Absent "Clear Showing Of Fraud," Or Irregularity In F'closure Procedure Itself, 6th Circuit Boots Post-Redemption Period Attempt To Set Aside Michigan Foreclosure Sale Over Forged, Robosigning Claims Where Screw-Up Would Render Process Merely Voidable, Not Void Ab Initio

From a From a client information release from the law firm Goodwin Proctor LLP:

• The United States Court of Appeals for the Sixth Circuit affirmed a lower court's decision dismissing plaintiff's action to set aside a foreclosure sale based on alleged violations of the non-judicial foreclosure process in Michigan.
  
  After plaintiff defaulted on his mortgage loan,his property was foreclosed upon and sold at a sheriff's sale through Michigan's non-judicial foreclosure process, which provides for a six-month redemption period. Plaintiff subsequently initiated an action seeking to set aside the non-judicial foreclosure asserting that the mortgagee could not foreclose on him because the mortgagee was not the note-holder, mortgage holder, or servicer as required by Michigan law.
  
  Plaintiff's claim was based on the assertions that the mortgage assignment was either forged or "robo-signed" and MERS had no authority to assign the mortgage to the foreclosing mortgagee.
  
  Since the six-month redemption period had expired, under Michigan law, plaintiff was required to meet a heightened standard by making a "'clear showing of fraud, or irregularly' . . . 'related to the foreclosure procedure itself.'"(1)
  
  Relying on Kim v. JP Morgan Chase Bank, NA, 825 N.W.2d 329 (Mich. 2012) and Davenport v. HSBC Bank USA, 739 N.W.2d 383 (Mich. Ct. App. 2007), the Court determined that any violation of the foreclosure law is only actionable when there is a showing of prejudice.(2)
  
  Since plaintiff would not be subject to additional liability, would not have been in a better position if defendant was the owner of the indebtedness or the owner an interest in the indebtedness, and did not show he was prejudiced in any other way, the Court determined plaintiff's claim was not actionable and affirmed the lower court's dismissal.

Source: Sixth Circuit Upholds Dismissal Of Suit To Set Aside Foreclosure Sale.

For the court ruling, see Conlin v. Mortgage Electronic Registration Systems, Inc., No. 12-2021 (6th Cir. April 10, 2013).

(1) On this point, the federal appeals court observed:

• Michigan's foreclosure-by-advertisement scheme was meant to, at once, impose order on the foreclosure process while still giving security and finality to purchasers of foreclosed properties. See Mills v. Jirasek, 255 N.W. 402, 404 (Mich. 1934) (citing Reading v. Waterman, 8 N.W. 691, 692 (Mich. 1881)); see also Gordon Grossman Bldg. Co. v. Elliott, 171 N.W.2d 441, 445 (Mich. 1969).
  
  To effectuate this interest in finality, the ability for a court to set aside a sheriff's sale has been drastically circumscribed. See Schulthies v. Barron, 167 N.W.2d 784, 785 (Mich. Ct. App. 1969); see also Senters, 503 N.W.2d at 643.
  
  Michigan courts have held that once the statutory redemption period lapses, they can only entertain the setting aside of a foreclosure sale where the mortgagor has made "a clear showing of fraud, or irregularity." Schulthies, 167 N.W.2d at 785; see also Sweet Air Inv., Inc. v. Kenney, 739 N.W.2d 656, 659 (Mich. Ct. App. 2007) ("The Michigan Supreme Court has held that it would require a strong case of fraud or irregularity, or some peculiar exigency, to warrant setting a foreclosure sale aside." (internal quotation marks omitted)).
  
  Whether the failure to make this showing is best classified as standing issue[3] or as a merits determination,[4] one thing is clear: a plaintiff-mortgagor must meet this "high standard" in order to have a foreclosure set aside after the lapse of the statutory redemption period. See El-Seblani v. Indymac Mortg. Servs., No. 12-1046, 2013 WL 69226, at *4 (6th Cir. Jan. 7, 2013).
  
  It is further clear that not just any type of fraud will suffice. Rather, "[t]he misconduct must relate to the foreclosure procedure itself." Id. (citing Freeman v. Wosniack, 617 N.W.2d 46, 49 (Mich. Ct. App. 2000)); see also Williams, 2012 WL 6200270, at *3 (citing Heimerdinger v. Heimerdinger, 299 N.W. 844, 846 (Mich. 1941), and Sagmani v. Lending Assocs. LLC, No. 302865, 2012 WL 3193940, at *1 (Mich. Ct. App. Aug. 7, 2012)).

(2) On this point, the federal appeals court observed:

• Recently, in Kim v. JPMorgan Chase Bank, N.A., 825 N.W.2d 329 (Mich. 2012), the Michigan Supreme Court made clear that failure to comply with the conditions set forth in Michigan's foreclosure-by-advertisement statute does not render flawed foreclosures void (i.e., void ab initio) but merely voidable.[6] Id. at 337.
  
  The precise issue in Kim was whether the mortgagee's failure to record its interest before the initiation of foreclosure proceedings, as required by Mich. Comp. Laws § 600.3204(3), rendered the subsequent sheriff's sale void ab initio.[7] Id. at 331, 336.
  
  However, in the course of holding that a subsection (3) defect rendered a foreclosure merely voidable, the Michigan Supreme Court rejected the analysis of a case that dealt with a subsection (1)(d) defect, Davenport v. HSBC Bank USA, 739 N.W.2d 383 (Mich. Ct. App. 2007)—the same defect that Plaintiff is claiming in this case. Kim, 825 N.W.2d at 336-37.
  
  In Davenport, the Michigan Court of Appeals held that the fact that the foreclosing defendant "had initiated the foreclosure proceeding several days before acquiring its interest in the mortgage . . . rendered the foreclosure proceedings void ab initio." Id. at 336 (citing Davenport, 739 N.W.2d at 347-48).
  
  Interpreting Davenport in Kim, the Michigan Supreme Court bluntly stated that "such a holding was contrary to the established precedent of this Court. We have long held that defective mortgage foreclosures are voidable." Id. at 336.
  
  Therefore, the Michigan Supreme Court broadly held that "defects or irregularities in a foreclosure proceeding result in a foreclosure that is voidable, not void ab initio." Id. at 337. It then explained that to prove foreclosure-defect claims, "plaintiffs must show that they were prejudiced by defendant's failure to comply with [Mich. Comp. Laws. §] 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." Id. (citing Sweet Air, 739 N.W.2d at 662, and Jackson Inv. Corp. v. Pittsfield Prods., Inc., 413 N.W.2d 99, 101-02 (Mich. Ct. App. 1987)).
  
  Kim's holding makes § 600.3204 defects actionable to the same extent that notice defects under Mich. Comp. Laws § 600.3208 are—only on a showing of prejudice. We explained the actionability of notice defects under § 600.3208 in Lessl v. CitiMortgage, Inc., No. 11-2285, 2013 WL 610904 (6th Cir. Feb. 19, 2013): "When `the mortgagor would have been in no better position had notice been fully proper and the mortgagor lost no potential opportunity to preserve some or any portion of his interest in the property,' courts uphold a completed foreclosure sale." Id. at *1 (quoting Jackson, 413 N.W.2d at 101) (citing Sweet Air, 739 N.W.2d at 662).
  
  Lessl involved a mortgagor's claim to set aside a sheriff's sale based on an alleged failure to post notice on his property. Id. We affirmed the district court's dismissal of the claim because the mortgagor had received actual notice of the foreclosure in the form of a letter from the foreclosing party. Id. at *2.
  
  Consequently, we found the mortgagor, who had allowed the statutory redemption period to lapse, incapable of "demonstrat[ing] prejudice from the non-posting." Id. Post-Kim, Michigan mortgagors seeking to set aside a sheriff's sale under § 600.3204 will have to demonstrate prejudice (e.g., double liability), cf. Livonia Properties, 399 F. App'x at 102, in the same way that those seeking a set-aside based on § 600.3208 (e.g., lack of actual notice) already must do.