"FULL CREDIT BID" RULE LIMITS CLAIMS AGAINST BORROWERS BUT NOT THIRD PARTIES

By Jonathan L. Engman, Esq.
Fabrizio & Brook, P.C.

Since a 2008 court decision, mortgagees in Michigan have had limited ability to bring causes of action against non-borrower third parties after a full debt bid at foreclosure. Right or wrong, the bid at sale set the damages a mortgagee could claim against third parties. A recent ruling from the Michigan Supreme Court has clarified that a "full credit bid" does not extend to a non-borrower who has breached obligations to the mortgagee.

Michigan's anti-deficiency statute was enacted at the time of the Great Depression to protect borrowers from collection after foreclosure. Under Michigan's foreclosure scheme, a mortgage holder is not required to bid the full amount of debt at a foreclosure sale and may bid the value of the property if it's lower than the outstanding debt. However, if a mortgagee sues a borrower after foreclosure to recover a deficiency, Michigan's anti-deficiency statute §600.3280 allows the borrower to show that the property sold was fairly worth the amount of the outstanding debt or that the amount of the bid was substantially less that the property's fair market value. Under the "full credit bid rule", if the mortgagee bids the full amount of the debt, the borrower is released from the defaulted note and the mortgagee may not attempt to collect a deficiency later claiming that the value of the property was actually less than its full debt bid.

Over the years, Michigan courts have extended the full credit bid rule to other circumstances. In one such circumstance, the court in New Freedom Mortgage Corp. v Globe Mortgage Corp. 281 Mich App 63 (2008), basing much of its rationale on California precedent, concluded that a mortgagee's claims for fraud and breach of contract against non-borrower third parties were barred when the plaintiff bid full debt at its foreclosure sale. The court reasoned that "when a mortgagee makes a full credit bid, the mortgage debt is satisfied, and the mortgage is extinguished," precluding the mortgagee from claiming the property was worth less than the bid when it's sold at REO.

After years of operating under this expanded full credit bid rule, the case of Bank of America, NA v First American Title Insurance Co., 2016 (Mich. Lexis 660), made it to the Michigan Supreme Court. In this case, Bank of America ("BOA") filed suit against the title underwriter, First American, and the closing agent, Westminster Abstract Company, for breach of contract and misrepresentation based on loans that BOA had financed for properties whose values had been fraudulently inflated and were purchased by straw buyers. Prior to closing on the loans, BOA sent closing instructions to Westminster that required, among other things, a closing protection letter issued by First American. Under this letter, First American agreed to reimburse BOA for its actual losses incurred in connection with the closing if the losses arose out of the fraud or dishonesty of the agent.

After the closings took place, the loans went into default and BOA foreclosed on the mortgages purchasing two of the properties with credit bids in the full amount outstanding on the loans. BOA sold the properties at REO and alleged it lost money on the deals.

BOA brought a claim against the closing agent, alleging that it breached specific terms of the closing instructions and a claim against First American for recovery under the closing protection letters for actual losses from the agent's dishonesty and fraud. In upholding the trial court's dismissal of BOA's suit, the Court of Appeals ruled that BOA's claims were barred on properties that it made full credit bids based on the expanded full credit bid rule followed in the New Freedom case .

In a unanimous opinion, the Supreme Court held that a mortgagee's full credit bid at its foreclosure sale does not bar it from bringing suit against non-borrower third parties for claims such as fraud and breach of contract. This opinion affirmatively overruled New Freedom to the extent that it conflicted with the Supreme Court's decision. The Michigan Supreme Court reasoned that the full credit bid rule was related to the anti-deficiency statute to provide a defense to a borrower, its purpose being to resolve the issue of value in determining whether a debt was satisfied. The court recognized that the legislature wrote the anti-deficiency statute to prevent a mortgagee from obtaining a money judgment after getting title to a property worth more than the amount of the debt. The court concluded that there was no justification for extending the protections of the rule to alter contractual responsibilities between a mortgagee and a non-borrower third party.

There were several additional rulings in the case that solidified a mortgagee's right to bring an action against title agents and underwriters. The decision further held that closing instructions issued by a lender to a title agent were a binding contract on which an action could be based, when the agent received a fee and closed the transaction. Finally, disclosures in the closing protection letter do not lessen liability since the underwriter unilaterally issued the letter.

This is a positive ruling for lenders who now have the ability to pursue potential claims against third parties after foreclosing on their mortgages regardless of their bid.