Articles of Interest for the
Practitioner of Debtor/Creditor Law
Update on Mortgage Avoidance Adversary Proceedings in Michigan
By: Brendan G. Best and Gina M. Capua, Dykema Gossett, PLLC
The failure of many of Michigan’s Registers of Deeds to comply with Michigan’s recording acts has recently been the subject of intense interest and litigation as a result of the high number of mortgages subject to avoidance actions by bankruptcy trustees who, upon conducting an investigation of a debtor's assets, are finding mortgages (typically arising from refinancings) that are either unrecorded or date stamped with a liber and page number within the 90 day preference period and not within certain safe harbors as provided in the Bankruptcy Code (post-BAPCPA, the safe harbor period is now 30 days for all transactions; in bankruptcy cases commenced prior to BAPCPA, the safe harbor is 20 days for purchase money mortgages and 10 days for refinancings).
Among the causes of the high number of unrecorded or late-recorded mortgages are the lengthy backlogs at the county Register of Deeds offices combined with the failure of many counties to maintain “entry books” at their register of deeds offices. This failure to maintain entry books “noting . . . the day, hour, and minute of receipt” of mortgages at the recording office is in derogation of Michigan’s recording statutes. See MCLA §565.25. Wayne County has been under orders from the Michigan Supreme Court since June 2004 to remedy this major problem. See Central Ceiling & Partition, Inc., v. Dept. Commerce, 470 Mich. 877 (2004). Recently, Wayne County was also named as a defendant in an action alleging that the Register of Deeds has violated numerous federal and state laws by failing to act in accordance with the recording statutes. See First American Title Insurance Company, et al, v. Bernard J. Youngblood, Case No. 2:06-cv-12061 (Wayne County Circuit Court, filed May 4, 2006).
To date, several Michigan bankruptcy judges have produced written opinions on this issue. InTibble v. Consumers Credit Union (In re: Koshar)(Judge Hughes), 334 B.R. 889 (Bankr. W.D. Mich. 2005), the mortgage at issue was alleged to have been sent within the applicable safeharbor period but not stamped with a liber and page number until twenty-eight days after closing, and the Kalamazoo Register of Deeds admitted that it does not maintain the required entry book. The court held that the date the mortgage was delivered and accepted by the county is the date an instrument is perfected, pursuant to Michigan’s race-notice recording statutes, and held that issues of fact existed as to the actual date of receipt of the mortgage by the Register of Deeds). In Gold v. Inerstate Financial Corp. (In re: Schmiel), Adversary Proceeding No. 04-04023 (Bankr. E.D. Mich., July 7, 2005) (unpublished) (Judge Shefferly), the mortgage was presented to the Oakland County Register of Deeds within the safe harbor period but stamped with a liber and page number ninety-six days after closing. The court held that Michigan statutes provide that the mortgage is recorded at the time so noted in an entry book, and holding that issues of fact existed with respect to both whether the Oakland County Register of Deeds maintained an entry book and when the mortgage was validly presented and received by the Register of Deeds, e.g. whether the mortgage complied with Michigan’s recording statutes and was accepted by the Register of Deeds for recording when presented.
With every bankruptcy judge in the Eastern District of Michigan facing this issue in multiple cases, the Michigan Supreme Court recently certified the following question to the Michigan Supreme Court: "When a County Register of Deeds Does Not Maintain an ‘Entry Book’ As Identified in MCL 565.24 and 565.25, When, If Ever, Is A Mortgage Deemed ‘Recorded’?” See Supreme Court Case No. 130966, In re Certified Question - Gold v. Interstate, (filed April 19, 2006). If the Court decides to answer the question, which it may decline to do, a decision is not expected until October 2007 or later.
While this issue may fade away in the coming months or years, as a combined result of the increase of the safe harbor period in BAPCPA and the current effort to force Registers of Deeds to maintain entry books, in the near-term attorneys and courts alike will continue to struggle with this elusive and costly problem.