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A Better Partnership
April 15, 2016

MSC holds that mortgage-lender could still sue third-parties who induced bad loans even after the lender purchased the mortgaged property for “full credit” at foreclosure sale

If the mortgage-lender bids the full amount of the debt in a foreclosure sale, the lender can still sue third parties for any loss caused by the fraud or breach of contract in closing on the defaulted loan, according to Bank of America, NA v. First American Title Insurance Co., No. 149599.  Called a “full credit bid,” giving full credit for the debt in exchange for the property satisfies the debt and bars any claim against the mortgagor-debtor for a deficiency.  But it does not bar a claim against third parties who wrongfully induced the loan for loss, if the properties were not worth the amount bid.  According to the Michigan Supreme Court, the “full credit bid” rule inures only to the benefit of the debtor, and does not eliminate claims against third parties. 
This case arose out of the 2008 housing market collapse.  In 2005 and 2006, Bank of America agreed to finance a percentage of four borrowers’ loan packages in exchange for mortgages on four properties.  The closing instructions required that a closing protection letter (CPL) be issued in connection with each closing.  First American Title Insurance Co. insured title on all four sales and issued closing protection letters to reimburse Bank of America for actual losses arising out of fraud or dishonesty of the closing agents in connection with the closing.  Unbeknownst to Bank of America, the values of the properties at the time of closing were inflated by fraudulent appraisals and straw buyers who flipped the properties (sometimes the same or next day) to obtain loans that exceeded the properties’ true values.  The values of the properties had been inflated resulting in its loss of approximately $7 million on the deals.  Soon after closing, all four borrowers defaulted.  Bank of America foreclosed by advertisement and then purchased all four properties at sheriffs’ sales for the full amount of the unpaid principal and interest plus foreclosure costs.  
Bank of America sued First American Title Insurance Company, the title agencies, the appraisers, and the closing agents for fraud and breach of contract to recover its $7 million in losses, claiming it was duped into issuing these loans as a result the closing agent’s fraud and failure to follow through with the closing instructions.  The Court of Appeals, bound by its prior case law, ruled that Bank of America’s claims were mostly barred by the “full credit bid” rule, as it extinguished substantially all of the debt.  After questioning whether the closing instructions were truly contracts, the Court further held that the closing agents could not be held liable for violating closing instructions because they were modified by the closing protection letters.
The Michigan Supreme Court reversed and remanded, holding that the full-credit-bid rule merely resolves the question of value for determining whether the mortgage debt is satisfied.  The rule does not cut off all remedies a mortgagee might have against third-parties.  The Court further held that the closing instructions issued from Bank of America to the title agency were enforceable contracts and could not be unilaterally modified by the title insurer’s credit protection letters.   
Disclaimer: Warner Norcross & Judd LLP represented amicus Michigan Bankers Association in support of the prevailing party, Bank of America. 

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