A deed in lieu of foreclosure (“DIL”) is a popular alternative to foreclosure in that it allows the mortgage lender to obtain immediate title to real property collateral without what could be a time-consuming foreclosure sale process and post-sale redemption period. In most DIL transactions, the deed from the borrower to the lender will contain anti-merger language indicating a clear intent that the mortgage and lender’s mortgagee interest will not be merged into the fee title acquired pursuant to the DIL (“Anti-Merger Language”). Absent this Anti-Merger Language, the mortgage will be deemed to have merged with fee title and the mortgage lien will therefore be extinguished.

Under Michigan law, it is well established that a merger will not result if it is the intent of the mortgagee to keep a mortgage alive, “unless the rights of the mortgagor or third persons are affected.” Anderson v Thompson, 225 Mich 155, 159 (1923). The intent to keep a mortgage alive can be implied or express, however, it is the express intent at the time of the transaction that is controlling. First National Bank of Utica v Ramm, 256 Mich 573, 575 (1932). Therefore, with DIL’s, lenders have long relied on Anti-Merger Language to express the intent that the mortgage does not merge into the fee.

On May 6, 2014 the Michigan Court of Appeals tightened Michigan’s version of the merger of title rule, holding that despite existence of Anti-Merger Language in the DIL, there may still be a merger of the mortgage and fee title. The Reserve At Heritage Vill. Ass’n v Warren Fin Acquisition, LLC, No. 317830, 2014 WL 1797599 (Mich Ct App May 6, 2014) (the “Reserve Case”).[1] The Court of Appeals reasoned that the “ purpose of declining to find a merger is to allow a mortgagee/lender to protect itself from the claims of junior lienholders of the mortgagor/borrower.” Id. (quoting, US Leather, Inc v Mitchell Mfg Group, Inc, 276 F3d 782, 787 (CA 6 2002)). In other words, the Court of Appeals held that even with Anti-Merger Language in the DIL, the Anti-Merger Language can be used only to protect the lender from the claims of the borrower’s creditors, but not from claims of the lender’s creditors. Id. This distinction was of critical importance in the Reserve Case because the post-DIL foreclosure of the mortgage was designed to eliminate condominium assessment liens asserted against the lender in its capacity as owner of the mortgaged premises.

Importantly, the Court of Appeals concluded that the time for evaluating the effect of Anti-Merger Language on a third party is “not limited to the time of the transaction.” The Court of Appeals therefore allowed the junior creditor’s lien, which arose after the DIL, to stand because the junior creditor was deemed a third-party creditor of the lender, not of the borrower, and was adversely affected by the Anti-Merger Language after the DIL transaction was consummated. 

Thus, based on the Reserve Case, a mortgage lender should avoid relying on Anti-Merger Language as a basis for protecting itself (by later foreclosure of the mortgage) against claims by creditors of the lender, even if the Anti-Merger Language’s adverse effect on the creditor would occur after consummation of the DIL. For example, if a judgment lien is filed against a lender (as the property owner) after the date that the lender acquires title through a DIL with Anti-Merger Language and the lender later forecloses its mortgage, the Reserve Case would enable the judgment lien creditor to argue that the Anti-Merger Language was not effective against that particular creditor and therefore that the foreclosure was invalid as applied to that creditor.