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July 28, 2014

Michigan Court of Appeals Confirms Power of Receiver to Sell Real Property Free and Clear of Redemption Rights

In a previous Alert that we published in July 2012 entitled “Michigan Court Authorizes Receiver Sale of Real Property Free and Clear of Redemption Rights,” we reported on a decision of a Michigan trial court in Ottawa County, Michigan permitting a state-court receiver to sell real property free and clear of a mortgagor’s redemption rights. As noted in this prior Alert, “[a]lthough Michigan law is clear that a circuit court has the equitable power to permit a receiver to sell real estate free and clear of liens, the case law is less clear with respect to redemption rights,” citing Patrick E. Mears and Dustin Daniels, Sales of Receivership Assets Free and Clear of Liens and Interests, 38 Mich. Real Prop. Rev. 112 (2011). On Oct. 18, 2012, the Michigan Court of Appeals, the state’s intermediate appeals court, affirmed a decision of another Michigan trial court authorizing a receiver to sell commercial real property free and clear of the mortgagors’ redemption rights. CSB Bank v. Christy, 2012 WL 5064618 (Mich. App. Oct. 18, 2012).

In Christy, the mortgagors, Necolaos and Patricia Christy, owned commercial realty in Lapeer County, Michigan that they leased to Ronald and Diana Romine for a four-year term beginning in 2006. The lease required the Romines to pay taxes and insurance on the leased property. Two years later, CSB Bank loaned the Christys the sum of $322,160.87, which was secured by a first mortgage lien on this real estate. The Christys thereafter defaulted on their obligations under the loan agreement and commenced a joint case under Chapter 13 of the Federal Bankruptcy Code, listing the value of the realty at $275,000 in their bankruptcy schedules.

Prior to the hearing on confirmation of a Chapter 13 plan, CSB Bank obtained relief from the automatic stay from the bankruptcy court to permit the bank to dispose of the mortgaged property. The order terminating the stay stated that the mortgagee was entitled “to exercise any and all state law remedies it may have to enforce” its mortgage lien. In November 2010, the Christys served the Romines with a notice to quit the leased premises on the ground that their tenancy had ended and demanded that they vacate the property by March 28, 2011.

On March 8, 2011, CSB Bank commenced a civil action against the Christys and the Romines in Lapeer County Circuit Court requesting the appointment of a receiver for the real estate along with an ex parte motion seeking that same relief. In the motion, the bank agreed that forcing the Romines to vacate the leased property would constitute “waste” which, under Michigan law, constitutes grounds for the appointment of a receiver. At the hearing on this motion, the circuit court appointed the receiver and authorized him to “perform all acts necessary to preserve the value” of the mortgaged realty. The order also “authorized and directed” the receiver to sell the property for cash to a bona fide third-party buyer, subject to approval by the bank. The circuit court also declared that the bank, the receiver and the Christys were allowed to petition the court to approve a contract for the property’s sale.

Thereafter, the Romines offered to purchase this realty through the receiver for the sum of $307,236.28, whereupon CSB Bank filed a motion with the circuit court to approve the sale. The Christys filed a brief opposing the sale, arguing that (i) the purchase price offered by the Romines was inadequate; and (ii) the proposed sale improperly circumvented Michigan’s foreclosure process by, inter alia, failing to recognize and give effect to the Christys’ redemption rights in the property.

At the hearing on the sale motion, the receiver introduced evidence through comparable sales of various industrial, retail and commercial property in the area to establish that the purchase price was adequate. Relying on this evidence and the Christys’ failure to provide an “offers, names of purchasers or any plans whatsoever for any possible sale” since the entry of the receivership order, the circuit court overruled the Christys’ objections on adequacy of the proposed sale price and circumvention of the foreclosure process, concluded that the transaction was at arm’s length and was reasonable, and approved the sale.

Only Necolaos Christy appealed to the Michigan Court of Appeals from the circuit court’s order approving the sale. One of the issues raised by him on appeal was the improper use of a receivership sale to circumvent the mortgage foreclosure process, which abridged his statutory right to redeem the property after a foreclosure sale. In its opinion affirming the decision of the Lapeer County Circuit Court below, the Michigan Court of Appeals rejected Christy’s argument, on the ground that “this [sale] was not a sale pursuant to foreclosure; it was a receivership sale. The sale was being conducted pursuant to the prior order appointing the receiver –– not a judicial foreclosure. Thus, the various requirements for a sale by foreclosure are simply inapplicable in the instant case.” (Emphasis supplied.) In a footnote to this passage, the Court of Appeals expressly included a mortgagor’s right of redemption in the category of “foreclosure requirements” that are not triggered by a receivership sale of mortgaged realty.

This recent Court of Appeals decision adds more certainty to the state of the law on receivership sales free and clear of liens and interests and may be cited to support receivership sales free and clear of redemption rights. This decision should also facilitate these types of property dispositions in the State of Michigan, which are favored by mortgagees over mortgage foreclosures which can sometimes be prolonged for a period of years through contentious litigation.

© 2014 BARNES & THORNBURG LLP

About the Author

Barnes & Thornburg LLP's Finance, Insolvency and Restructuring Department handles all aspects of general representation of secured and unsecured creditors, borrowers, guarantors, trustees, and creditors' committees, including negotiating and drafting loan agreements, negotiable instruments, and other commercial transactions in both litigation and transactional aspects of the practice. Our lawyers represent creditors and obligors nationally in out-of-court workouts and refinancings, as well as in various state and federal courts, including bankruptcy proceedings, repossessions,...

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