Friday, January 4, 2013

Michigan Supreme Court: Bankster Screw-Ups When Following Foreclosure Process As Laid Out Under State Law Result In Foreclosures That Are Merely Voidable, Not Void Ab Initio

From the Syllabus of a recent Michigan court ruling, prepared by the Reporter Of Decisions for the Michigan Supreme Court:

  • Euihyung and In Sook Kim brought an action in the Macomb Circuit Court against JPMorgan Chase Bank, N.A., seeking to set aside a sheriff’s sale of their home.

    Plaintiffs had obtained a loan from Washington Mutual Bank to refinance their home and granted Washington Mutual a mortgage interest in the property to secure the loan.

    The federal Office of Thrift Management subsequently closed Washington Mutual and appointed the Federal Deposit Insurance Corporation (FDIC) as receiver for the bank. Defendant acquired Washington Mutual’s assets, including loans and loan commitments, pursuant to a purchase and assumption agreement that it reached with the FDIC. After plaintiffs defaulted on their loan payments, defendant foreclosed on the property by advertisement and purchased the property at the sheriff’s sale.

    Both parties moved for summary disposition. Plaintiffs argued in part that defendant had failed to comply with the statutory foreclosure-by-advertisement requirements and that as a result the foreclosure sale was void ab initio.

    The court, [...] granted summary disposition in favor of defendant, finding that because defendant had acquired plaintiffs’ mortgage by operation of law, defendant was not required to record the mortgage assignment before beginning foreclosure-by-advertisement proceedings.

    The Court of Appeals, [...] reversed, concluding that because defendant was not the original mortgagee and had acquired the loan by assignment rather than by operation of law, defendant was obligated under MCL 600.3204(3) to record the assignment of plaintiffs’ mortgage to it before foreclosing by advertisement. The Court of Appeals determined that defendant’s failure to record the assignment rendered the sheriff’s sale void ab initio. 295 Mich App 200 (2012).

    The Supreme Court granted defendant’s application for leave to appeal. 491 Mich 915 (2012).

    In an opinion by Justice MARILYN KELLY, joined by Justices CAVANAGH, MARKMAN, and HATHAWAY, the Supreme Court held:

    When a subsequent mortgagee acquires an interest in a mortgage through a voluntary purchase agreement with the FDIC, the mortgage has not been acquired by operation of law and that subsequent mortgagee must comply with the provisions of MCL 600.3204 and record the assignment of the mortgage before foreclosing on the mortgage by advertisement.

    Any defect or irregularity in a foreclosure proceeding results in a foreclosure that is voidable, not void ab initio.(1)
For the full Syllabus, and the Michigan high court ruling, see Kim v. JPMorgan Chase Bank, N.A., Docket No. 144690 (December 21, 2012)

(1) The Michigan Supreme Court addresses this issue in the following excerpt:
  • As noted earlier, MCL 600.3204 sets forth several requirements for foreclosing a property by advertisement. Subsection (3) requires a party that is not the original mortgagee to record the assignment of the mortgage to it before foreclosing. Because defendant acquired plaintiffs’ mortgage through a voluntary transfer, and given that it was not the original mortgagee, it was subject to the recordation requirement of MCL 600.3204(3). Having made that determination, we must now decide the effect of defendant’s failure to comply with that provision.

    With meager supporting analysis, the Court of Appeals concluded that defendant’s failure to record its mortgage interest before initiating foreclosure proceedings rendered the foreclosure sale void ab initio.

    It cited one case in support of its holding, Davenport v HSBC Bank USA. There, the plaintiff, who was in default on her mortgage, brought an action to void a foreclosure. The defendant, who was the successor in interest of the initial mortgagee, had initiated the foreclosure proceeding several days before acquiring its interest in the mortgage. The trial court granted summary disposition to defendant.

    The Court of Appeals reversed the trial court’s ruling. It held that the defendant’s failure to comply with MCL 600.3204(1)(d), which requires that a party own some or all of the indebtedness before foreclosing by advertisement, rendered the foreclosure proceedings void ab initio.

    But it cited not a single case in support of the proposition that the foreclosure was void ab initio as opposed to merely voidable. Davenport’s holding was contrary to the established precedent of this Court.

    We have long held that defective mortgage foreclosures are voidable. For example, in Kuschinski v Equitable & Central Trust Co, the Court considered a foreclosure undertaken in violation of a restraining order. The Court held:

    Our attention is called to a few isolated cases where under a different factual set-up, such sales have been held to be void. The better rule seems to be that such sale is voidable and not void. Plaintiff was not misled into believing that no sale had been had because of the order restraining such action. He knew of the sale and, although he was warned by defendants’ attorneys, violated the rule that in seeking to set aside a foreclosure sale, the moving party must act promptly after he becomes aware of the facts upon which he bases his complaint. The total lack of equity in plaintiff’s claim, his failure to pay anything on the mortgage debt and his laches preclude him from any relief in a court of equity.

    Similarly, in Feldman v Equitable Trust Co, the Court held that a foreclosure commenced without first recording all assignments of the mortgage is not invalid if the defect does not harm the homeowner.

    This Court, the Court of Appeals, and the United States District Court for the Eastern District of Michigan have consistently used this interpretation. We continue to adhere to it.

    Therefore, we hold that defects or irregularities in a foreclosure proceeding result in a foreclosure that is voidable, not void ab initio.

    Because the Court of Appeals erred by holding to the contrary, we reverse that portion of its decision.

    We leave to the trial court the determination of whether, under the facts presented, the foreclosure sale of plaintiffs’ property is voidable. In this regard, to set aside the foreclosure sale, plaintiffs must show that they were prejudiced by defendant’s failure to comply with MCL 600.3204. To demonstrate such prejudice, they must show that they would have been in a better position to preserve their interest in the property absent defendant’s noncompliance with the statute.

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