By order of the Bankruptcy Appellate Panel, the precedential effect

of this decision is limited to the case and parties pursuant to 6th

Cir. BAP LBR 8013-1(b). See also 6th Cir. BAP LBR 8010-1(c).

File Name: 11b0007n.06

BANKRUPTCY APPELLATE PANEL OF THE SIXTH CIRCUIT

In re: KIMBERLY C. EMERSON,

Debtor.

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THOMAS C. RICHARDSON, TRUSTEE, 

Plaintiff-Appellant,

v.

CITIMORTGAGE, INC., 

Defendant-Appellee.

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No. 11-8015

Appeal from the United States Bankruptcy Court

for the Western District of Michigan, at Grand Rapids.

Bankruptcy Case No. 09-09534; Adversary Case No. 10-80055.

Argued: August 17, 2011

Decided and Filed: October 7, 2011

Before: BOSWELL, RHODES, SHEA-STONUM, Bankruptcy Appellate Panel Judges.

____________________

COUNSEL

ARGUED: John T. Piggins, MILLER JOHNSON, Grand Rapids, Michigan, for Appellant. Melissa

C. Brown, DYKEMA GOSSETT PLLC, Grand Rapids, Michigan, for Appellee. ON BRIEF: John

T. Piggins, MILLER JOHNSON, Grand Rapids, Michigan, for Appellant. Melissa C. Brown,

DYKEMA GOSSETT PLLC, Grand Rapids, Michigan, for Appellee.
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____________________

OPINION

____________________

MARILYN SHEA-STONUM, Bankruptcy Appellate Panel Judge. This is an appeal by

Thomas C. Richardson, the Chapter 7 Trustee (the “Trustee”), from an order of the bankruptcy court

granting summaryjudgment to Citimortgage, Inc. (“Citimortgage”) and denying summary judgment

to the Trustee on his avoidance action pursuant to 11 U.S.C. § 544(a)(3). The Trustee argues that

Citimortgage’s mortgage on the debtor’s Property (defined below) was released upon the filing of

a “Certificate of Discharge” and that Citimortgage’s attempt to “reperfect” the mortgage failed.

Therefore, the Trustee argues that as a hypothetical bona fide purchaser he has priority over the

interest of Citimortgage in the debtor’s Property. For the reasons set forth below, we AFFIRM the

order of the bankruptcy court.

I. ISSUE ON APPEAL

Whether the bankruptcy court erred when it held that under Michigan law a trustee, standing

in the shoes of a hypothetical bona fide purchaser, had constructive notice of a mortgage that had

been erroneously discharged by a certificate of discharge that was subsequently rescinded. 

II. JURISDICTION AND STANDARD OF REVIEW

The Bankruptcy Appellate Panel of the Sixth Circuit (the “BAP”) has jurisdiction to decide

this appeal. The United States District Court for the Western District of Michigan has authorized

appeals to the BAP and none of the parties elected to have this appeal heard by the district court.

28 U.S.C. § 158(b)(6), (c)(1). A bankruptcy court’s final order may be appealed as of right.

28 U.S.C. § 158(a)(1), (b)(6) and (c)(1). For purposes of an appeal, a final order “ends the litigation

on the merits and leaves nothing for the court to do but execute the judgment.” Midland Asphalt

Corp. v. United States, 489 U.S. 794, 798, 109 S. Ct. 1494, 1497 (1989) (citations omitted). The

bankruptcy court’s order denying the Trustee’s motion for summary judgment and granting

Citimortgage’s motion for summary judgment is a final order. See Thomas v. United States,

166 F.3d 825, 828 (6th Cir. 1999) (denial of summary judgment presented together with an appeal

from a grant of summary judgment is final and appealable).
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The BAP reviews the bankruptcy court’s final order granting Citimortgage’s motion for

summary judgment and denying the Trustee’s motion for summary judgment de novo, using the

same standard applied by the trial court. B.F. Goodrich Co. v. U.S. Filter Corp., 245 F.3d 587, 595-

96 (6th Cir. 2001). Thus, an appellate court decides the issues of law independently of, and without

deference to, a trial court’s determinations. Drown v. Nat’l City Bank (In re Ingersoll), 420 B.R.

414, 415 (B.A.P. 6th Cir. 2009). The bankruptcy court's findings of fact are reviewed under the

clear-error standard. Behlke v. Eisen (In re Behlke), 358 F.3d 429, 433 (6th Cir. 2004). Crossmotions for summary judgment do not alter this standard. See Wells Real Estate Inv. Trust II, Inc.

v. Chardon/Hato Rey P’ship, S.E., 615 F.3d 45, 51 (1st Cir. 2010).

III. FACTS

The facts in this case are not disputed. Kimberly Emerson (the “Debtor”) owns real property

located at 433 Sunnyshores Dr., Coldwater, MI 49036 (the “Property”). On July 31, 2007, the

Debtor granted ABN AMRO Mortgage Group Inc. (“ABN AMRO”) a mortgage on the Property (the

“Mortgage”). On August 10, 2007, the Mortgage was recorded by the Branch County Register of

Deeds (“Register of Deeds”). As a result of a merger in late August 2007, Citimortgage is the

successor in interest of ABN AMRO to the Mortgage. All of the parties agree that in August 2007

the Mortgage was properly perfected and unavoidable by a bankruptcy trustee.

Although the Debtor’s payment obligation had not been satisfied, Citimortgage executed a

Certificate of Discharge on December 17, 2007 (the “Discharge”) and caused it to be recorded with

the Register of Deeds on December 26, 2007. The erroneous Discharge was signed by an executive

of Citimortgage, properly notarized and recorded. All of the parties agree that the recording of the

Discharge rendered the Mortgage unperfected. The Debtor continued to make payments as agreed

under the note secured by the Mortgage until July 2009. 

In February 2008, Citimortgage realized that it had mistakenly executed and recorded the

Discharge. Thereafter, on February 25, 2008, Citimortgage executed a document titled a Rescission

of Release of Mortgage and Reinstatement of Mortgage (the “Rescission”) which provides that the

Discharge “was executed in error, and that said Deed of Trust has not been fully satisfied or paid,

and that said Release of Mortgage is hereby withdrawn, cancelled and declared of no force or effect,

and the lien of said Deed of Trust on the property described herein shall be unaffected by such
The Trustee cites to Turner Lewis v. Pub. Serv. Credit Union (In re Neal), 406 B.R. 288 (Bankr. 1

E.D. Mich. 2009). In Neal, the bankruptcy court dealt with cross motions for summary judgment in the

trustee’s adversary proceeding seeking to avoid the credit union’s mortgage on the debtor’s residence. The

published opinion is the result of the court’s analysis under 544(a)(1). In the published opinion, the

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erroneous Release of Mortgage.” The Rescission contained the signature of an officer of

Citimortgage and was properly notarized. The Rescission was recorded with the Register of Deeds

on March 5, 2008.

The Debtor filed a voluntary petition for relief under Chapter 7 of the Bankruptcy Code on

August 11, 2009 (the “Petition Date”), more than one year after the Rescission was recorded. 

Thomas C. Richardson was appointed as the Chapter 7 trustee.

The Trustee filed an adversary proceeding seeking to avoid Citimortgage’s interest in the

Property pursuant to his strong-arm powers provided for in 11 U.S.C. § 544(a)(3). Cross-motions

for summary judgment were filed. Following a lengthy oral decision, the bankruptcy court entered

an order granting summary judgment in favor of Citimortgage and against the Trustee. The Trustee

timely filed a notice of appeal

IV. DISCUSSION

The Trustee argues that when Citimortgage recorded the Discharge, the Mortgage became

unperfected, and Citimortgage’s Rescission did not “re-perfect” the Mortgage. Thus, the Trustee

argues that under 11 U.S.C. § 544(a)(3) he can avoid Citimortgage’s unperfected security interest

in the Property. The Trustee acknowledges that, under Michigan law an erroneously discharged

mortgage may, in certain circumstances, become “re-perfected,” but argues that, in this case, the

Rescission is ineffective because it was not signed by the mortgagor. In contrast, Citimortgage

argues that because the Mortgage was properly perfected originally, the Discharge and Rescission

were properly executed conveyances under Michigan law and operated to “re-perfect” the Mortgage.

As a result, Citimortgage’s argument continues, the Trustee cannot avoid Citimortgage’s interest

using 11 U.S.C. § 544(a)(3). 

Section 544 of the Bankruptcy Code gives the Trustee the power to avoid a mortgage, if

under applicable state law, a hypothetical bona fide purchaser could avoid the mortgage. 11 U.S.C.

§ 544(a)(3). Thus, the question is whether a bona fide purchaser under Michigan law could avoid 1
bankruptcy court analyzed whether the credit union had a properly perfected mortgage interest sufficient

to overcome the interest of a judicial lien creditor. The bankruptcy court found that recording an affidavit

of lost mortgage was insufficient to perfect a mortgage interest as if the original had been properly

recorded. Therefore, the bankruptcy court found the mortgage avoidable under § 544(a)(1) and as a

preference under § 547(b). In an unpublished order on the cross motions for summary judgment, the

bankruptcy court previously had found against the trustee under § 544(a)(3) and granted summary

judgment to the credit union as to the trustee’s claim under § 544(a)(3). In re Neal, Adv. Case No. 08-

5147 (Bankr. E.D. Mich. Feb. 18, 2009, Order Regarding Cross Motions for Summary Judgment). The

bankruptcy court then scheduled additional briefing with respect to the trustee’s claims under § 544(a)(1).

The published opinion cited above appears to be the Court’s analysis under § 544(a)(1). In re Neal is also

distinguishable from the facts in this case, given the agreement that the Mortgage, which is the subject of

this appeal, as recorded on August 10, 2007 was a properly executed mortgage that perfected the security

interest and provided notice, actual and constructive, to the world. 

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the Mortgage and whether the Trustee would be considered a bona fide purchaser of the Property

under Michigan law. Treinish v. Norwest Bank Minn. (In re Periandri), 266 B.R. 651, 655 (6th Cir.

2001) (“[S]tate law determines the extent of the trustee’s rights under § 544(a)(3).”).

As discussed below, under Michigan law an erroneously discharged mortgage can have

priority over a subsequent lienholder, even one without notice. “There are many circumstances in

which equity may be justified in restoring or reinstating a mortgage which has been discharged of

record, at least if the interests of innocent third parties do not intervene.” C. C. Marvel,

Reinstatement and Restoration of Mortgages Released or Discharged Without Authorization, As

Against Subsequent Purchasers, Lienholders, Judgment Creditors and The Like, Without Notice,

35 A.L.R. 2d 948, § 2 (originally published in 1954) (footnote omitted). In deciding whether a

mortgage can or cannot be restored or reinstated, the touchstone for most courts has been the extent

of themortgagee’sinvolvement in themistaken discharge and the impact on subsequent lienholders.

Id.

[I]t is the overwhelming weight of authority that a mortgage released or discharged

entirely without the authority, knowledge, or fault of the mortgagee, may be restored,

reinstated, foreclosed, or given precedence, even as against the rights of a subsequent

purchaser or encumbrancer entirely without notice of the illegal nature of the release.

A theory advanced in support of this position has been that, both parties being

innocent, the equities are balanced and rights in order of time must prevail. The most

common types of situations are those in which one entrusted with the public record

made entry of satisfaction or discharge by mistake, or in which the same official was

induced to make such entry upon presentation of a forged satisfaction or release. In

the latter case, the courts are firm in their refusal to allow one to be deprived of

property through the equivalent of a theft. The position of a mere judgment creditor

as contrasted with that of a purchaser or one who has loaned money on the strength
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of the record-clear security is even weaker, since he has given up nothing in reliance

upon the record, but merely seeks to have satisfaction out of available property. 

Where there are elements of negligence on the part of the mortgagee which may be

said to have enhanced the possibility of the unauthorized release, a subsequent

purchaser or encumbrancer without notice may be protected, frequently on the theory

that, of two innocent parties, the loss should fall upon the one whose conduct made

the loss possible.

Id. (citations and footnotes omitted). Where, as here, the release is the result of the mortgagee’s

actions,

The right of the mortgagee to have his mortgage reinstated or its precedence

maintained as against subsequent purchasers or encumbrancers without notice is

qualified upon his freedom from negligence with respect to the creation of the

circumstances which made possible the release or discharge without his

authorization. The presence of negligence may give rise to an estoppel against the

mortgagee to assert his prior lien, frequently under the rule that where a loss must be

borne by one of two innocent parties, the loss will fall upon the one whose conduct

enabled the loss to be occasioned.

Id. at § 6. 

Michigan law adheres to these principles. See Johns v. Dover, Case No. 2007-080637-CH,

2010 WL 2696656 (Mich. Ct. App. July 8, 2010)(unpublished).

[A] forged discharge of mortgage, through no fault of the mortgagee, has no effect.

Keller v. Hannah, 52 Mich. 535, 536; 18 NW 346 (1884). Moreover, a recorded

forged discharge does not allow a subsequent mortgagee to have priority over the

first-in-time mortgagee. Id. The rationale for this principle is that the original

mortgagee should not be punished when it was not the first-in-time mortgagee’s fault

that the latter mortgagee was deceived. Id. This type of treatment of forged

documents is pervasive throughout Michigan case law, where even a good-faith

purchaser is afforded no protections when a forged deed is used to acquire property

interests. See Horvath v. Nat’l Mortgage Co., 238 Mich. 354, 360; 213 NW 202

(1927); Special Property VI v. Woodruff, 273 Mich. App 586, 591; 730 NW2d 753

(2007); VanderWall v. Midkiff, 166 Mich. App 668, 685; 421 NW2d 263 (1988) . . . .

[C]ases such as Lowry v. Bennett, 119 Mich. 301; 77 NW 935 (1899), and Ferguson

v. Glassford, 68 Mich. 36; 35 NW 820 (1888), mandate that [subsequent mortgagees]

should prevail because they afford protections to bona fide purchasers. However,

these cases dealt explicitly with discharges that were recorded intentionally, but

mistakenly, by the original mortgagee. Lowry, 119 Mich. at 302; Ferguson, 68 Mich.

at 37, 39.
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Johns, 2010 WL 2696656, at *2. Citimortgage concedes, had the bankruptcy been filed in between

the recording of the Discharge and the Rescission, it is likely that the Trustee would prevail in an

action against Citimortage. 

However, unlike those cases where an intervening interest arose before the record had been

corrected, this bankruptcy case was filed long after Citimortgage took action to correct the public

record by filing its Rescission. The state of the real estate record was clarified well in advance of

the Petition Date. As the bankruptcy court noted, the real estate records in this case would reveal

the Mortgage, the Discharge and the Rescission. The language of the Rescission states clearly the

mortgagee’s belief that the Discharge was mistakenly recorded and should be considered to be of no

further effect. Under Michigan law, “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 v. Tibaldi, 726 N.W.2d 770, 780

(Mich. Ct. App. 2007). The Rescission announced that the Discharge was mistaken. Any purchaser

looking at the record would be aware of the Mortgage, the Discharge and the Rescission. As the

bankruptcy judge noted in his oral decision, 

[T]here is a mortgage on record; it was not expunged. And anybody who looks at the

record will see [a] valid mortgage, discharge of mortgage, rescission of the discharge,

in effect, wiping out the discharge....The trustee will see that. The real estate person

will see it. The title company will see it. And so, in this instance, there’s

constructive notice. 

Transcript, page 31. 

In Ferguson v. Glassford, 35 N.W. 820 (Mich. 1888), the court found that 

where a mortgage has been discharged from the record through mistake, it may be

restored in equity, and given its original priority as a lien, when the rights of innocent

third parties will not be affected. . . . [T]he simple cancellation of a mortgage is not

an absolute bar to foreclosure, unless there has been actual satisfaction. It is not

conclusive evidence.

Id. at 826. This suggests that under Michigan law, the impact of the Discharge on the Mortgage was

not to expunge the Mortgage or make it as if it never had been filed. It was to change the perfected

status of the mortgagee’s lien as against subsequent lien holders who relied on the state of the public

records. The obligation between the Debtor and Citimortgage remained in place. See French v. De
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Bow, 38 Mich. 708 (1878) (a mistakenly discharged mortgage should be restored in equity), and

Wood v. De Pew, 230 N.W. 175 (1930) (discharged mortgage restored in equity). Relying on French

and Wood, the Trustee argues that the Discharge not only destroyed the perfection of Citimortgage’s

interest in the Property but also extinguished the lien as a matter of law. Therefore, the Trustee’s

argument continues, the Rescission must be a conveyance under Michigan law in order for

Citimortgage’s interest to have priority over his interest as a hypothetical bona fide purchaser.

As the Trustee himself recognized, however, equitable principles allow for the restoration

of a mortgage which has been discharged bymistake, if such restoration does not detrimentally affect

the rights of an innocent third party, such as a bona fide purchaser of real property. Ferguson,

35 N.W. at 826. The Discharge, though it altered the perfection of Citimortgage’s interest in the

Property, did not affect the Debtor’s obligation to Citimortgage. Under this authority, we find that

a Michigan state court would, given the circumstances of this case, give effect to the Rescission, treat

the Mortgage as reinstated and accord Citimortgage’s lien interest priority over subsequent

lienholders whose interests arose after the Rescission was filed. Whether the Rescission was a

conveyance under Michigan law is not the point. Applying Michigan law, the existence of the

Rescission in the public records, coupled with the Mortgage, is sufficient to place a subsequent

lienholder on inquiry notice of the properly perfected Mortgage. Therefore, under the facts of this

case and Michigan precedent, the Trustee would be treated as having constructive notice of the

Mortgage that had been erroneously discharged by a certificate of discharge once that discharge was

subsequently rescinded. Thus, the Trustee cannot avoid Citimortgage’s interest under § 544(a)(3).

V. CONCLUSION

We find that under the facts and circumstances of this case, a Michigan state court, in equity,

would recognize the efficacy of a mortgagee’s rescission of the erroneously filed Discharge and give

the mortgagee priority over holders of liens arising after the date the mortgagee filed a document in

the public records making clear that the discharge was erroneously filed. Therefore, we AFFIRM

the bankruptcy court’s grant of summary judgment to Citimortgage and against the Trustee.