Miller et al

Filing 8

OPINION and ORDER Affirming Bankruptcy Court's Order Granting Defendant/Appellee's Motion for Summary Judgment. Signed by District Judge Gerald E. Rosen. (JOwe)

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF MICHIGAN
SOUTHERN DIVISION
In re:
Case No. 14-14194
Hon. Gerald E. Rosen

GUSTAV G. MILLER, III and
MICHELLE L. MILLER,
Debtors.
_______________________________/
CHARLES J. TAUNT, Trustee,

Bankr. Case No. 13-62174
Chapter 7
Hon. Marci B. McIvor

Plaintiff/Appellant,
v.

Adv. Proceeding No. 14-4326
CENTRAL MORTGAGE COMPANY,
Defendant/Appellee.
___________________________/
OPINION AND ORDER AFFIRMING
BANKRUPTCY COURT’S ORDER GRANTING
DEFENDANT/APPELLEE’S MOTION FOR SUMMARY JUDGMENT
At a session of said Court, held in
the U.S. Courthouse, Detroit, Michigan
on
October 30, 2015
PRESENT: Honorable Gerald E. Rosen
Chief Judge, United States District Court
I. INTRODUCTION
Plaintiff/Appellant Charles J. Taunt (the “Trustee”), the Chapter 7 trustee for the
bankruptcy estate of Debtors Gustav Miller, III and Michelle Miller (the “Debtors”),
commenced an adversary proceeding in the Debtors’ bankruptcy case against

Defendant/Appellee Central Mortgage Company (“CMC”), alleging that a mortgage held
by CMC on real property purchased by the Debtors is defective under state law, and may
therefore be avoided through the exercise of the powers granted to the Trustee under 11
U.S.C. § 544. The Trustee and CMC filed cross-motions for summary judgment on the
Trustee’s claim to avoid the CMC mortgage, and the Bankruptcy Court determined at the
conclusion of a September 30, 2014 hearing that CMC’s motion should be granted and
the Trustee’s motion should be denied.
Through the present appeal, the Trustee now seeks the reversal of this ruling,
arguing that the Bankruptcy Court erred in holding that a Michigan statute, Mich. Comp.
Laws § 565.604, operated to cure a defect in one of the statutory requirements for
granting a valid mortgage under Michigan law — namely, the requirement under Mich.
Comp. Laws § 565.8 that a notary must record on the mortgage instrument itself the date
that the mortgagors (in this case, the Debtors) acknowledged their intention to grant the
mortgage. In the Trustee’s view, while the statute upon which the Bankruptcy Court
relied, § 565.604, specifically enumerates the types of defects that will not be deemed to
invalidate a mortgage, this statute purportedly does not identify a missing
acknowledgment date as one of the specified defects that may be overlooked in an
otherwise valid mortgage instrument. In response, CMC contends that a notary’s failure
to record the date of an acknowledgment fits comfortably within the language of §
565.604 that deems a mortgage valid despite “any defect in any statutory requisite in the .
. . acknowledgment” of the mortgage.
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Having reviewed the parties’ briefs and the record on appeal, the Court finds that
the relevant facts and legal arguments are adequately presented in these written
submissions, and that oral argument would not aid the decisional process. Accordingly,
the Court will decide this appeal “on the briefs.” See Local Rule 7.1(f)(2), U.S. District
Court, Eastern District of Michigan. For the reasons stated below, the Court affirms the
Bankruptcy Court’s ruling in its entirety.
II. FACTUAL AND PROCEDURAL BACKGROUND
The facts pertinent to this appeal are straightforward and undisputed. In October
of 2002, Debtors Gustav Miller, III and Michelle Miller executed a mortgage on real
property located in Trenton, Michigan as security for a loan made to them by non-party
Alliance Venture Mortgage, LLC. The mortgage was recorded with the Wayne County
Register of Deeds on November 19, 2002. Defendant/Appellee Central Mortgage
Company (“CMC”) is the current holder of the mortgage.
The mortgage instrument was signed by both Debtors, and the signature page
includes the signature and stamp of a notary public indicating that the Debtors
acknowledged this instrument in the notary’s presence. The notary, however, failed to
record the date of the acknowledgment in the mortgage instrument, but instead left a
blank space in the portion of this document where this date is meant to be recorded.
In December of 2013, the Debtors filed a voluntary petition for relief under
Chapter 7 of the Bankruptcy Code, and Plaintiff/Appellant Charles J. Taunt was
appointed the Chapter 7 trustee of the Debtors’ bankruptcy estate. On March 27, 2014,
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the Trustee initiated an adversary proceeding against CMC, asserting that the mortgage
granted by the Debtors in 2002 and now held by CMC is avoidable under 11 U.S.C. § 544
due to a defect in the mortgage instrument — namely, the absence of the date upon which
the Debtors acknowledged their execution of the mortgage.
A few months after the commencement of this adversary proceeding, the Trustee
and CMC filed cross-motions for summary judgment, inviting the Bankruptcy Court to
determine as a matter of law whether CMC’s mortgage is avoidable. The Bankruptcy
Court heard argument on these cross-motions on September 30, 2014, and then ruled at
the conclusion of this hearing that the defect cited by the Trustee in the mortgage
instrument did not render the mortgage transaction avoidable under 11 U.S.C. § 544.
Rather, the Bankruptcy Court construed a Michigan statute, Mich. Comp. Laws §
565.604, as dictating that CMC’s mortgage was valid despite the notary’s failure to
record the date on which the Debtors acknowledged this mortgage. The Trustee now
appeals this ruling, arguing that the absence of an acknowledgment date cannot be cured
under a proper reading of Mich. Comp. Laws § 565.604.
III. ANALYSIS
A.

The Standards Governing This Appeal
The challenged Bankruptcy Court decision rests purely on that court’s

interpretation of a Michigan statute, Mich. Comp. Laws § 565.604. Accordingly, this
appeal presents a question of law that the Court reviews de novo. See LPP Mortgage,
Ltd. v. Brinley, 547 F.3d 643, 647 (6th Cir. 2008).
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B.

The Bankruptcy Court Properly Construed Mich. Comp. Laws § 565.604 as
Curing the Defect in the Debtors’ Mortgage Arising from the Notary’s
Failure to Record the Date upon Which the Debtors Acknowledged the
Mortgage.
Through his claims in the adversary proceeding brought against CMC, the Trustee

seeks to invoke the power of avoidance granted under 11 U.S.C. § 544. Specifically, this
Bankruptcy Code provision authorizes a trustee to “avoid any transfer of property of the
debtor or any obligation incurred by the debtor that is voidable by . . . a bona fide
purchaser of real property . . . from the debtor, against whom applicable law permits such
transfer to be perfected, that obtains the status of a bona fide purchaser and has perfected
such transfer at the time of the commencement of the [bankruptcy] case, whether or not
such a purchaser exists.” 11 U.S.C. § 544(a). As the Sixth Circuit has explained, §
544(a) places the trustee in the position of a “hypothetical[] purchas[er] [of] the debtor’s
property at the commencement of the bankruptcy case,” and the trustee then may hold or
dispose of this property subject only to “any valid prior interests” that would have existed
at the time of this hypothetical purchase. Gregory v. Ocwen Federal Bank (In re Biggs),
377 F.3d 515, 517 (6th Cir. 2004); see also Owen-Ames-Kimball Co. v. Michigan
Lithographing Co. (In re Michigan Lithographing Co.), 997 F.2d 1158, 1159 (6th Cir.
1993) (likewise observing that § 544(a)(3) grants a bankruptcy trustee “the rights and
powers of a bona fide purchaser of real property from the debtor if, at the time the
bankruptcy is commenced, a hypothetical buyer could have obtained bona fide purchaser
status”). More to the point here, a bankruptcy trustee “is entitled to avoid [a debtor’s]

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mortgage under section 544(a)(3) if a hypothetical bona fide purchaser would be able to
avoid this mortgage.” Simon v. Chase Manhattan Bank (In re Zaptocky), 250 F.3d 1020,
1024 (6th Cir. 2001). State law governs the determination whether this hypothetical
buyer could have achieved bona fide purchaser status. See In re Michigan Lithographing
Co., 997 F.2d at 1159.
In this case, the Trustee argues that in light of a defect in the mortgage instrument
executed by the Debtors in connection with a October 2002 loan made to them by CMC’s
predecessor-in-interest, Alliance Venture Mortgage, LLC, the mortgage interest
purportedly granted to Alliance at the time, and subsequently assigned to CMC, does not
qualify as a valid prior interest that would have encumbered the Debtors’ property in
Trenton, Michigan at the time they filed their Chapter 7 bankruptcy petition in December
of 2013. In particular, the Trustee points to the failure of the notary who witnessed the
Debtors’ execution of the mortgage instrument to record, on the instrument itself, the date
on which the Debtors acknowledged their grant of a mortgage to Alliance.1 Due to this
oversight, the Trustee contends that the mortgage instrument failed to comply with a
Michigan statute that governs (and mandates) the acknowledgment of instruments that
convey interests in real property:
Deeds executed within this state of lands, or any interest in lands,
shall be acknowledged before any judge, clerk of a court of record, or

1

As noted earlier, the mortgage instrument includes the signature and stamp of the notary,
Candice Rudder, indicating that the Debtors acknowledged the mortgage in her presence, but the
space in which the notary was to have recorded the date of this acknowledgment was left blank.
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notary public within this state. The officer taking the acknowledgment shall
endorse on the deed a certificate of the acknowledgment, and the true date
of taking the acknowledgment, under his or her hand.
Mich. Comp. Laws § 565.8 (emphasis added).2
To be sure, the Trustee concedes that the mortgage granted by the Debtors to
Alliance was recorded with the Wayne County Register of Deeds back in November of
2002, less than a month after the Debtors executed the mortgage instrument.
Nonetheless, he maintains that a defect in the execution of this instrument — namely, the
omission of the “true date of taking the acknowledgment,” as required under Mich.
Comp. Laws § 565.8 — operated to deprive this recording of any legal effect. See Hall v.
Redson, 10 Mich. 21, 23 (1862); Galpin v. Abbott, 6 Mich. 17, 30 (1858); see also Wells
Fargo Home Mortgage, Inc. v. Richardson (In re Brandt), 434 B.R. 493, 497 (W.D.
Mich. 2010) (“Several Michigan courts have held that conveyances of real property that
have been executed in violation of law are ineffective to provide notice to subsequent
purchasers, even if they are recorded.” (citing cases)). It follows, according to the
Trustee, that a hypothetical purchaser of the Debtors’ property at the time of their
bankruptcy filing would have lacked notice of the mortgage interest granted to Alliance
and now claimed by CMC, and that the Trustee, standing in the shoes of this hypothetical
bona fide purchaser without notice, is entitled under 11 U.S.C. § 544(a) to avoid CMC’s
mortgage interest.

2

Although this statute refers only to deeds, the Trustee states without contradiction that it
is made applicable to mortgage instruments pursuant to Mich. Comp. Laws § 565.46.
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In response, CMC does not take issue with the bulk of the Trustee’s reasoning,
with one important exception. Specifically, CMC points to a Michigan statute that
operates to cure certain types of defects in instruments conveying interests in real
property:
No conveyance of land or instrument intended to operate as such
conveyance, made in good faith and upon a valuable consideration, whether
heretofore made or hereafter to be made, shall be wholly void by reason of
any defect in any statutory requisite in the sealing, signing, attestation,
acknowledgment, or certificate of acknowledgment thereof . . . .
Mich. Comp. Laws § 565.604. CMC argues, and the Bankruptcy Court agreed, that the
notary’s failure to record on the mortgage instrument the date on which the Debtors
acknowledged this mortgage transaction qualifies as a “defect in a[] statutory requisite in
the . . . acknowledgment” of this transaction, so that § 565.604 deems this defect
insufficient to invalidate the mortgage interest granted by the Debtors and now held by
CMC. (See Bankr. Ct. 9/30/2014 Hearing Tr. at 32.)
In challenging the reading of § 565.604 advanced by CMC and adopted by the
Bankruptcy Court, the Trustee first construes this statute as addressing five discrete types
of defects: namely, defects in an instrument’s “sealing, signing, attestation,
acknowledgment, or certificate of acknowledgment.” Mich. Comp. Laws § 565.604. In
the Trustee’s view, the defect in the mortgage instrument in this case — the omission of
the date on which the Debtors acknowledged their execution of the mortgage — cannot
be characterized as a defect of any of the types enumerated in the statute. The closest fit,
according to the Trustee, is found in § 565.604’s reference to defects in the
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“acknowledgment” of a conveyance of an interest in land. Yet, the Trustee contends that
the defect giving rise to his claim for avoidance cannot accurately be characterized as a
defect in the Debtors’ acknowledgment of their mortgage transaction; rather, this defect
instead arose from the failure of the notary (and not the Debtors) to comply with a
separate statutory duty to record the date on which the Debtors acknowledged their
mortgage transaction. Thus, the Trustee argues that § 565.604 cannot properly be
construed as curing the defect at issue here, where this defect purportedly does not lie
within any of the specific categories enumerated in this statute.
The Trustee’s proposed reading of § 565.604, however, overlooks the language
that immediately precedes the statute’s reference to the “sealing, signing, attestation,
acknowledgment, [and] certificate of acknowledgment” components of an instrument
conveying an interest in land. Specifically, this statute, by its express terms, is not limited
to curing deficiencies found within these five discrete components of a deed or similar
instrument; rather, it overcomes defects “in any statutory requisite” to any of these
constituent elements of an instrument conveying an interest in land. Mich. Comp. Laws §
565.604 (emphasis added). As observed earlier, the statute that mandates the
acknowledgment of transactions conveying an interest in land also imposes the
requirement that “[t]he officer taking the acknowledgment shall endorse on” the
instrument the “true date of taking the acknowledgment.” Mich. Comp. Laws § 565.8
(emphasis added). As part of the same statute giving rise to the overarching obligation
that a grantor must acknowledge his or her intent to convey an interest in land, the
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language in § 565.8 dictating that a notary or other officer must record the “true date of
taking the acknowledgment” readily qualifies as a “statutory requisite in the . . .
acknowledgment” of a conveyance of land within the meaning of § 565.604. It follows
that the omission of this “statutory requisite” to a lawful acknowledgment — as imposed
under the very statute, § 565.8, that mandates and otherwise governs this element of an
instrument conveying an interest in land — constitutes a “defect in a[] statutory requisite”
to acknowledgment that is cured by operation of § 565.604. See Gold v. JP Morgan
Chase Bank, N.A. (In re Bright), Bankr. Case No. 11-46894, Adversary Proc. No. 134286, 2013 WL 3270346, at *5-*7 (Bankr. E.D. Mich. June 26, 2013) (holding that
defects in the notarization of two mortgage instruments were cured under Mich. Comp.
Laws § 565.604, and thus could not support avoidance of the mortgage transactions under
11 U.S.C. § 547(b)).
Even assuming that the plain language of § 565.604 were viewed as insufficient by
itself to resolve the question presented here, the Trustee has failed to cite any authorities
that would support his preferred reading of this statute. First and foremost, the Trustee
himself acknowledges that “the text of M.C.L. § 565.604 . . . is clear and unambiguous,”
so that this Court should “strictly adhere” to this text rather than “read[ing] words” into
the statute. (Trustee’s Br. on Appeal at 31-32.) Moreover, to the extent that the Trustee
appeals to the decisions in Galpin and In re Brandt for the proposition that a recorded
instrument “is a nullity and is entirely inoperative to provide notice” if a defect in the
instrument renders it “not in compliance with law or [otherwise] not entitled to be
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recorded,” In re Brandt, 434 B.R. at 501 (internal quotation marks and citations omitted),
the rule recognized in these cases applies only once it is determined that the defects in an
instrument render it ineligible for recording. As explained, this is not the case here,
where § 565.604 provides that the defect in the mortgage instrument executed by the
Debtors did not preclude the recording of this instrument or otherwise render the Debtors’
mortgage transaction invalid.
Finally, the Trustee suggests that the omission of the date of the Debtors’
acknowledgment of their mortgage transaction cannot be viewed as a defect “in the . . .
acknowledgment” of this transaction within the meaning of § 565.604, where the two
functions of acknowledging a transaction and recording the date of this acknowledgment
are distinct duties carried out by different people — i.e., the Debtors versus a notary —
and only the former are capable of introducing defects into the “acknowledgment” of the
mortgage transaction. Again, however, § 565.604 cures defects in “any statutory
requisite” to an acknowledgment, and not just in the acknowledgment itself. As
discussed earlier, the statutory prerequisites for an acknowledgment are set forth in §
565.8, and the requirements of this statute are directed at both (i) the grantor of an interest
in land, who must acknowledge the intention to grant this interest, and (ii) the individual
before whom the acknowledgment occurs, who (a) must be a “judge, clerk of a court of
record, or notary public,” and (b) must “endorse on the deed [or instrument] a certificate
of the acknowledgment, and the true date of taking the acknowledgment.” Mich. Comp.
Laws § 565.8.
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A fair reading of § 565.604, therefore, encompasses defects in the performance of
either the grantor or the notary or other officer before whom the grantor acknowledges an
intention to grant an interest in land, as these two individuals together attempt to satisfy
the various statutory requirements for an acknowledgment as set forth in § 565.8.
Because the Bankruptcy Court correctly adopted this reading of § 565.604 in awarding
summary judgment in favor of CMC on the Trustee’s claim of avoidance, this Court
affirms the Bankruptcy Court’s ruling.

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IV. CONCLUSION
For the reasons set forth above,
NOW, THEREFORE, IT IS HEREBY ORDERED that the Bankruptcy Court’s
September 30, 2014 ruling and accompanying order granting Defendant/Appellee Central
Mortgage Company’s motion for summary judgment and denying the Plaintiff/Appellant
Trustee’s motion for summary judgment are AFFIRMED.

s/Gerald E. Rosen
Chief Judge, United States District Court
Dated: October 30, 2015
I hereby certify that a copy of the foregoing document was served upon the parties and/or
counsel of record on October 30, 2015, by electronic and/or ordinary mail.
s/Julie Owens
Case Manager, [phone]

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