Which Type of Foreclosure, Judicial or Advertisement, is Best for Your Condominium Association?
Condominium associations are often faced with delinquent co-owners. Unfortunately, the days are long gone when a Condominium Association is guaranteed to recoup all of the delinquent assessments plus attorney fees and costs from a sheriff sale of the condominium unit. However, there are times when a Condominium Association should proceed to foreclose on its lien.
The Michigan Condominium Act, MCL 559.101 et seq., provides that a condominium association may foreclose its lien for unpaid assessments, together with interest on such sums, collection and late charges, any advances made by the association of co-owners for taxes or other liens to protect its lien, attorney fees, and fines in accordance with the condominium documents. The foreclosure process is by the same methods as permitted for in mortgage foreclosures in the State of Michigan. MCL 559.208(2).
In Michigan, there are two different types of foreclosure: Judicial Foreclosure and Foreclosure by Advertisement. This article will examine both types of foreclosure, the nature of the foreclosure process and the advantages and disadvantages of both.
Judicial foreclosure is the process by which a condominium association can file a lawsuit in circuit court against the delinquent co-owner seeking to have the court order the sale of the property to satisfy the debt owed to the Association. Under MCL 559.208(2), a condominium association procedurally forecloses its lien in the same manner as a lender, whose power to commence a judicial mortgage foreclosure action is derived from MCL § 600.3101 et seq.
After the association has served the complaint on the delinquent co-owner, the co-owner will have either twenty-one (21) days if personally served or twenty-eight (28) days if alternative service is utilized to answer or otherwise respond to the complaint. The co-owner is also entitled to file a counter-complaint against the association for any alleged violations of his/her rights under the condominium documents and the Condominium Act.
If the co-owner files an answer or otherwise responds to the Association’s complaint, often the parties will engage in discovery. The typical discovery process entails responding to requests for production of documents, answering interrogatories and/or participating in the deposition of the association’s current and/or past Board members and/or managers. Much of the discovery is centered on the association’s collection procedures, payments made, when payments were received, how payments were applied to the account, notices sent by the Association or its manager, the budget, etc.
Once discovery is complete (or if no discovery takes place), the association normally files a motion for summary disposition stating that 1) there are no undisputed facts that the co-owner is delinquent in payment of their assessment, 2) the Association has duly assessed the assessments and 3) the co-owner has no valid defense for not paying the assessments. If the Court agrees, a judgement would most likely be entered in favor of the Association against the co-owner. If the Court determines that there are disputed issues of material fact, however, then there could be a trial.
On the other hand, if the co-owner does not answer or otherwise respond to the Association’s complaint, then the Association could seek a default, and once a default is entered the Association could file a motion for entry of a default judgment to obtain a judgment against the co-owner in the amount sought in the Complaint. Whether the judgment is obtained via default, by the motion for summary disposition or after a trial, the Association cannot conduct a sale of the unit until at least six (6) months after the filing of the complaint for foreclosure of the Association’s lien. MCL 600.3115.
The foreclosure sale is conducted by the county sheriff ordinarily in the county courthouse’s lobby where the property is located. The association and others are entitled to bid at the sheriff’s sale. In the majority of circumstances, the Association will simply enter a credit bid (i.e., a credit bid is the amount of the Judgment plus any additional expenses, interest, attorney fees incurred since entry of the Judgment). In many cases, there is little, if any, equity and it is not common for the proceeds of the sale to cover every lien. In rare instances, if the Unit is sold for a price greater than the amount of the Judgment and costs associated with the collection thereof, then such surplus is given back to the co-owner after the association is paid the amount it is owed.
If the association is the successful purchaser, a Sheriff’s Deed is recorded with the County Register of Deeds. At that point, the redemption period, the specific time period given to borrowers in foreclosure during which they can buy back, or “redeem,” their property after foreclosure, begins. In most instances, the redemption period will be six (6) months unless the property is deemed abandoned, in which case the redemption period would expire one (1) month from the date of sale. MCL 559.208(2).
Foreclosure by Advertisement
Foreclosure by advertisement is the process by which an Association forecloses its lien by publishing a foreclosure notice in a newspaper for a certain period of time prior to sale (i.e., advertising the sale), instead of obtaining a court order prior to the foreclosure sale. The statute governing foreclosure by advertisement is MCL § 600.3201 et seq. A condominium association’s right to foreclose by advertisement is found in MCL 559.208(2).
A notice of foreclosure is published at least once per week for four (4) consecutive weeks with a newspaper published in the county where the unit is situated and the association must also post a copy of the notice in a conspicuous place on the Unit. MCL § 600.3208. If the condominium documents so provide, the Association must send notice to the co-owner that the association is pursuing foreclosure by advertisement and that the co-owner may request a judicial hearing on the matter by bringing suit against the Association. Gorosh v Woodhill Condominium Ass’n, Docket No. 306822 (Mich Ct App Oct. 16, 2012).
If the co-owner fails to pay the amount stated in the notice, then a sale is scheduled and the sheriff conducts the sale in the same manner as a judicial foreclosure. Similar to a judicial foreclosure, the co-owner who has defaulted on their assessment obligations and has had the accompanying lien foreclosed has the right to redeem the unit. As with a judicial foreclosure, the redemption period in a foreclosure by advertisement will usually be six (6) months unless the property is deemed abandoned. MCL 559.208(2).
Advantages and Disadvantages
From a practical standpoint, a major advantage of judicial foreclosures is that the Association will typically file a two count complaint against the delinquent co-owner for a judgment of foreclosure and a money judgment, which would also include a money judgment for any deficiency after any sale. Thus, if the co-owner is uncollectable and/or there is little or no equity in the unit and/or the likelihood of leasing the unit is slim to none, then the Association would be able to foreclose. If the Unit is “underwater” or the first mortgagee of record forecloses prior to the Association doing so, then the Association can seek to recover on the money judgment, without having to file a new lawsuit, and garnish the wages and/or bank accounts of the delinquent co-owner. For this reason, judicial foreclosures provide an association with more flexibility in pursuing delinquent co-owners and are used ninety (90%) of the time in this author’s experience.
Another advantage of judicial foreclosures is that the association can seek to have a receiver appointed, especially if there is a tenant in the unit or lease it to try to collect rent during the litigation. MCL 559.208(7). Finally, if the association expects the co-owner to contest the foreclosure, it may be more efficient to proceed judicially rather than foreclosure by advertisement and still have to defend the foreclosure in court.
However, in the majority of circumstances, judicial foreclosures are disadvantageous because they take longer (a minimum of seven (7) months before the Association would take title to the unit) and can be more complex and costly than a foreclosure by advertisement. Also, where a co-owner has passed away, the Association will have to begin probate proceedings, if proceedings have not been opened or have already closed, to have a personal representative appointed upon whom to serve the complaint.
There are several benefits to foreclosing by advertisement. Foreclosure by advertisement is typically faster, easier and less expensive than judicial foreclosures. In addition, foreclosure by advertisement only requires publishing and posting of the notice of foreclosure (i.e., advertising) and does not require personal service of the complaint. Accordingly, if the co-owner is deceased, then unlike a judicial foreclosure, the association would not be required to involve the probate court, as personal service on the estate would not be required.
On the other hand, foreclosure by advertisement can be disadvantageous in some instances as some title companies may not issue a title policy unless the unit is sold judicially. The title company may be concerned that there could be a challenge to the sale based on improper notice (or some other defect), or will not issue a title policy over a second mortgage. Moreover, even though the Condominium Act provides that the association’s lien prevails over all others except first mortgages of record and/or federal and state tax liens, some junior lienholders can cause problems by challenging the purchaser’s title and forcing the purchaser and/or the association to file a quiet title action to establish title.
Whether the sheriff sale is conducted judicially or by advertisement, if the association purchases the unit at the foreclosure sale and the Unit is subject to a senior lienholder, such as a first mortgage of record or a state or federal tax lien, then the association would own the Unit and be entitled to lease the Unit only until the senior lienholder foreclosed its lien, at which time the Association’s interest would most likely be terminated.
Which Foreclosure Type is Best for Your Association?
Unfortunately, there is no universal answer as to which foreclosure is the best option for your association. Each case depends on its own unique facts and circumstances. For instance, if the association is facing a situation where the co-owner has walked away from the unit and is uncollectable, then a foreclosure by advertisement would most likely be the best solution for the Association. It would be expected to be the quickest, least expensive and easiest way to sell or obtain ownership of the unit to sell it (so long as there is no senior lienholder), or to lease it to recover the delinquent assessments and costs incurred.
On the other hand, if the association expects the co-owner will contest the foreclosure and/or there are a number of junior lienholders, it may be better to pursue a judicial foreclosure rather than incur the fees and costs of initiating a foreclosure by advertisement and then still having to litigate the matter.
Given the nuances inherent in deciding whether a judicial foreclosure or a foreclosure by advertisement is right for your association, it is crucial to seek and obtain competent legal advice by experienced condominium attorneys.
William Z. Kolobaric is an attorney with the law firm of Cummings, McClorey, Davis & Acho, P.L.C. where he focuses his practice on community association law, construction law, real estate law, creditor’s rights in bankruptcy and probate and estate planning. He has extensive experience in state and federal courts involving a wide scope of real estate, commercial litigation and creditor’s rights matters. He can be reached at (734) 261-2400 or firstname.lastname@example.org. Please view The Michigan Community Association Law Blog at http://www.micondolaw.com for additional resources on Michigan Community Association Law.
Brandan A. Hallaq is an attorney with the law firm of Cummings, McClorey, Davis & Acho, P.L.C., in the firm’s Livonia, MI office where he focuses his practice in the areas of business and real estate law. He practices in state and federal courts handling a wide scope of real estate and business/commercial litigation matters. He also has experience preparing the necessary documents for business formation, purchases/sales of businesses, as well as negotiating and drafting contracts. Mr. Hallaq obtained his Juris Doctor degree from Wayne State University Law School where he graduated cum laude and his Bachelor of Arts degree in Political Science from Wayne State University where he graduated cum laude. He can be reached at (734) 261-2400 or at email@example.com.