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.