mortgage to replace the discharged mortgage, neither of which conditions was met. Subordination of mortgages under the process outlined in MCL 565.391 was not attempted. Several years later, the mortgagors defaulted on the mortgage that had originally been recorded second in time, and foreclosure proceedings were commenced by an assignee traced back to the one-time junior lienholder, resulting in the assignee's purchase of the real property at a sheriff's sale. An assignee of the mortgagee that had held the original and new mortgages then instituted the current action, alleging various causes of action and claiming priority of its assigned mortgage interest on the basis of the discharge of mortgage and equitable subrogation. The main questions posed in this appeal regard the validity of the discharge and the applicability of the doctrine of equitable subrogation under the described circumstances. Arguments in favor of the doctrine's applicability and the discharge's validity were advanced by plaintiff Wells Fargo Bank, N.A., as Trustee for Option One Mortgage Loan Trust 2005-2 Asset Backed Certificates, Series 2005-2 (Wells Fargo). The trial court rejected Wells Fargo's attempt to employ equitable subrogation and the discharge to its benefit, granting summary disposition in favor of defendants SBC IV REO, LLC (SBC), and Capitol National Bank (Capitol). Wells Fargo appeals as of right, and we hold that the discharge of mortgage was ineffective and unenforceable as a matter of law for failure to satisfy conditions precedent, but that equitable subrogation is available to Wells Fargo, albeit to the exclusion of the new or additional monies. Accordingly, we affirm in part, reverse in part, and remand for further proceedings.

         I. BACKGROUND

         In December 2003, two individuals, as tenants in common, granted a mortgage to Option One Mortgage Corporation (Option One) on certain real property located in Mackinac County, securing a $449, 000 loan made by Option One to the mortgagors under a promissory note. The mortgage was recorded that same month. In August 2004, the same mortgagors, joined by a spouse in order to bar any right of dower, granted a $400, 000 mortgage to Capitol with respect to the same real property encompassed by the first mortgage, partially securing a loan in excess of $1 million. This mortgage was recorded in September 2004, and for purposes of this opinion and ease of reference, we shall refer to it as the Capitol mortgage.

         In April 2005, the two mortgagors granted a "new" mortgage to Option One in regard to the real property, securing a $520, 000 loan. According to the settlement statement pertaining to the closing, $458, 109 of the loan proceeds were used to pay off the entire balance on Option One's original mortgage and, after disbursements to cover settlement charges and delinquent taxes, the mortgagors received the remaining $34, 566. This mortgage was recorded in May 2005, and we shall refer to it as the Option One mortgage.[1] In June 2005, Option One recorded a satisfaction of mortgage with respect to its original mortgage. There was no modification of the original Option One mortgage; rather, it was completely discharged and replaced. The satisfaction of mortgage provided that "Option One . . . has received full payment of [the] promissory note, acknowledged satisfaction of said mortgage and hereby directs the clerk of the Circuit Court of the above described county to cancel the same of record."

         We must take a moment to explore the circumstances surrounding the closing relative to the Option One mortgage. A couple of months prior to the closing, [2] the title company prepared a commitment for title insurance in regard to the planned transaction, which acknowledged the Capitol mortgage and the original Option One mortgage in schedule B, section 1 of the commitment, and which called for a discharge of those mortgages at the closing, otherwise they would be shown as being excepted on the final title insurance policy. Closing instructions from Option One to the closing agent directed that the mortgage must record in "First Lien Position." Given the existence of the Capitol mortgage, the closing agent or someone from the title company contacted Capitol in order to obtain a discharge of the Capitol mortgage, conceptually allowing for a priority recording of the Option One mortgage upon discharge of the Capitol mortgage, followed by the recording of a newly-prepared replacement mortgage in favor of Capitol, with Capitol thereby retaining its junior lienholder position.

         An assistant vice-president for Capitol faxed a discharge of mortgage to the title company's closing department. In an affidavit obtained for purposes of the litigation, the assistant vice-president averred that she had faxed the discharge of mortgage under the belief that the Option One mortgage only entailed the refinancing of the original mortgage, "without the new loan advancing any new money that would be secured with [the] new mortgage." She further averred:

In response to the Title Company Request[, ] I had prepared and executed the Discharge of Mortgage . . ., telefaxed the Discharge of Mortgage to the Title Company representative and advised the representative from the Title Company that the original Discharge of Mortgage would be provided and could be recorded upon confirmation that no new money was being loaned to [the mortgagors] and . . . that [the] Title Company would record the replacement [Capitol] Mortgage to secure [Capitol's] position. This would have been the standard practice of [Capitol], in that an original, effective, recordable discharge of mortgage would not be provided until either funds were obtained to pay-off the [Capitol] loan secured by the mortgage or [Capitol's] equity position was not in any way impaired and a replacement mortgage was prepared and recorded or to be recorded contemporaneous with the discharge. If the title company had requested an original, recordable discharge of mortgage, [Capitol's] practice would have been to provide it to the title company in escrow subject to an agreement that it could only be released and recorded when these conditions had been met.

         The assistant vice-president also indicated that the Capitol mortgage was not paid off, that the Option One mortgage "was for an increased principal amount, " and that no replacement mortgage was recorded on behalf or in favor of Capitol. And, therefore, the conditions precedent to Capitol's agreement to discharge the mortgage were never satisfied. In turn, according to the assistant vice-president, Capitol did not record the discharge of mortgage, nor was a discharge ever effectively delivered.[3] In a letter from the title company to Option One dated April 15, 2005, Option One was informed that the closing had occurred, that the title company had "completely disbursed the mortgage in the amount of $520, 000, " and that the mortgage constituted "a valid first lien on the property, subject only to those encumbrances shown in Schedule B, Section II of [the] commitment."[4] In the title insurance policy dated May 2, 2005, there is an express exception for the Capitol mortgage, specifying that the policy did not insure against loss or damage arising out of the Capitol mortgage.

         In August 2005, a few months after the closing on the Option One mortgage, one of the mortgagors conveyed his tenants-in-common interest in the property to the other mortgagor pursuant to a quitclaim deed. In May 2009, American Home Mortgage Servicing, Inc. (American Home), as successor-in-interest to Option One, assigned the Option One mortgage to Wells Fargo. However, in August 2011, Wells Fargo recorded an affidavit to expunge or rescind the assignment, claiming that it was not executed by an authorized signer for American Home. But then in March 2012, Sand Canyon Corporation, formerly known as Option One, executed and recorded an assignment that assigned the Option One mortgage to Wells Fargo. At the time of the instant litigation, Wells Fargo held the Option One mortgage. The lower court record contains various documents, including title worksheets contemplating foreclosure on the Option One mortgage, property reports, demands on the title insurance policy relative to the Option One mortgage, a fax seeking to obtain the discharge of mortgage, and law firm communications to its client, Option One and later Wells Fargo, that were dated from before the failed May 2009 assignment to Wells Fargo to after the successful March 2012 assignment to Wells Fargo. These documents made clear that, for purposes of the public record at the register of deeds office, the Capitol mortgage remained in existence, it had not been discharged, and it was superior to the Option One mortgage. The documents further reflected that Wells Fargo was well aware of these facts and the lack of a recorded discharge of mortgage before accepting the 2009 and 2012 assignments, although Wells Fargo did not appear to know the reasons why the discharge had not been recorded. Evidently, the Option One mortgage had been in default, but foreclosure proceedings were not pursued, ostensibly because of the Capitol mortgage conundrum.

         On March 11, 2013, in an earlier, separate lawsuit, Wells Fargo filed a quiet-title action against Capitol, acknowledging the Option One and Capitol mortgages and Wells Fargo's status as an assignee of the Option One mortgage, and alleging that the Option One mortgage was superior. Wells Fargo asserted that Capitol's mortgage had "been paid off or otherwise satisfied, however no discharge of mortgage ha[d] been recorded and [Capitol's] mortgage remain[ed] in senior lien position[, ]" even though the Option One mortgage "was intended to be a senior mortgage on the Property." Wells Fargo further alleged that Capitol's "failure to record a discharge of mortgage [was] creating a cloud on [Wells Fargo's] claim to the Subject Property[.]" Wells Fargo asked the circuit court to discharge the Capitol mortgage, terminate any interest in the property claimed by Capitol, and to recognize the Option One mortgage now held by Wells Fargo as the senior lien on the property.

         On May 31, 2013, while Wells Fargo's quiet-title action remained pending, Capitol assigned its mortgage to SummitBridge Credit Investments IV, LLC (SummitBridge), upon SummitBridge's purchase of the underlying loan. The assignment was recorded on August 8, 2013. Also on August 8, 2013, Wells Fargo and Capitol stipulated to the dismissal of Wells Fargo's quiet-title action without prejudice, with the circuit court entering an order to that effect on August 20, 2013.[5] On August 27, 2013, SummitBridge assigned the Capitol mortgage to SBC, which was a SummitBridge affiliate. At the time of the instant litigation, SBC held the Capitol mortgage.

         An asset manager connected to SummitBridge and SBC executed an affidavit in which he averred that in entering into the loan purchase agreement and related assignment with Capitol, SummitBridge had relied on the Capitol mortgage being a first or senior mortgage on the real property. The asset manager further asserted that "[n]either SummitBridge nor SBC received any notice from Option One, Wells Fargo or any other entity or person of the existence of a copy or original of the document entitled "Discharge of Mortgage" referenced in, and attached as Exhibit F, to Wells Fargo's Complaint [in the instant action], until on or about May 14, 2014." The asset manager additionally averred that had SummitBridge been informed of the allegations made by Wells Fargo concerning equitable subrogation and the purported discharge of the Capitol mortgage prior to SummitBridge's purchase of the Capitol loan, "it would have either not have entered into the Loan Purchase or would have otherwise paid a purchase price substantially less than that which was agreed thereunder."[6]

         In a notice of foreclosure sale dated October 31, 2013, SBC indicated that there had been a default relative to the Capitol mortgage, with nearly $700, 000 due and owing on the promissory note.[7] The foreclosure sale was scheduled for and conducted on December 5, 2013, where SBC purchased the property for $371, 000 under a sheriff's deed. A six-month redemption period applied and was set to expire on June 4, 2014.

         On May 22, 2014, Wells Fargo filed its complaint in the present action against Capitol and SBC, alleging six separate counts. In count I of the complaint, Wells Fargo alleged that Capitol had unlawfully failed to discharge the Capitol mortgage. Wells Fargo asserted that Capitol had a statutory obligation to file or record the discharge of mortgage that had been faxed to the title company for purposes of the closing on the Option One mortgage. Wells Fargo further alleged that Option One had only agreed to the new mortgage on the condition that it would retain first priority lien position, that Capitol had induced Option One into proceeding with the closing and new mortgage by agreeing to the discharge, that Capitol faxed a discharge of mortgage to the closing agent, and that Capitol then failed to record the discharge. In count II of the complaint, Wells Fargo alleged common-law indemnity, claiming that Capitol should indemnify Wells Fargo for any monies required to be paid in order to redeem the property. The basis for the indemnity claim was that Capitol's failure to honor and record the discharge of mortgage was wrongful. In count III of the complaint, Wells Fargo alleged fraud and misrepresentation, once again relying on the underlying facts surrounding the faxed discharge of mortgage and Capitol's failure to record the discharge. In count IV of the complaint, Wells Fargo assumed the record priority of the Capitol mortgage and alleged equitable subrogation, which, as explained in the opening paragraph of this opinion, "is available to place a new mortgage in the same priority as a discharged mortgage if the new mortgagee was the original mortgagee and the holders of any junior liens are not prejudiced as a consequence." CitiMortgage, 295 Mich.App. at 81. In count V of the complaint, Wells Fargo alleged a claim to determine an interest in land under MCL 600.2932, contending that the Option One mortgage assigned to Wells Fargo was "superior to all other liens" that might encumber the property. Although not directly expressed in count V, which constituted a quiet-title claim, the allegations contained therein in support of Wells Fargo's contention that it held the senior lien on the property essentially reflected reliance on the doctrine of equitable subrogation and on the unrecorded discharge of mortgage. In count VI of the complaint, Wells Fargo alleged that the foreclosure by advertisement conducted by SBC was invalid, given that SBC had no interest in the property to foreclose upon in light of Capitol's discharge of the mortgage. As gleaned by review of the six counts in Wells Fargo's complaint, it becomes clear that the case ultimately boils down to two broad primary issues, i.e., the applicability of equitable subrogation and the validity and enforceability of the faxed discharge of mortgage.

         Contemporaneous to the filing of its complaint, Wells Fargo filed a motion for a temporary restraining order (TRO), show cause order, and for a preliminary injunction, seeking to toll the running of the redemption period arising out of the foreclosure sale. On the day of the filing of the complaint and motion, the trial court entered an ex parte TRO, tolling the redemption period until further order of the court and setting the matter for a hearing on June 20, 2014. The hearing was conducted as scheduled, and by order dated June 23, 2014, the trial court converted the TRO to a preliminary injunction and extended the redemption period for 14 days. By amended order dated June 30, 2014, the trial court reversed its position and dissolved and terminated the TRO and preliminary injunction, concluding that SBC had been a bona fide purchaser without notice of any alleged mortgage discharge and thus Wells Fargo could not establish a threat of irreparable harm or a likelihood of prevailing on the merits.

         The parties filed multiple competing motions for summary disposition, and after entertaining oral argument on the issues at two hearings, the trial court entered a couple of orders denying Wells Fargo's motion for summary disposition and granting summary disposition in favor of SBC and Capitol for the reasons stated on the record at a hearing on May 22, 2015. At that hearing, the trial court initially observed that "[t]here wasn't a discharge." The court stated that the discharge of the Capitol mortgage was subject to a "condition precedent" of being paid off and that "within two weeks' time, everybody knew that [the] mortgage was still there." With respect to equitable subrogation, the trial court found that CitiMortgage was distinguishable and did not support application of the doctrine, considering that, relative to the Option One mortgage, "the new money made it a new mortgage and not a refinance[.]" The trial court also concluded that the equitable subrogation claim was time-barred under a six-year statute of limitations and that prejudice would be incurred if the doctrine was invoked. For these reasons, the trial court granted summary disposition in favor of SBC on counts IV (equitable subrogation), V (superior interest in land), and VI (invalid foreclosure), which were the only counts applicable to SBC, under MCR 2.116(C)(7), (8), and (10). The trial court indicated that counts IV through VI were inapplicable to Capitol; nonetheless, the court granted summary disposition in favor of Capitol on those counts.

         With respect to counts I (failure to honor and record discharge of mortgage) and II (common-law indemnity), which were solely applicable to Capitol, the trial court granted summary disposition under MCR 2.116(C)(7) on the basis that the claims were time-barred pursuant to a six-year statute of limitations and under MCR 2.116(C)(8) for failure to state a claim. In regard to count III (fraud and misrepresentation), which also pertained solely to Capitol, the trial court ruled:

As to the fraud claims, the statute requires a clear and convincing demonstration that some fraud has occurred, and the Court just does not see it based on the pleadings and the arguments that have been made by Counsel.

         Wells Fargo appeals as of right.

         II. ANALYSIS


         We review de novo a trial court's ruling on a motion for summary disposition, Loweke v Ann Arbor Ceiling & Partition Co, LLC, 489 Mich. 157, 162; 809 N.W.2d 553 (2011), matters of statutory construction, Snead v John Carlo, Inc, 294 Mich.App. 343, 354; 813 N.W.2d 294 (2011), whether a cause of action is time-barred, Caron v Cranbrook Ed Community, 298 Mich.App. 629, 635; 828 N.W.2d 99 (2012), the applicability of equitable subrogation, CitiMortgage, 295 Mich.App. at 75, and questions of law generally, id.


         The trial court relied on MCR 2.116(C)(7), (8), and (10) in ruling on the motions for summary disposition. With respect to MCR 2.116(C)(7), which provides, in part, for summary dismissal when an action is barred by a statute of limitations, this Court in RDM Holdings, Ltd v Continental Plastics Co, 281 Mich.App. 678, 687; 762 N.W.2d 529 (2008), observed:

Under MCR 2.116(C)(7) . . ., this Court must consider not only the pleadings, but also any affidavits, depositions, admissions, or other documentary evidence filed or submitted by the parties. The contents of the complaint must be accepted as true unless contradicted by the documentary evidence. This Court must consider the documentary evidence in a light most favorable to the nonmoving party. If there is no factual dispute, whether a plaintiff's claim is barred under a principle set forth in MCR 2.116(C)(7) is a question of law for the court to decide. If a factual dispute exists, however, summary disposition is not appropriate. [Citations omitted.]

         In regard to MCR 2.116(C)(8), which provides for summary disposition when a "party has failed to state a claim on which relief can be granted, " it tests the legal sufficiency of a complaint. Beaudrie v Henderson, 465 Mich. 124, 129; 631 N.W.2d 308 (2001). The trial court may only consider the pleadings in rendering its decision. Id. All factual allegations in the complaint must be accepted as true. Dolan v Continental Airlines/Continental Express, 454 Mich. 373, 380-381; 563 N.W.2d 23 (1997). "The motion should be granted if no factual development could possibly justify recovery." Beaudrie, 465 Mich. at 130.

         Finally, with respect to the well-established principles governing a motion for summary disposition brought pursuant to MCR 2.116(C)(10), this Court in Pioneer State Mut Ins Co v Dells, 301 Mich.App. 368, 377; 836 N.W.2d 257 (2013), explained:

In general, MCR 2.116(C)(10) provides for summary disposition when there is no genuine issue regarding any material fact and the moving party is entitled to judgment or partial judgment as a matter of law. A motion brought under MCR 2.116(C)(10) tests the factual support for a party's claim. A trial court may grant a motion for summary disposition under MCR 2.116(C)(10) if the pleadings, affidavits, and other documentary evidence, when viewed in a light most favorable to the nonmovant, show that there is no genuine issue with respect to any material fact. A genuine issue of material fact exists when the record, giving the benefit of reasonable doubt to the opposing party, leaves open an issue upon which reasonable minds might differ. The trial court is not permitted to assess credibility, weigh the evidence, or resolve factual disputes, and if material evidence conflicts, it is not appropriate to grant a motion for summary disposition under MCR 2.116(C)(10). A court may only consider substantively admissible evidence actually proffered relative to a motion for summary disposition under MCR 2.116(C)(10). [Citations and quotation marks omitted.]

         C. DISCUSSION


         Counts I, II, III, V (in part), and VI of Wells Fargo's complaint were reliant on the discharge of mortgage that the assistant vice-president for Capitol had faxed to the closing department of the title company handling the closing on the 2005 Option One mortgage. Count I alleged an unlawful failure to discharge the mortgage and record the discharge; count II alleged common-law indemnity predicated on a failure to honor and record the discharge; count III alleged fraud and misrepresentation for Capitol's failure to follow through and record the discharge as promised; count V sought a determination that Wells Fargo's mortgage interest was superior to SBC's mortgage interest based, in part, on the discharge of the Capitol mortgage; and count VI alleged that SBC's foreclosure was invalid because there was no mortgage to foreclose upon given the discharge.

         Within the pertinent time period, as prescribed by MCL 565.44(2), "after a mortgage has been paid or otherwise satisfied, the mortgagee . . . shall prepare a discharge of the mortgage, file the discharge with the register of deeds for the county where the mortgaged property is located, and pay the fee for recording the discharge." MCL 565.41(1). A mortgagee is liable for statutory and actual damages for refusing or neglecting to discharge a mortgage "after full performance of the condition of the mortgage, . . . or, if the mortgage is entirely due, after a tender of the whole amount due[.]" MCL 565.44(1).

         There is no dispute that the mortgagors did not pay off, satisfy, or fully perform the conditions of the Capitol mortgage, so there was no general statutory entitlement to a discharge of mortgage. Rather, this case presented an attempted subordination of mortgages as between the Capitol and Option One mortgages, through the planned use of a discharge of mortgage and a replacement mortgage, whereby Option One would retain its superior lien position despite recording the 2005 Option One mortgage after the 2004 Capitol mortgage had been recorded. See Black's Law Dictionary (7th ed) (defining a "subordination agreement" as "[an] agreement by which one who holds an otherwise senior interest agrees to subordinate that interest to a normally lesser interest"). Stated otherwise, Option One and Capitol contemplated subordination of Capitol's first lien to a second or junior lien, although not through the mechanism set forth in MCL 565.391.[8 ...

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