Opinion
Case No. 1:02-CV-31, Bankruptcy Case No. ST 00-03660, Adversary Proceeding No. 00-88404
September 27, 2002
MEMORANDUM OPINION
This is an appeal from a ruling of the bankruptcy court awarding summary judgment in favor of plaintiff-appellee James W. Boyd, Bankruptcy Trustee, on count I of his complaint. Essentially, the bankruptcy court ruled that defendant-appellant Superior Bank FSB could not invoke equitable subrogation to defeat the Trustee's avoiding of debtor Kay Lorraine Lewis's preferential transfer of property pursuant to 11 U.S.C. § 547(b). On appeal, Superior Bank contends the bankruptcy court failed to apply or misconstrued the governing Michigan law on equitable subrogation.
I
The relevant facts are not disputed. Debtor Kay Lorraine Lewis filed a Chapter 7 bankruptcy petition on May 4, 2000. Less than three weeks earlier, on April 17, 2000, a mortgage held by Superior Bank ("Superior") on real property owned by debtor Lewis in Mancelona, Michigan was recorded with the Antrim County Register of Deeds. The mortgage secured repayment of $57,400 loaned by Superior to Lewis in connection with refinancing and discharge of her previous mortgage on the property. The previous mortgage was held by Empire National Bank ("Empire") and had been duly recorded on December 17, 1998.
The property, consisting of a private residence on 10 acres, was jointly owned by Lewis and her son Ronald C. Bigger and his finance Jessica DePeel, pursuant to a quitclaim deed.
The mortgage had been executed on September 9, 1999, but, for reasons unknown to the Court, was not recorded until seven months later.
There is no dispute that, for purposes of 11 U.S.C. § 547, Superior's recording of the mortgage constitutes a "transfer" of the debtor's interest in property. Because the transfer occurred within 90 days before the filing of Lewis's bankruptcy petition, the Trustee sought to avoid it as an improper preferential transfer, pursuant to 11 U.S.C. § 547(b). In response, Superior did not assert any of the defenses available under § 547(c). Rather, it invoked the doctrine of equitable subrogation, asking the bankruptcy court to recognize that Superior, by virtue of having paid Lewis's debt to the original mortgagee, Empire, thereby acquired, in equity, all rights and remedies previously held by Empire, including its secured lien on the subject real property.
The bankruptcy court held that equitable subrogation did not apply because Superior was a "mere volunteer" in satisfying Lewis's obligation to Empire, whose failure to perfect its own security interest was its own fault. Superior insists the bankruptcy court applied an overly narrow view of equitable subrogation in reliance on Missouri law, whereas controlling Michigan law recognizes it to be a broad and flexible doctrine.
The Court reviews the judgment of the bankruptcy court de novo.
II
Superior correctly argues that application of equitable subrogation in this case is a function of Michigan law. In Hartford Accident Indemnity Co. v. Used Car Factory, Inc., 461 Mich. 210 (1999), the Michigan Supreme Court described the doctrine as follows:
"Equitable subrogation is 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. It is well established that the subrogee acquires no greater rights than those possessed by the subrogor, and that the subrogee may not be a `mere volunteer.'"
. . .
Equitable subrogation is a flexible, elastic doctrine of equity . . . Its application "should and must proceed on the case-by-case analysis characteristic of equity jurisprudence."Id. at 215 (citations, footnote omitted). The Hartford court went on to further emphasize that among the conditions precedent to this flexible, elastic application of the doctrine are the requirements that the would be subrogee not be a mere volunteer and that it have no available legal remedy. Id.
Superior recognizes that it failed to timely perfect its interest in the Lewis property. If it had timely recorded its mortgage at the time of execution, its interest would have been perfected prior to the § 547(b) preference period and its secured claim would have been superior to other creditors' unsecured claims. If the Trustee is allowed to avoid the late recordation of its mortgage, however, Superior is rendered an unsecured creditor. To avoid this result, Superior seeks, via equitable subrogation, to assert the secured claim that Empire would have had had the first mortgage not been extinguished through refinancing. Equity should come to its aid, Superior maintains, to achieve justice and prevent unjust enrichment of the bankrupt's estate.
As the bankruptcy court recognized, equitable subrogation cannot be invoked in this situation under Michigan law for lack of two conditions precedent. First, Superior is undisputedly a "mere volunteer." It voluntarily paid Lewis's debt to Empire in order to realize a profit on its own loan to Lewis, secured by the second mortgage. Second, Superior had a legal remedy to protect the validity of its lien: timely recordation of its mortgage. Superior has offered no explanation for its failure to timely record the mortgage. The Court must therefore presume that it was within Superior's power to timely record. Its failure to do so, as the bankruptcy court observed, is simply an error for which it, a sophisticated creditor, must bear responsibility. Since Superior, a volunteer, is not blameless in its failure to perfect its lien, the equities are not such as would appeal to the conscience of the Court.
It follows that equitable subrogation is not available under Michigan law to permit Superior to circumvent the requirements of the Bankruptcy Code. See also, refusing to allow equitable subrogation in similar circumstance under the laws of other states, Midlantic Nat'l Bank v. Bridge, 18 F.3d 195 (3rd Cir. 1994) (New Jersey law); Vieira v. Pearce, 236 B.R. 261 (Bankr.S.D.Ill. 1999) (Illinois law); Rouse v. Chase Manhattan Bank, U.S.A., N.A. (In re Brown), 226 B.R. 39 (Bankr.W.D.Mo. 1998) (Missouri law). Case law cited by Superior in support of a different outcome is distinguishable and inapposite.
Superior objects to the bankruptcy court's reference to Missouri law in support of its ruling. Indeed, the bankruptcy court cited Rouse v. Chase Manhattan Bank, U.S.A., N.A. (In re Brown), 226 B.R. 39 (W.D.Mo. 1998), for the general proposition that equitable subrogation is used "only in extreme cases bordering on if not reaching the level of fraud." Id. at 44, quoting Kansas City Downtown Minority Dev. Corp. v. Corrigan Assoc. Ltd. Partnership, 868 S.W.2d 210, 223 (Mo.Ct.App. 1994). And indeed, this general proposition of Missouri law may not be entirely harmonious with the laws of Michigan, where equitable subrogation may be applied more broadly. Yet, in Michigan, certain conditions must be met before the doctrine may be invoked. Two of these conditions are clearly not met in this case, as the bankruptcy court recognized. The bankruptcy court's reference to Missouri law was therefore of no material consequence.
III
Alternatively, Superior seems to argue that it should be deemed to have an equitable lien on the Lewis property, by virtue of its unrecorded mortgage, that is superior to the Trustee's lien. Such an equitable lien cannot be avoided by the Trustee pursuant to 11 U.S.C. § 544(a)(3), Superior contends, because the Trustee had actual knowledge, at the commencement of the bankruptcy case, of Superior's mortgage which had been recorded 17 days earlier.
This argument goes beyond the scope of count I of the complaint. The bankruptcy court awarded summary judgment to the Trustee solely on count I, which ruling is the exclusive subject of this appeal. Count I merely asserted the Trustee's right to avoid Superior's mortgage lien as a preferential transfer pursuant to § 547(b). The Trustee's knowledge at the commencement of the bankruptcy case is irrelevant to such a claim. In count I, the Trustee has not sought any relief under § 544, the strong arm clause of the Bankruptcy Code. Superior's alternative argument under § 544(a)(3) therefore presents no grounds to disturb the bankruptcy court's award of summary judgment on count I.
To the extent the bankruptcy court reached the issue, however, finding that the Trustee's hypothetical judicial lien is, irrespective of his knowledge, superior to Superior's unperfected lien, pursuant to § 544(a)(1), the Court finds no error.
IV
Accordingly, the bankruptcy court's judgment will be affirmed. An order consistent with this opinion shall issue forthwith.JUDGMENT ORDER
In accordance with the Court's memorandum opinion of even date,
IT IS HEREBY ORDERED that the judgment of the bankruptcy court, awarding summary judgment in favor of plaintiff James W. Boyd, Trustee, on his count I claim against defendant Superior Bank FSB, is AFFIRMED.