In an opinion that will have banks reevaluating collection and foreclosure strategies, this week the Michigan Court of Appeals decided that Michigan's "one action rule" may bar foreclosure by advertisement if an action is then pending against a guarantor of the mortgage debt.
In Greenville Lafayette, LLC v. Elgin State Bank, the mortgagee bank sued on two guaranties securing a mortgage debt. While the action on the guaranties was pending, the mortgagee bank notified the mortgagor of its intent to foreclose by advertisement. The mortgagor sued, arguing that Michigan's foreclosure statute, which prohibits foreclosure by advertisement if an action or proceeding has been commenced "to recover the debt secured by the mortgage," barred the mortgagee bank from foreclosing the mortgage. The trial court disagreed, granting the defendant bank's motion for summary judgment.
The Court of Appeals reversed, pointing out that the "plain language of the mortgage contract specifically includes guaranties in the indebtedness secured by the mortgage." Since the mortgagee bank had already sued to recover on the guaranties, and that suit remained pending, the Court of Appeals concluded that foreclosure by advertisement was "invalid."
Many standard mortgage documents, by design, define the debt secured by the mortgage to include a guaranty of the mortgage indebtedness. While that language will expand the obligations secured by the mortgage, it may eliminate the option of suing a guarantor and foreclosing by advertisement at the same time.
If you have questions about this ruling and its potential implications, please contact any member of the Financial Services or Restructuring/Insolvency groups at Warner.