Patricia Paruch, Kemp Klein Law Firm
Think Before You Bid
By Karen Smyth, Lipson, Nielson, Cole, Seltzer & Garin, P.C
The "full credit bid rule" mandates that a creditor bidding the full amount of an obligation at a foreclosure sale extinguishes the obligation. As a result, the creditor has no deficiency or loss to recover through other remedies. This rule has significant applicability beyond recovery of mortgage debt.
In Traynor v. McMillen, a Michigan Court of Appeals unpublished per curiam opinion (8/5/10 Docket #289284), the Court applied the full credit bid rule in the context of a legal malpractice case. Plaintiff alleged that his attorney failed to properly secure a $350,000 loan with a first lien mortgage. Plaintiff's "full credit bid" at the foreclosure sale precluded any claim of damages in the ensuing legal malpractice lawsuit.
In Pines Inv. Co. v. Canvasser, a Michigan Court of Appeals unpublished per curiam opinion (8/19/10 Docket #291314), the Court applied the "full credit bid rule" to defeat the creditor's claim pursuant to a written guarantee. Obligations under the guarantee existed only to the extent of an outstanding "'amount of delinquent indebtedness' related to the mortgage." Plaintiff's full credit bid left no deficiency and thus, there was no indebtedness to pay under the guarantee. The mere fact that the parties contemplated post-foreclosure obligations did not make the contract ambiguous, nor did it show defendants' breach of an obligation to make the creditor whole.
A deficiency obligation is measured by the balance remaining after the sheriff sale or public auction, and not by the loss remaining after the lender disposes of the collateral. Creditors are advised to obtain and bid the appraised value of collateral to preserve other remedies and claims against the borrower or third parties.
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March 10-12, 2011
Michigan Dissolves Homeowner Construction Lien FundBy Michael F. Matheson, Loomis, Ewert, Parsley, Davis & Gotting, PC
The Michigan legislature recently eliminated the Michigan Homeowner Construction Lien Recovery Fund (Fund). Claims by residential building subcontractors and suppliers overwhelmed the Fund in recent years, resulting in its insolvency. The rise in claims was no surprise as residential building contractor defaults increased in the troubled market.
The legislature created the Fund as a safeguard against homeowners' having to pay twice for the same work. For example, when a fully paid general contractor became uncollectible or vanished with contract payments, a homeowner could be forced to reimburse unpaid subcontractors and suppliers to remove liens recorded against the real property even though the defunct contractor had already been paid once.
The Fund was a mechanism for unpaid lien claimants to receive payment once the homeowner established, with an affidavit filed in circuit court, the general contractor had been paid in full. With satisfactory proof, the court could discharge the lien against the property.
Elimination of the Fund puts unpaid subcontractors, suppliers, and other lien claimants at risk of being without an effective remedy. Even in the absence of the Fund, a lien will not attach to a residential structure once the homeowner demonstrates, by affidavit, that the general contractor was paid for the improvements in accordance with the contract.
How can you best counsel your subcontractor, supplier, and homeowner clients against payment problems emerging in the absence of the Fund? (1) Carefully scrutinize the financial strength and credit worthiness of the general contractor. (2) Don't sign lien waivers on blanket faith that the contractor will pay after being paid by the homeowner. (3) Insist upon joint checks to subcontractors and suppliers. (4) Require a construction escrow be established through a title company or similar agent.