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One Action Rule Invalidates Lender’s Foreclosure

April 27, 2012 Leave a comment

A Mortgagee can foreclosure by advertisement AND at that same time file suit to recover on a personal guaranty, right?  Not so fast.

 

 

On April 17th, 2012, the Michigan Court of Appeals decided Greenville Lafayette, LLC v Elgin State Bank, 2012 WL 1319417, — N.W.2d —- (Mich Ct App April 17, 2012) and put a wrinkle in a mortgage holder’s commonly understood ability to foreclose by advertisement and sue to recover on a personal guaranty in connection with the debt.

 

Facts of Greenville Lafayette v Elgin Bank

Greenville concerned Elgin State Bank’s foreclosure by advertisement of Greenville Lafayette’s real property located in Montcalm, MI.  In early June 2007, the parties entered into a “Business Loan Agreement” for approximately $1.8 million as well as a mortgage agreement to secure the debt. In the mortgage agreement, Greenville Lafayette mortgaged to the Bank real property it owned in Montcalm County. The $1.8 million loan was also secured by two separate commercial guaranties.

The loan came due in June 2011, with Greenville Lafayette owing the Bank approximately $1.7 million. After unsuccessful attempts to renegotiate the debt, the Bank filed suit on the commercial guaranties in August 2011. The next month, while the action regarding the guaranties was still pending, the Bank sent Greenville Lafayette its “Notice of Mortgage Foreclosure Sale,” which informed of the Bank’s intent to foreclose by advertisement on the real property.
On October 20, 2011, Greenville Lafayette filed its complaint seeking an injunction against the Bank’s pending foreclosure sale and a declaratory judgment stating that the Bank was not entitled to proceed with the foreclosure sale according to MCL 600.3204(1)(b).
Foreclosure by Advertisement – in General

MCL 600.3204(1), provides the requirements in order t0 foreclose by advertisement in Michigan, in relevant part:

a party may foreclose a mortgage by advertisement if all of the following circumstances exist:
(a) A default in a condition of the mortgage has occurred, by which the power to sell became operative.
(b) An action or proceeding has not been instituted, at law, to recover the debt secured by the mortgage or any part of the mortgage; or, if an action or proceeding has been instituted, the action or proceeding has been discontinued; or an execution on a judgment rendered in an action or proceeding has been returned unsatisfied, in whole or in part.
(c) The mortgage containing the power of sale has been properly recorded.
(d) The party foreclosing the mortgage is either the owner of the indebtedness or of an interest in the indebtedness secured by the mortgage or the servicing agent of the mortgage. (Emphasis added.)
Greenville Lafayette claimed that the Bank was not entitled to foreclose by advertisement since the Bank filed suit to recover the “debt secured by the mortgage” in violation of MCL 600.3204(1)(b) – commonly referred to as the “One Action Rule“.
Suit To Collect on Guaranty Is Not Generally a Suit to Collect the Debt
The Court cited US v. Leslie, 421 F.2d 763, 766 (CA6, 1970) which held that “[u]nder Michigan law, a creditor generally may simultaneously proceed against a guarantor and foreclose on a mortgaged property because the guaranty is an obligation separate from the mortgage note.” Id. See also Mazur v. Young, 507 F3d 1013, 1019 (CA 6, 2007) (deciding issue under Michigan law, stating “[t]hat a guaranty agreement is an independent, collateral agreement is what allows a seller to proceed against a guarantor without having first exhausted the foreclosure remedy against the buyer.”).
Regardless, the Court found that Elgin State Bank’s mortgage was different than the one in Leslie.
“The mortgage in this case provides that it is “given to secure” payment of the “indebtedness.” The mortgage further defines indebtedness to mean “all principal, interest, and other amounts, costs and expenses payable under the Note or Related Documents….” “Related Documents” is defined to mean “all promissory notes, credit agreements, loan agreements, environmental agreements, guaranties, security agreements, mortgages, deeds of trust, security deeds, collateral mortgages, and all other instruments, agreements and documents, whether now or hereafter existing, executed in connection with Indebtedness” (emphasis added).
Therefore the Court held the the lawsuit against the commercial guarantors was an action to recover the debt pursuant to MCL 600.3204(1)(b) and therefore the foreclosure by advertisement was invalid.
Moral of the Story:
Application for lenders: If you want the ability to file suit against the personal guarantors and simultaneously proceed to foreclose by advertisement on real property secured by the debt, make sure the Mortgage document does not describe indebtedness or the debt to include guaranties.
Application for debtors: If you need to renegotiate your debt and are facing this all too common situation like Greenville Lafayette – read the Mortgage documents!  This case law came down due to some diligent attorney for Greenville Lafayette paying close attention to the details in the mortgage documents. Knowing whether or not the lender can sue on the personal guaranty and simultaneously foreclose by advertisement may provide some extra leverage in renegotiating a loan – or at the very least might buy you additional time to locate a third party willing to refinance your debt.
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