UPDATE: On August 26, 2014, the Michigan Court of Appeals issued an Order vacating the court’s June 24, 2014 opinion in the FHLMA v Kelley case discussed in this blog post, and issued a replacement opinion. The effect of the replacement opinion is to withdraw the earlier holding that would have required a recorded mortgage assignment under MCL 600.3204(3) before a successor mortgagee by merger could conduct a non-judicial foreclosure sale, and expressly leaves that issue open for a future court to determine. Another possible effect of the replacement opinion is to support a more expansive interpretation of the “voidable not void” holding in the earlier Michigan Supreme Court opinion in Kim v JPMorganChase Bank. With that said, given the uncertainty on this issue, a prudent lender that holds a mortgage as a successor by merger should still seriously consider the appropriateness of recording an assignment prior to the foreclosure sale.
In December of 2012, the Michigan Supreme Court addressed the provision of Michigan’s foreclosure by advertisement statute that requires a record chain of title evidencing the assignment of a mortgage to the party foreclosing the mortgage. In explaining its decision, the Supreme Court revisited long-standing Michigan common law that exempts mortgages transferred by “operation of law” from the statutory mandate for a recorded assignment. In holding that a mortgage transfer from the FDIC (as statutory receiver of a failed bank) to a “rescue” bank acquiring the failed bank’s assets was not a transfer by operation of law and a recorded assignment was therefore required, the Supreme Court’s opinion can be read to define, and limit, a transfer by “operation of law” to one “that occurs unintentionally, involuntarily, or through no affirmative act of the transferee.”
But the Supreme Court left unanswered the important question of whether a mortgage acquired in a merger fits within these new “operation of law” parameters. The Michigan Court of Appeals, in a published opinion issued June 24, 2014, provided the answer.
In Federal Home Loan Mortgage Assn v Kelley, et al. (Case No. 315082), the Michigan Court of Appeals applied the “operation of law” definition established by the Michigan Supreme Court in Kim to the situation where the mortgage holder acquired the mortgage as part of a merger transaction. Focusing on the fact that the merger survivor voluntarily signed the merger agreement, the Court of Appeals held that the mortgage therefore could not have passed “unintentionally, involuntarily, or through no affirmative act of the transferee.” In so holding, the Court danced (unconvincingly) around the fact that, under most statutory merger regimes, assets transfer automatically under the statute upon consummation of the merger.
The Court of Appeals’ holding in Kelley will require an additional step—recording evidence of the assignment—before a successor mortgagee by merger can properly foreclose the mortgage by advertisement in Michigan. But it is not all bad news for mortgagees. Despite the mortgage holder’s failure to record evidence of the assignment via merger, the Court of Appeals in Kelley also held that the failure did not render the foreclosure sale void, only voidable, and adopted the Kim requirement that, to overturn the foreclosure, the mortgagor must demonstrate prejudice by showing it would have been in a better position to preserve its interest in the property absent the foreclosing mortgagee’s failure to record the assignment, a heavy burden to be sure.