STATE OF MICHIGAN IN THE SUPREME COURT APPEAL FROM THE MICHIGAN COURT OF APPEALS Estate of DARRYL HOUSTON PRICE. NASTASSIA PRICE and ERIN DUFFY-PRICE, Personal Representatives of the Estate of DARRYL HOUSTON PRICE, Plaintifis, Supreme Court No. 143123 v Court of Appeals Docket No: 295212 LORI JEAN KOSMALSKI and TRADE DEVELOPMENT COMPANY a/k/a TRADE, Ingham County Circuit Court WORLD COMPANY, INC., File No: 06-228-NZ Defendants, and Estate of RUDAFORD R. STERRETT, JR., Defendant-Appellee, and THOMAS WOODS, Receiver, Appellee, and DART BANK, Intervening Defendant-Appellant. BRIEF ON APPEAL - APPELLANT ORAL ARGUMENT REQUESTED Peter A. Teholiz (P34265) ‘The Hubbard Law Firm, P.C. Attomeys for Appellant Dart Bank P.O. Box 80857 Lansing, MI 48908-0857 517/886-7176 CECEIVES DEC 22 201‘TABLE OF CONTENTS INDEX OF AUTHORITIES....... JURISDICTIONAL STATEMENT ane STATEMENT OF QUESTIONS PRESENTED... STATEMENT OF FACTS. I, THE STATUTORY RIGHT OF FIRST PRIORITY GIVEN TO A RECORDED MORTGAGE CANNOT BE DISREGARDED IN FAVOR OF A SUBSEQUENTLY APPOINTED RECEIVER'S COSTS AND FEES Il, A MORTGAGEE’S STATUTORY PRIORITY POSITION ON ITS MORTGAGE CANNOT BE SURCHARGED BY A RECEIVER’S COSTS AND FEES WHERE THE RECEIVER CANNOT SHOW THAT THE MORTGAGEE CONSENTED TO HIS APPOINTMENT OR WAIVED ITS PRIORITY POSITION....e-e I A MORTGAGEE’S STATUTORY PRIORITY POSITION FOR ITS RECORDED MORTGAGE CANNOT BE SURCHARGED BY A RECEIVER’S COSTS AND FEES, WHERE THE RECEIVER DID NOT SHOW THAT THOSE COSTS AND FEES SPECIFICALLY BENEFITTED THE MORTGAGEE, AND THEY, IN FACT, DID NOT... ' IV. A RULE OF LAW ALLOWING A RECEIVER TO SURCHARGE HIS FEES AND COSTS OVER A MORTGAGE RECORDED PRIOR TO HIS APPOINTMENT, WHERE THE MORTGAGEE NEITHER CONSENTS TO HIS APPOINTMENT NOR WAIVES ITS PRIORITY POSITION, IS A TAKING OF THE MORTGAGEE’S PROPERTY IN VIOLATION OF THE 5™ AMENDMENT. CONCLUSION.(DEX OF AUTHORITIES Cases Ameriquest Mortgage Co v Alton, 273 Mich App 84; 731 NW2d 99 (2006) .. ‘Armstrong v United States, 364 US 40; 80 S Ct 1563; 4 L Ed2d 1554 (1960) Attica Hydraulic Exchange v Seslar, 264 Mich App 577; 691 NW2d 802 (2004).. 6, 12, 14, 15 Bailey v Bailey, 262 Mich 215; 247 NW 160 (1933) .9, 10, 15, Cheboygan Co Construction Code Dep't v Burke, 148 Mich App 56; 384 NW2d 77 (1985)... Compton Impressions Ltd v Queen City Bank NA, 217 F3d 1256 (CA 9 2000) Detroit Trust Co v Detroit Service Co, 262 Mich 14; 247 NW 76 (1933 Detroit Trust Co v Detroit, 269 Mich 81; 256 NW 811 (1934) Deutsche Bank Trust Co Americas v Spot Realty Inc, 269 Mich App 714 NW24 409 (2005) Erickson v Lampi, 150 Mich 92; 113 NW 778 (1907) Fecteau v Fries, 253 Mich 51; 234 NW 113 (1930) Fisk y Fisk 333 Mich 513; 53 NW2d 356 (1952). Graves v American Acceptance Mortgage Corp, 467 Mich 308; 652 NW2d 221 (2002) vacated on reconsideration, 469 Mich 608; 677 NW2d 829 (2004). Gray v Lincoln Housing Trust, 229 Mich 441; 201 NW 489 (1924). Haliw v City of Sterling Heights, 471 Mich 700; 691 NW2d 753 (2005). Heidelberg Harris Inc v Grogan, 200 BR 138 (ED Mich 1996) . 6,17 Holmes v Holmes, 265 Mich 16; 251 NW 360 (1933)... Houston Ice & Brewing Co v Clint, 159 SW 409 (Tex App 1913)... In re Chaffee, 262 Mich 291; 247 NW 186 (1933) Inre Ferncrest Court Partnership, 66 F34 778 (CA 6, 1995) Inre Glen Eden Hospital Inc, 202 BR 589 (ED Mich 1995) Koester v Citizens’ Pub Co, 154 SC 54; 151 SE 452 (1930). Licavoli v Licavoli,__ Mich App__;__ NW2d_ (201). Louisville Joint Stock Land Bank v Radford, 295 US 555; 55 S Ct 854; 79 L Ed 1593 (1938).. Lucking v Ballantine, 132 Mich 584; 94 NW 8 (1903) Marsh y Arthur C Marsh Co, 153 Ore 154; 55 P2d 1111 (193 Ohio Dep't of Transp v Eastlake Land Dev Co, 177 Ohio App 34 379; 2008 Ohio 3013; 894 NE2d 1255 (Ohio App 2008). Piech v Beaty, 298 Mich 535; 299 NW 795 (1941) Pohutski v Allen Park, 465 Mich 675; 642 NW2d 219 (2002). Price v Kosmalski,__ Mich App__;___ NW2d__ (2011) Quality Concepts and Products Co v Nagel Precision Inc, 469 Mich 362; 666 NW2d 251 (2003) Roberts v Mecosta Co Hosp, 466 Mich 57; 642 NW2d 663 (2002) Sloat v Mid-West Finance Corp, 219 Mich 577; 189 NW 52 (1922) .Stop the Beach Renourishment Inc v Florida Dep't of Environmental Protection, __US_; 130 § Ct.2592; 177 L Ed 2d 184 (2010)... Thachik v Mandeville, 487 Mich 38; 790 NW2d 260 (2010). United States v Security Industrial Bank, 459 US 70; 103 § Ct 407; 74 L Ed 2d 235 (1982)... Veenstra v Washtenaw Country Club, 466 Mich 1 Whitehead v Barker, 288 Mich 19; 284 NW 629 (1939) Ypsilanti Fire Marshal v Kircher (On Reconsideration), 730 NW2d 481 (2007) Constitutional Provisions US Const, Am V.. 5 NW2d 643 (2002). Statutes 11 USC 506(c) 11 USC 522(f) MCL 211.40... MCL 324.20138(2). MCL 565.35, MCL 565.903 MCL 570.1119. MCL 600,3236. Rules MCR 2.622(D). MCR 7.301(A)(2) MCR 7.30:JURISDICTIONAL STATEMENT. By its Order of November 2, 2011, this Court has granted Appellant Dart Mortgage Company leave to appeal from the published opinion of the Court of Appeals in Price v Kosmalski,__ Mich App __; __ NW2d __ (2011), issued April 12, 2011.' Jurisdiction is, therefore, predicated upon MCR 7.301(A)(2) and 7.302. ‘Appellant requests that the Court reverse the decision of the Court of Appeals. As the Court recognized in its Order granting leave, this case involves an interpretation of MCI. 600.3236, and “whether the statutory right of first priority... overrides the common-law rule that, a receiver’s costs and fees enjoy first priority.” " Appendix, pp 2a-5a— Court of Appeals Opinion of April 12, 2011. 2 Appendix, p 1a — Supreme Court Order of November 2, 2011. 1mm. STATEMENT OF QUESTIONS PRESENTED CAN THE STATUTORY RIGHT OF FIRST PRIORITY GIVEN TO A RECORDED MORTGAGE BE DISREGARDED IN FAVOR OF A SUBSEQUENTLY APPOINTED RECEIVER'S COSTS AND FEES? ‘The Court of Appeals says “Yes.” ‘The Circuit Court says “Yes.” Defendant-Appellees say “Yes.” Intervening Defendant-Appellant says “No,” CAN A MORTGAGEE’S STATUTORY PRIORITY POSITION ON ITS MORTGAGE BE SURCHARGED BY A RECEIVER'S COSTS AND FEES WHERE THE RECEIVER CANNOT SHOW THAT THE MORTGAGEE CONSENTED TO HIS APPOINTMENT OR WAIVED ITS PRIORITY POSITION? ‘The Court of Appeals says “Yes.” ‘The Circuit Court says “Yes.” Defendant-Appellees say “Yes.” Intervening Defendant-Appellant says “No.” CAN A MORTGAGEE’S STATUTORY PRIORITY POSITION FOR ITS RECORDED MORTGAGE BE SURCHARGED BY A RECEIVER’S COSTS AND FEES, WHERE THE RECEIVER DID NOT SHOW THAT THOSE COSTS AND FEES SPECIFICALLY BENEFITTED THE MORTGAGEE, AND THEY, IN FACT, DID NOT? The Court of Appeals says “Yes.” The Circuit Court says “Yes.” Defendant-Appellees say “Yes.” Intervening Defendant-Appellant says “No.” IS A RULE OF LAW ALLOWING A RECEIVER TO SURCHARGE HIS FEES AND COSTS OVER A MORTGAGE RECORDED PRIOR TO HIS APPOINTMENT, WHERE THE MORTGAGEE NEITHER CONSENTS TO HIS APPOINTMENT NOR WAIVES ITS PRIORITY POSITION, A TAKING OF THE MORTGAGEE’S PROPERTY IN VIOLATION OF THE 5™ AMENDMENT? The Court of Appeals says “No.” ‘The Circuit Court did not address this question. Defendant-Appellees say “No.” Intervening Defendant-Appellant says “Yes.”STATEMENT OF FACTS On Angust 8, 2003, Rudy Sterrett (“Sterrett”), a single man, took out a loan with Dart ‘Mortgage Company (“Dart”) in the amount of $192,000.00. To secure this loan, he granted Dart ‘a mortgage on certain real estate that he owned located at 11910 Francis Road, in DeWitt (Clinton County), Michigan.’ The mortgage was properly recorded with the Clinton County Register of Deeds in 2003. The loan went into default and, in 2008, Dart commenced a mortgage foreclosure by advertisement. On June 5, 2008, a foreclosure sale was held, and Dart was the only bidder, bidding in $169,312.50, and retaining a deficiency. Dart received a Sheriff's Deed to the Francis Road property, with a one-year redemption period that expired June 5, 20095 Sterrett had died prior to the initiation of the foreclosure process, leaving no recourse to Dart to collect any of the deficienoy, Several years after the recording of the mortgage, but before its foreclosure, the Plaintiffs in the present action filed a collection suit against various defendants, including Sterrett,' After obtaining a judgment against these defendants, the Plaintiffs sought the appointment of a receiver for purposes of selling the Francis Road property to satisfy the judgment. On April 10, 2008, * Dart Mortgage Company is a wholly-owned subsidiary of Dart Bank. Early on in the case, the Receiver corresponded with the then-attomney for Dart Mortgage Company and the parties started using “Dart Bank” as the party in interest. At no time was an acttal order entered allowing either Dart Bank or Dart Mortgage Company to formally intervene in the casc, but the parties (and the trial court) allowed Dart Mortgage Company to make arguments under the misnomer of Dart Bank. For the purposes of this brief, “Dart” refers to Dart Mortgage Company as incorrectly labeled throughout the pleadings as Dart Bank, * Appendix, pp 117a-126a — Mortgage dated August 8, 2003. 5 Appendix, pp 47a-53a — Sheriff's Deed dated June 5, 2008. 6 Appendix, p [1a ~ Circuit Court Register of Actions, showing Complaint was filed on February 17, 2006.‘Thomas E, Woods, Esq., was appointed as the Receiver in the present action for this purpose. An “Amended Stipulated Order” of appointment was entered on April 29, 2008. 7 Dart did not seek the appointment of the Receiver, and, indeed, was not a party to the initial appointment process. In fact, Dart was not given any notice of the lawsuit or the appointment of the Receiver until after he had been appointed and after the foreclosure proceedings had commenced, Subsequently, as the Court of Appeals noted in its Opinion, Dart did not provide consent to the appointment of the Receiver.’ Instead, on June 5, 2008, Dart foreclosed on the mortgage on the Francis Road property.” On May 18, 2009, almost a year after Dart’s foreclosure sale had occurred and as the redemption period was expiting, the Receiver filed a motion asking that the foreclosure sale be set aside." Dart objected to such and asked for possession of the Francis Road property upon the expiration of the redemption period.’ By Order dated June 3, 2009, the trial court denied the Receiver’s motion.” However, the trial court also extended the redemption period for the Receiver until August 25, 2009. Notwithstanding this extension of time, the Receiver did not redeem or attempt to redeem the property, and the August 25 deadline passed without any redemption, Dart then filed a motion to compel turnover of possession of the property and the Receiver filed a motion to close the receivership, asking that Dart be required to pay all of his receivership costs and fees. On November 5, 2009, the trial court entered an order closing the receivership, turing over possession of the property to Dart, and imposing a lien on the property 7 Appendix, pp 54a-60a— Amended Stipulated Order Appointing Receiver dated April 28, 2008. ® Appendix, p 3a— Court of Appeals Opinion. * Appendix, pp 47a-53a— Sheriff's Deed dated June 5, 2008. " Appendix, pp 61a-110a—Receiver’s Motion to Void Foreclosure dated May 18, 2009. * Appendix, pp 111a-144a — Dart’s Response to Motion to Void Foreclosure dated May 20, 2009. ® Appendix, pp 149a-150a ~ Order Denying Receiver’s Motion to Void Foreclosure Sale and Sheriff's Deed dated June 3, 2009.forall of the Receiver’s costs and fees.'® This lien gave the costs and fees of the Receiver priority over the property interest that Dart had acquired through foreclosure, Dart subsequently sold the property for $189,000.00 (gross), and deposited $41,874.57 with the trial court pursuant fo the terms of the order, which allowed Dart to transfer the property free of the lien, At the time of such sale, Dart’s investment in the property was in excess of $220,000.00, Dart also filed an appeal of this order, and on April 12, 2010, the Court of Appeals, issued a published opinion holding that because Dart had ended up with the property through a foreclosure sale, it was responsible for paying all of the costs and fees of the Receiver. There was no requirement in the opinion that the Receiver demonstrate that his costs and fees benefitted Dart or the property. This Court has now accepted leave. ‘On May 11, 2011, the trial court enteted a subsequent order requiring Dart to deposit with the court the Receiver’s appellate fees, along with interest on those sums that the Receiver had borrowed during his receivership." It did so, on the grounds of “equity.” Dart has appealed this second order to the Court of Appeals, which has stayed the matter, pending a determination by this Court of the present appeal. ® Appendix, pp 151a-153a — Order Approving Final Receiver Report, Granting a Lien for Payment of Receiver Fees and Costs, Discharging the Receiver and Canceling the Receiver's Bond dated November 5, 2009. ¥ Appendix, pp 154a-155a — Order to Release Escrow Funds, Require Payment of Additional Receiver Fees and Costs or Require Deposit of Additional Funds dated May 11, 2011. 5STANDARD OF REVIEW “Whether the trial court had the authority to order an intervening party to pay for the costs of a receivership that it did not request is a question of law.” Attica Hydraulic Exchange v Seslar, 264 Mich App 577, 588; 691 NW2d 802 (2004) Questions of law are reviewed de novo, Veenstra v Washtenaw Country Club, 466 Mich 155, 159; 645 NW2d 643 (2002). ARGUMENT I, THE STATUTORY RIGHT OF FIRST PRIORITY GIVEN TO A RECORDED MORTGAGE CANNOT BE DISREGARDED IN FAVOR OF A SUBSEQUENTLY APPOINTED RECEIVER'S COSTS AND FEES Michigan is a recording priority jurisdiction. Ameriquest Mortgage Co v Alton, 273 Mich App 84; 731 NW2d 99 (2006). A conveyance of real estate that is not recorded "shall be void as against any subsequent purchaser in good faith and for a valuable consideration, of the same real estate or any portion thereof, whose conveyance shall be first duly recorded." MCL 565.29. A conveyance includes a mortgage. MCL 565.35. A purchaser is a "person to whom any estate or interest in real estate shall be conveyed for a valuable consideration . . ." MCL 565.34. A recorded mortgage gives notice to any subsequent purchasers that they take property subject to the mortgage. Piech v Beaty, 298 Mich 535; 299 NW 795 (1941). Consequently, a recorded mortgage has priority over subsequent purchasers. Deutsche Bank Trust Co Americas v Spot Realty Inc, 269 Mich App 607, 613; 714 NW2d 409 (2005); MCL 565.902 (priority of future advances relates back to date of recording), Since a receiver takes property subject to whatever encumbrances exist as of the date of his appointment, Gray v Lincoln Housing Trust, 229 Mich 441; 201 NW 489 (1924), a receiver takes property subject to any prior recorded mortgages. Furthermore, a receiver cannot sell 6mortgaged property free and clear of the mortgage if such a sale will adversely affect redemption rights of the mortgagee. Detroit Trust Co v Detroit Service Co, 262 Mich 14; 247 NW 76 (1933). Dart’s recorded mortgage in the present case, therefore, has priority over the Receiver (and his fees and costs) under established Michigan property law. Once Dart foreclosed its mortgage and the redemption period expired, the Receiver’s rights to the property were extinguished. MCL 600.3236, In Cheboygan Co Construction Code Dep't v Burke, 148 Mich App 56, 59; 384 NW2d 77 (1985), the Court of Appeals reaffirmed the “first in time, first in right” rule for recorded mortgages: At common law, a recorded mortgage lien was superior to any lien subsequently recorded, regardless of the fact that a later lien might have been reduced to judgment. Erickson v Lampi, 150 Mich 92, 93; 113 NW 778 (1907). Unless altered by statute, this proposition remains valid, Sloat v Mid-West Finance Corp, 219 Mich 577, 579; 189 NW 52 (1922). There are numerous statutes which alter this “first in time, first in right” rule. So, for example, construction liens have priority over mortgages recorded after the date of first physical improvement to property. MCL 570.1119, The state can seek a lien for the costs of environmental remediation that will have priority over prior recorded mortgages. MCL 324.20138(2). And, of course, real estate taxes have priority over prior recorded mortgages. MCL 211.40." But in the absence of an agreement between the parties or some other fixed rule of law, a court cannot create a lien, Whitehead v Barker, 288 Mich 19; 284 NW 629 (1939). Hence, costs for abating a public nuisance do not have priority over a prior recorded mortgage. 'S Personal property tax liens also have priority over prior perfected security interests. MCL 211.40. However, this Court has held that in the absence of such statute, the prior security interests have priority, Lucking v Ballantine, 132 Mich S84; 94 NW 8 (1903), and also that the statute imposing such priority cannot be imposed retroactively. Detroit Trust Co v Detroit, 269 Mich 81; 256 NW 811 (1934).Ypsilanti Fire Marshal v Kircher (On Reconsideration), 273 Mich App 496; 730 NW2d 481 (2007); Burke, supra. A judge has no ability to impose a tien for payment of an unpaid judgment of divorce against real estate owned by the ex-spouse as entireties property with his new wife. Licavoli vy Licavoli, __ Mich App __; __ NW2d __ (2011)."6 A court should not use the doctrine of equitable subrogation to violate the priority rights of a recorded mortgage when a lender refinances a prior mortgage on the property and the lender is a mere volunteer. Ameriquest Mortgage Co v Alton, supra. And although a first recorded mortgage may not have priority over a purchase money mortgage — See Fecteau v Fries, 253 Mich 51; 234 NW 113 (1930) ~ the basis for this is that the first mortgage has nothing to attach to until the property is purchased through the benefit of the purchase-money mortgage. The priority of the first mortgage cannot become existent until the property passes into the hands of the mortgagor, at which time it already is subject to the purchase-money mortgage. The priority of purchase money mortgages'” continues to recognize the “first in time, first in right” rule, ‘The Receiver in this case argues, and the Court of Appeals agreed, that there is another exception to the “first in time, first in right” rule applicable to the costs and fees of a receiver appointed after a mortgage has been recorded on property. However, a careful examination of the 1© Compare Tkachik v Mandeville, 487 Mich 38, 790 NW2d 260 (2010), where this Court, although imposing contribution requirements on a husband who absented himself from his wife during her last 18 months of cancer for the costs that she incurred to preserve entireties property, did not impose a lien on the property, and specifically said that “[iJn this case, as in every future case, the ‘protective purpose of the tenancy by the entirety’ — i.e, the unencumbered right of survivorship — will be given full effect, and the surviving spouse would own entirety properties in fee simple absolute.” Id, at 62-63. This recognizes the necessity of preserving property interests, such as Dart’s mortgage in the present case, in the absence of legislative changes. 17 It is somewhat questionable whether the priority of purchase-money mortgages continues to have validity in Michigan, See Graves v American Acceptance Mortgage Corp, 467 Mich 308; 652 NW2d 221 (2002) vacated on reconsideration, 469 Mich 608; 677 NW2d 829 (2004) because there was no purchase-money mortgage involved and without expressing an opinion on the continuing validity of priority for purchase-money mortgages. 8ccases relied upon by the Receiver demonstrates there is no such exception. Rather, a receiver is entitled to his fees and costs in front of a recorded mortgage in those instances where the mortgagee has agreed to such a shift in priority positions, Cf. Whitehead, supra. Only one Michigan case deals with the imposition of a lien on property for a receiver's costs and fees that is given priority over an earlier recorded mortgage: Bailey v Bailey, 262 Mich 215; 247 NW 160 (1933). In that case, the mortgagee specifically consented to the appointment of, and the actions taken by, the receiver. There, the widow of a partner in a partnership that operated a hotel asked for the appointment of a receiver to preserve and protect the hotel business, and the trial court granted that request. The receiver needed to operate the hotel, which ‘was encumbered by a mortgage. The receiver asked the mortgagee whether it would consent to his fees being given priority over its mortgage, and the mortgagee consented: It is not dispuled that before filing the bill the [mortgagee] was consulted and consented to and advised the receivership. The receiver refused [to operate the hotel] unless the mortgagees would consent to his borrowing money and issuing certain receiver's certificates to be a first lien and prior to the mortgage and unless the possible loss of such operation be treated as an ‘expense to be preferred over the mortgage. The mortgagees agreed with the receiver. * . * ‘The mortgagees dealt with the receiver promptly and in an effort to save loss to themselves by keeping the hotel a going concern, and receivership was used in an attempt to effect sale of the property. As they availed themselves of any possible advantage of the receivership, they will not be heard to say that the property in the hands of the receiver is not chargeable with the receiver’s expense and administration costs, even though it may result practically in a corresponding loss to them. Bailey, supra at 218-220. It is clear from the facts of the case that, notwithstanding general language in Bailey that a mortgagee is responsible for paying a receiver's fees and costs, the reason for imposing such a responsibility was the mortgages’ consent: “If the mortgages hadkept out of this matter, except perhaps in respect of contest of the receiver's account, there might be force in their contention that they are liable for no part of the administration costs and expenses of the receivership.” Jd. at 219, The Court of Appeals cited Fisk v Fisk, 333 Mich 513; 53 NW2d 356 (1952), as further support for its position authorizing surcharge. However, Fisk is even less on point, Rather than dealing with the priority of a receiver’s costs vis-d-vis a pre-existing mortgage, the case involved a dispute between two individuals as to who was the proper owner of a casket manufacturing business. The plaintiff (C. D. Fisk) and an employee of the business (W. F. Shuett) were appointed as receivers to operate and preserve the business while the case was progressing. The case was ultimately dismissed. Subsequently, the issue arose as to whether the defendant was required to pay for the plaintifP's costs incurred as a receiver, as well as for his own employee, whose costs exceeded the salary that he would have eamed performing the same functions. Citing Bailey, the court held that where the receiver is appointed to preserve and protect a business during a dispute as to ownership, the party who is awarded ownership benefits from that preservation and protection and should be the one from whom payment is required. And as in Bailey (but unlike the present casc), there was consent: “In the instant case the parties agreed by stipulation to the appointment of C. D. Fisk and W. F. Shuett as receivers, and by doing so, appellant in effect waived the complaint he might otherwise make regarding the propriety or legality of the appointment and its effect upon the question of who was to bear the receivership’s expenses.” Fisk, supra at 516. But unlike Bailey (and the present case), there was no dispute between the priority positions of the receiver and a third-party mortgagee not a party to the suit, 10or the ultimate sale or other disposition of the property.'® Indeed, the issue was whether the , and did not involve imposing a lien against Receiver could be paid from funds in his possessi the business. These cases do not stand for the extraordinary proposition enunciated by the Court of Appeals that a pre-existing morigagee is strictly liable for the costs and fees of a receiver appointed to liquidate property just because the receiver is unable to liquidate the property and the mortgagee ultimately ends up with the property upon foreclosure." Rather, they stand for the relatively unremarkable rule that where a receiver appointed to preserve an on-going business obtains consent to incur costs from a person with a claimed interest in the business (whether a mortgagee or a party claiming ownership) that consenting party may be responsible for the receiver’s costs and fees in doing so. Because such consent did not occur in the present case, the opinion of the Court of Appeals, affirming the ruling of the trial court, must be overruled. Indeed, itis difficult to hold otherwise in light of the express language of MCR 2.622(D): When there are no funds in the hands of the receiver at the termination of the receivership, the court, on application of the receiver, may set the receiver's compensation and the fees of the receiver's attomey for the services rendered, and may direct the party who moved for the appointment of the receiver to pay these sums in addition to the necessary expenditures of the receiver. If more than one creditor sought the appointment of a receiver, the court may allocate the costs among them, '8 See also Holmes v Holmes, 265 Mich 16, 18; 251 NW 360 (1933), involving the appointment of a receiver to preserve a business while the plaintiff and defendant litigated over ownership: “The defendants’ contention would be full of merit if they had not consented to the appointment of the receiver and actively participated with him in the administration of the assets. In view of these facts they cannot now question the validity of the appointment, or reasonably claim that it vwas not for their benefit.” '? Under this rule, if Dart had abandoned the property and it was foreclosed upon by a local municipality for unpaid taxes, that local municipality would be liable for the receiver's fees and costs, notwithstanding the super-priority granted to it under MCL 211.40. 11Because ownership of the real estate vested in Dart at the expiration of the redemption period, MCL 600.3236, this is exactly the situation at hand, Under the court rule, the trial court had the authority to impose the receiver's costs on the plaintiffs in this case, who had asked for his appointment, but it had no authority under this rule to impose liability on any other person, including Dart, Attica Hydraulic, supra. Il, A MORTGAGEE’S STATUTORY PRIORITY POSITION ON ITS MORTGAGE CANNOT BE SURCHARGED BY A RECEIVER'S COSTS AND FEES WHERE, ‘THE RECEIVER CANNOT SHOW THAT THE MORTGAGEE CONSENTED ‘TO HIS APPOINTMENT OR WAIVED ITS PRIORITY POSITION ‘As demonstrated in the first part of this brief, Michigan law is clear that in order for a mortgagee to be held responsible for a receiver’s costs and fees, the mortgagee must consent to those costs and fees, Indeed, no Michigan ease could be found where a mortgagee who does not specifically consent is nevertheless held liable for the receiver's costs and fees. Compare 11 USC 506(c) (bankruptcy trustee may recover from property securing a secured claim the reasonable and necessary costs and expenses of preserving or disposing of such property, to the extent of any benefit to the holder of the claim). This rule is consistent with cases from outside of Michigan, In Ohio Dep't of Transp v Eastlake Land Dev Co, 177 Ohio App 3d 379; 2008 Ohio 3013; 894 NE2d 1255 (Ohio App 2008), a receiver was appointed to liquidate property. The receiver asked for authority to sell the property free and clear of the mortgage, with the mortgage lien attaching to the proceeds received from the sale,” The receiver also asked that his costs and fees be paid from the ® Compare Detroit Trust Co v Detroit Service Co, 262 Mich 14; 247 NW 76 (1933) (a receiver cannot sell mortgaged property free and clear of the mortgage if such a sale will adversely affect the redemption rights of the mortgagee); Cf. 11 USC 363 (under certain circumstances, bankruptcy trustee can sell property free and clear of interests with those interests attaching to the proceeds). 2proceeds, with priority over the mortgage interest. The Ohio appellate court refused both requests, stating on the second issue: Only if a mortgagee participates in the receivership proceedings, using the machinery of that action to secure the sale of the mortgaged assets, may the reasonable costs and expenses of the receivership be charged against the proceeds of the sale of the mortgaged property. 1d, at 388-89. Other states have reached the same conclusion. Marsh v Arthur C Marsh Co, 153 Ore 154; 55 Pad 1111 (1936); Koester v Citizens’ Pub Co, 154 SC 54; 151 SE 452 (1930); Houston Ice & Brewing Co v Clint, 159 SW 409 (Tex App 1913), Ttis true that a mortgagee may waive its mortgage priority through its actions during the receivership. A waiver is a voluntary and intentional abandonment of a known right. Roberts v Mecosta Co Hosp, 466 Mich 57; 642 NW2d 663 (2002). A mere knowing silence generally ‘eannot constitute a waiver. Quality Concepts and Products Co v Nagel Precision Inc, 469 Mich 362; 666 NW2d 251 (2003). Typically, waivers must be shown through clear and convincing evidence, Id. A review of the facts in this case shows that not only did the Receiver fail to establish such a waiver, a waiver simply never occurred. Dart’s actions in this case consisted of the following: «Being notified of the receivership after the fact. © Foreclosing its mortgage, despite claims by the Receiver that such was prohibited, © Requesting possession of the property upon expiration of the one-year redemption period and then defending against the Receiver’s unsuccessful motion to set aside the foreclosure sale. * 2! ‘The foreclosure of a mortgage on receivership property without leave of the court is voidable. In re Chaffee, 262 Mich 291; 247 NW 186 (1933). In the present case, at the end of the one-year redemption period, the Receiver brought a motion to set aside the foreclosure sale, which the ‘tial court denied (the trial court did extend the redemption period for an additional three months). This ruling by the trial court was not appealed to the Court of Appeals, nor did the Receiver pursue a cross-application for leave in this matter, 13© Requesting possession of the property upon expiration of the extended redemption period, and opposing the claims of the Receiver that it was responsible for his costs and fees, ‘The foregoing provide no evidence of any waiver of mortgage priority, let alone under the higher standards required by applicable law. Indeed, Dart’s interactions with the Receiver consist almost wholly of adversary actions, to which attachment of the label “consensual” would be Iudicrous? Cf. Koester, supra (lien-holder without notice of entry of order of receivership does not consent to receivership by failing to contest same after entry). Il. A MORTGAGEE’S STATUTORY PRIORITY POSITION FOR ITS RECORDED MORTGAGE CANNOT BE SURCHARGED BY A RECEIVER'S COSTS AND FEES, WHERE THE RECEIVER DID NOT SHOW THAT THOSE COSTS AND FEES SPECIFICALLY BENEFITTED THE MORTGAGEE, AND THEY, IN FACT, DID NOT ‘The Receiver argues that Dart is responsible for all of his fees and cost, notwithstanding whether they benefitted the encumbered property. As shown above, there was no consent in this case, and a waiver by Dart of its mortgage priority cannot be shown. Even if either had occurred, under applicable law, Dart could only have been liable for the Receiver’s costs that benefitted the property. ‘This issue was partially addressed in Attica Hydraulic, supra, a case involving a dispute ‘of ownership between plaintiffs and the defendants. The plaintiffs had filed suit claiming breach of contract, fraud and misrepresentation in conncetion with the defendants’ sale of property to them and in connection with the defendants’ dumping of toxic waste on the property. The plaintiffs obtained a judgment, and asked that a receiver be appointed to resolve all issues 2 Requiring Dart to pay for the receiver’s fees incurred as a result of his challenges regarding the foreclosure of Dart’s mortgage would also be a violation of the “American Rule” on payment of attomey fees, Haliw v City of Sterling Heights, 471 Mich 700; 691 NW2d 753 (2005). 4concerning the property. The receiver was also given the power to sell two other parcels owned by the defendants to satisfy the judgment, with the receiver's costs being given a priority lien on the expenses of sale, After the receiver’s appointment, the Michigan Department of Environmental Quality was allowed to intervene, claiming that the property was contaminated and requiring environmental remediation, The receiver expended fees and costs in attempting to clear title to the property, but before he was able to sell the property, the owner filed for bankruptey relief, staying any further attempts to sell, The Bankruptcy Court sold the property to the plaintiffs in an auction, with the proceeds being retained by the Bankruptey Court for further disposition, The receiver then asked the trial court to assess his fees and costs against MDEQ, as, ‘the party benefitting from his efforts. Although the trial court granted the motion, the Court of Appeals reversed. It held that even though the receiver had consulted with and cooperated with MDEQ and MDEQ, such ultimately did not benefit MDEQ, the Department was not ultimately benefited and, therefore, MDEQ was not liable for payment of the receiver's costs. Compare Compton Impressions Ltd v Queen City Bank NA, 217 F3d 1256 (CA 9 2000) (cooperation by bank with bankruptcy trustee on administrative matters is not equivalent fo consent to surcharge bank’s mortgaged property with trustee's costs). Attica Hydraulic, like Fisk, supra® does not involve the appointment of a receiver to liquidate property or his ability to recover his expenses by surcharging the priority of a pre- existing mortgagee. Only Bailey involved that factual scenario, and the Bailey Court was not called upon to itemize which costs were recoverable, given the mortgagee’s consent in that case. Thus, in the absence of controlling state precedence, it is appropriate to consult decisions addressing a receiver's recoverable costs issued by other jurisdictions. ® And Holmes, supra. asIn an analogous situation, a trustee appointed under the Bankruptey Code has the statutory power to surcharge property subject to a mortgage or security interest with his or her costs incurred to preserve or dispose of the property. 11 USC 506(c). However, by statute, this can only be done to the extent that there is benefit to the secured creditor. The cases are clear that in order to fall under this statute the trustee must show a direct quantifiable benefit to the secured party enabling that secured party to realize as much or more than it would if it had foreclosed, In re Fernerest Court Partnership, 66 F3d 778 (CA 6, 1995); In re Glen Eden Hospital Inc, 202 BR 589 (ED Mich 1995). ‘A good analysis of this approach is set forth in Heidelberg Harris Inc v Grogan, 200 BR 138 (ED Mich 1996). There, in a Chapter 7 liquidation case, a trustee attempted to market and sell a press that was subject to a security interest in favor of the Heidelberg. The trustee was unable to do so, and eventually tumed over the press to Heidelberg, which later sold it. The trustee then asked for the court to surcharge Heidelberg for the costs of preserving the machine, including the rent for the building where it was stored, and for gas, electricity, locksmith services, and other miscellaneous expenses, The Bankruptey Court allowed this surcharge, but on appeal, the District Court reversed. In doing so, the court pointed out that the trustec’s costs were for the benefit of the creditors as a whole, not the secured creditor, specifically: The trustee's possession, however, is beneficial to the trustee solely for the possibility that the chattel may be worth more than the debt it secures; if so, the estate and its general creditors will benefit by its sale and the subsequent receipt of a portion of the sale proceeds. Thus, retention of the property is not for the benefit of the secured creditor and normal expenses of preservation of the asset during this time are deemed administrative expenses benefiting only the estate~even if it is ultimately determined that there is no benefit. Ta, at 142, 16Asa result, the surcharge was not allowed: Mere expenses of retaining possession during the period before abandonment are not subject to a surcharge. The expense elements that compose the surcharge in the Bankruptcy Court's order — rental for the space occupied by the machine, heating expenses and locksmith services -- were all necessary solely because the Trustee retained possession and provided no special benefit to the secured creditor. They are clearly unlike permanent repairs to the equipment, The Bankruptcy Court's finding that these expenses were incurred by the special Trustee for the benefit of the secured creditor was clearly erroneous. Accordingly, the surcharge was not authorized by the Bankruptcy Code, and the decision of the Bankruptcy Court must be reversed. /d. at 142. ‘Thus, in order to be surcharged, the expenses must specifically benefit the secured party. Merely being a cost of the trustee — or in this case, the receiver - does not qualify. In Marsh y Arthur C Marsh Co, 153 Ore 154; $5 P2d 1111 (1936), a receiver was appointed to operate a company involved in real estate development. The property was subject to a pre-existing mortgage; the mortgagee did not consent to the appointment of the receiver. When the development failed, the receiver requested that the mortgagee pay his costs of $10,000 for labor and supplies for the development. The Oregon Supreme Court refused the request, holding that because the receiver was appointed to protect the interests of the general creditors and not the mortgagee, the latter was not responsible for payment of the receiver’s costs. What the Oregon Court said is equally applicable to the present situation: In the present instance, the appellant did not ask for the receiver's appointment and did not participate in his selection. It never requested him to perform any service for it and never interfered with his discharge of his duties. It appeared in the suit which brought about the appointment of the receiver only for the purpose of obtaining leave to foreclose its mortgages. The receivership was not sought for its benefit; quite to the contrary, the purpose of the receivership was antagonistic to the appellant; that is, to prevent it from enforeing its rights. * * * 7Nor do we find that the appellant received any benefit from the receivership for which it should pay. It is true that the receiver paid a very substantial sum of money to the appellant, but it had a right to ali of that money, and more. Had the debtor itself made the payments, it could not have charged for the service performed in making payment. Jn making payment the receiver was not seeking 10 serve the mortgagee, but was doing what he thought was best for the unsecured creditors and the stockholders. Id. at 50 (emphasis added). IV. A RULE OF LAW ALLOWING A RECEIVER TO SURCHARGE HIS FEES AND COSTS OVER A MORTGAGE RECORDED PRIOR TO HIS APPOINTMENT, WHERE THE MORTGAGEE NEITHER CONSENTS TO HIS APPOINTMENT NOR WAIVES ITS PRIORITY POSITION, IS A TAKING OF THE MORTGAGEE’S PROPERTY IN VIOLATION OF THE 5™ AMENDMENT Here, the Court of Appeals has imposed a rule of strict liability: That a receiver is entitled to a lien on property within his control, over a first recorded mortgage, in the absence of the mortgagee’s consent to the receivership or the actions of the receiver. Such a rule has significant Constitutional implications under the 5" Amendment.* In Louisville Joint Stock Land Bank v Radford, 295 US 555; 55 S Ct 854; 79 L Ed 1593 (1935), the bank held a mortgage on Radford’s farm. When the mortgage went into foreclosure, Radford filed for bankruptcy under the newly-enacted Frazier-Lemke amendments to the United States Bankruptcy Act. Under these provisions, the farmer was entitled to repurchase his property at a price less than the fair market value. The Supreme Court held because the mortgage pre-existed the enactment of the amendments, their application to the mortgages constituted a taking of property without fair compensation, in violation of the 5" Amendment. The Frazier- Lemke amendments were struck down as unconstitutional. See United States v Security Industrial Bank, 459 US 70; 103 S Ct 407; 74 L Ed 2d 235 (1982), (11 USC 522(f), which allows a bankruptey debtor to remove liens on property to the extent that they impair the debtor's 24 US Const, Am V. 18exemptions, cannot be applied to liens existing prior to the enactment of the statute to avoid being struck down as a taking under the 5" Amendment), In Armstrong v United States, 364 US 40; 80 S Ct 1563; 4 L Ed2d 1554 (1960), the government contracted with Rice to build navy personnel boats. Armstrong supplied materials for the boats, which allowed it a materialmen’s lien under applicable state law. When Rice defaulted on his contract with the government, the government required him to transfer title to the boats to it, pursuant to the contracts between the parties. The government removed the boats to another location (out-of-state) and refused to pay Armstrong. The Supreme Court held that ‘Armstrong held a compensable interest in the boats and that the actions of the government resulted in a total destruction of that compensable interest in violation of the 5" Amendment. ‘As in the cases discussed above, Dart held a compensable interest in the property. As in these cases, subsequent action by the government (here the new rule announced by the Court of Appeals) resulted in a measurable loss to Dart.”* And, as in these cases, if this Court adopts the decision of the Court of Appeals, a violation of the S“ Amendment will be judicially sanctioned. See Stop the Beach Renourishment Inc v Florida Dep't of Environmental Protection, US __; 130 $ Ct 2592; 177 L Bd 2d 184 (2010) (“If a legislature or a court declares that what was once an established right of private property no longer exists, it has taken 25 There was no equity in the property, The receiver had over 18 months in which to find a buyer and pay off Dart’s mortgage, but was unable to do so. When the Bank finally did sell the property, it received only $189,000.00 gross, approximately $41,000 of which was required to be escrowed for payment of the Receiver’s costs and fees. At the time, Dart’s investment in the property was well in excess of $220,000. ® As well as having major policy implications for mortgage-backed lenders in Michigan. The system of lending money backed by a mortgage for security is based, in large part, on the certainty of priority given to a recorded mortgage under Michigan statutes. See, ¢.g. MCL 600.3236, Without such, lenders will be more cautious about making such loans in the future, resulting in higher interest costs to reflect this additional risk, 19that property, no less than if the State had physically appropriated it or destroyed its value by regulation.” J. Scalia, concurring at 2601; emphasis in original).”” CONCLUSION Dart has a pre-existing recorded mortgage that has priority over the rights of the subsequently-appointed Receiver whose appointment Dart did not seek, and whose actions were also taken without Dart’s consent. Allowing the Receiver to surcharge his fecs and costs on property that went out of the receivership due to the expiration of a redemption period following foreclosure of Dart’s mortgage is a seismic change in Michigan property law that should not be sanctioned by this Court. For the reasons set forth above, Dart requests that the Opinion and order of the Court of Appeals be reversed and this matter be remanded to the Ingham County Circuit court with instructions to release the escrowed funds to Dart. Respectfully submitted, THE HUBBARD LAW FIRM, P.C. December 22, 2011 Michael G. Woodworth (P26918) Attorneys for Respondent/Appellant 5801 West Michigan Avenue P.O. Box 80857 Lansing, MI 48908-0857 (617) 886-7176 \WAD\Dar Hank. 4325\steret Supreme Count -08\Pleadings20111215 Brietdoex % Alternatively, this Court should limit application of the new rule prospectively only, Pohutski y Allen Park, 465 Mich 675; 642 NW2d 219 (2002). See also Security Industrial Bank, supra. 20