ISSUE:  Whether a mortgagee bidding total debt at foreclosure sale can recover post-foreclosure advances for repairs and/or improvements through a deficiency action against mortgagor.

CONCLUSION: A mortgagee (Lender) cannot pursue a mortgagor for a deficiency arising from post-foreclosure advances expended to repair or improve the premises.

When a mortgagee makes a full credit bid for the total amount owing on the Note at the time of the Sheriff Sale, the mortgage debt is satisfied and the mortgage is extinguished.  Bank of Three Oaks v. Lakefront Properties, 178 Mich. App. 551; 444 N.W. 2d 217 (1989); M.C.L. 600.3280; In Re: Marlon Leshan Finley and Lesley Nicole Finley (U.S. Bkcy. E.D. Mich. [Detroit], Case No. 09-44480, decided June 22, 2010).

The Courts have consistently held that a full bid for the amount owing on the Mortgage Note at the time of the Sheriff Sale, extinguishes any claim for a deficiency.  The borrower is not liable for any funds expended to repair or improve the property after the Sheriff Sale.

LEGAL ANALYSIS:    In Bank of Three Oaks, supra, the lender bid the full amount of the mortgage debt at a foreclosure sale.

The lender then attempted to recover interest that accrued during the redemption period as well as fees advanced for insurance and taxes.

The Court held that the lender’s purchase for the full amount of indebtedness extinguished the debt and the mortgage.  Id. at 555.

The Court noted that the lender’s full credit bid meant that there was no deficiency.  The Court cited M.C.L. 600.3280 which addresses deficiencies and provides:

When, in the foreclosure of a mortgage by advertisement, any sale of real property has been made after February 11, 1933, or shall hereafter be made by a mortgagee, trustee, or other person authorized to make the same pursuant to the power of sale contained therein, at which the mortgagee, payee or other holder of the obligation thereby secured has become or becomes the purchaser, or takes or has taken title thereto at such sale either directly or indirectly, and thereafter such mortgagee, payee or other holder of the secured obligation, as aforesaid, shall sue for and undertake to recover a deficiency judgment against the mortgagor, trustor, or other maker of any such obligation, or any other person liable thereon, it shall be competent and lawful for the defendant against whom such deficiency judgment is sought to allege and show as matter of defense and set-off to the extent only the amount of the plaintiff’s claim, that the property sold was fairly worth the amount of debt secured (emphasis added)by it at the time and place of sale or that the amount bid was substantially less than its true value, and such showing shall constitute a defense to such action and shall defeat the deficiency judgment against him, (emphasis added) either in whole or in part to such extent.

The Banks Court, citing Janower v. F M Sibley Lumber Co., 245 Mich. 571; 222 N.W. 736 (1929), further held that the rule of caveat emptor [buyer beware] applies with full force to a purchaser at a foreclosure, with no distinction between the purchaser being a third party or the lender foreclosing.

Therefore, when the lender purchases a property at a foreclosure sale, the lenders takes said property subject to defects . . . which it has notice or which it could obtain knowledge under its duty to inform itself.  Id. 

If the mortgagee purchases the property at a sale, it stands in the position of an ordinary purchaser. [Emphasis Supplied]  Senters v. Ottawa Savings Bank, FSB 443 Mich. 45; 503 N.W. 2d 639 (1993) citing Wood v. Button, 205 Mich. 692, 701; 172 N.W. 422 (1919).

Michigan Courts have reasoned that the lender is in a position to determine the property’s value before making its full credit bid and bears the burden of making an informed bid.  Therefore, any post-foreclosure liabilities do not arise out of the credit granted by the lender and recovery cannot be had for the same.

Similarly, in the case of In Re: Marlon Leshan Finley and Lesley Nicole Finley (U.S. Bkcy. E.D. Mich. [Detroit], Case No. 09-44480, decided June 22, 2010), Judge Marci B. McIvor ruled that, as a matter of law, a bid submitted by a mortgagee at the Sheriff Sale, when the bid equals or exceeds the amount owing on the underlying loan balance at the time of the Sheriff Sale, extinguishes the balance owed by Debtors on the note secured by the mortgage.

 [T]he credit bid made by the [credit union] at that sale determines the deficiency claim.

In the Finley case immediately above, the court noted that a bid submitted at the Sheriff Sale is determined solely by the lender and is commonly referred to as a “credit bid. The Court found that:

If the credit bid is for the entire balance owed on the note secured by the mortgage, then the note and mortgage are extinguished.

The lender cannot return at a later date and request the borrower to pay for any amounts expended by the lender after the Sheriff Sale date.

It is noteworthy that the lender may have an independent action for the borrower maliciously damaging the property, but that is not considered a deficiency and is a separate tortuous cause of action against the borrowers wrongful acts.

Authors: Marla Skeltis, Attorney at Law and Charles R. Harroun, Attorney at Law.