Void Or Voidable Foreclosure? Federal Appeals Court Reinstates Homeowner Challenge Involving Post-Sale Redemption Attempt Under Michigan State Law

In a recent ruling from a Federal Appeals Court, a homeowner's challenge to a non-judicial foreclosure action in Michigan was reinstated for further litigation.

In the case, the estate of a deceased homeowner challenged a foreclosure on the grounds that the foreclosing bank failed to provide proper notice under Mich. Comp. Laws § 600.3204(4)(a) regarding the necessity to comply with the loan-modification process when conducting a foreclosure by advertisement. Further, an issue arose as to whether the estate attempted to have redeemed the property pursuant to Michigan state law prior to the end of the statutory redemption period.

The estate contended that, because the statute wasn't followed, the foreclosure action was absolutely void (ie. void ab initio). Based on this argument, the estate asserted that the redemption period on a void foreclosure never started and, accordingly, it should be allowed to redeem the property. The lower court dismissed the estate's challenge, and the estate subsequently filed an appeal.

On appeal, the 6th Circuit Court of Appeals determined that the facts of the case were not fully developed by the lower court so as to determine whether a failure to comply with the Michigan statute rendered the foreclosure void ab initio, or merely voidable.

Accordingly, the appellate court reversed the earlier ruling and booted the case back to the lower court to further develop the facts necessary to determine whether the flaw in the foreclosure process rendered the sale void ab initio, or merely voidable.

The appeals court discusses the foregoing in the following excerpt ("Mitan" refers to the personal representative of the deceased homeowner's estate):

• As a general rule, Michigan law does not permit property owners to make claims related to foreclosed property after expiration of the redemption period. See Piotrowski, 4 N.W.2d at 517; Overton, 2009 WL 1507342, at *1. Mitan claims that this rule is not applicable here. Because the foreclosure by advertisement violated Mich. Comp. Laws § 600.3204(4)(f), he argues, it was void and the redemption period never began. We agree with Mitan's interpretation of the law.
  
  Michigan law distinguishes between foreclosures with notice defects and those with "structural defect[s] that go[] to the very heart of defendant's ability to foreclose by advertisement in the first instance." Davenport, 739 N.W.2d at 384.
  
  Notice defects render a foreclosure voidable. Jackson Inv. Corp. v. Pittsfield Prods., Inc., 413 N.W.2d 99,101 (Mich. Ct. App. 1987).
  
  Structural defects, on the other hand, render the foreclosure absolutely void. Davenport, 739 N.W.2d at 385. In Davenport, for instance, the defendant bank had no statutory authority to foreclose because it did not own an interest in the mortgage when it published its first notice of foreclosure, as required by Mich. Comp. Laws § 600.3204(1)(d). Similarly, Mich. Comp. Laws § 600.3204(4) is a statutory prohibition on foreclosure by advertisement where a lender does not take the required steps to negotiate a loan modification.
  
  Although one of the required steps is to provide notice, see Mich. Comp. Laws § 600.3204(4)(a), the failure to comply with the loan-modification process as outlined in the statute is a structural defect because it deprives the borrower of the opportunity to demonstrate eligibility for a loan modification that would avoid foreclosure altogether. See id. § 600.3204(4)(f).
  
  In contrast, the notice defect at issue in Jackson did not call into question the underlying right of the lender to foreclose once past the procedural defect. See 413 N.W.2d at 101. It follows that, as a matter of Michigan law, a lender that fails to follow the loan-modification procedures set forth by the statute has engendered a structural defect and is thus without authority to commence a foreclosure. Without a valid foreclosure, the redemption period has not begun, and the owner of the property retains an interest conferring standing to sue.
  
  The remaining question is factual. Did Wells Fargo, in this particular case, foreclose on the property in violation of the loan-modification law? On this record, we are unable to tell. Mitan alleges that Frank returned the necessary paperwork to Wells Fargo, that Wells Fargo had approved a loan modification, and that Frank qualified for a loan modification under the statutory calculations. Portions of the record bring these points into dispute. Besides this, it is altogether unclear why Wells Fargo's designated agent did not have access to communications that Frank may have sent directly to Wells Fargo. It is also unclear whether Wells Fargo or its agent ever attempted to make the calculation required under Mich. Comp. Laws § 600.3205c(1).
  
  If further factual development shows that Wells Fargo did not comply with the loan-modification law, then Mitan has standing and may pursue the merits of his claim.
  
  In sum, the district court erred when it held that Mitan lacked standing because the redemption period had expired. If Wells Fargo violated the loan-modification law, then the redemption period never began. On remand, the district court should make factual findings to determine whether Wells Fargo assessed Frank's eligibility for a loan modification as required by statute.

For the ruling, see Mitan v. Federal Home Loan Mortgage Corporation, No. 12-1169 (December 12, 2012).

Editor's Note: In unrelated litigation decided by the Michigan Supreme Court nine days after this ruling was issued (on December 21, 2012), the state high court appears to have decided whether screw-ups in the foreclosure process result in foreclosures that are either void ab initio or merely voidable. See Michigan Supreme Court: Bankster Screw-Ups When Following Foreclosure Process As Laid Out Under State Law Results In Foreclosures That Are Merely Voidable, Not Void Ab Initio.