Real Property Notes Blog

Competing third-party purchase money mortgages: first recorded has first priority

In an unpublished Michigan Court of Appeals decision deciding an issue of first impression, the court held in JPMorgan Chase Bank NA v Bayle that, when there are two competing purchase money mortgages, the race-notice statute is not implicated because neither mortgage is “subsequent” to the other mortgage.  Purchase money mortgages attach at the same time that the purchaser acquires title to the property.  As between two purchase money mortgages, the first recorded has priority.

It is interesting that, although an issue of first impression, the Michigan Court of Appeals did not automatically authorize this decision for publication, meaning it has no stare decisis effect.  One would think that a decision of an issue of first impression would be noteworthy enough to publish.

Get it in Writing!

If you want to acquire someone’s real property, GET IT IN WRITING.  An unpublished opinion highlighting this principle, Exclusive Auto, Inc. v Mattawan Holdings, LLC, was recently released by the Michigan Court of Appeals.

Plaintiff-Lessee negotiated with the mother of the owner of real property.  He claimed that they agreed upon a “rent to own” contract, but the document signed was a lease.  It provided that Plaintiff could make improvements to the property, which would remain on the property at the end of the lease.  The lease also contained an integration clause, stating that it was the complete agreement between the parties and neither party was relying on any prior or contemporaneous oral representations.  At the end of the lease, he attempted to negotiate a land contract, but signed a second lease containing the same provisions.  When negotiations for a land contract fell through, Lessee began escrowing his rent.  He filed suit claiming breach of contract, promissory estoppel, and unjust enrichment.  The lessor counterclaimed for possession and back rent.  The trial court entered a judgment for the lessor and dismissed Lessee’s complaint.

The court of appeals affirmed.  Because the written lease provided for the improvements to stay at the end of the lease term, Lessee’s unjust enrichment claim was dismissed:  there can be no recovery on a theory of unjust enrichment when there is an express contract between the parties.  Also, his promissory estoppel claim failed, because the long-standing doctrine that an interest in real property cannot be acquired by estoppel.

Lessee clearly intended to acquire the property; his mistake was not getting it in writing.

Bad Contracts are Still Contracts

Copacia v Ginzinger, an unpublished Michigan Court of Appeals Case, highlights a fairly unpalatable axiom of the law that the fact a party made a bad deal does not relieve him of the consequences of his contract.

Copacia and Ginzinger formed a limited liability company to develop a condominium project.  They both initially made equal capital contributions; however, during the course of the development Copacia wound up contributing the lion’s share of the capital to finish the project.  The operating agreement for the LLC provided that the parties would share in the "net profits, net losses, and other items of income, gain, loss, deduction and credit of the condominium project based upon the ratios of the capital contributions between the parties.

When the parties each contribute equal funds to the project, they also share 50-50 in the expenses and the profits.  But when one member starts contributing more than the other member, the ratios change, and the person contributing more also starts bearing more of the expenses (as well as receiving more of the profits).  The opinion does not state whether the project was profitable, but one can assume if there was a lawsuit, it probably was not.

The heavily contributing partner tried to get around this bad deal by claiming there was an oral agreement to split the expenses 50-50 notwithstanding the operating agreement, but the operating agreement had an integration clause, and the Limited Liability Company Act has a statute of frauds, barring oral agreements.  The court also dismissed the fraud, unjust enrichment and quasi-contract claims, because there was an express contract (the operating agreement) between the parties.

In hindsight, the moneyed partner should have requested a change in the operating agreement before contributing more capital than the destitute partner.  However, his lack of business savvy (his lack of understanding of his contract), did not excuse him from its provisions.

UPDATE:  the Court of Appeals vacated its prior opinion and issued a new opinion; however, it does not change the analysis above.

Dont Be Late! Sixth Circuit reverses allowance of late-filed claim in Chapter 13 Case

In In re Tench, a decision of the Bankruptcy Appellate Panel out of the Sixth Circuit, the panel reversed the decision of the bankruptcy court to allow an unsecured claim filed 8 days after the bar date.  In Chapter 13 cases, the late filing of a claim is itself grounds for disallowance of the claim.  Although there are certain exceptions, the creditor did not fit into any of them.  The Sixth Circuit court held that the court’s equitable powers under Section 105 of the bankruptcy code did not allow it to relieve a creditor of the express provisions of the code.

© Steve Sowell 2018