On April 13, 2016, in Bank of America, NA v. First American Title Ins. Co., Docket No. 149599, the Supreme Court of Michigan held that the “full credit bid” rule does not bar fraud and breach of contract claims by a mortgagee against a nonborrower third party. This case overruled, in part, New Freedom Mtg. Corp.v. Globe Mtg. Corp., 281 Mich App 63 (2008).
In cases of foreclosure, an auction will be held to sell the foreclosed property. The proceeds in these auctions will go to pay the balance of the mortgage. In these auctions, the mortgagee (typically a bank) may bid using the balance of the mortgage as credit, since the foreclosure proceeds would otherwise go to the mortgagee. In cases where the bid does not cover the remaining balance of the loan, the mortgagee may bring an action against the borrower to recover the deficiency. However, when the mortgagee makes a full credit bid (which refers to bidding the unpaid principal and interest plus foreclosure costs), it is barred from making any additional claims against the borrower.
The Supreme Court in Bank of America held, however, that the “full credit bid” rule does not extend to protect nonborrower third parties for fraud and breach of contract claims. In Bank of America, the mortgagee was the victim of fraud in the inducement by various entities who had inflated the value of properties through the use of fraudulent appraisals and straw buyers. As a result, Bank of America (the mortgagee) wrote mortgages for the properties for far greater than their actual market value. The borrowers of these loans all defaulted. Relying on the false information regarding value, Bank of America made full credit bids on the properties at auction. The bank then sold the properties for their actual fair market value, losing $7 million in the process.
During the process of foreclosing on the properties, Bank of America discovered the fraud and brought claims against the nonborrower third parties. The Oakland County Circuit Court granted summary disposition and dismissed the claims against the nonborrower third parties. The Michigan Court of Appeals affirmed the dismissal, relying heavily on the New Freedom case which barred a mortgagee from making any additional claims against any entity involved with the mortgage after a full credit bid. The Supreme Court of Michigan, in overruling New Freedom to the extent that it barred fraud and breach of contract claims against nonborrower third parties, relied in part on a California Supreme Court opinion, Alliance Mortgage v. Rothwell, 10 Cal 4th 1226, which stated that full credit bids do not necessarily bar claims where there existed a deficit between the fair market value and the full credit bid if that bid was proximately caused by fraud.
The Court reversed the ruling of the Court of Appeals and remanded the case to be tried with the instructions that the full credit bid rule does not, as a matter of law, bar claims against nonborrower third parties.
This article was written by Tyler Kemper, law clerk.
