The Michigan Court of Appeals recently held that a lien asserted by a condominium association is subordinate to the previously filed mortgage of a mortgagee, notwithstanding the fact that a prior mortgage existed because of the failure to record a discharge. Oakwood Park Ass'n. v. Cathey, et al., Case No. 08-093850 (Mich. Ct. App. Dec. 9, 2010). The decision in Oakwood Park serves as yet another reminder to mortgage lenders to ensure that discharges of all previous mortgages and liens have been recorded.
Background
In Oakwood Park, the former mortgagor granted a
mortgage to Standard Federal Bank on a condominium in 2007. In
September 2003, the prior mortgagor satisfied the promissory note
secured by the mortgage and the underlying debt was extinguished.
Neither the former mortgagor nor Standard Federal, however,
recorded a discharge of the mortgage. Approximately one month
later, the current mortgagor, who had presumably purchased the
property from the former mortgagor, granted Option One Mortgage
Corporation a mortgage on the condominium. In 2007, the condominium
association asserted a lien (which was subsequently amended) on the
condominium for common charges owed by the current owner. Finally,
in 2008, a discharge of the initial mortgage held by Standard
Federal was recorded.
Although it is unclear from the decision, the condominium
association presumably filed suit and in the context of the action,
the Oakland County Circuit Court was called upon to determine
whether the lien of the association or the mortgage of Option One
had priority. After Option One and the condominium association
filed cross motions for summary judgment, the trial court ruled in
favor of Option One.
On appeal, the Michigan Court of Appeals identified the
parties' dispute as one concerning the meaning of "first
mortgage of record" as used in the Michigan Condominium Act,
MCL 559.101 et seq. (the "Act"). Section 208 of the Act
provides, in relevant part, that:
Sums assessed to a co-owner by the association of co-owners that are unpaid together with interest on such sums, collection and late charges, advances made by the association of co-owners for taxes or other liens to protect its lien, attorney fees, and finds in accordance with the condominium documents, constitute a lien upon the unit or units in the project owned by the co-owner at the time of the assessment before other liens except tax liens n the condominium unit in favor of any state or federal taxing authority and sums unpaid on a first mortgage of record, except that past due assessments that are evidenced by a notice of a lien recorded as set forth in subsection (3) have priority over a first mortgage recorded subsequent to the recording of the notice of lien.
MCL 559.208(1).
Option One contended that the condominium association's lien
does not have priority under the Act because it was recorded after
Option One's mortgage, which was the only mortgage in effect.
The condominium association, however, argued that Option One's
mortgage was not the "first mortgage of record" because
of the failure to record the discharge of the prior Standard
Federal mortgage until 2008. In essence, the condominium
association asserted that even though the underlying debt secured
by the mortgage was satisfied, the date of the recording of the
discharge controls for purposes of priority.
In affirming the trial court, the Michigan Court of Appeals
rejected the condominium association's argument. The court
explained that although the Standard Federal mortgage was "of
record," it was also a nullity due to the extinguishment of
the underlying debt prior to the time the association recorded its
lien under the Act. The court held that because the Standard
Federal mortgage ceased to exist in 2003 when the note was
satisfied, it could not have been the "first mortgage of
record" under the Act.
Moreover, the court noted that the Act provides that a lien under
the Act does not have priority over "sums unpaid on a first
mortgage of record." Because Standard Federal's mortgage
had no "sums unpaid," it could not qualify for priority.
According to the court, Option One's mortgage was the only
"first mortgage of record" with "sums unpaid"
and was thus entitled to priority over the condominium
association's lien.
Summary
At the sake of repetitiveness, it is not sufficient to simply rely on a payoff letter without receiving a recorded discharge of the mortgage. For example, if Standard Federal had been owed even a nominal sum (e.g., $15.00) by the prior owner at the time that the condominium association asserted its lien against the current owner, Option One's mortgage, based on a strict reading of the court's decision in Oakwood Park, would have been subordinate to the condominium association's lien. As another example, the mortgage granted to Standard Federal may have contained a dragnet clause, in which case the mortgage could have secured indebtedness evidenced by a separate promissory note. Arguably, and subject to further interpretation by the Michigan courts with respect to dragnet clauses in future advance residential mortgages, Option One's mortgage could have been deemed subordinate to the condominium association's lien because the indebtedness to Standard Federal would not have been satisfied.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
