MICHIGAN COURT VALIDATES FORECLOSURE SALE UNDER THE DOCTRINE OF SUBSTANTIAL COMPLIANCE

On February 14, 2017, the Michigan Court of Appeals issued an unpublished opinion in the matter of Miehlke v Bayview Condominium Association of Manistee, et al.  The Miehlke case is important as a reminder that a defect in a foreclosure notice renders a foreclosure sale voidable rather than void and if a junior lien holder wishes to preserve its interest it will need to redeem the property.

Background

The case involves real property located in Manistee.   When defendant Linden Court Corporation (“Linden”) purchased the property, it obtained a mortgage with defendant Community Shores Bank (“CSB”).  A number of years later Linden granted a second mortgage to defendant Bayview Condominium Association of Manistee (“Bayview”).   Both mortgages were properly recorded with the county register of deeds and, thus, the Bayview mortgage was junior to the CSB mortgage.

Linden consequently defaulted on the CSB mortgage and CSB foreclosed by advertisement.  CSB was the purchaser at the sheriff’s sale and a sheriff’s deed was recorded on October 20, 2011.  Since the property was underwater, CSB purchased the property for less than what remained on CSB’s mortgage so Bayview’s junior interest was extinguished.

Nearly two years later in September of 2013, CSB recorded an affidavit of scrivener’s error to correct an error in the legal description of the property contained in the sheriff’s deed.  The sheriff’s deed contained the following legal description:

Part of Government Lot 3, Section 1, Township 21 North, Range 17 West, City of Manistee, Manistee County, Michigan; Commencing at a point here the East line of Arthur Street intersects the South line of the North 2/3 of said Government Lot; thence North 11°08’14” East 250.13 feet for the Point of Beginning; thence North 11°08’14” East 88.71 feet; thence North 14°58’21” East 61.29 feet; thence South 78°51’46” West 118 feet to the Point of Beginning.

Missing from the sheriff’s deed legal description was the following “East 146.87 feet; thence South 23°32’40” West 153.46 Feet; thence North 78°51’46”, which should have come after South 78°51’46” and before West 118 feet to the Point of Beginning.

Subsequent to the recording of the affidavit of scrivener’s error, CSB contracted to sell the property to Plaintiffs Robert Miehlke (“Miehlke”) and George Lafata.  At some point during the due diligence review period to verify that CSB had marketable title to the property, one or both of the purchasers or all three parties became concerned that the affidavit of scrivener’s error did not sufficiently correct the error in the sheriff’s deed’s legal description.  Accordingly, Linden and Plaintiffs executed an addendum to the CSB sale contract, whereby Linden was selling the property to Plaintiffs.  In addition to the addendum, CSB recorded a document purporting to rescind the sheriff’s sale.

Bayview informed Plaintiffs that CSB’s rescission of the sheriff sale revived its junior interest in the property.  As a result, Plaintiffs filed a declaratory action to clarify who held what interests in the property.

The Court’s Decision

The Trial Court granted summary disposition to Plaintiffs on the ground that the original notice of foreclosure was not defective because the legal description contained therein was substantially the same as the legal description contained in the mortgage. The Trial Court found that Bayview was not prejudiced by the errors contained and thus, the foreclosure sale was valid and could not be set aside by an affidavit.  Bayview appealed and the Court of Appeals affirmed the Trial Court’s decision.

The Court of Appeals first examined the effect of a foreclosure by advertisement and stated that a proper foreclosure sale extinguishes the mortgage and the purchaser becomes the owner of an equitable interest in the property subject to the right of redemption.  If the mortgagor or any other interest holder does not redeem, the equitable interest ripens into legal title and destroys all junior interests in the property. Trademark Prop of Mich, LLC v Fed Nat’l Mtg Ass’n, 308 Mich App 132; 138; 863 NW2d 344 (2014).

The Appellate Court then examined the notice requirements for a foreclosure by advertisement and stated that every notice must include a “description of the mortgaged premises that substantially conforms with the description contained in the mortgage.” MCL 600.3212(d). “The property to be sold must be described in the notice with such a reasonable degree of certainty that the public by the exercise of ordinary intelligence may be enabled to identify it, and may be directed to the means of obtaining an exact description if desired.” Provident Mut Life Ins Co of Philadelphia v Vinton Co, 282 Mich 84, 88; 275 NW 776 (1937).

The Appellate Court further stated that a defect in the notice renders a foreclosure sale voidable rather than void.  Sweet Air Investment, Inc v Kenney, 275 Mich App 492, 502; 739 NW2d 656 (2007) (internal quotation marks and citation omitted).  The Court stated that to set aside a foreclosure sale, the opposing party must show they were prejudiced by showing that they would have been in a better position to preserve their interest in the property absent the defect. Kim v JPMorgan Chase Bank, NA, 493 Mich 98, 115; 825 NW2d 329 (2012).  Finally, the Appellate Court stated that a foreclosure sale should not be set aside unless there is “a strong case of fraud or irregularity, or some peculiar exigency.” Kubicki v Mtg Electronic Registration Sys, 292 Mich App 287, 289; 807 NW2d 433 (2011) (internal quotation marks and citation omitted).

Based on the above, the Court found that the Trial Court properly concluded that the legal description in the foreclosure notice substantially conformed with the description in the mortgage.  The Court further found that because this notice correctly referenced part of the property, and because the correct legal description was contained in the mortgage, a person of ordinary intelligence would be able to identify the property and obtain an exact description if desired. Accordingly, the description was not legally deficient.

The Court further found that Bayview had actual notice of the foreclosure sale and its representative attended the sale and testified that he was aware of the error in the legal description and would not have done anything differently had the notice contained the correct legal description.  Thus, the Court held that Bayview was not prejudiced from the incorrect legal description.

Therefore, the Court agreed with the Trial Court that the foreclosure sale was valid, both Linden’s and Bayview’s interests in the property were extinguished, CSB’s subsequent attempt to rescind the sale was ineffective and so was Linden’s purported transfer of property to Plaintiffs. See Trademark Prop of Mich, 308 Mich App at 142 (concluding that a mortgagee’s filing an affidavit that a foreclosure sale is void does not revive a previously extinguished mortgage if the foreclosure sale was valid).

Finally, the Court also stated that Bayview’s attempt to characterize CSB’s rescission of the foreclosure sale as an agreement to extend the redemption period did not hold water as there was nothing in the document that CSB recorded referencing the redemption period, nor was there anything in the record about CSB agreeing to extend the redemption period.

Conclusion

The Miehlke case reiterates that courts will allow substantial compliance in the foreclosure by advertisement process so long as there is no prejudice to any junior interested party.

 

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 wkolobaric@cmda-law.com. Please view The Michigan Community Association Law Blog at http://www.micondolaw.com for additional resources on Michigan Community Association Law.