665 F.3d 722, 728 (6th Cir. 2012)
In September 1994, Daniel and Sheryl Sutter purchased a home in Lapeer, Michigan.1 Beginning in the mid to late 1990s, the Sutters experienced financial difficulties that resulted in a Chapter 7 bankruptcy petition and a discharge granted by the Bankruptcy Court for the Eastern District of Michigan on January 30, 2004.2
Prior to entry of the discharge, the Sutters attempted to refinance their existing mortgages through World Wide Financial Services, Inc., also known as LoanGiant.com. After the discharge, World Wide agreed to refinance the Sutters' loan obligations with funding from New Century Mortgage Corporation, and the closing occurred in Sacramento, California, on April 8, 2004.3 At the closing, the Sutters signed a note payable to World Wide in the amount of $78,000, though they apparently did not sign a mortgage instrument.4 New Century provided the funds to pay off the two existing mortgages on the Sutter property, and at some point after the closing the mortgage instrument was assigned to U.S. National Bank with Saxon Mortgage Services, Inc., as servicer.5
After falling behind on payments under the World Wide mortgage, the Sutters filed a Chapter 13 bankruptcy petition on November 21, 2005. Saxon filed a proof of claim asserting a secured claim in the amount of $83,498.26, attaching the World Wide mortgage that was notarized and bore the Sutters' signatures, with the certificate of acknowledgment stating that the Sutters had acknowledged the instrument before a notary in Michigan on April 8, 2004.6
The Sutters objected to the proof of claim and filed an adversary proceeding alleging that their signatures on the mortgage were forged.7 At the April 24, 2007 hearing, the bankruptcy court found that the Sutters had established by the necessary burden of proof that the signatures on the mortgage were not theirs, based on the uncontested fact that they were in California on April 8, 2004.8 The bankruptcy court avoided the mortgage for the benefit of the estate pursuant to an order entered in July 2007.9
On remand after the district court reversed and remanded for consideration of an equitable mortgage, the bankruptcy court imposed an equitable mortgage on the Sutter property.10 The Sutters appealed, and the district court reversed the bankruptcy court's imposition of an equitable mortgage.11 This appeal to the Sixth Circuit followed.12
Whether the district court properly considered whether the World Wide mortgage was void under Michigan law despite the July 2007 avoidance order?13
The law-of-the-case doctrine bars challenges to a decision made at a previous stage of litigation which could have been challenged in a prior appeal, but were not. A party preserves its claims by appealing subsequent orders that misconstrue the relief originally granted in its favor.14
Yes. The district court properly considered whether the World Wide mortgage was void under Michigan law. The Sutters' Count I sought a judgment extinguishing all claimed interest on the ground that under state law a forged mortgage passes no title.15 The July 2007 Order granted relief on both counts, including the request to declare the mortgage invalid.16 When later orders treated the mortgage as avoided rather than void, the Sutters appealed those decisions in a timely manner.17 Appellants failed to appeal the district court's initial ruling that the mortgage was void, forfeiting any objection to further consideration of the issue.18
The Sutters therefore preserved their argument that the mortgage was void ab initio.19
The district court properly considered the voidness of the World Wide mortgage under Michigan law.20
Whether the World Wide mortgage is void ab initio under Michigan law because the Sutters' signatures were forged?21
Michigan law provides that a forged mortgage is void ab initio and conveys no interest even to an innocent subsequent assignee or purchaser.22
Yes. The bankruptcy court determined after the April 2007 hearing that the Sutters met their burden of proving the signatures on the mortgage were not genuine. This finding rested on the undisputed fact that the certificate of acknowledgment placed the signing in Michigan on April 8, 2004, while the Sutters were in California. Appellants offered no evidence supporting any explanation other than forgery and conceded at oral argument that the mortgage had been forged.23
Michigan cases hold that there is no bona fide holder under a forgery and that the instrument together with all subsequent transactions must be set aside.
The World Wide mortgage is void ab initio under Michigan law.24
Whether an equitable mortgage may be imposed on the Sutter property when the forgery was committed by World Wide or its agents?25
Under Michigan equity jurisprudence, a party who comes to equity must come with clean hands, and an assignee of a mortgage is subject to all equitable defenses that could have been asserted against the original mortgagee, including unclean hands arising from forgery.26
No. World Wide or its agents committed the forgery of the Sutters' signatures on the mortgage.27 U.S. National Bank and Saxon stand in the shoes of World Wide by virtue of the assignment and therefore inherit the taint of that inequitable conduct. The clean hands doctrine closes the doors of equity to a party tainted by bad faith relative to the matter in which relief is sought. Cases applying equitable mortgages despite forgery involved innocent original mortgagees, whereas here the originating party engaged in the forgery itself.28
An equitable mortgage may not be imposed on the Sutter property.29