In re Miller, 2013 WL 425342 (6th Cir. Feb. 5, 2013)
The Sixth Circuit Court of Appeals held that the secured lender’s credit bid, which equaled the total debt owed on two properties but exceeded the value of the only foreclosed property involved in the sheriff’s sale, extinguished the entire debt. The court affirmed the order to lift the automatic stay only to require the lender to dismiss the second foreclosure action, release the promissory note and mortgage, and turn over the second property to the borrower free and clear.
The borrower, Miller, owned a total of five parcels of real property – one in Wisconsin and four in Michigan. Miller signed a promissory note to the State Bank of Florence, and executed a mortgage on his residence in Wisconsin to secure the note. A few months later, Miller signed a second note with the Bank, pledging as collateral a second residence in Michigan and three parcels of land in Michigan. Miller fell behind in his payments, and the Bank decided to foreclose against Miller’s properties. In accordance with the foreclosure laws of Wisconsin and Michigan, the Bank commenced a judicial foreclosure proceeding in Wisconsin, and commenced a non-judicial foreclosure by advertisement in Michigan. Miller did not object or participate in either proceeding, but he did file a chapter 13 petition in Wisconsin bankruptcy court staying the foreclosure sales in each foreclosure proceeding. Shortly thereafter, Miller dismissed his bankruptcy petition, sold his Michigan residence, and paid the proceeds to the Bank to reduce his debt.
The Bank obtained a foreclosure judgment in Wisconsin on the Wisconsin mortgage in the amount of $408,000 plus interest, fees and costs. Wisconsin law provides a one-year redemption period applied to foreclosure judgments, so the Bank was precluded from scheduling a foreclosure sale for one year. The Bank also published a new notice of foreclosure by advertisement in Michigan, and scheduled a sheriff’s sale of the remaining three parcels of land in Michigan. Miller owed the Bank a total of $413,560.27 on the Wisconsin and Michigan notes, and the Bank credit bid that total amount in the Michigan sheriff’s sale of the three Michigan parcels. Michigan law also provides a one-year redemption period.
Miller did not redeem the Wisconsin property within the year, so the Bank scheduled a Wisconsin foreclosure sale. This sale did not proceed, however, because Miller filed a second chapter 13 petition, staying the sale. Miller’s bankruptcy filing also extended the Michigan redemption period by 60 days. At the end of the extended period, the Bank cancelled Miller’s Michigan note and made an entry on its books that the Bank owned the three parcels.
The Bank claimed that, pre-petition, Miller owed more than $256,000 on the Wisconsin note and more than $185,000 on the Michigan note, for a total of $441,176.37. The Bank claimed that the value of the Wisconsin property had declined, leaving it undersecured, and moved to lift the automatic stay on that basis. The bankruptcy court determined that Miller did not owe the Bank any amount of money because the Bank’s credit bid for the total amount of debt at the Michigan sheriff’s sale satisfied his entire debt. The bankruptcy court lifted the stay only to allow the Bank to dismiss its Wisconsin foreclosure judgment with prejudice, release that note and mortgage, and turn over the Wisconsin property to Miller free and clear of any debt. The Bank appealed, the Bankruptcy Appellate Panel affirmed, and the Bank appealed to the Sixth Circuit.
The promissory notes each provided that Wisconsin law was the applicable law, and the Bank contended that the bankruptcy court erred in applying Michigan law to its analysis. The Court of Appeals found that the case law relied upon by the Bank actually supported the contention that the state in which the real property is located (Michigan) applies when determining issues relating to the mortgage and foreclosure thereof. Notwithstanding, the court determined that it need not decide the choice-of-law issue, and instead agreed with the bankruptcy court that, under either Michigan or Wisconsin law, "the Bank’s overbid of the full amount of debt at the Michigan sheriff’s sale extinguished the entire debt." The court then reviewed decisions from both states.
Michigan cases, in which mortgagees submitted bids in the full amount of debt owed and subsequently discovered that the property was worth less than the sale price, established that such mortgagees must live with their errors. As one Michigan court observed, "[i]t would defy logic to allow [the mortgagees] to bid an inflated price on a piece of property to ensure that they would not be overbid and to defeat the equity of redemption and to then claim that the ‘true value’ was less than half the value of the bid." Another Michigan court held that the debt is satisfied where a property purchased at foreclosure for the full amount of the debt owed.
"The governing legal rule is no different in Wisconsin." Citing a Wisconsin Supreme Court case, the court said that a purchaser who complains that his foreclosure sale overbid was the result of his unilateral mistake, "will be bound by his bid." Only where the overbid results from deceit, undue influence or other fraudulent inducement, will the court intervene.
Accordingly, the Court of Appeals held that "the bankruptcy court did not err in concluding under both Michigan and Wisconsin law that the effect of the Bank’s credit bid at the Michigan sheriff’s sale was to extinguish the entire debt Miller owed to the Bank. As a result, the Bank may not execute on the Wisconsin foreclosure judgment to recover a debt that no longer exists."
As an ancillary matter, the Bank raised a procedural argument regarding its proof of claim for the first time on appeal. Pursuant to section 502(a) of the Bankruptcy Code, a proof of claim is deemed to be allowed unless the debtor or a party in interest objects to such proof of claim. In this case, the debtor did not formally object to the Bank’s proof of claim, so the Bank argued on appeal that the Bank’s claim should be deemed allowed. The Court of Appeals held that "a party may not litigate the merits of an issue and later attempt to defeat an adverse decision by asserting the other party’s failure to comply with a claim-processing rule." Therefore, by raising the issue for the first time on appeal, the Bank had waived the issue. Moreover, the court held that although the debtor did not file a formal objection to the Bank’s proof of claim, language in the debtor’s chapter 13 plan and its brief submitted in support of the plan and in opposition to the Bank’s stay relief motion constituted an objection to the Bank’s proof of claim.
This case provides guidance with regard to both non-bankruptcy foreclosures and bankruptcy proof-of-claim litigation. Regarding foreclosure sales, great care should be taken by lenders in deciding what to bid at foreclosure sales, especially where multiple properties constitute collateral. Given that a defaulting borrower is probably more likely to file for bankruptcy, a lender may be in a better position to credit bid the value attributed to each specific property, and if bankruptcy ensues, file the appropriate proofs of claim in the bankruptcy case claiming a deficiency. Moreover, once a bankruptcy is filed, a creditor should be sure to advance all arguments – procedural and substantive – in opposition to any proof-of-claim litigation, as procedural arguments might be waived if not timely raised.