Prime Financial v. Vinton

761 N.W.2d 694

279 Mich. App. 245

PRIME FINANCIAL SERVICES v. VINTON.

Docket No. 273264.

Court of Appeals of Michigan.

Submitted May 13, 2008, at Grand Rapids.

Decided June 3, 2008, at 9:00 a.m.

Drew, Cooper & Anding (by John E. Anding, Bridget C. Kehoe, and Thomas V.

Hubbard), Grand Rapids, for Prime Financial Services LLC.

Dickinson Wright PLLC (by Jeffery V. Stuckey, Rock A. Wood, Geoffrey A. Fields, and Erin E. Gravelyn), Grand Rapids, for Bank One, NA.

Before: O'CONNELL, P.J., and HOEKSTRA and SMOLENSKI, JJ.

SMOLENSKI, J.

In this collateral dispute involving priority to notes secured by mortgages, defendant Bank One, NA (Bank One),¹ appeals as of right the jury verdict in favor of plaintiff Prime Financial Services LLC (Prime) premised on conversion, unjust enrichment, aiding and abetting conversion and aiding and abetting breach of fiduciary duty. On appeal, the primary issues are whether prior Article 9 of the Uniform Commercial Code (UCC)² governed the creation of a security interest in a note secured by a mortgage and, if it did, whether a properly recorded assignment of mortgage could give the assignee greater rights to the note than the assignee had under Article 9. We conclude that Article 9 governed the creation of the security interests at issue and that an assignment of mortgage can give no greater rights to the assignee than it has in the note underlying the mortgage. We further conclude that, after applying Article 9 to the undisputed facts of this case, Bank One's interest in the notes was superior to that of Prime. Finally, because Bank One's dispositions of the notes and mortgages were specifically authorized under Article 9, we conclude that those actions cannot—as a matter of law—constitute conversion, unjust enrichment, or aiding and abetting conversion or breach of fiduciary duty. Accordingly, we reverse the trial court's decision to deny Bank One's motion for judgment notwithstanding the verdict (JNOV) and remand for entry of judgment in favor of Bank One on all Prime's claims.

I. BASIC FACTS AND PROCEDURAL HISTORY

This case arises out of the failure of Bedford Financial, Inc. (Bedford), which did business under the name of Apex Financial. Bedford was in the business of making short-term subprime loans to consumers to cover the cost of constructing modular homes. In a typical transaction, a consumer would arrange to finance the purchase and construction of a modular home through Bedford. The consumer would execute a note for the balance of the construction loan and grant Bedford a mortgage on the real property to secure repayment of the note. Once the home was complete, the consumer would obtain permanent financing—referred to as a "takeout loan" or "end-mortgage"—and pay off the loan from Bedford. Under ideal circumstances, the consumer would pay off the construction loan with Bedford in 60 to 90 days.

Because Bedford did not have the cash reserves to fund its lending activities, it had to secure funding from outside sources.³ Patrick Hundley, who was the owner of Bedford, initially obtained funding for Bedford through First of America Bank. At some point before December 1997, Hundley's loan officer from First of America approached Arthur Bott, who was a business owner and investor, about funding Bedford's business. Bott began to fund Bedford's loan activities through his trust, which eventually became Bedford's primary source of funds. Bott was attracted to Bedford by the 15 percent rate of return on the loans.

In the summer of 1997, Bott organized Prime with Hundley. Sometime thereafter, Bank One⁴ approached Bott about assisting him with his business activities, and Bott suggested that the bank help him fund Bedford. Bott testified that he and Hundley agreed that Bott would take over Prime after talks with Bank One began. Eventually, Bott's trust became the sole member of Prime with Bott as the sole officer. After the formation of Prime, Bott began to fund Bedford through Prime, but also continued to provide some funding through his trust.

In November 1997, Bank One agreed to provide a "short-term construction loan facility" to Prime in the amount of $5 million. Under the terms of the facility, the bank would fund 72 percent of the lesser of the cost or appraised value of the project. Apparently Prime was supposed to fund an additional eight percent, and the remaining 20 percent represented the consumer's equity. The loan payments were interest-only until the consumer obtained end-mortgage financing. Once the consumer obtained an end-mortgage and paid Prime through Bedford, Prime was required to pay Bank One the principal associated with that particular consumer's loan. However, the facility also provided that, if the consumer did not obtain an end-mortgage within nine months of the initial advance, Prime had to pay the principal associated with that particular consumer's loan. As part of the facility, Bott gave his personal guaranty and that of his trust to Bank One. Prime closed on the facility with Bank One on January 9, 1998.

Prime entered into a $10 million credit facility with Bedford on January 28, 1998. This facility was similar to the credit facility between Prime and Bank One. Under this facility, Prime took a security interest in all the loans originated by Bedford with funds supplied by Prime, required payment of the principal associated with a given loan when the consumer obtained end-financing, and, if the consumer did not obtain an end-mortgage within nine months of the initial disbursement, required Bedford to repay the principal associated with that particular project. Likewise, under the terms of the agreement, Bedford granted a security interest in certain notes, which it was required to deliver to Prime along with the corresponding mortgage. In addition, Bedford was required to assign the mortgage to Prime. Despite the delivery requirement, Prime permitted Bedford to retain the notes in its possession.

After these agreements, Prime funded some loans originated by Bedford jointly with its own funds and funds drawn on its facility with Bank One. In the case of the jointly funded loans, Prime funded more than the contemplated eight percent. In other cases, Prime funded the loans entirely without drawing on the credit facility with Bank One.

At some point after Bank One entered into the facility with Prime, Bott apparently received information that there were concerns with Bedford's loan practices. Bott's attorney wrote a letter to Hundley expressing concern over his "cavalier" attitude toward the loans and "lack of documentation." Bott also had problems with another bank related to his interests in Bedford loans. Some time in March 1999, Bott told Hundley to find another lender "besides me[;] I would like out." In the past, Hundley had had dealings with Richard Baidas, who owned several businesses, including one that manufactured modular homes. Baidas expressed interest in purchasing an interest in Bedford.

In June 1999, Bank One entered into a new $15 million facility agreement with Bedford. Under this new facility, Bank One would directly fund Bedford's lending. As part of the deal, Bank One would pay off the amount currently owed by Prime to Bank One under the $5 million facility between Prime and Bank One. This effectively transferred the debt from Prime to Bedford and relieved Bott and his trust of their liability under their guaranties. This new facility was made possible in part by the personal guaranty of Baidas.

Under the terms of the $15 million facility, Bedford granted Bank One a security interest in certain property "now owned, or at any time hereafter acquired," including "all Mortgage Notes and Mortgages . . . which from time to time are delivered, or caused to be delivered, to the Bank . . . pursuant hereto or in respect of which an extension of credit has been made by the Bank under the Credit Agreement." Bank One instructed Bedford to bring all its notes and mortgages to the closing, which included some notes that were funded solely by Prime. In addition, Bank One had Bedford obtain UCC termination statements from several lenders, including Prime. These termination statements purported to terminate the respective lenders' security interests in Bedford's instruments. However, at trial, Bott testified that he signed the UCC termination statement in blank with the understanding that it only terminated his security interest in those notes and mortgages that were jointly funded using funds from Prime and Bank One, as opposed to those notes and mortgages funded solely by Prime.

By spring 2000, Bedford was no longer sending principal payments to Bank One. Indeed, Bank One became aware that Bedford had conducted end-mortgage closings and discharged many of the notes and mortgages securing its facility with Bedford. As a result, Bank One's loan to Bedford was seriously under-collateralized. In addition, Bank One learned that Bedford had ceased operations and was liquidating its assets in violation of the credit agreement. For these reasons, in May 2000, Bank One informed Bedford by letter that it considered Bedford to be in default on the $15 million facility.

After Bedford defaulted, Bank One examined its exposure and, rather than try to liquidate Bedford's assets, it decided to call on the guaranty of Baidas. The bank determined that the total debt owed was approximately $6.5 million. After some negotiations, Bank One settled with Baidas in June 2000. The bank accepted payment of approximately $5.5 million in full settlement of Baidas's guaranty. As part of the settlement, Bank One agreed to transfer the collateral it held under its agreement with Bedford to Baidas. This collateral included 23 notes that were originated by Bedford using funds provided solely by Prime.

In addition to the millions of dollars that Bedford owed Bank One, Bedford owed Prime almost $1.7 million. In May 2001, Prime settled this debt with Bedford and...