In an important ruling for mortgage lenders and servicers, the Michigan Supreme Court clarified in Bank of America v First American Title Ins Co, Docket No. 149599 (2016) the impact of a full credit bid—when a lender bids the full amount of the outstanding debt at a foreclosure sale—on a lender’s ability to bring claims against a third party following foreclosure. In doing so, the Supreme Court expressly overruled a previous holding by the Court of Appeals in New Freedom Mtg Corp v Globe Mtg Corp, 281 Mich App 63; 761 NW2d 832 (2008).
In Bank of America, lender brought claims against title closing agents and a title insurer, seeking damages for violations of the closing instructions and closing protection letters for several properties. The trial court granted summary disposition in the defendants’ favor. In a split opinion on appeal, the Court of Appeals affirmed, holding that under New Freedom’s analysis, lender’s full credit bid for the properties during foreclosure prohibited it from seeking damages from third parties related to the closing of the properties, theorizing that the lender obtained full recovery via the full credit bid.
The Supreme Court granted leave to appeal, and asked the parties to brief several issues, including whether New Freedom’s full credit bid rule was an accurate rule of law, and whether it should be applied in Bank of America. Analyzing the full credit bid law, the Court noted that the most general purpose of the rule was to “bar a mortgagee who takes title at a nonjudicial foreclosure sale following a full credit bid from pursuing a deficiency judgment against the mortgagor.” Bank of America, Docket No. 149599 at p. 12. Thus, following a lengthy analysis of several cases relied upon by the Court of Appeals in New Freedom, the Court decided New Freedom’s holding that full credit bids bar claims against third parties was incorrect. Explaining its rationale, the Court held:
the full credit bid rule is related to the anti-deficiency statute, and its purpose is merely to resolve the question of the value of the property for purposes of determining whether the mortgage debt was satisfied. It is not concerned with the relationship between the lender and third parties and was simply not intended to cut off all remedies a mortgagee might have against nonborrower third parties. Id. at p. 19.
The Court further explained that applying the limitations of the full credit bid rule to contracts between a lender and third party would improperly “impinge on the parties’ ability to contract as they see fit and would nullify the protections for which Bank of America contracted.” Id. at p. 21. The Court saw “no justification for limiting or nullifying Bank of America’s contractual rights by application of a rule designed to determine Bank of America’s rights in relation to the mortgagors.” Id. As such, the Court held that “the full credit bid rule does not bar contract claims by a mortgagee against nonborrower third parties, and we overrule New Freedom to the extent that it conflicts with our decision today.” Id. at p. 22.
Additionally, in a matter of first impression, the Court held that closing protection letters satisfy all the requirements of a formal contractual agreement, and therefore “constitute contracts upon which a breach of contract action may lie.” Id. at p. 25.
Both holdings will have an important and immediate impact on mortgage lenders and servicers operating in Michigan, and may wield significant influence in other jurisdictions as well.