During the last four years, real estate lenders collecting defaulted commercial loans from financially distressed borrowers have often sought court appointment of receivers with the power to sell mortgaged real estate free and clear of liens and redemption rights in states that recognize redemption rights, including Michigan. Receiver sales free and clear of these liens and rights are often less cumbersome and expensive than judicial and, in states that permit them, nonjudicial mortgage sales and are greatly favored by purchasers who are able to obtain marketable title to the real estate on their closing and are not required to wait for redemption rights to expire.

In a substantial number of these cases, mortgagors will object to a receiver’s motion to sell real estate free and clear of their redemption rights, arguing that such a sale is a disguised mortgage foreclosure sale for the sole benefit of the first mortgagee or that it is a “judicial sale” that is subject to the mortgagor’s redemption rights. These arguments are sometimes made even though the objecting parties would have no realistic chance of redeeming the property from a mortgage foreclosure sale made subject to their redemption rights. In these circumstances, the objectors often have the ulterior motive of forcing a settlement of any deficiency claim that the mortgagee may have against the borrower and any guarantors by threatening to derail the receiver sale process. When faced with a stiff challenge, the mortgagor may prefer to release or reduce any deficiency claim rather than run the risk of having the receiver’s sale motion denied.

One of the states that continue to recognize redemption rights of mortgagors and lienors is Michigan. In Michigan, mortgagees may foreclose by judicial action and, if they do, the redemption rights for all benefited parties and with respect to all types of property is six months following the sale. MCL 600.3140. The redemption rights of mortgagors and lienors on a nonjudicial sale will depend upon the nature of the property (e.g., commercial, farmland, etc.) and the remaining percentage of the indebtedness due to the foreclosing mortgagee. MCL 600.3240. Typically with respect to commercial property, the redemption period will be six months. Although Michigan law is clear that a circuit court has the equitable power to permit a receiver to sell real estate free and clear of liens, the caselaw is less clear with respect to redemption rights. See generally, Patrick E. Mears and Dustin Daniels, Sales of Receivership Assets Free and Clear of Liens and Interests, 38 Mich.Real Prop.Rev. 112 (2011), which collects and discusses this caselaw. However, in an important new development, a Michigan circuit court recently authorized a receiver to sell real estate free and clear of redemption rights and wrote a detailed opinion discussing the issues involved. First Financial Bank, N.A. v. Scott T. Bosgraaf, et al., Case No 11-02488 (Ottawa Cty. Cir.Ct. July 11, 2012).

In Bosgraaf, the court-appointed receiver of real and personal property of related defendants filed a motion to sell certain real estate subject to the first mortgage held by Huntington National Bank. The underlying action had been commenced by the Bank against individuals and their affiliated business entities for the entry of money judgments based upon the defendants’ status as either principal obligors or guarantors. No claim for foreclosure had been sought by the Bank, no foreclosure proceedings had taken place and no foreclosure sale had been consummated. The receiver was appointed in order to marshal the defendants’ assets, dispose of them in a commercially reasonable manner and apply the proceeds received from that disposition for the benefit of the defendants and their creditors.

The defendants objected to the receiver’s motion to sell real estate free and clear of what they claimed was their statutory redemption rights under MCL 600.3140. By selling this property in this manner, the defendants alleged that they would be deprived of their rights to redeem this property from what they claimed was tantamount to a judicial foreclosure. In his Opinion and Order, Circuit Judge Edward R. Post rejected this argument outright, holding that, based upon the plain language of the redemption statute relied upon by the defendants, that statute’s protections only apply in the context of a mortgage foreclosure sale and not to a receiver sale:

“‘The sale’ in the redemption statute refers to the foreclosure sale—that is, the sale that occurs following the filing of a complaint for foreclosure, the completion of foreclosure, and the consummation of the foreclosure sale. . . . The right to redeem from a foreclosure at law is a legal right, is created by statute, is created by statute, and can neither be enlarged nor abridged by the courts. . . . Thus, the right of redemption is a creature of statute that arises only if there has been the filing of a complaint for foreclosure proceedings, and the consummation of the foreclosure sale.” Judge Post concluded by noting that the objectors had “failed to cite a statute, case, or court rule that indicates that a sale by a court-appointed of receiver of receivership assets triggers a right of redemption in the former mortgagor. This is not surprising, because a receiver ‘. . .succeed[s] to all of the property rights and interests . . .[the] judgment debtor. . . . All’ means ‘each and every,’ including the judgment debtor’s statutory right of redemption.” Opinion and Order, pp. 7-8. The rationale of this opinion follows closely the analysis adopted by the Utah Supreme Court in 1938 in similar circumstances, where that court upheld a sale free and clear by a receiver. Chapman v. Schiller, 95 Utah 514, 83 P.2d 249 (1938).

This recent decision by a trial court addresses a murky area of Michigan law on the extent to which a receiver can sell real estate free and clear of redemption rights. The analysis adopted by Judge Post in his opinion is logically sound and difficult to fault, especially in light of earlier Michigan appellate decisions such as H.G. Vogel Co. v. Original Cabinet Corp., 252 Mich. 129, 233 N.W. 200 (1930), where the Michigan Supreme Court declared that a receiver essentially steps into the shoes of the debtor and succeeds to its property interests. It may be that this trial court decision begins a judicial dialogue that ultimately results in a clarification of this area of the law by the Michigan appellate courts.