H. Douglas Shepherd Banking Law Blog on Lawyers.com

On December 30, 2006 Governor Granholm approved Senate Bill No. 1203 thereby amending the Foreclosure by Advertisement Statute (hereinafter the "Statute"), which amendment took immediate effect on January 3, 2007.[1] Specifically, the Bill amended MCL 600.3240 and MCL 600.3241a, modifying the post-commencement abandonment procedure and in certain circumstances the redemption period following the foreclosure sale.

There are several sections of the Statute that lack clarity and are left open to interpretation. Due to the limited case law in the area of foreclosure by advertisement, judicial interpretation of the “gray areas” of the Statute is limited.  For that reason, I applaud the Legislature for identifying the Statute was in need of clarification.

Unfortunately, the issues addressed by this amendment are only the tip of the iceberg, as there are many more "gray areas" that need attention, even within the specific sections affected by this amendment. Worse yet, the amendment itself has created new issues.  In addition to the amendment, I will address those issues, along with briefly mention a few of the other “gray areas” of the Statute that I believe need clarification.

In general, the amendment was as follows:

1.  The abandonment procedure can now be completed after the foreclosure sale.

2.             The abandonment procedure now applies to residential property greater than 3 acres.

3.             The time period for the mortgagor to overcome the presumption of abandonment in the post-commencement abandonment procedure, has been slightly modified from 15 days from “receipt of” the Notice of Abandonment to 15 days from the date the Notice of Abandonment is “posted and mailed” by the mortgagee.

PRE-COMMENCEMENT AND POST-COMMENCMENT ABANDONMENT

To understand the amendment, you must first understand that if residential property is abandoned, the redemption period can be shortened by following either of two abandonment procedures. Depending upon whether the abandonment procedure is completed before or after the foreclosure is commenced (commenced = publication in the newspaper) determines whether the “pre-commencement abandonment procedure” under MCL 600.3241 is utilized or the “post-commencement abandonment procedure” under MCL 600.3241a is utilized. There are several differences between the two procedures, the major differences being how the mortgagee establishes the presumption of abandonment and how the mortgagor overcomes that presumption.[2]

The amendment did not affect the pre-commencement abandonment procedure (except that it can now be applied to residential property greater than 3 acres, which is discussed below).

CHANGES TO THE POST-COMMENCEMENT ABANDONMENT PROCEDURE

The amendment substantially changed and clarified the post-commencement abandonment procedure. Prior to the amendment it was clear that the post-commencement abandonment procedure could be completed after commencement of, but prior to, the foreclosure sale (what I call a “post-commencement/pre-sale abandonment”). What was left open to interpretation was whether the post-commencement abandonment procedure could be completed after the foreclosure sale (what I call a “post-commencement/post-sale abandonment”). In my opinion, there were persuasive arguments that before the amendment, the Statute did not contemplate a post-commencement/post-sale abandonment procedure. However, that argument is now moot because after the amendment the Statute clearly provides for a post-commencement/post-sale abandonment procedure.[3]

Assuming the mortgagor does not overcome the presumption of abandonment, the redemption period under the post-commencement abandonment procedure is 30 days from the date of the foreclosure sale, or 15 days from the date the presumption of abandonment is established, whichever is later.[4] In other words, if the presumption of abandonment is established by the mortgagee prior to or within 15 days after the foreclosure sale, the redemption period is 30 days, but if the presumption of abandonment is established more than 15 days after of the foreclosure sale, the redemption period is 15 days from the date the presumption of abandonment is established.

“POSTED AND MAILED” REPLACES “RECEIPT OF”

The amendment also changed the time period in which the mortgagor must overcome the presumption of abandonment in the post-commencement abandonment procedure. The mortgagor must now provide written notice within 15 days from the Notice of Abandonment being “posted and mailed” by the mortgagee.[5] Previously, the 15 day time period started the date the Notice of Abandonment was “received” by the mortgagor.[6]

PROPERTY OVER 3 ACRES ELIGIBLE FOR ABANDONMENT

The amendment also changed the redemption period for abandoned residential property over 3 acres.[7] Prior to the amendment, property over 3 acres was not eligible for either of the abandonment procedure. The Statute now allows the redemption period for abandoned property over 3 acres to be shortened under either of the abandonment procedures (1 month and 3 months in the pre-commencement procedure and 30 days in the post-commencement procedure).[8] The only residential property that is not eligible for the abandonment procedure is property in excess of 4 units.[9]

ISSUES/CONCERNS WITH THE AMENDMENT

While the amendment has clarified a few of the “gray areas” of the Statute, it created new issues. Some of the new issues to consider after the amendment are as follows:

• I do not know how the Register of Deeds offices will address the new post-sale abandonment procedure. Although most offices are now returning the Sheriff’s Deeds immediately after being recorded, there are still some offices that hold the Sheriff’s Deeds until the redemption period expires. There is no trigger for the return of the Sheriff’s Deed if the abandonment procedure is completed post-sale. Are the Register of Deeds offices going to rely upon the word of the grantee that the Sheriff’s Deed has become operative?  What document triggers the change of ownership for tax purposes?

• The Statute does not contain a requirement that the mortgagee record any documentation to evidence that the post-commencement abandonment procedure was completed. How does a debtor or subordinate lien holder know that the abandonment procedure was completed properly and how does a title insurance company insure the title in a post-commencement abandonment situation? I would predict, suggest, and recent underwriting updates regarding this topic have supported, that to insure the title in a post-commencement abandonment situation, the title companies will require that the mortgagee record an Affidavit of Abandonment setting forth proof that the Notice of Abandonment was mailed (attaching the certified mail receipt), that the Notice of Abandonment was posted at the property (attaching an “Affidavit of Posting Notice of Abandonment” if posted by someone other than the Affiant) and attesting that the presumption of abandonment was not overcome by the mortgagor. In a post-commencement/pre-sale situation, that Affidavit can be recorded with the Sheriff’s Deed. In a post-commencement/post-sale situation, that Affidavit would be recorded as a stand-alone document.
• Subordinate lien holders do not receive any notice of the post-sale abandonment procedure.  In my opinion, this is the most concerning, inequitable and poorly thought-out consequence of the amendment.  The Statute has never required actual notice to the mortgagor or subordinate lien holders of the foreclosure or of the “old” abandonment procedure.[10]  However, they do receive constructive notice of both the foreclosure (constructive notice = publication of the Notice of Foreclosure in the newspaper) and of the “old” pre-commencement and post-commencement/pre-sale abandonment procedures, as they existed prior to the amendment (constructive notice = recording of the Affidavit in the pre-commencement abandonment situation and the shortened redemption stated in the Sheriff’s Deed at the time of the foreclosure sale in the post-commencement/pre-sale procedure).  Under the new post-commencement/post-sale procedure, the subordinate lien holders do not receive either actual or constructive notice of the post-sale abandonment procedure.  The mortgagee is not required to mail the Notice of Abandonment to subordinate lien holders.  It is also unrealistic to expect that the subordinate lien holders would see the Notice of Abandonment posted at the property.  Although a subordinate lien holder has the same rights to redeem as the mortgagor, they are not afforded the same notice of the abandonment procedure. Consider a subordinate lien holder that plans to redeem in the 5^th  month of a 6 month redemption period, only to find that the redemption period had been shortened under the post-sale abandonment procedure, without having received any notice, actual or constructive. Although this issue and the inequitable consequences created were discussed in the legislative notes prior to the amendment being passed, it was not addressed in its final form.[11] Going forward, the only way for a subordinate lien holder to truly protect its interest is to satisfy the prior mortgage before the foreclosure sale (presuming their mortgage or lien allows them to do so as a protective advance), redeem within 30 days or purchase the property at the foreclosure sale. It is no longer advisable for a subordinate lien holder to take the common “wait and see” approach. The risk of a post-sale abandonment without any notice is too high.
• The amendment did not address whether a non-mortgagee holder of the Sheriff’s Deed (i.e. third party bidder) can conduct the post-sale abandonment procedure. The third party bidder is considered to have stepped in to the shoes of the mortgagee and therefore I do not see any logical reason why they should not have the same right to invoke the abandonment procedure. However, all references to the post-sale abandonment procedure refer to the “mortgagee,” and not the grantee or holder of the Sheriff’s Deed.[12]

OTHER “GRAY AREAS” OF THE STATUTE

Unfortunately, the Legislature did not take this opportunity to clarify other “gray areas” while they were amending the Statute.  A few of those “gray areas” (all of which are worthy of their own articles and attention by the Legislature) include the following:

• What is the definition of commercial, industrial and residential property? Currently there is no definition and thus ambiguity in the Statute. For example, is it determined by the use or the zoning of the property?

• What is the definition of abandoned property? Is a builder's spec home abandoned or is it being used for the purpose it was intended, which is to sit unoccupied until it is sold?

• Can unimproved (vacant) property be abandoned? The legislative notes for the Bill suggest that abandonment might apply to unimproved (vacant) property.[13] Again, although discussed in the legislative notes, the final amendment did not address or clarify this issue.

• The amendment did not address a discrepancy in the redemption period for abandoned residential property in which the amount of the debt is less than or equal to 66 2/3 of the original indebtedness (what I call “66 2/3 property”). If the pre-commencement abandonment procedure is followed for 66 2/3 property the redemption period is 3 months, but if the post-commencement abandonment procedure is followed the redemption period is 30 days or 15 days from the date the presumption of abandonment is established.[14] This is the only such circumstance in which there is a substantial difference in the length of the redemption period between the pre-commencement abandonment and the post-commencement abandonment procedures. There does not appear to be any logical explanation for this discrepancy.

• Under the pre-commencement abandonment procedure, the redemption period for 66 2/3 property is shortened from 1 year to 3 months, but property in excess of 3 acres is shortened from1 year to 1 month.[15] All other categories of property that share the same redemption period if not abandoned, also share the same redemption period if abandoned. Again, there does not appear to be any logical explanation for this discrepancy.