Given the continued stress in the real estate market, it’s not surprising that we continue to experience a steady flow of court opinions involving issues pertinent to Michigan real estate finance. Summaries of interesting recent opinions follow.
Statutory Assignment of Rents
In 7800 W. Outer Road Holdings, L.L.C. v. College Park Partners, L.L.C., Case No. 303182 (Michigan Court of Appeals Unpublished1, June 26, 2012), the Michigan Court of Appeals interpreted Michigan’s assignment of rents statute (MCL 554.231 et seq.) on the question of who, as between the mortgagor and the mortgagee, is entitled to “rents” collected and held by the mortgagor before default and before exercise of the mortgagee’s assignment of rents rights. Observing that (i) the assignment of rents provision in the mortgage at issue covered all rents without distinguishing between pre- and post-default time periods, and (ii) Michigan’s assignment of rents statute “do[es] not impose a temporal limitation preventing collection of rental income collected before default,” the Court affirmed the trial court’s award to the mortgagee of the rents collected by the mortgagor before default. In light of this decision, commercial real estate lenders in Michigan should examine their standard assignment of rents granting provisions to confirm that they do not contain language that could be construed to preclude or limit the lender’s ability to recover rents collected before default.
Statutory Redemption Rights and Sale of Property by Court-Appointed Receiver
Given the statutory redemption rights afforded to mortgagors under Michigan’s judicial and non-judicial foreclosure statutes, questions have lingered in Michigan as to whether a court-approved sale of mortgaged commercial property by a court-appointed receiver is subject to, or can take place free and clear of, statutory redemption rights. This question was directly addressed in a trial court opinion recently issued by Ottawa County Circuit Court Judge Edward R. Post, in First Financial Bank, N.A. v. Scott T. Bosgraaf, et al., Case No. 11-02488 (Ottawa County Circuit Court, July 11, 2012)2. Judge Post answered the question by holding that the statutory redemption right, as “a creature of statute”, is available by the plain language of the statute only in the circumstance of a foreclosure sale, and not in the circumstance of a receiver’s sale. Accordingly, Judge Post concluded that the receiver’s sale should proceed free and clear of the debtor’s statutory redemption rights. His opinion was bolstered by citation to Michigan Supreme Court authority for the proposition that a receiver steps into the shoes of a debtor and succeeds to the debtor’s property rights and interests. It is likely that other Michigan courts will grapple with this issue in the relatively near future given the increasing frequency with which commercial mortgagees are incorporating the receiver’s sale into their loan recovery strategy.
Shortening Redemption Period Due to Abandonment
When a mortgage covering residential property (fewer than four units) is foreclosed non-judicially in Michigan, MCL 600.3241a provides a mechanism pursuant to which the otherwise applicable statutory redemption period may be shortened post-foreclosure if the property has been abandoned by the mortgagor. In Leggio v. Huffet, et al., Case No. 301821 (Michigan Court of Appeals Unpublished, July 3, 2012), a third-party (i.e., not the mortgagee) was the successful purchaser at the foreclosure sale, and thereafter took the listed steps under MCL 600.3241a to shorten the redemption period. The Michigan Court of Appeals continued its trend of strictly construing the language used in Michigan statutes by ruling that, because of the statute’s express references to the “mortgagee,” only the holder of the mortgage (i.e., the “mortgagee” in the eyes of the Court), and not a third-party foreclosure sale purchaser, may take advantage of the redemption period shortening rights granted by this statute. It is noteworthy that the Court’s opinion does not address how its ruling might apply to other foreclosure-related statutes concerning post-foreclosure sale issues and in which only the term “mortgagee” may be used.
Priority Between Prior Mortgage Lien and Court-Appointed Receiver Expenses
With the proliferation of delinquent financings involving a court-appointed receiver to take control of the mortgage property, either on behalf of the mortgagee or another interested party, the question of priority between the prior mortgage lien and the receiver’s expenses is an important one. The Michigan Supreme Court recently resolved this question in the foreclosure by advertisement context in In re Receivership of 11910 South Francis Road, Case No. 143123 (Michigan Supreme Court, July 30, 2012). In this case, the receiver was appointed upon request not of the mortgagee, but of a third party seeking a money judgment against the property owner. The mortgagee was not provided notice of the receivership motion; but after becoming aware of the receivership did not formally object and ostensibly benefited from the receivership. The mortgagee initiated non-judicial (by advertisement) foreclosure proceedings and was the successful bidder at the foreclosure sale. Within this same general timeframe, the receiver, consistent with its powers under the receivership order, incurred significant expenses to maintain and repair the property and administer the receivership. Because the property value was less than the amount of the mortgage debt and the foreclosure sale already had taken place, the receiver petitioned the court to hold the mortgagee liable for paying the receiver’s expenses. The Michigan Supreme Court, in overturning both the trial court and the Michigan Court of Appeals, held that the statutory right of first priority belonging to the holder of the prior mortgage as clearly articulated by MCL 600.3236 must necessarily override the common-law rule that a receiver’s costs and fees are entitled to first priority, absent unequivocal waiver by the mortgagee of its statutory right of priority. The mere receipt of benefit, because of the receivership or receiver’s actions and the mortgagee’s failure to contest the receivership appointment, were not sufficient to constitute that waiver. Moreover, because the receivership order did not make the parties that brought the motion to appoint the receiver responsible for paying the receiver’s expenses, and the receiver did not avail itself of the procedure set forth in MCR 2.622(D) to petition the court to make those parties responsible, the receiver was left without a repayment source.
Criminal Forfeiture—Bona Fide Purchaser Exception for Secured Lender
United States of America v. Huntington National Bank, Case No. 10-2071 (U.S. Sixth Circuit Court of Appeals, June 14, 2012), addresses whether a bank’s pre-existing perfected security interest in a borrower’s “deposit account” given to secure a loan can qualify the bank as a “bona fide purchaser” of the funds in that account and therefore defeat the federal government’s seizure of the account as part of a criminal forfeiture proceeding against the borrower. Overturning the district court’s contrary conclusion and denying the government’s argument that a perfected security interest is merely the functional equivalent of a contractual or common law right of setoff, the Court of Appeals unequivocally held that a party that takes a security interest in property, tangible or intangible, in exchange for value, can be a bona fide purchaser under the federal criminal forfeiture statutory regime. The Court also rejected that government’s attempt to distinguish between a security interest in a deposit account and the funds in the deposit account, concluding that the government presented no evidence to support a finding that Michigan law supports that distinction. Finally, because the bank did not have reason to believe the account was subject to forfeiture when the loan was made and the security interest in the account was created, the bank was entitled to the protections of 21 USC §§ 853(c) and (n)(6)(B) as a bona fide purchaser for value.