STATE OF MICHIGAN

COURT OF APPEALS

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TRADE PARTNERS, INC., UNPUBLISHED

February 4, 2000

Plaintiff-Appellant,

v No. 211516

Kent Circuit Court

WILLIAM CHARTIER D/B/A FINANCIAL LC No. 96-004832-CK

RESOURCE SERVICES, and TMS

MORTGAGE, INC.,

Defendants-Appellees,

and

DAVID KITSMILLER, PENNY KITSMILLER,

and DAVID K. JEWELERS, LTD.,

Defendants.

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TRADE PARTNERS, INC.,

Plaintiff-Appellant,

v No. 214410

Kent Circuit Court

WILLIAM CHARTIER D/B/A FINANCIAL LC No. 96-004832-CK

RESOURCE SERVICES, and TMS

MORTGAGE, INC.,

Defendants-Appellees;

and

DAVID KITSMILLER, PENNY KITSMILLER,

and DAVID K. JEWELERS, LTD.

Defendants.

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Before: McDonald, P.J., and Neff and Smolenski, JJ.

PER CURIAM.

In Docket No. 211516, plaintiff Trade Partners, Inc. appeals as of right from the trial court's judgment of no cause of action in plaintiff's complaint seeking judicial foreclosure of an interest in real property. In Docket No. 214410, this Court granted plaintiff leave to appeal the trial court's order awarding defendants' costs in the amount of $22,090.36 as sanctions under the offer of judgment rule, MCR 2.405(D). We reverse the trial court's judgment in Docket No. 211516, which renders plaintiff's appeal in Docket No. 214410 moot.

The trial court made the following findings of fact:

In its conclusions of law, the trial court found that

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The trial court subsequently entered a judgment of no cause of action against defendants FRS and TMS; declared that the interest of defendants FRS and TMS in the property is superior to any interest in the property claimed by plaintiff, and held that plaintiff was entitled to an equitable lien against the interest of the Kitsmillers¹ in the property in the amount of $206,796.86 which was junior and subject to the mortgage presently held by defendant TMS.² The trial court awarded defendants FRS and TMS costs against plaintiff as sanctions under MCR 2.405(D) and also awarded plaintiff costs against the Kitsmillers.

Docket No. 211516

Plaintiff contends that the trial court erred when it determined that plaintiff's duly recorded lien against a land contract vendee's interest in real property did not have priority over defendants' subsequently recorded mortgage against the same real property pursuant to Michigan's "race notice" statute, MCL 565.29; MSA 26.547. While we agree with plaintiff that the mortgage is subject to plaintiff's interest in the property, we disagree with plaintiff's characterization of its interest as a lien that has priority over the mortgage pursuant to MCL 565.29; MSA 26.547. In addition, while we agree with the trial court's determination that an equitable lien is appropriate here, we disagree with the trial court's determination of the amount and priority of that lien.

This case presents a question of law and therefore is subject to de novo review. Michigan Basic Property Ins Ass'n v Ware, 230 Mich App 44, 48; 583 NW2d 240 (1998). "Michigan law is quite clear that, when property is sold on a land contract, legal title is retained by the vendor and an equitable title or interest is obtained by the vendee." Tidwell v Dasher, 152 Mich App 379, 384-385; 393 NW2d 644 (1986). "By an assignment [of a vendee's interest in a land contract] the vendee conveys to the assignee his present interest in the lands, together with the right to obtain further interest and final title on the performance of the contract." Gorman v Butzel, 272 Mich 525, 530; 262 NW 302 (1935); General Electric Co v Levine, 50 Mich App 733, 736; 213 NW2d 811 (1973).

A vendee under a land contract receives only the equitable title to the property while the vendor retains the legal title. See Ross Properties v Sheng, 151 Mich App 729, 734; 391 NW2d 464 (1986). The vendee may assign or transfer this equitable interest. Id. When an assignment is made as security, "the vendee still retains an equitable interest in the contract, and on satisfaction of the obligation secured thereby, he is entitled to a reassignment thereof " Krueger v Campbell, 264 Mich 449, 452; 250 NW 285 (1933). However, if the vendee receives a conveyance from the vendor after an assignment of his interest, the vendee holds legal title to the property in trust for his assignee. Levine, supra at 737.

In its brief, plaintiff identified Michigan's "race notice" statute as MCL 565.29; MSA 26.547, which provides:

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While MCL 565.29; MSA 26.547 is part of Michigan's race notice recording scheme, we note that the scheme involves two aspects: constructive notice of prior recorded interests and the priority of those interests recorded first in time over unrecorded interests. In First of America Bank v Alt, 848 F Supp 1343, 1347 (DC Mich 1993), the federal court summarized the recording scheme:

The court's analysis in First of America is consistent with the opinion expressed in Edwards v McKernan, 55 Mich 520, 526; 22 NW 20 (1885), in which our Supreme Court stated that "the effect of the recording laws was that the record of a conveyance, which is entitled to be recorded under such laws, operates as constructive notice to subsequent purchasers claiming under the same grantor." The Court in Edwards also stated that the predecessor to MCL 565.29; MSA 26.547 did not declare that the record shall be notice to subsequent purchasers, "but only that unrecorded conveyances shall be void as to subsequent purchasers in good faith whose conveyances shall be first recorded." Id. at 525-526. Consequently, we do not believe that MCL 565.29; MSA 26.547 applies here, because plaintiff does not possess a prior unrecorded lien in the property.

The trial court found that the Kitsmillers' assignment to Kacos (the "Kacos assignment") was intended to secure the note payable to Kacos (the "Kacos note"). The Kitsmillers, as vendees, assigned to Kacos their "present interest" in the property "together with the right to obtain further interest and final title on the performance of the contract." Gorman, supra at 530. This assignment of the Kitsmillers' vendee's interest as security for a debt owed by them became a "valid, separate and distinct interest in the property for security" which, upon recording, constituted constructive notice to subsequent purchasers of the assignee's claim against the property pursuant to MCL 565.25; MSA 26.543. Boraks v Siegel, 366 Mich 308, 311-312; 115 NW2d 126 (1962) (applying CL 1948 § 565.25, the predecessor of MCL 565.25; MSA 26.543). At the time of the transactions in this case, MCL 565.25; MSA 26.543 read in pertinent part:

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Although our Supreme Court did not characterize vendee's assignment in Borak as a mortgage or other lien, the Court nonetheless concluded that subsequent owners or encumbrancers took the property subject to the rights as set forth in the recorded assignment.⁴ Therefore, we conclude that, as a matter of law, defendant FRS took its mortgage subject to plaintiff's interest in the property.

Having concluded that defendant FRS' mortgage is subject to plaintiff's interest as vendee's assignee, we must now determine how plaintiff can enforce this interest. Under the facts in this case, we agree with the trial court that plaintiff was entitled to an equitable lien; however, we disagree with the court as to the extent of that lien. An assignment of a land contract as collateral by the vendee may operate to give the assignee an equitable lien on the property. Levine, supra at 737. Equity will create a lien against real estate only in those cases where the party has been prevented by fraud, accident or mistake from securing that to which he was equitably entitled. Cheff v Haan, 269 Mich 593, 598; 257 NW 894 (1934). This Court defined an "equitable lien" in Warren Tool Co v Stephenson, 11 Mich App 274, 281; 161 NW2d 133 (1968):

Generally, an equitable lien would be unnecessary to protect the interest of a vendee's assignee, like plaintiff here, because the assignee holds the equitable ownership of the property. See, e.g., Cheff, supra at 596, 598, in which the Court determined that the vendee's assignee was not entitled to a mortgage lien, reasoning in part that a lien was not a collateral contract, but a claim against some interest in the property created by law as an incident of the contract. Because

plaintiff held a present interest in the property, plaintiff should have been able to obtain its collateral by stepping into Kitsmillers' shoes and acquiring the legal title to the property under the land contract. However, the Kitsmillers prevented plaintiff from taking this action when they paid off the land contract and executed a mortgage against the property that exceeded the property's

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purchase price.⁵ Furthermore, when the Kitsmillers obtained the deed to the property from the vendor, they held the title to the property in trust for plaintiff, Levine, supra at 737, and, as a result, could not mortgage the property in such a manner as to extinguish plaintiff's security interest. See, e.g., Georges v Ballard, 20 Mich App 554, 557; 174 NW2d 311 (1969) (where title holder to joint adventure property was constructive trustee of the property, the title holder should not be allowed to mortgage the property for his own private advantage without the consent of the other joint adventurer).

Here, we agree with the trial court that equity should create a lien against the property because plaintiff has been prevented by "fraud, accident or mistake" from securing that to which it was entitled. However, we disagree with the trial court's determination that plaintiff's equitable lien is in the amount of $206,796.86 and that the lien is unenforceable against defendants. When the Kitsmillers assigned their vendee's interest in the land contract, they assigned their "present interest in the lands, together with the right to obtain further interest and final title on the performance of the contract." Gorman, supra at 530. We note from the record that the vendor's deed conveying the property to the Kitsmillers contains a stated purchase price of $127,700. We further note that the Kacos assignment stated that it was subject to an outstanding balance on the contract of $112,945.85. Based upon this record, we conclude that the Kitsmillers' present interest in the property at the time of the assignment had a monetary value of $14,054.15. Id. Because plaintiff did not make any payments on the contract, and thus obtained no further interest, we do not believe that it should be entitled to any additional equitable interest in the property.

We further conclude that plaintiff's equitable lien is enforceable against defendants because defendants are "encumbrancers with notice." See Warren Tool, supra at 281. Defendant FRS had constructive notice of plaintiff's previously recorded interest in the Kitsmillers' contract to purchase the property and took its mortgage subject to that interest. Boraks, supra at 311-312; MCL 565.25; MSA 26.543.

Finally, we disagree with defendants' contention that the Kacos assignment was not operative because the Kitsmillers previously assigned that interest to Bender. Smith testified that he and the Kitsmillers intended to release their assignments to Bender and replace them with other security. We find nothing in the record to contradict Smith's testimony that the unrecorded Bender assignment was not collateral for the Bender note. Furthermore, defendants did not object to plaintiff's attorney's representation to the trial court that the Bender loan was not secured and discharged in bankruptcy.

In summary, we affirm the trial court's determination that plaintiff has an equitable lien in the property, but conclude that, as a matter of law the lien is limited to $14,054.15. We also reverse the trial court's judgment that plaintiff had no cause of action against defendants FRS and TMS, and hold that, as a matter of law, defendants' mortgage is subject to this equitable lien. Accordingly, we vacate the trial court's order assessing costs against plaintiff.

Docket No. 214410

Because we have vacated the trial court's order assessing costs against plaintiff, the issues raised in this appeal are moot.

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Reversed in part, affirmed in part. No taxable costs pursuant to MCR 7.219, neither party having prevailed in full.