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Mortgage Electronic Registration Systems, Inc. v. Sheldon: US District Court :REAL PROPERTY - summary judgment on priority questions denied regarding legal error in description

UNITED STATES DISTRICT COURT
DISTRICT OF MINNESOTA
Mortgage Electronic Registration Civil No. 08-5220 (DWF/FLN)
Systems, Inc., as nominee for
CitiMortgage, Inc.,
Plaintiff,
MEMORANDUM
v. OPINION AND ORDER
Christopher S. Sheldon;
Wells Fargo Bank, N.A.;
United States of America;
XYZ Corporation; ABC Partnership;
John Doe, whose true names are
unknown to Plaintiff; Mary Roe,
whose true names are unknown to
Plaintiff; and Citibank,
Defendants.
Sean O. Skrypek, Esq., and Steven R. Little, Esq., Coleman Hull & van Vliet, PLLP,
counsel for Plaintiff.
Ana H. Voss and Roylene A. Champeaux, Assistant United States Attorneys, United
States Attorneys Office, counsel for Defendant United States of America.
INTRODUCTION
This matter is before the Court on cross-motions for summary judgment brought
by Defendant United States of America and Plaintiff Mortgage Electronic Registration
Systems, Inc. (MERS). In its Complaint, which was removed to this Court from
Hennepin County District Court, MERS asserts a cause of action for reformation of the
2
legal description on its mortgage and an action to quiet title.1 For the reasons set forth
below, both motions are denied.
BACKGROUND
This action centers on a mortgage for certain real property located in Hennepin
County, Minnesota, in which the legal description contained a typographical error. The
United States asserts that, as a result of the typographical error, the first mortgage is
inchoate and that the later-filed federal tax lien on the property by the United States on
behalf of the Internal Revenue Service (IRS) is entitled to priority.
By all accounts, the property at issue (the Property) is correctly2 legally
described as follows:
Parcel 1: That part of Lot 1, Block 3, Braemar Hills Fourth Addition,
embraced within the East 189 feet of the Northeast 1/4 of Section 7,
Township 116, Range 21, according to the plat thereof. (Torrens);
Parcel 2: Lot 1, Block 3, Braemar Hills Fourth Addition except for that
embraced within the East 189 feet of the Northeast 1/4 of the Northeast 1/4
of Section 7, Township 116, Range 21, according to the plat thereof.
(Abstract)
(Skrypek Aff. 2.) Defendant Christopher S. Sheldon is currently the fee owner of the
Property. (Id. at 3.)
1 Defendants Citibank and Wells Fargo Bank were both served with MERS
Complaint and Summons on September 3, 2008. Neither of these two Defendants has
responded to the Complaint. (Skrypek Aff. 8, Exs. 5, 6.)
2 Although not relevant to the Courts ruling, the Court believes that, based on the
parties illustration of the legal description at oral argument, the phrase of the Northeast
1/4 of the Northeast 1/4 appears to contain a redundancy as to Parcel 2.
3
MERS, as nominee for CitiMortgage, Inc., holds a mortgage on the Property dated
September 19, 2005, for the original principal amount of 2,500, given by Sheldon as
mortgagor in favor of MERS as mortgagee (the MERS mortgage). (Id. 4.) The
MERS mortgage contains the following incorrect legal description:
Parcel 1: That part of Lot 1, Block 3, Braemar Hills Fourth Addition,
embraced within the East 189 feet of the Northeast 1/4 of Section 7,
Township 116, Range 21, according to the plat thereof. (Torrens);
Parcel 2: Lot 1, Block 3, Braemar Hills Fourth Addition except for that
embraced within the East 189 feet of the Northeast 1/4 of the Northeast 14
of Section 7, Township 116, Range 21, according to the plat thereof.
(Abstract).
(Id. 4, Ex. 1 at 17 (emphasis added).) The MERS mortgage was recorded with the
Office of the Hennepin County Recorder on September 20, 2005, as Document
No. 8658239 and with the Hennepin County Office of the Registrar of Titles as
Document No. 4164023. (Id. at 4.) MERS attorney asserts that it is an undisputed
fact that [the MERS mortgage] was properly recorded against the Property and appears
on all title searches of the Property. (Mem. of Law in Supp. of Pls Mot. for Summ. J. at
5.)
Defendant Citibank holds a home equity line of credit mortgage on the Property
dated April 4, 2006, for the amount of ,200, given by Sheldon as mortgagor in favor
of Citibank (the Citibank mortgage). (Skrypek Aff. 5, Ex. 2.) The Citibank
mortgage was recorded on April 27, 2006, with the Hennepin County Office of the
Registrar of Titles as Document No. 4252004. (Id. 5.) The Citibank mortgage used an
abbreviated version of the legal description. (Id. 5, Ex. 2 at 8.)
4
Defendant Wells Fargo Bank holds a home equity line of credit mortgage on the
Property dated October 11, 2006, for the amount of 8,000, given by Sheldon as
mortgagor in favor of Wells Fargo (the Wells Fargo mortgage). The Wells Fargo
mortgage was recorded on November 2, 2006, as Document No. 4323697 with the Office
of the Hennepin County Recorder, and on June 17, 2008, with the Hennepin County
Office of the Registrar of Titles as Document No. 9148061. (Id. 6, Ex. 3.) The Wells
Fargo mortgage also utilized an abbreviated version of the legal description. (Id.)
The United States, through the Internal Revenue Service (IRS), holds an
unreleased Notice of Federal Internal Revenue Tax Lien or Abstract of Judgment against
Sheldon dated November 29, 2006, in the amount of ,062.89 (the Federal Tax
Lien).3 The Federal Tax Lien was recorded with the Office of the Hennepin County
Recorder on December 11, 2006, as Document No. 8905640. (Skrypek Aff. 7, Ex. 4.)
MERS Complaint sought to reform the MERS mortgage by correcting the legal
description for Parcel 2 of the Property. In addition, MERS sought a court order
declaring that the MERS Mortgage took priority over the interests of Citibank, Wells
Fargo, and the federal tax lien.
DISCUSSION
Summary judgment is proper if there are no disputed issues of material fact and
the moving party is entitled to judgment as a matter of law. Fed. R. Civ. P. 56(c). The
Court must view the evidence, and the inferences that may be reasonably drawn from the
3 As of September 19, 2008, the value of the federal tax lien was ,427.48.
5
evidence, in the light most favorable to the nonmoving party. Enter. Bank v. Magna
Bank of Mo., 92 F.3d 743, 747 (8th Cir. 1996). However, as the Supreme Court has
stated, [s]ummary judgment procedure is properly regarded not as a disfavored
procedural shortcut, but rather as an integral part of the Federal Rules as a whole, which
are designed to secure the just, speedy and inexpensive determination of every action.
Celotex Corp. v. Catrett, 477 U.S. 317, 327 (1986) (quoting Fed. R. Civ. P. 1).
The moving party bears the burden of showing that there is no genuine issue of
material fact and that it is entitled to judgment as a matter of law. Enter. Bank,
92 F.3d at 747. The nonmoving party must demonstrate the existence of specific facts in
the record that create a genuine issue for trial. Krenik v. County of Le Sueur,
47 F.3d 953, 957 (8th Cir. 1995). A party opposing a properly supported motion for
summary judgment may not rest upon mere allegations or denials of his pleading, but
must set forth specific facts showing that there is a genuine issue for trial. Anderson v.
Liberty Lobby, Inc., 477 U.S. 242, 256 (1986).
State law determines the nature and extent of a taxpayers interest in property.
Minn. Dept. of Revenue v. United States, 184 F.3d 725, 728 (8th Cir. 1999) (citing
Aquilino v. United States, 363 U.S. 509, 513 (1960) (other citations omitted)). But
federal law governs the relative priority accorded to the competing liens asserted against
the property of the delinquent taxpayer. Id. (citing Aquilino, 363 U.S. at 513-14).
Federal tax liens do not automatically have priority over all other liens. Absent
provision to the contrary, priority for purposes of federal law is governed by the
common-law principle that the first in time is the first in right. Id. (quoting United
6
States v. McDermott, 507 U.S. 447, 449 (1993); and United States v. City of New Britain,
347 U.S. 81, 87 (1954) (other citations omitted)). Under federal law, the priority of a lien
depends on the time that the lien attached to the property in question and when the lien
became choate. Minn. Dept. of Revenue, 184 F.3d at 728 (citations omitted).4
It is a question of federal law as to when a lien has become choate or perfected.
United States v. Pioneer Am. Ins. Co., 374 U.S. 84, 88 (1963). Choate state-created
liens take priority over later federal tax liens. Id. A state-created lien is choate for
first in time purposes only when it has been perfected in the sense that there is nothing
more to be done, i.e., when the identity of the lienor, the property subject to the lien, and
the amount of the lien are established. Minn. Dept. of Revenue, 184 F.3d at 728
(quoting New Britain, 347 U.S. at 84). The test for choateness or perfection requires
that the creditor [has] the right to summarily enforce its lien. Id. (citing United States v.
Vermont, 377 U.S. 351, 359 (1964)).
In its Motion for Summary Judgment, MERS asserts that its mortgage is a choate
lien. Specifically, MERS contends that the MERS mortgage properly identifies MERS as
the mortgagee, clearly indicates that the original principal amount was 2,500, and
4 Federal law regarding lien priority differs from state law in this regard. Under
Minnesota law, a bona fide purchaser can avoid prior conveyances that have not been
recorded in accordance with the law. In re Vondall, 364 B.R. 668, 670 (B.A.P. 8th Cir.
2007) (citing Minn. Stat. 507.34). A bona fide purchaser is one who in good faith
pays value for an interest in property without actual, constructive, or implied notice of the
inconsistent, outstanding rights of others. Id. at 671. Constructive notice is limited to
what is set forth on the face of the mortgage, and a mortgage with a defective legal
description does not provide constructive notice to subsequent purchasers unless the
subject property can be determined with reasonable certainty or the defect is apparent on
the face of the mortgage. Id. (citations omitted).
7
identifies the property, even though it contains a minor typographical error. MERS
asserts that its position is consistent with relevant case law regarding the choateness
doctrine.
In support of its position, MERS points to In re Vondall, 364 B.R. 668. The
property in Vondall was correctly legally described as Lot 13, Block 3, West River
Estates, Abstract Property. Id. at 670. But the mortgage incorrectly described the
property as Lot B, Block 3, West River Estates Abstract Property. Id. (emphasis
added). Due to the incorrect legal description, this mortgage appeared only in Hennepin
Countys grantor-grantee index, but the tract index did not contain a record of the
mortgage. Id. The debtors filed for bankruptcy, and the trustee ultimately sought to
avoid the mortgage. Id. The Bankruptcy Appellate Panel for the Eighth Circuit affirmed
the bankruptcy courts decision to avoid the defective mortgage. Id. Specifically, the
court noted that a purchaser of land may be charged with knowledge of a defect arising
from an impossible legal description, but . . . that defect will not be considered apparent
unless it can be resolved in only one way. Id. at 672. The court found that in
Minnesota, lots may be designated by numbers or letters. As a result, the defect in the
legal description was not apparentit could have been resolved in more than one way.
Id.
MERS asserts that the defect in the MERS mortgage is distinguishable from the
mortgage at issue in Vondall. MERS contends that here, the MERS mortgage was
recorded against the Property, and anyone performing a title search would have
8
discovered the existence of the MERS mortgage.5 Thus, MERS asserts that the principles
set forth in Vondall do not render the federal tax lien here superior in priority to the
MERS mortgage.
MERS also distinguishes the MERS mortgage from that in In re Stradtmann, 391
B.R. 14 (B.A.P. 8th Cir. 2008). In Stradtmann, although the mortgage stated the correct
address of the debtors homestead, the mortgage contained the legal description of an
entirely different parcel of property. Id. at 16. The IRS, which held later-priority tax
liens, sought priority over the mortgage, and the bankruptcy trustee sought to avoid the
mortgage as well. The Bankruptcy Appellate Panel for the Eighth Circuit affirmed the
bankruptcy courts decision to avoid the mortgage, holding that for a defect to be
apparent for purposes of constructive notice, the defect had to render the legal description
impossible to the extent that the defect can only be cured in one way. 6 Id. at 18.
Quoting Vondall, the Bankruptcy Appellate Panel stated that if there is nothing on the
face of a mortgage to alert a purchaser that the property description is defective, then
there is nothing on the face of the mortgage to trigger a duty of further inquiry. Id. at 19
(quoting 364 B.R. at 672-73). The panel found that there was nothing on the face of the
5 Although MERS has provided no support (other than lawyer argument) for its
position that the mortgage was recorded properly, the Government has stated that it does
not dispute any of the facts as presented by MERS. (United States of Americas Opp. to
Pl.s Mot. for Summ. J. at 1.)
6 It should be noted that the court acknowledged that neither the trustee nor the
mortgage company challenged the bankruptcy courts ruling that the IRSs liens were
superior to the mortgage based on the choateness doctrine. Stradtmann, 391 B.R. at 17
n.6. The panel found that despite the absence of an explicit challenge to this ruling, the
bankruptcy court ruled correctly and should be affirmed. Id. (citation omitted).
9
mortgage at issue to alert a purchaser that the property description was defective; in fact,
the property description did not contain any defects. Id. As a result, the mortgage was
avoidable. MERS asserts that here, unlike the mortgage in Stradtmann, the MERS
mortgage was properly recorded, and despite the minor typographical error, provided
constructive notice to subsequent lien holders.
In its Motion for Summary Judgment, the United States contends that the MERS
mortgage cannot be enforced without reformation due to the incorrect legal description,
thereby rendering MERS mortgage inchoate. First, the United States asserts that the
MERS mortgage is not summarily enforceable. Specifically, the United States
recognizes that before a lien is capable of being senior in priority to a federal tax lien, the
property subject to the lien must be established and the holder of the lien must have the
right to summarily enforce its interest, with nothing more to be done to perfect the
interest. United States v. New Britain, 347 U.S. 81, 84 (1954). The United States
contends that the fact that MERS brought a reformation action prior to its foreclosure of
the lien proves that MERS could not summarily enforce its interest in the Property. As a
result, the United States asserts that the MERS mortgage is inchoate and cannot compete
against the federal tax lien.
In support of its position that the MERS mortgage is not summarily enforceable,
the Government relies upon Samco Mortgage Corp. v. Keehn, 721 F. Supp. 1209 (D.
Wyo. 1989). Like the MERS mortgage, the mortgage at issue in Samco contained the
10
correct street address, but the mortgage contained an erroneous legal description.7 Prior
to the reformation of the mortgage, the IRS filed three tax liens against the property
owners. Then, after the tax liens were properly recorded, the plaintiff-mortgage company
brought a successful action to reform the mortgage to correct the erroneous legal
description. Subsequently, the plaintiff-mortgage company sought to foreclose on the
property. The IRS also sought to declare its liens superior to the plaintiffs lien on the
ground that the mortgage described the taxpayers property incorrectly. The district court
found that because the plaintiff could not demonstrate that the mortgage was summarily
enforceablebecause more needed to be done to enforce the plaintiffs rights under its
mortgage at the time the IRS filed its notices of the federal tax liensthe plaintiffs
mortgage did not have priority over the tax liens. Samco, 721 F. Supp. at 1211-12.
Specifically, the court noted that the plaintiff recognized that more had to be done to
perfect its mortgage when the plaintiff filed its reformation action in state court. Id. at
1211. The district court also noted that the plaintiff could not rely on a relation back
theory to give its mortgage priority over the federal tax liens. Id. Thus, the district court
granted the United States motion for summary judgment, declaring its tax liens superior
to the mortgage. Id. at 1212.
The United States also contends here that MERS is misguided in asserting that the
United States had constructive notice of the MERS mortgage, despite the defect in the
7 It appears although the warranty deed conveyed the west end of the parcel
described in the deed, while reserving the east end to the grantor, the mortgage described
the property in the reverse. Samco, 721 F. Supp. at 1211.
11
legal description. The United States asserts that the defect was not apparent, and that the
defect can be resolved in more than one way. Specifically, the United States contends
that the defect in the detailed description of the property is inconsistent with what would
be expected given the lot and block numbers listed in the legal description and that this
inconsistency could suggest to a party reviewing the filing that there was an error in the
lot or block description. (Opp. at 5.) Or, the United States suggests that the description
could connote that the mortgage was intended to encumber something other than the
entire parcel. (Id.) The United States asserts that because MERS has not shown that the
legal description is impossible on its face, or that altering 14 to 1/4 was the only way
to resolve the error, the United States is entitled to summary judgment.
Finally, the United States contends that under Haas v. Internal Revenue Service,
31 F.3d 1081 (11th Cir. 1994) and Samco, 721 F. Supp. 1209, even if this Court were to
allow reformation, MERS interest would not relate back against the federal tax lien.
The Court finds that neither party is entitled to summary judgment on the record
currently before the Court. Although the United States concedes that all of the facts as
set forth by MERS are truethus conceding that a title search would reveal the existence
of the MERS mortgagethe Court finds that questions of fact remain as to whether the
error in the MERS mortgage property description could be interpreted in only one way.
With the record before the Court, the Court would be left to merely speculate as to
whether the error has more than one interpretation. The Court finds that some sort of
expert testimony and supplemental briefing would be helpful for the Court to reach a
dispositive decision in this regard. Because of this shortcoming in the record, the Court
12
cannot determine whether MERS would be able to summarily enforce its rights under the
mortgage without doing anything else.
Moreover, the Court finds that a decision in favor of the United States could lead
to a conflicting result. The Citibank and Wells Fargo mortgages are not governed by the
same federal law that controls the disposition of the MERS mortgage as to the federal tax
lien. Under state law principles of constructive notice, the MERS mortgage would retain
priority over the Citibank and Wells Fargo mortgages. In addition, by not answering the
Summons and Complaint, Citibank and Wells Fargo have conceded that the MERS
mortgage takes priority. If the Court were to rule in favor of the United States, however,
a conflict would arise. Under state law principles, MERS would retain priority over
Citibank and Wells Fargo; but under federal law, the federal tax lien would trump the
MERS lien in priority, but the federal tax lien would still remain subordinate to the
Citibank and Wells Fargo liens. The Court is unclear what the practical effect of such a
ruling would be, or whether the United States would be left with a right but not a remedy.
CONCLUSION
The Court has found that summary judgment is inappropriate at this time and that
additional briefing on the matter could result in a dispositive decision by the Court.
However, under the circumstances involved in this case, the Court suggests that it is in
the best interests of the parties to negotiate a resolution of this dispute prior to any further
litigation. As the parties are aware, Magistrate Judge Franklin Noel is available to assist
in the negotiation of a settlement should the parties find such services to be helpful.
13
Now, therefore, it is HEREBY ORDERED:
1. The Motion for Summary Judgment brought by Plaintiff Mortgage
Electronic Registration Systems, Inc. (Doc. No. 15), is DENIED; and
2. The Motion for Summary Judgment brought by the United States of
America (Doc. No. 10) is DENIED.
Dated: March 25, 2009 s/Donovan W. Frank
DONOVAN W. FRANK
Judge of United States District Court
 

 
 
 

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