Sunday, January 22, 2012

FYI: 6th Cir Upholds Objection to Proof of Claim by Innocent Assignee of Allegedly Forged Mortgage, Denies Equitable Mortgage

The U.S. Court of Appeals for the Sixth Circuit recently held that, under Michigan law, a mortgage on which the borrowers' signatures were allegedly forged was void ab initio including as to innocent assignees, and that an equitable mortgage could not be imposed under the facts at hand because of the unclean hands of the mortgage originator. 
A copy of the opinion is available at:
Two borrowers closed their mortgage loan refinancing transaction in California, as to real estate located in Michigan.  The borrowers executed a Note, among other documents, but allegedly did not execute the related security instrument.   
The originator of the loan sold and assigned the loan to the appellants in this matter (collectively, the "bank"). When the borrowers fell behind on their payments, the bank instituted foreclosure proceedings.  The borrowers subsequently filed Chapter 13 bankruptcy proceedings. 
The bank asserted a secured claim in the Chapter 13 matter.  Their related proof of claim included the mortgage instrument, which allegedly had been signed by the borrowers and notarized.  However, the notary who acknowledged the signatures was located in Michigan, but the borrowers were in California at the time the transaction closed.  
The borrowers objected to the proof of claim, on the grounds that their signatures were allegedly forged.  The bankruptcy court granted summary judgment to the borrowers, and disallowed the secured claim.  The bankruptcy court also imposed an equitable mortgage on the subject property. 
The borrowers appealed. The district court held that the mortgage was void ab initio.  The bank appealed the district court decision. 
On appeal, the Sixth Circuit considered, among other things, whether the mortgage was void ab initio, and whether an equitable mortgage might be imposed under the facts at issue here. 
First, the Sixth Circuit affirmed that the mortgage was void ab initio, noting that counsel for the bank at oral argument conceded that the mortgage was forged.  The Court stated that Michigan case law provided that "parties that take possession of interests granted by the forged instrument, even if they do so innocently, have no rights under the forged document."  Special Property VI v. Woodruff, 730 N.W.2d 753, 756 (Mich. Ct. App. 2007). 
Next, the Sixth Circuit surveyed the relevant case law pertaining to equitable mortgages.  It noted that equitable mortgages may be appropriate where a mortgage is void, but only if the party seeking the equitable mortgage has clean hands. 
The Sixth Circuit noted that when a party is assigned a mortgage, that party "stands in the shoes of the original party for equitable purposes."  Burkhardt v. Bailey, 680 N.W. 2d 453, 462 (Mich. Ct. App. 2004).  Because the district court found that the originator forged the borrowers' signatures, and even though the bank itself was not accused of any wrong doing, the Sixth Circuit held that neither the originator nor the bank could "seek an equitable remedy that would protect them from the consequences of their own improper conduct."
Therefore, the Sixth Circuit held that borrowers' property was not subject to any mortgage, equitable or otherwise, and affirmed the lower court's decision. 
Finally, the Sixth Circuit disagreed with the bank's contention that the Court's decision amounted to a windfall for the borrowers in the form of a free house.  The Sixth Circuit noted that borrowers remained liable on the now-unsecured note, and that it saw no obstacle to the bank accessing the remedies of a judgment lien creditor as to the borrowers' property to collect the debt.

Ralph T. Wutscher
McGinnis Tessitore Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874

NOTICE: We do not send unsolicited emails. If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention. Thank you.

Our updates are available on the internet, in searchable format, at: