Home > Uncategorized > Lesson For Banks: When Fighting over Mortgage Priority – Don’t Forget about the Property Owner.

Lesson For Banks: When Fighting over Mortgage Priority – Don’t Forget about the Property Owner.

 

An interesting unpublished decision came out on June 27, 2013 –  JPMorgan Chase Bank, N.A. v. First Michigan Bank, 309857, 2013 WL 3239983 (Mich. Ct. App. June 27, 2013).

The case essentially involved a fight over whose mortgage had priority: Chase or First Michigan Bank.

FACTS:

JP Morgan Chase Bank and First Michigan Bank had  mortgages  on property in West Bloomfield, Michigan.

The property was owned by a married couple, the Zairs.

The lender of the first mortgage, Peoples State Bank (PSB), foreclosed on the mortgage and the property was sold at a sheriff’s sale.

The security interest of the second lender, JP Morgan Chase Bank, was extinguished.

Chase sued  and claimed that its lien had priority due to a “Subordination Agreement” it entered into with PSB.

The assignee of PSB’s rights to the property, First Michigan Bank, argued that the subordination agreement was not effective and that any breach of the agreement by PSB did not entitle Chase to relief against First Michigan.

During the litigation, Chase and First Michigan Bank made a deal pursuant to a “Consent Order” – they agreed to undo the foreclosure sale and stipulated that Chase’s mortgage would have priority. over First Michigan’s mortgage.

This was all fine and well……EXCEPT

The Banks evidently forgot to ask what the Zairs thought about all this.

Well, not really, the Banks thought they didn’t need to include the Zairs, in their Consent Order they indicated that “the Zairs had not consented but their consent was not necessary.

The Zairs Appealed the decision, claiming that, as owners of the Property, they were parties to the lawsuit and the banks needed their permission to enter any Consent Order.

 

LAW:

An agreement or consent between the parties or their attorneys respecting the proceedings in an action is not binding unless it was made in open court, or unless evidence of the agreement is in writing, subscribed by the party against whom the agreement is offered or by that party’s attorney.

Essentially, the Zairs said – hey, Banks, wait a second – we are parties to this lawsuit – we didn’t agree to any Order!

The Court of Appeals agreed with the Zairs, and rejected the Consent Order, and remanded the case back to circuit Court.
LESSON:
The gist of this case was a simple dispute over a subordination agreement, and the case didn’t really result in a new development in real estate law.  However, I believe there is a larger take away point here. The two banks were wrapped up in resolving a contract dispute between themselves and took for granted that the property owners had a legitimate interest – as parties – that needed to be accounted for.  The homeowners also had a legitimate interest in the property, albeit a “redemption interest” that would likely be extinguished within 6 months after the foreclosure.   Now, the banks will need have their case remanded back to Circuit Court which, regardless of the outcome, will result in additional expenses for everyone.
Do you have an interesting issue related to business or real estate? I’d love to hear about it.   
Email or call me.  Ph: (616) 454-3883; Email: Jeshua@dwlawpc.com
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