Ownership Interest Under Equitable Mortgage Defeats Interest Of Subsequent Buyer; Lack Of Knowledge Not Enough To Sustain Bona Fide Purchaser Status

A February 14, 2008 decision of the Michigan Court of Appeals provides an illustration of how the equitable mortgage doctrine and the bona fide purchaser doctrine operate in a given case.

The case, Vernier v. Sipe (No. 276037, Mich. Ct. App., February 14, 2008), involved an arrangement whereby a real property owner ("Defendant" or "equitable mortgagor") executed a deed which, on its face, purported to convey absolute legal title to real property to another ("original grantee" or "equitable mortgagee"). The undisputed purpose of the conveyance was to provide collateral for a loan.

The original grantee subsequently conveyed its interest in the property by quit claim deed to another, and after another conveyance, the property interest ended in the hands of the Plaintiff. The Plaintiff had no knowledge of the original arrangement between Defendant/equitable mortgagor and the original grantee/equitable mortgagee.

Given the facts of the case, the trial court originally hearing the case ruled that:

• the conveyance from the Defendant did not convey absolute legal title to the original grantee. Because the conveyance was intended to secure a debt, the conveyance was treated as an equitable mortgage;

• because the Plaintiff had no knowledge of the original arrangement between the Defendant and original grantee, the Plaintiff was a bona fide purchaser without notice of the interest. Therefore, according to the trial court, despite that the original arrangement was ruled to be an equitable mortgage, the Plaintiff's property interest, acquired as a bona fide purchaser without notice, defeats the property interest of the Defendant under the equitable mortgage.

On appeal, the Michigan Court of Appeals ruled as follows:

• affirmed the trial court ruling that the arrangement was an equitable mortgage, and

• reversed the trial court ruling that the Plaintiff was a bona fide purchaser without notice, despite the fact that Plaintiff had no knowledge of the original arrangement giving rise to the equitable mortgage.

Even though the Plaintiff had no knowledge of the existence of the arrangement ultimately held to be an equitable mortgage, the Michigan appeals court (given the specific facts of the case), ruled that the Plaintiff nevertheless "had notice" of the equitable mortgage arrangement, and consequently, was not entitled to bona fide purchaser status.

The court based its ruling on the fact that Plaintiff had failed to satisfy his obligation of exercising due diligence in inquiring as to the possible existence of rights of others in the subject property. Given the specific facts of the case, the court ruled that had the plaintiff satisfied his obligation to exercise said due diligence and made the appropriate inquiries, it would have discovered the rights of the Defendant/equitable mortgagor under the equitable mortgage arrangement.

Given that the specific facts of the case are a bit convoluted, anyone interested in finding out exactly what transpired will have to read the case. What follows below are the observations of the Michigan Court of Appeals regarding the bona fide purchaser doctrine in the context of an equitable mortgage, as applied under the law of the state of Michigan (Note: For ease of reading, I made a couple of minor alterations to the excerpts from the original text of the decision below. For the exact text as it appears in the case, please refer to the court decision itself).

• However, if the [equitable] mortgagee, i.e., Holtz, transfers the property to a bona fide purchaser for value, the interest of the equitable mortgagor, i.e., Sipe, is defeated. MCL 565.32; In re Van Duzer, [390 Mich. 571, 578; 213 N.W.2d 167 (1973)]; 1 Cameron, Michigan Real Property Law (3d ed), § 18.8, p 685.

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• A bona fide purchaser is one who has acquired a property interest for consideration and without notice of claims of interest in the property by a third party. Richards v Tibaldi, 272 Mich. App. 522, 539; 726 N.W.2d 770 (2006); 1 Cameron, Michigan Real Property Law (3d ed), § 11.20, pp 395-396. Notice may be actual or constructive and has been defined as follows:

"When a person has knowledge of such facts as would lead any honest man, using ordinary caution, to make further inquiries concerning the possible rights of another in real estate, and fails to make them, he is chargeable with notice of what such inquiries and the exercise of ordinary caution would have disclosed." [Richards, supra at 539, quoting Kastle v Clemons, 330 Mich. 28, 31; 46 N.W.2d 450 (1951).]

• A purchaser of real estate has a duty to investigate the seller's title as follows:

"It is the duty of a purchaser of real estate to investigate the title of his vendor, and to take notice of any adverse rights or equities of third persons which he has the means of discovering, and as to which he is put on inquiry. If he makes all the inquiry which due diligence requires, and still fails to discover the outstanding right, he is excused, but, if he fails to use due diligence, he is chargeable, as a matter of law, with notice of the facts which the inquiry would have disclosed." [American Fed S&L Ass'n v Orenstein, 81 Mich. App. 249, 252; 265 N.W.2d 111 (1978), quoting Schweiss v Woodruff, 73 Mich. 473, 477-478; 41 NW 511 (1889).]

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To view the court decision, see Vernier v. Sipe (No. 276037, Mich. Ct. App., Per Curiam - Unpublished, February 14, 2008).

This is an UNPUBLISHED OPINION. In accordance with Michigan Court of Appeals rules, UNPUBLISHED OPINIONS are NOT PRECEDENTIALLY BINDING under the rules of STARE DECISIS. Michigan equitable mortgage alpha Michigan bona fide purchaser