The U.S. Court of Appeals for the Sixth Circuit recently upheld the dismissal of a challenge to a non-judicial foreclosure sale based on an allegedly defective assignment of mortgage from MERS to the owner of the underlying loan, filed after the expiration of Michigan's post-foreclosure redemption period.
In so doing, the Court ruled that, in instances where the redemption period has passed, a defective foreclosure sale could be set aside only upon a showing of fraud or irregularity in the foreclosure process that prejudiced borrower such that, absent such a defect in the foreclosure process, the borrower would have been in a better position to preserve his interest in the property.
A copy of the opinion is available at: http://www.ca6.uscourts.gov/opinions.pdf/13a0102p-06.pdf.
Plaintiff borrower ("Borrower") refinanced his home mortgage loan with a lender ("Lender") and secured the loan with a mortgage against his property. The mortgage provided that Mortgage Electronic Registration Systems, Inc. ("MERS") was the nominee for Lender and Lender's successors and assigns. Shortly after the execution of the loan agreement, Lender sold the loan on the secondary market to defendant securitized trust ("Loan Owner") for which defendant loan servicer ("Servicer") serviced the loan.
After Borrower defaulted on the loan, MERS assigned the mortgage to Loan Owner. Over two years later, Servicer, through its attorneys ("Law Firm"), sent Borrower a letter notifying him that he was in default on the loan. Law Firm specified that the letter was sent on behalf of Servicer as "the creditor to whom your mortgage debt is owed or the servicing agent for the creditor to whom the debt is owed." Several months later, Law Firm published the statutorily required notices of the scheduled property sale in a local newspaper, identifying Loan Owner as the holder of the loan by assignment. Loan Owner purchased the property at the sheriff's sale.
Almost seven months after the sale, Borrower filed a complaint in state court, seeking to have the foreclosure sale set aside on grounds that the assignment was "robo-signed" and that MERS lacked capacity to assign the mortgage. The defendants removed the case to federal court, where they moved to dismiss. The lower court granted the dismissal. Borrower appealed. The Sixth Circuit affirmed.
As you may recall, Michigan's so-called "foreclosure-by-advertisement" statute governs the steps a mortgagee must take to validly foreclose, and allows mortgage borrowers six months after the foreclosure sale to redeem the property. See Mich. Comp. Laws §§ 600.3204(8); 600.3236. After the redemption period lapses, the mortgagor's right, title, and interest in the property are extinguished. See Mich. Comp. Laws § 600.3236.
Noting that the six-month redemption period had lapsed by the time Borrower filed his complaint, the Appellate Court rejected Borrower's assertion that because the assignment of mortgage to Loan Owner was defective the foreclosure sale should be set aside. In so doing, the Court pointed out that, even if there were a defect in the assignment, a third party to the assignment such as Borrower could only challenge the assignment if that challenge would render the assignment completely void. Stressing that a "clear showing of fraud or irregularity " in the foreclosure procedure itself was necessary to have the sale set aside, the Court explained that defects in a foreclosure only result in a voidable foreclosure, rather than one that is void. See, e.g., Kim V. JPMorgan Chase Bank, N.A., 825 N.W.2d 329, 337 (Mich. 2012); Schulties v. Barron, 167 N.W.2d 784, 785 (Mich. Ct. App. 1969); Sweet Air Inv., Inc., v. Kenney, 739 N.W.2d 656, 659 (Mich. Ct. App. 2007).
The Court thus also observed that, due to the lapse of the redemption period, in order to have the foreclosure sale in this case set aside, Borrower had to show he had been prejudiced by MERS's supposed non-compliance with Michigan's foreclosure-by-advertisement statute, such that he would have been in a better position to preserve his interest in the property absent MERS's alleged non-compliance with the statute. The Court noted Borrower's failure to show that he would be subject to liability from any creditor other than Loan Owner, or that he would have been in a position to keep the property absent the alleged defect in the mortgage assignment.
Concluding that Borrower failed to show that he was prejudiced by any alleged defect in the mortgage assignment, or by any alleged fraud in the foreclosure process, the Court affirmed the dismissal of Borrower's case.
Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
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