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More Legal Maneuvering Over the Scope and Applicability of Michigan's "One Action" Rule Governing Mortgage Foreclosures By Advertisement

In order to commence and complete in Michigan a foreclosure of a mortgage by advertisement, there must not have been instituted “an action or proceeding . . . at law, to recover the debt secured by the mortgage or any part of the mortgage” unless that action has either been “discontinued” or an “execution on a judgment rendered in that action or proceeding has been returned unsatisfied, in whole or in part.” MCL § 600.3204(b). The rationale behind this rule is to prohibit harassment of the mortgagor by requiring it to defend two proceedings at once and to forbid a double recovery on the debt. See, e.g., Lee v. Clary, 38 Mich. 223, 227 (1878); Larzelere v. Startkweather, 38 Mich. 96 (1878).

In a previous alert dated April 23, 2012 , the authors discussed the long-recognized exception to this rule when a mortgagee commences an action for an in personam judgment against a guarantor of the mortgage debt. See, e.g., United States v. Leslie, 421 F.2d 763 (6th Cir. 1970) and Church & Church, Inc. v. A-1 Carpentry, 281 Mich. App. 330, 766 N.W.2d 30 (2008), for court decisions recognizing and applying this exception. This earlier alert discussed a recent Michigan Court of Appeals decision holding that a mortgagor’s action against a guarantor of the mortgage debt triggered the application of the one-action rule to invalidate a foreclosure sale when the loan documents defined the mortgage indebtedness as including debt arising under “guaranties.” Greenville Lafayette, LLC v. Elgin State Bank, 818 N.W.2d 460 (2012).

In a decision issued this November, the Michigan Court of Appeals struggled with the consequences of its Greenville Lafayette decision in a similar context, only to be aided by the guarantor’s imprecise pleading in the trial court below.  Canvasser Heritage, L.L.C. v. Fifth Third Bank, Case No. 304510 (Mich. Ct. App. Nov. 15, 2012). In Canvasser, Fifth Third Bank (the “Bank”) made two separate loans to Canvasser Heritage, L.L.C. (the “LLC”) secured by a real estate development located in Macomb County, Mich. Payment of the entire mortgage debt was guaranteed by Mark Canvasser (“Canvasser”) an individual, and his trust. After the LLC defaulted on the two notes, the Bank commenced a collection against the two guarantors for a money judgment on their guaranties and was granted summary judgment in that action by the Macomb County Circuit Court. Thereafter, the LLC commenced a separate action against the Bank in the same court seeking an injunction prohibiting the Bank from foreclosing on its mortgages in the real estate. In its complaint, the LLC asserted that the action commenced by the Bank against the two guarantors constituted a prohibited “action or proceeding” under MCL § 600.3204(b) that barred foreclosure by advertisement. The Bank then moved for summary judgment in this second action, arguing that the exception to the one action rule announced in the Leslie decision and its progeny applied and did not prohibit foreclosure in these circumstances. The trial court agreed and the LLC appealed to the Michigan Court of Appeals from this grant of summary judgment to the Bank.

In its decision affirming the decision of the trial court, the Michigan Court of Appeals distinguished the facts before it from the facts involved in Greenville Lafayette, stating that the relevant facts resembled those present in Leslie. The Court of Appeals noted that the Bank’s first mortgage on the realty made no mention of any guaranties, unlike the mortgage inGreenville Lafayette. The court also noted that this mortgage specifically permitted the Bank to foreclose “under applicable law.” The second mortgage, however, described the indebtedness secured by the Bank’s lien as specifically including obligations arising from “guaranty(ies),” which paralleled the language of the mortgage that the Court of Appeals found to be prohibitive in Greenville Lafayette. However, all was not lost for the Bank. The Michigan Court of Appeals concluded that, because the LLC did not specifically rely on this language in the second mortgage in its pleadings filed in the trial court or on appeal, the case was “not controlled by Greenville Lafayette” but by Leslie. This court arrived at this conclusion by pointing to the fact that, on appeal, the LLC referred only ”to one singular ‘mortgage,’” without differentiating between the first and second mortgage:

We conclude, given the unique factual circumstances, that we are not bound by Greenville Lafayette in this case, and we agree with the court’s observation in Leslie that guaranties are “obligation[s] separate from . . . mortgage note[s].” Leslie, 421 F2d at 766. Plaintiff has not adequately demonstrated, by way of its arguments, that the action against the guarantors was an action “to recover the debt secured by the mortgage[s] or any part of the mortgage[s].” MCL 600.3204(1)(b). Therefore, the trial court did not err in finding that defendant was not prohibited from pursuing foreclosure by advertisement because of the prior action against the guarantors.

Canvasser Heritage, L.L.C. v. Fifth Third Bank, supra at p. 6.

One important takeaway lesson from this decision and Greenville Lafayette is that, when making mortgage loans in Michigan that will be personally guaranteed by other entities, the inclusion of any reference to guaranties in the mortgage’s definition of secured indebtedness may expose a foreclosing mortgagee to the defense that any attempted foreclosure by advertisement is prohibited by the “one action” rule of MCL § 600.3204. One method of avoiding the application of this rule is to commence and complete the foreclosure proceeding before commencing an action against the guarantors for a money judgment. However, there may be circumstances that militate otherwise, e.g., the guarantors may be secreting assets to render themselves judgment-proof. Another method of avoidance is not to include any reference to “guaranties” in the definition of the secured indebtedness although this strategy has its own risks. Debt which otherwise could be secured by available collateral may be treated as unsecured and, therefore, unrecoverable from an insolvent guarantor.

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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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