MORTGAGES; DEBT: Where debt and mortgage instrument does not set forth terms of repayment, it will not operate to establish a valid mortgage, even where parties understood document to create a mortgage and have operated pursuant to an agreed upon repayment schedule for two years. In re Boyd, 185 B.R. 529 (Bankr. E.D. Mich. 1995)

The parties executed a single document that purported to constitute both the evidence of indebtedness and the mortgage. The document acknowledged a debt in a specified principal amount with a set interest rate. In the space in the form provided to insert the payment terms, the document preparer, apparently by accident, inserted the title description. The only other language dealing with payment terms was the sentence: "Both principal and interest of this note are payable at to be determined by Lender." [sic] (This part of the form really dealt with the location of payments, rather than their timing.) The document indicated "this debt is secured by a mortgage of even date" and the lender later recorded it as a mortgage. The debtor made payments of $200 per month on the debt for about two years, and there was evidence that this was an agreed upon payment schedule.

When debtor declared bankruptcy, the lender attempted to establish itself as a secured creditor and the trustee argued that no valid mortgage existed and that the property was a homestead.

Held: The mortgage is invalid. Debtor's homestead is protected.

Although there might be some argument that the parties intended that a separate mortgage be executed, there was evidence that the parties understood that this document would stand as the mortgage, and the court did not adopt this argument to support its conclusion that the mortgage was invalid. Rather, the court pointed to the fact that the statement of the indebtedness

The Michigan statute (MCLA Section 565.154) requires that a mortgage must:

"recite the sum for which the mortgage is granted, or the notes or other evidence [evidences] of debt, or a description thereof, sought to be secured, also the date of the re-payment. . . "

An earlier Michigan case had upheld the validity of a mortgage which had set forth a payment schedule but no ultimate due date. The lender in the instant case argued that there was an agreed upon payment schedule here as well, but the court concluded that the terms of the statute invalidated the mortgage if the debt terms were not set forth in writing. The lender then argued that where the note was silent it should be assumed that the note was payable on demand. Although the court does not respond specifically to this argument it appears to conclude that a "presumptive" interpretation does not satisfy the statutory requirement that the repayment terms be in writing.

The lender then attempted to argue that it had an equitable mortgage, since it clearly advanced money on the strength of an agreement on the part of the debtor to give it a mortgage. It is unclear whether such an argument would have survived the trustee's avoidance powers in any event, but the court chose instead to hold simply that the lender did not have a sufficient equitable position where the problem arose because of its own "lack of thoroughness and diligence in protecting their own position."

Comment 1: The court's decision to conclude that the lender's negligence in the development of faulty debt instruments invalidated its equitable position is a difficult holding. Most cases involving equitable mortgages arise because the lender has not been careful enough in "protecting its position" legally. Negligence usually is excusable in equity if there has been unjust enrichment, as is the case here.

Comment 2: A Michigan banking specialist reports that this case has caused consternation in the Michigan banking law community:

"This decision has been widely criticized as a misrepresentation of Michigan law which, if followed by other judges, will invalidate the vast majority of commercial mortgages recorded in the state. This decision also presents problems for lenders who wish to modify the terms of repayment -- a modification of the mortgage would be necessary. Furthermore, it calls into question the validity of adjustable rate mortgages which vary the payment amount with changes in some index, and future advance mortgages which secure multiple advance loans and which base the repayment amount on the amount borrowed."

The editor has difficulty seeing how the holding in this case presents all the "horribles" described above. The case clearly can be limited to its facts - there was no date for repayment at all, even in documents that were incorporated by reference. Commercial loans commonly have agreed upon terms of repayment of some sort set forth in loan agreements referred to in the mortgage. In many cases, lenders attach the notes or otherwise set forth the repayment terms in the mortgage instrument precisely so that the mortgage will stand alone, if necessary, as an acknowledgement of the indebtedness. As to adjustable rate loans, the statute requires only that the note be attached, not that the terms be limited in any particular way.

The critic is accurate in pointing out that a literal reading of the statute would make it difficult to have the mortgage secure notes as they are later amended. Again, however, a narrow reading of the case does not require such a restrictive reading of the statute.

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