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A Better Partnership
September 15, 2016

COA upholds receiver sale of mortgaged property

In Stock Building Supply v Crosswinds Communities, Inc. et. al., No. 325719, the Michigan Court of Appeals held that trial courts have authority under MCL 570.1123(2) to discharge mortgages pursuant to a sale by a receiver of encumbered property; the property is not required to be foreclosed upon before any sale under the statute commences; and finally, trial courts are not limited to solely considering other forms of consideration for the sale. 

This case began in July 2008 when contractor Stock Building Supply sued Hitchingham Development, Co., its guarantor Bernard Glieberman, and Crosswinds Communities, Inc., after Crosswinds and Hitchingham defaulted on their contract to pay Stock for construction services on the development of the Eton Street Station II condominium project in Birmingham, Michigan.  Stock initiated an action to foreclose on its construction liens and to notify the court of the priority of its interests in the project.  Stock also included in its complaint several other contractors, including Church & Church, Inc., as parties that might have had an interest in the condominium project.  Church provided supplies to Hutchingham for work performed on various units in the condominium project, including units 60-68, and 24, 30, 72, and 73.  As a result, Church was provided with four separate mortgages for that work in the amount of $20,000 each.

The condominium project was funded by a $13,201,800 loan from Citizens Bank, and in September 2008, the bank, as senior mortgage holder, filed a cross-complaint requesting foreclosure of all mortgages on the project, including the mortgages belonging to Church.  The bank also moved the trial court to appoint O’Keefe & Associates as a receiver to complete the construction and sale of the condominium project.  The court subsequently entered the order on October 15, 2008.

In July 2009, the receiver began selling units in the condominium project, including the units that Church had mortgages on.  For each unit, the receiver reported the offer to the trial court, and the court entered an order approving the sale that stated the property was to be conveyed “free and clear of all claims, liens and encumbrances without redemption periods, with the proceeds received therefrom to be distributed in accordance with the same priorities as held prior to consummation of such sales.”  In September 2009, Church entered into a settlement agreement with Citizens Bank, agreeing to extinguish its liens on units 60-68 in exchange for $55,000.  The last clause of the settlement agreement stated that the agreement had no effect on Church’s remaining mortgages.  The court subsequently dismissed Church from the case.

Thereafter, for each unit sold in the condominium project, including units 24, 30, 72, and 73, the receiver presented an offer to purchase to the trial court and the court entered identical orders approving each sale free and clear of all claims.   Church was provided notice of each sale and did not challenge the unit sales until three years later on September 11, 2013, when it moved the trial court to reopen the case, arguing it still maintained mortgages on the condominium units.  Church asserted that the settlement agreement between it and Citizens Bank expressly reserved its mortgages on four of the units, and that because it never foreclosed on the mortgages or voluntarily discharged them, they were in full force and effect. 

Citizens Bank opposed Church’s motion, asserting that: (1) the motion was untimely because the disputed units were sold more than three years earlier, and (2) Citizens Bank was entitled to the proceeds of the sales because it was the senior mortgage holder and had not been fully recompensed for that mortgage.  The trial court granted Church’s motion and ordered it to amend its counter and cross-complaint to add the parties now in interest to those properties.  After adding the parties in interest to the units, Church amended its complaint to include foreclosure of the units. 

On September 30, 2014, Church moved for summary disposition under MCR 2.116(C)(10) and judicial foreclosure of the units under MCL 600.3115, arguing that the trial court lacked authority to extinguish its mortgages on the disputed units.  Third party defendants, JP Morgan chase Bank, Bank of America, U.S. Bank, Hong Doan, Howard Hanson III, Catherine B. Hanson, and Michael Coleman jointly filed their own motion for summary disposition, asserting that Church’s mortgages were extinguished upon the trial court’s unambiguous orders approving the sales.  They asserted that the trial court had power to discharge the mortgages via a receiver sale pursuant to MCL 570.1123(2) and that Church’s claims should be barred by the doctrine of laches because its three-year delay in asserting any rights prejudiced them.  William and Laura Davidson, additional third party defendants, adopted the same arguments and moved for summary disposition in their favor also.  The trial court on January 9, 2015, granted the third party defendants summary disposition and denied Church’s motion.  The court held that MCL 570.1123(2), which states that “[a] receiver may petition the court for authority to sell the real property interest under foreclosure,” granted the court authority to extinguish a mortgage via a receiver sale, and that the clear language of its orders approving the receiver sales extinguished Church’s mortgages on the disputed units.  The appellate court affirmed, holding that the plain language of the statute supported the trial court’s interpretation of the statute.  The appellate court also rejected Church’s argument that the property in dispute had to be foreclosed upon before the trial court could authorize a receiver sale.  The appellate court again relied on the plain language of the statute, reiterating that the statute refers to property that is “under foreclosure” and not “foreclosed.”  Finally, the appellate court held that a trial court has discretion to determine the terms of the receiver sale, and in this case, the trial court’s orders of sale free of all liens and encumbrances were a proper exercise of authority under MCL 570.1123(2).
 

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