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October 2017
Sixth Circuit Clarifies Equitable Merger Doctrine

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.

“PACE” Financing

PACEBy Robert Mattler, Green Portfolio Solutions LLC

In 2010, Michigan passed the Property Assessed Clean Energy Act (PACE) (MCL 460.931 et. seq.). PACE is a form of owner-arranged financing facilitated by local governmental units allowing a commercial or industrial property owner to fund energy saving or renewable energy projects without upfront cost and repay it through property tax assessments. Local governmental units may provide such financing directly, but to date it is owner arranged. Below are five advantages to consider.

 1. Non-Recourse: Often, commercial financing for upgrading property requires personal liability or guaranties. PACE financing is non-recourse with property assessments being assigned to the lender by the local governmental unit and serving as the repayment source. However, under the act a property owner may be personally liable for repayment of the special assessment the same as a property tax.
2. Improved Cash Flow: PACE is long-term financing where the costs of the upgrades are spread over the life of the upgrade, generally between 15 and 20 years.
3. Easier Financing or Sale of Property: An owner may find financing easier since the PACE lender looks to special assessments and not a mortgage for repayment. The PACE financing remains in place on sale and the new owner becomes responsible for the assessments.
4. Upfront Costs: No more waiting to improve energy efficiency since 100% financing may be available.
5. Advantages For Tenants: Tenants should realize savings when lower energy costs are passed through. A landlord may also be able to pass through special assessments that could not be passed through as capital improvements.

PACE can complete a capital stack for gap financing and work with other economic incentives. Don't leave money on the table without reviewing PACE financing first.

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Real Property Law Academy I
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Developments in Construction Law
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