Home > business, litigation, Real Estate > Real Estate Law Update: Michigan Supreme Court Holds Full Credit Bid did not Bar Contract Claim against Third-Party.

Real Estate Law Update: Michigan Supreme Court Holds Full Credit Bid did not Bar Contract Claim against Third-Party.

Happy Friday, all!

Real Estate Investors and anyone involved in the foreclosure process is aware that a “full credit bid” at the foreclosure sale by the bank/mortgage holder “extinguishes the underlying debt.” You can check out my prior posts on this subject.

A case that has been on appeal for years is Bank of America v First American Title, et. al.

Two days ago the Michigan Supreme Issued an Opinion that has legal and precedential significance.

The Michigan Supreme Court was asked to, among other things, address “the scope of the full credit bid rule.” Bank of Am. v. First Am. Title Ins. Co., 2016 Mich. LEXIS 660, *1 (Mich. Apr. 13, 2016).

Regarding that scope, the Court held that “the full credit bid rule does not bar contract claims by a mortgagee against nonborrower third parties.” Id. pg 29.

In so doing, the Court overruled prior case law.


This case was factually interesting in that it was based on BOA’s financing the purchase of 4 properties (with inflated property values), the borrowers turned out to be “straw borrowers” who took the money, ran, and defaulted on the loans.   BOA foreclosed and bid the full amount (a full credit bid) on two of the properties, and then took a $7 million hit when it thereafter sold the properties.

ISSUES: CPLs and the Scope of the Full Credit Bid Rule

The issues are varied, including the enforceability of closing protection letters (CPLs) issued by title insurance companies under certain circumstances.

What is a Closing Protection Letter?

As the Supreme Court explains, A CPL “is a contract between the title company and the lender whereby the title insurance company agrees to indemnify the lender for any losses caused by the failure of the title agent to follow the lender’s closing instructions.” Id pg 37.

“[a] lender who also wants the title insurer to be responsible for the agent’s acts in connection with escrow closing activities and services must separately contract with the title insurer for such additional protection by entering into an ‘insured closing letter’ or ‘closing protection letter.” Id.

In BOA’s case, it was on the hook for a huge loss and wanted to point to the Title Company and say “you should have caught that, you must indemnify me!”

Words Matter.

A word (literally) on the CPL issue – the Court made a distinction between the inclusion of the word “in” in the CPL in the prior case, and the “exclusion” of the word “in” in the instant case. In the Court’s determination:

“Although the distinction is slight—the only difference is the word “in”—the distinction is legally significant.” Id. page 43.

“[i]f the word ‘in’ is not included, as is the case here, the phrase ‘handling your funds or documents in connection with . . . closings’ simply defines or identifies the closing agent, effectively broadening the indemnification coverage to any acts of fraud or dishonesty by the closing agent related to a closing.” In light of this distinction, the fraud or dishonesty by Westminster or Patriot need not be tied to their handling of Bank of America’s funds or documents.” Bank of Am. v. First Am. Title Ins. Co.id. at page *44 (Mich. Apr. 13, 2016)

Words matter!


1. The Full Credit Bid Rule applies to the borrower/lender.  It does not apply to third-parties and will not affect any contracts or claims between a lender and a third party.

2. Words matter! As the Supreme Court opined – one word can be “legally significant.” It could determine liability for millions of dollars…

E-mail: Jeshua@dwlawpc.com

Twitter: @JeshuaTLauka



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