By Ford Turrell, Warner Norcross & Judd, LLP
In DAGS II, LLC, et al. v. Huntington National Bank, et al, 865 F.3d 384, 390 (6th Cir. 2017), a bank foreclosed on its junior mortgage, purchased the property at the foreclosure sale, sold the property to a third party, and then tried to collect the remaining debt (including the senior mortgage debt) by exercising its security in other collateral. The mortgagor argued in part that the bank’s senior mortgage was extinguished by the equitable merger doctrine, relying upon Board of Trustees of the General Retirement System of the City of Detroit v. Ren-Cen Indoor Tennis & Racquet Club, 145 Mich. App. 318, 322 (1985).
In the Ren-Cen case, the court held that if the holder of both a junior and senior mortgage forecloses the junior mortgage and buys the property at a foreclosure sale in the absence of an agreement to the contrary, the mortgagor’s personal liability for the debt secured by the first mortgage is extinguished. In Ren-Cen, the second mortgage secured a $500,000 note and the mortgagee purchased a property worth approximately $3,000,000. Accordingly, one aim of the equitable merger doctrine is preventing a windfall to a mortgagee who could otherwise foreclose on the junior debt, purchase the property for a depressed value at a foreclosure sale, and then attempt to collect on the senior debt.
The DAGS court rejected application of the equitable merger doctrine where the outstanding debt exceeds the value of the property purchased at the foreclosure sale. In that context, the court explained, there is no windfall to the mortgagee. In fact, applying the doctrine would result in a windfall for the mortgagor, the court noted.