Michigan Court Reaffirms Mortgagor’s Right to Contest Validity of Foreclosure by Advertisement in Summary Proceeding Action

On January 12, 2017, the Michigan Court of Appeals issued an unpublished opinion in the matter of JPMorgan Chase Bank v Zair.  The Zair case is important as a reminder that a mortgagor may, for the first time in any proceedings, contest the validity of the foreclosure by advertisement sale in the summary proceeding.

Background

The case involves real property located in West Bloomfield.   Defendants Kays Zair and Patrice Zair (“Zair”) were the record title owners of the real property and executed a promissory note and mortgage against the property in favor of Peoples State Bank in April of 2002 (“Peoples mortgage”).  In December of 2006, the Zairs executed a promissory note and mortgage in favor of JPMorgan Chase Bank (“JPMorgan mortgage”).  JPMorgan Chase claimed that a subordination agreement was entered into between Peoples State Bank and JPMorgan Chase Bank so that the Peoples mortgage was made subordinate to the JPMorgan mortgage, placing the JPMorgan mortgage in a first/senior lien position against the property.

Peoples State Bank foreclosed on the property by advertisement in March 2010 and obtained a sheriff’s deed as it was the highest bidder.   The Zairs did not redeem the property after the foreclosure sale. Furthermore, Peoples State Bank had entered into an option agreement whereby the Zairs’ daughter could have purchased the property for $850,000 but the option agreement expired on October 31, 2010 without being completed by the parties.

In February 2011, First Michigan Bank purchased Peoples State Bank’s interest in the property.

In March 2011, JPMorgan sued First Michigan Bank and the Zairs alleging that Peoples State Bank had breached the subordination agreement.  JPMorgan and First Michigan Bank entered into a consent order setting aside the sheriff’s sale and deed, restoring the liens and establishing that JPMorgan’s mortgage had first priority. The trial court entered the order and the case was dismissed.  The Zairs appealed, arguing that their consent was necessary to the consent order because they were named parties in the proceeding.  The Court of Appeals agreed and vacated the consent order and remanded the case for further proceedings.

Following remand, JPMorgan voluntarily dismissed its lawsuit, which would lead intact the Peoples State Bank foreclosure by advertisement and subsequent transfer of the property to First Michigan Bank. The Zairs opposed the voluntary dismissal and JPMorgan argued that at the time of its lawsuit in March 2011, the Zairs no longer had any interest in the property after failing to redeem after the foreclosure by advertisement. The trial court granted the voluntary dismissal. The Court of Appeals affirmed holding that the Zairs could not establish any prejudice since they “no longer have an interest to protect in the subject property.”  The Court of Appeals held that by the time JPMorgan filed its lawsuit in March 2011, the Zairs had no property right to vindicate as the redemption period had expired and they had raised no allegations of fraud or irregularity in the foreclosure process.   The Court of Appeals concluded that “the Zairs ended the lawsuit in the same position as they began, holding over on property on which they had not legal right to reside.”

In December 2013, JPMorgan purchased First Michigan Bank’s interest in the property and obtained a quitclaim deed for the property.

In December 2014, JPMorgan began summary proceedings for possession of the property in the 48th District Court, seeking to evict the Zairs from the property.  The Zairs argued in their counterclaim for the first time in any of the proceedings that the foreclosure process was improper because the underlying Peoples mortgage had been discharged and released by Peoples State Bank as set forth in the unrecorded Discharge of Mortgage dated March 1, 2004.  The Zairs argued that the alleged foreclosure by advertisement was unlawful and, as a result, the sheriff’s deed was void ab initio because the underlying mortgage had been discharged in 2004.

The counterclaim was removed to the Oakland County Circuit Court and the summary proceeding was stayed until the counterclaim was resolved.  JPMorgan filed a motion for summary disposition arguing that the Zairs lacked standing to challenge the 2010 foreclosure because the statutory redemption period expired and the Zairs lost all right, title and interest in the property when the Zairs failed to redeem or challenge the proceeding. JPMorgan also alleged that the Zairs failed to allege that they were prejudiced by any procedural defect in the foreclosure proceeding and that res judicata bared the Zairs from now raising their claims. Finally, JPMorgan argued that the doctrine of judicial estoppel applied to prevent the Zairs from challenging the finality of the foreclosure sale when they conceded those points in the previous lawsuits.

The Zairs responded by stating that they had standing to challenge the unlawful foreclosure proceeding as they were the true owners of the property and that Peoples State Bank did not have a mortgage to foreclose. The Zairs argued that the discharge of mortgage did not have to be recorded to be valid and that they could contest the validity of the foreclosure sale for the first time as late as the time of the summary proceedings for eviction. Finally, the Zairs argued that neither res judicata nor judicial estoppel applied because in the previous lawsuits, the lawfulness of the Peoples State Bank foreclosure was not an issue and they had never asserted a position that was wholly inconsistent with their claim now.  Thus, the Zairs argued that they were entitled to summary disposition in their favor.

The Court’s Decision

The Trial Court granted summary disposition to JPMorgan on the grounds that the Zairs lacked standing because they no longer held a legally protected interest in the Property; that they failed to allege any prejudice as a result of the foreclosure proceedings; res judicata barred their claim because the Court of Appeals had stated in the prior actions that the defendants held no interest in the property; and that JPMorgan had failed to establish that judicial estoppel applied.  Accordingly, the case was dismissed and returned to the 48th District Court for continuation of the eviction proceedings.  The Zairs appealed and the Court of Appeals reversed and remanded the case for further proceedings consistent with its opinion.

The Court of Appeals first examined the standing issue and whether the Zairs could contest the validity of the foreclosure sale.  The Appellate Court stated that “the mortgagor may hold over after foreclosure by advertisement and test the validity of the sale in the summary proceeding. Otherwise, the typical mortgagor who faces an invalid foreclosure would be without remedy, being without the financial means to pursue the alternate course of filing an independent action to restrain or set aside the sale. The mortgagor may raise whatever defenses are available in a summary eviction proceeding.”  Mfrs Hanover Mtg Corp v Snell, 142 Mich App 548, 553 (1985) (internal citations omitted).  The Appellate Court stated that the Zairs remained on the property without interruption since the property was foreclosed by advertisement by Peoples State Bank in 2010.  Thus, once JPMorgan sought the Zairs eviction, the Zairs were entitled to “test the validity of the sale in the summary proceeding” and could “raise whatever defenses are available in a summary eviction proceeding.” Id.   The Appellate Court further stated that the applicable statute of limitations period in quiet title actions under MCL 600.2932(1)[1] is 15 years. According, the Appellate Court held that the Zairs had standing to bring their counterclaim against JPMorgan’s claim of superior title to the property.

The Appellate Court then examined the issue of whether the Zairs were prejudiced by any procedural defect related to the foreclosure proceeding conducted under MCL 600.3204. The Appellate Court stated that for a foreclosure by advertisement to be operative, the ‘power of sale” provision in a mortgage does not become operative unless there is a “default in a condition of the mortgage.” MCL 600.3204(1)(a).  The Appellate Court held that the trial court was required to consider the documentary evidence submitted by the parties in the light most favorable to the Zairs, as the non-moving party with respect to JPMorgan’s motion for summary disposition. The Appellate Court held that foreclosure was unlawful as a result of the Discharge of Mortgage provided by the Zairs.[2]  The Appellate Court further stated that although a foreclosure sale will only be set aside if there is a significant irregularity, the non-existence of a mortgage to foreclose upon is such a significant irregularity.   Therefore, the Appellate Court held that the Zairs had clearly alleged a prejudice as a consequence of Peoples State Bank’s failure to comply with the foreclosure by advertisement statute, i.e., the basic requirements of a mortgage existing and its default.

The Appellate Court then examined the res judicata issue and held that res judicata did not apply to bar the Zairs action. The Appellate Court stated that “[i]n general, res judicata bars a subsequent action between the same parties when the facts or evidence essential to the action is identical to that essential to a prior action.” Richards v Tibaldi, 272 Mich App 522, 530 (2006).  The Court further stated that res judicata requires that “(1) the prior action was decided on the merits, (2) both actions involve the same parties or their privies, and (3) the matter in the second case was, or could have been, resolved in the first.” Washington v Sinai Hosp of Greater Detroit, 478 Mich 412, 418 (2007) (citation omitted).  The Appellate Court found that at the time of the prior litigation, the Zairs had no knowledge of the Discharge of Mortgage despite repeatedly requesting all mortgage documents from the title company. It was not until December 2014 that Transworld Title Company provided the Zairs with a copy of the Discharge of Mortgage.  Thus, the Appellate Court held that the Zairs could not have previously challenged the lawfulness of the foreclosure as it could not have been raised or resolved in the previous breach of contract matter.

Thus, in summary, the Court of Appeals held that the Zairs had standing to challenge JPMorgan’s claim of superior title to the property in the summary eviction proceeding; that the Zairs were prejudiced by procedural defects in the foreclosure proceeding and res judicata did not apply.  Thus, the trial court’s order granting JPMorgan’s motion for summary disposition was vacated.

The Appellate Court also addressed the issue of whether the Zairs were entitled to summary disposition in their favor under MCR 2.116(I)(2) and found that the Zairs were not entitled to summary disposition.. The Appellate Court stated that under MCR 2.116(I)(2), the opposing party is properly granted summary disposition if it appears to the court that the party, rather than the moving party, is entitled to judgment. Sharper Image Corp v Dep’t of Treasury, 216 Mich App 598, 701 (1996).  The Appellate Court stated that in the instant case, the Zairs’ counterclaim rests wholly on the validity of, and circumstances surrounding the execution of, the late-discovered and unrecorded Mortgage Discharge, which are matters requiring factual proofs that were not provided to the trial court.

Finally, the Appellate Court addressed the Zairs claims that the circuit court did not have subject-matter jurisdiction to hear their counterclaim and that the case be assigned to a different judge. The Appellate Court held that circuit court has original jurisdiction over all civil claims and remedies unless exclusive jurisdiction is vested in another court.  The Appellate Court stated that the district court did not have exclusive jurisdiction over the counterclaims raised by the Zairs and the Zairs stipulated to the removal of their counterclaim to the circuit court and thus, could not now argue on the appeal that the resulting action was erroneous. See Hodge v Parks, 303 Mich App 552, 556 (2014).

As to the request to have the case assigned to a different judge, the Appellate Court stated that a remanded case is heard by the same judge unless the appearance of justice requires it and it is appropriate “if the original judge would have difficulty in putting aside previously expressed views or findings, if reassignment is advisable to preserve the appearance of justice, and if reassignment will not entail excessive waster or duplication.”  Bayati v Bayati, 264 Mich App 595, 602-603 (2004). The Appellate Court held that adverse rulings alone are not sufficient to warrant remand before a different judge.

Conclusion

The Zair case reiterates that courts will allow a mortgagor, for the first time in any proceedings, to contest the validity of the foreclosure by advertisement sale in the summary proceeding so long as it is done within the 15 year statute of limitations.

William Z. Kolobaric is an attorney with the law firm of Cummings, McClorey, Davis & Acho, P.L.C. where he focuses his practice on community association law, construction law, real estate law, creditor’s rights in bankruptcy and probate and estate planning. He has extensive experience in state and federal courts involving a wide scope of real estate, commercial litigation and creditor’s rights matters. He can be reached at (734) 261-2400 or wkolobaric@cmda-law.com. Please view The Michigan Community Association Law Blog at http://www.micondolaw.com for additional resources on Michigan Community Association Law.

[1] “Any person … who claims any right in, title to, equitable title to, interest in, or right to possession of land, may bring an action in the circuit court against any other person who claims or might claim any interest inconsistent with the interest claimed by the plaintiff …”

[2] The Appellate Court held that while the discharge was not recorded, it was incumbent upon the mortgagee, Peoples State Bank, and not the Zairs to file the discharge with the register of deeds, see MCL 565.41(1) and MCL 565.44(1), and, accordingly, Peoples State Bank could not be considered a “good faith purchaser” of the property who acquired the property without notice of the discharge. See MCL 565.29, 565.35.

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