MI Court rules that MCL 559.208 does not protect a Condominium Association’s lien priority after taking a deed in lieu of foreclosure

In Stonehenge Condominium Association v Bank of New York Mellon Trust Company, NA, unpublished opinion of the Court of Appeals, issued July 24, 2018 (Docket No. 339106), the Michigan Court of Appeals held that a condominium association’s lien priority over a second mortgage was extinguished when the association received a deed to the condominium unit from the co-owner instead of foreclosing on its assessment lien.

Facts

Frances Stuchell purchased a condominium unit in the Stonehenge Condominium in 1989.  Stuchell granted two mortgages against the unit, a 2003 mortgage to Bank One, NA and a second mortgage in 2007 to GMAC Mortgage, LLC. The 2003 mortgage was later assigned to JP Morgan Chase Bank (“JP Morgan”), and the 2007 mortgage was later assigned to the Bank of New York Mellon Trust Company, NA (“BNY).  Stuchell became delinquent in paying her condominium assessment and the Stonehenge Condominium Association (the “Association”) recorded an assessment lien in March of 2015.  In June of 2015, Stuchell conveyed the condominium unit to the Association via a quitclaim deed to resolve the delinquency.

BNY initiated proceedings to foreclose the 2007 mortgage in November 2015. On November 10, 2015, BNY  purchased the property at a sheriff’s sale and received a sheriff’s deed, which was recorded on November 17, 2015. BNY declared that the amount needed to redeem the property was $38,117.69, plus daily interest in the amount of $8.85.

In December 2015, JP Morgan’s counsel gave notice to BNY and the Association that it was foreclosing its senior mortgage, the 2003 mortgage. Before a foreclosure sale was held, BNY paid off the outstanding debt of $33,085.32 secured by the 2003 mortgage, and JP Morgan discharged the 2003 mortgage. In January 2016, BNY determined that the unit was abandoned, entitling it to shorten the redemption period to 30 days after notice of abandonment. BNY posted a Notice of Abandonment, dated January 7, 2016, at the premises and sent a copy of the notice to Stuchell by certified mail at her last known address. The Association later filed a Notice of Non-Abandonment, dated February 19, 2016, and recorded on February 22, 2016. On May 10, 2016, Stonehenge tendered the redemption amount of $39,780.77 to the Oakland County Register of Deeds. BNY refused to accept the funds, maintaining that payment was untimely under the shortened redemption period.

The Association filed an action to quiet title. BNY filed a counterclaim asserting its own claim to quiet title, as well as claims for slander of title and unjust enrichment. The trial court quieted title to the property in favor of BNY and ordered the Association to deliver to BNY all payments it had received from its lease of the property.

The Association’s March 2015 lien had priority over the second mortgage

The Court of Appeals agreed with the Association that the 2007 mortgage did not attain priority over the Association’s lien when the 2003 mortgage was discharged.  The Court relied on MCL 559.208(1), which provides as follows:

Sec. 108. (1) Sums assessed to a co-owner by the association of co-owners that are unpaid together with interest on such sums, collection and late charges, 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, constitute a lien upon the unit or units in the project owned by the co-owner at the time of the assessment before other liens except tax liens on the condominium unit in favor of any state or federal taxing authority and sums unpaid on a first mortgage of record, except that past due assessments that are evidenced by a notice of lien recorded as set forth in subsection (3) have priority over a first mortgage recorded subsequent to the recording of the notice of lien. The lien upon each condominium unit owned by the co-owner shall be in the amount assessed against the condominium unit, plus a proportionate share of the total of all other unpaid assessments attributable to condominium units no longer owned by the co-owner but which became due while the co-owner had title to the condominium units. The lien may be foreclosed by an action or by advertisement by the association of co-owners in the name of the condominium project on behalf of the other co-owners.

In relying on a prior case, the court of appeals held that a “first mortgage of record” was “the mortgage that is recorded before all others with respect to time pursuant to the laws of this state relating to the recording of deeds.” The court held that since BNY paid the 2003 mortgage, and that it was discharged, the Association’s lien had priority over BNY’s second mortgage, the 2007 mortgage, under the plain language of MCL 559.208.  However, as will be discussed below, the Association ultimately lost this case as accepting the deed in lieu of foreclosure, as opposed to actually foreclosing, extinguished the Association’s lien, which resulted in the loss of its priority over the second mortgage.

The Association lost priority under the merger doctrine when it accepted a deed in lieu of foreclosure

The Association disputed that its assessment lien was merged into the fee simple estate it acquired when Stuchell provided a quit claim deed to the Association, which extinguished the Association’s lien.  The court of appeals applied the merger doctrine.  The merger doctrine states that:

…. when the holder of a real estate mortgage becomes the owner of the fee, the former estate is merged in the latter. This rule is, however, subject to the exception that when it is to the interest of the mortgagee and is his intention to keep the mortgage alive, there is no merger, unless the rights of the mortgagor or third persons are affected thereby.  Anderson v Thompson, 225 Mich 155, 159; 195 NW 689 (1923).

The court also stated that, “[u]nder Michigan law, a mortgage is not an estate in land; it is a lien on real property intended to secure performance or payment of an obligation.” Prime Fin Servs LLC v Vinton, 279 Mich App 245, 256; 761 NW2d 694 (2008). Similarly, “[p]ayment or release of the underlying debt ‘extinguishes the mortgage.’” Ginsberg v Capitol City Wrecking Co, 300 Mich 712, 717; 2 NW2d 892 (1942).

In applying the above principles, the court stated that the exception to the merger doctrine did not apply as the Association did nothing to attempt to preserve its lien priority and prevent the lien from merging into the fee simple estate.  Specifically, there was nothing in writing that evidenced this intent.  The Court held that the assessment lien had already served its purpose once the lienholder has obtained fee simple title to the property that secured the obligation. Accordingly, the court held that the Association’s assessment lien was merged into, and extinguished by, the quitclaim deed.

Conclusion

            The takeaways from Stonehenge Condominium Association v Bank of New York Mellon Trust Company, NA, unpublished opinion of the Court of Appeals, issued July 24, 2018 (Docket No. 339106), are as follows:

  1. If the condominium association had foreclosed on its lien, the assessment lien would not have been merged and the association would have maintained its priority over the bank.
  2. Even if the Association had put some language into the deed that evidenced its intent to avoid the merger doctrine, it is not clear that this would have saved the Association as the court indicated that the assessment lien had served its purpose once the Association acquired title.
  3. After the Association became aware of the bank’s foreclosure, it should have timely redeemed after the sheriff’s sale in order to preserve its interest in the condominium unit.

Accordingly, Michigan condominium associations should foreclose on assessment liens, instead of taking a deed in lieu of foreclosure, if there are other recorded mortgages against the condominium unit.  In this case, the Association likely anticipated that it would be cheaper and easier to accept a deed in lieu of foreclosure from a delinquent co-owner, instead of proceeding with foreclosure.  In cases, where there are no other recorded interests against a condominium unit, a deed in lieu of foreclosure may still be a viable option.  However, condominium associations should be careful in accepting a deed in lieu of foreclosure and make sure that an appropriate title search is performed.

Kevin Hirzel is the Managing Member of Hirzel Law, PLC and concentrates his practice on commercial litigation, community association law, condominium law, Fair Housing Act compliance, homeowners association and real estate law. Mr. Hirzel is a fellow in the College of Community Association Lawyers, a prestigious designation given to less than 175 attorneys in the country. He has been a Michigan Super Lawyer’s Rising Star in Real Estate Law from 2013-2018, an award given to only 2.5% of the attorneys in Michigan each year. Mr. Hirzel was named an Up & Coming Lawyer by Michigan Lawyer’s Weekly in 2015, an award given to only 30 attorneys in Michigan each year. He represents community associations, condominium associations, cooperatives, homeowners associations, property owners and property managers throughout Michigan. He may be reached at (248) 478-1800 or kevin@hirzellaw.com.

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