When it comes to foreclosures, Michigan is a hybrid state with respect to statutory remedies allowed to mortgagees following a mortgagor’s default on a mortgage. Foreclosure by advertisement and judicial foreclosure are both remedies available to mortgagees under Michigan’s statutory scheme. Sturgis Building v Kirsch Industrial Park, 2016 Mich App LEXIS 1491 discusses not only the differences that exist between foreclosures by advertisement and judicial foreclosures, but the similarities as well.
In a foreclosure by advertisement, which is the typical choice for foreclosure, the courts have established what is known as the “Full Credit Bid Rule” which explains:
“When a lender bids at a foreclosure sale, it is not required to pay cash, but rather is permitted to make a credit bid because any cash tendered would be returned to it. If this credit bid is equal to the unpaid principal and interest on the mortgage plus the costs of foreclosure, this is known as a ‘full credit bid.’ When a mortgagee makes a full credit bid, the mortgage debt is satisfied, and the mortgage is extinguished.” Bank of America, NA v First American Title Ins Co, 499 Mich 74, 83; 878 NW2d 816 (2016), quoting New Freedom Mortgage Co v Globe Mortgage Corp, 281 Mich App 63, 68; 761 NW2d 832 (2008), citing Alliance Mortgage Co v Rothwell, 10 Cal 4th 1226, 1238-1239; 44 Cal Rptr 2d 352; 900 P2d 601 (1995).
The courts in Michigan have also discussed the Legislature’s intent in terms of a foreclosure by advertisement. As one example, a foreclosing lender may collect any taxes paid prior to the foreclosure sale, but not taxes paid after a foreclosure sale. This is due to the fact that a mortgagor is only responsible for post-foreclosure sale taxes when the mortgagor redeems the property. The presumed intent of the Legislature is that a full credit bid extinguishes the mortgage as there is no longer a debt to secure, and therefore, the remedies allowed by the mortgage are also extinguished, including collecting post-foreclosure costs. The courts have consistently applied the “Full Credit Bid Rule” to foreclosures by advertisement.
The Kirsch Court, in a question of first impression, refused to extend the “Full Credit Bid Rule” to apply to judicial foreclosures, and further addressed the tremendous differences between a foreclosure by advertisement and a judicial foreclosure. The Court reasoned that because a court is responsible for identifying any personal liability for the mortgage debt, the amount of the mortgage debt that is due and owing, the parties entitled to distribution of the sale proceeds, as well as the existence of any deficiency, it would be nonsensical to determine that a mortgage is extinguished “at a point when the mortgagee has had to rely on its solo efforts to calculate its bid.” Id. at 15. Although not discussed in the case, MCL §600.3145 allows a foreclosing mortgagee to collect any amounts paid for taxes or insurance from the time of the foreclosure sale until the expiration of redemption, if, under the mortgage, the mortgagors would have been responsible for paying such amounts. The Court’s conclusion that the mortgage is not extinguished upon the sale in a judicial foreclosure action, and the foreclosing mortgagee may still rely on provisions in the mortgage, coincides with the Legislature’s declarations in the statutes governing judicial foreclosures.
Although the Kirsch Court distinguished between foreclosure by advertisement and judicial foreclosures as they relate to the “Full Credit Bid Rule,” it found congruity between the two when analyzing the effect of a foreclosure on existing leases. The Court determined that, as is with foreclosures by advertisement, a lease executed prior to a foreclosure sale is terminated upon the expiration of redemption. In its analysis, the Kirsch Court acknowledged the fact that MCL §554.231 allows for the assignment of rents, but identifies that this statute does not extend to the assignment of leases. The determination that a lease terminates upon the expiration has long been recognized not only as the legal conclusion, but also as an important matter of public policy. To conclude that a lease continues past the expiration of redemption would force purchasers at a foreclosure sale, as well as tenants of foreclosed properties, to be contractually bound to each other without having the opportunity to decide if such a relationship is in the best interests of each. The only rational interpretation of the effect of a foreclosure on an existing lease is that the lease would terminate when the original lessor’s rights have ceased to exist.
Michigan will face alternative theories of law as they relate to foreclosures as long as Michigan remains a hybrid foreclosure state. For now, it appears as if the courts and the Legislature agree about the best interests of the state.
If you have any questions about this case, please contact Supervising Bankruptcy Attorney, Mary K. Atallah at email@example.com or (248) 853.4400, ext. 1239.