Daily Development for Thursday, October 28, 2004
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin Kansas City, Missouri dirt@umkc.edu

MORTGAGES; REDEMPTION; EXTENSION: Foreclosed Michigan mortgagor can validly agree with foreclosure sale purchaser to extend term of statutory redemption period, even after the period had terminated, but junior liens foreclosed away by the sale will not be extinguished. (2 cases)

Keybank Nat’l Assoc. v. Ameriquest Mortgage Co., 2004 WL 1057814 (Mich. App. 5/11/04)

In re Parlovecchio, Case No. 04-41796 (Bkrtcy. E.D. Mich, No. 04-41796-R (10/6/04)

Like many states, Michigan has created a statutory redemption right following judicial foreclosures and foreclosures by advertisement. The right currently is a six month right in most cases (the redemption period can be as little as 30 days for abandoned property, or one year when the remaining principal balance is less than 2/3 of the loan amount or the property is more than 3 acres, etc. See M.C.L. 600.3240.). These cases indicates definitively that the right is held by the foreclosed judgment debtor, but does not indicate whether there is any provision for redemption by juniors foreclosed away under the original judgment, as would be the case in many similar statutes. But Howard Lax reports that other cases provide that junior lienholders, or anyone else with an interest in the property, may redeem the foreclosure sale. We also know that a mortgagor and a senior lienholder may not reduce or enlarge the redemption rights of junior lienholders by agreement.

What does appear clear is that if the property is redeemed by the judgment debtor, the liens of other junior lienholders foreclosed away under the original judgment will not be extinguished and will continue to bind the property in their original order of priority. Only the foreclosing senior lien will be deemed extinguished.

In Keybank, the questions presented were whether the judgment debtor (in this case a mortgagor) can agree with the foreclosure sale purchaser (in this case the foreclosing mortgagee) to extend the redemption period beyond the six months and, if this occurs, what impact such extension would have on the rights of the junior lienholders.

The court noted, in fact, that the right of a judgment debtor and judgment creditor to agree to extend the statutory redemption period is well established in Michigan. In fact, if the extension agreement occurs during the pendency of the redemption period, the agreement need not be in writing, apparently because it would be deemed part of the statutory scheme. If the agreement occurs (as it did in the instant case) after the expiration of the six months period, then the parties must commit to it in writing, as they did here.

The debtors in Keybank arranged to redeem the property by repaying the mortgagee for the amount that it bid at the sale, plus interest, by obtaining a new loan from Ameriquest. In fact, it was Ameriquest, on the debtor’s behalf, that contacted the former mortgagee/foreclosure purchaser, and requested the extension, so that Ameriquest could have the property available as security for the loan. The original lender, agreed in writing to the extension.

Ameriquest funded the redemption during the extension period and its mortgage loan went of record. But the title report that Ameriquest had obtained in evaluating the loan had neglected to mention the record of another mortgagee, Keybank, junior to the foreclosing lender. Keybank asserted that under Michigan law, when a mortgagor redeems from a foreclosure sale, junior liens that otherwise would have been cut off by that sale remain valid against the property. (The editor would use the term “reattach,” as that is the usual phrasing of this concept, but the court doesn’t use that term and technically, such liens have never been cut off until the redemption process is final.)

Ameriquest argued that the Keybank mortgage could not reattach because its right to reattach arose only if the redemption arose during the six month period. Since the period was extended, and in fact extended following the expiration of the original six months, Ameriquest argued, Keybank had been eliminated by the language of the statute, which provides that if there is no redemption within six months the deed shall vest in the foreclosure sale purchaser the title that had existed in the foreclosed mortgagor at the time the foreclosing mortgage was entered into (which would have been free of any junior liens, presumably).

The court concluded, however, with virtually no analysis, that the extension of the redemption period, although it occurred after the running of the six months, nevertheless continued the entire statutory process, and thus Keybank was not cut off. Thus, when the mortgagor ultimately redeemed, Keybank’s mortgage remained viable. As Keybank was of record at the time that Ameriquest took its mortgage, and as it had not been eliminated by the running of the six months.

Ameriquest argued for subrogation rights to the original mortgage lien, which it effectively paid with its loan proceeds, but the court concluded that there was no such lien to which Ameriquest could subrogate, because it had been eliminated by the original foreclosure. (Hmmmmmm.)

In Parlovecchio, when the debtor declared bankruptcy within six months of a foreclosure of the debtor’s property, the bankruptcy court recognized the redemption rights under Michigan law as available to the bankruptcy trustee. In fact, the bankruptcy laws provide for an additional 60 days following any state provided statutory redemption period. After the running of the original six months, but within the 60 days, the trustee redeemed. A junior lender from the original foreclosure argued that its lien now reattached in bankruptcy. The court agreed, citing Keybank. The court noted that the right to extend the redemption period was not available to junior creditors, but when the mortgagor sought an extension, junior creditors are benefitted by an extension of the cutoff period that otherwise would apply to them.

Comment 1: From glimmerings in the case, the editor gets the impression that Illinois, at least, has (or had) a similar statutory redemption provision, and perhaps other states in the region do as well. In Kansas, the statutory redemption scheme with which the editor is most familiar, the statute provides for certain redemption rights during the redemption process for the junior creditor, and otherwise prohibits reattachment.

In many other jurisdictions, sold out junior liens will reattach when the mortgagor reaquires title to the property whether such acquisition occurs as a consequence of redemption or otherwise - even if the mortgagor simply buys the property from the foreclosure sale purchaser.

Comment 2: The issue of whether the lender that financed the redemption should somehow be subrogated to the senior mortgagee’s position is an interesting one. The case doesn’t tell us how the redemption price is figured. In many states it is based upon the amount bid at foreclosure, rather than the lien amount. So subrogation to the lien amount would seem inappropriate, and subrogation to any other amount inconsistent with the notion of subrogation. But in similar situations in which there was a lien, albeit an extinguished one such as where a lender takes a deed in lieu without actual knowledge of a recorded junior, have resulted in equitable relief to the sloppy senior (even when the senior has cancelled of record). It seems anomalous that relief would be granted in one case and not the other - but it consistent with the editor’s frequently voiced conservatism about bailing out lenders (and their insurers) for faulty title searches.
Comment by Michigan Banking Law Specialist Howard Lax: This decision follows the banking industry practice of insisting that the junior lien holders are paid off, or the junior liens are reaffirmed, when a mortgagor buys a home back from a lender after the foreclosure redemption period expires. Lenders will not assist a mortgagor to avoid junior liens through foreclosure of a senior mortgage and reacquisistion of the property.

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