State Bank of Florence v. Miller (In re Miller)

Citation:
2011 FED. App. 0012P (6th Cir.)
Tag(s):
Ruling:
The Panel affirmed the Bankruptcy Court’s decision stating that the Bank made a unilateral mistake by bidding the entire amount owed to it by the Debtor at a Michigan foreclosure sale and that it was required by Michigan law to pay to, or credit the Debtor with, the full amount of its bid. The Sixth Circuit Bankruptcy Appellate Panel (the “Panel”) addressed eight (8) distinct issues on appeal. First, the Panel held that the Bank had failed to raise the issue of the lack of objection to its proof of claim in the trial court and that it had thus waived this procedural argument. Moreover the Panel found that the Bank was fully aware of the issues to be decided and participated in an evidentiary hearing and introduced exhibits and testimony designed to show that a debt was still owed. Second, the Panel addressed the Bank’s assertion that Wisconsin law must be applied to the dispute between the Bank and the Debtor where the notes executed by the Debtor contained a choice of law provision that the notes would be governed by Wisconsin law. The Panel affirmed the Bankruptcy Court’s application of Michigan law holding that under the forum state’s (Michigan’s) choice of law rules and under federal choice of law rules, the local law of the situs of real property governs the effect of foreclosure upon interests in land. Third, the Panel addressed the Bank’s assertion that it should be permitted to “undo” the Michigan foreclosure sale due to its overbid. The Panel found that the Bank did not violate the Michigan statute prohibiting foreclosure by private sale when another action “at law” was pending because the Wisconsin judicial foreclosure action was not a proceeding “at law” but, rather, was an equitable action. The Panel also affirmed the Bankruptcy Court’s findings that Michigan law prohibits judicial attacks on foreclosure in the absence of a showing of fraud and that a mistaken overbid was not a basis for undoing the sale. Fourth, addressing the overbid issue, the Panel affirmed the Bankruptcy Court’s conclusion that the Bank was legally forbidden from crediting the Debtor with an amount less than its full bid at the Michigan foreclosure sale, finding that Michigan law as well as the “mainstream of American jurisprudence” holds that if a mortgagee bides more than the value of the property purchased, it is required to pay, or credit the mortgagor the entire amount of the bid. Fifth, the Panel made short work of the Bank’s argument that the loans were not cross-collateralized noting that the Bank had previously presented sworn testimony that the loans were cross-collateralized. Additionally, the Panel held that even if the Bank were permitted to take an inconsistent position the Bank’s bid at the Michigan foreclosure sale created a surplus equal to the amount of the 2006 note which had to be credited to the benefit of or paid to the Debtor. Sixth, the Panel found that the Debtor was entitled to assert a setoff right under § 558 of the Bankruptcy Code as part of his plan thus, the credit of $413,560 from the Michigan sale could be use to satisfy the $407,914 Wisconsin judgment. Seventh, the Panel found that the Bankruptcy Court’s did not abuse its discretion in denying the Bank’s stay relief request inasmuch as it agreed that any challenge to the Michigan foreclosure sale would be unsuccessful and that the Wisconsin judgment was subject to being satisfied by the Debtor’s assertion of setoff rights under the proposed plan. Finally, the Panel was not persuaded by the Bank’s argument that it did not receive requisite due process. The Panel found that procedural due process required that the Bank be afforded “notice and opportunity for hearing appropriate to the nature of the case” and that the Bank was fully aware that the Debtor sought release of the Wisconsin mortgage in his amended plan.
Procedural context:
Bank filed a motion for relief from the automatic stay to seeking to undo a Michigan foreclosure which it contended was invalid due to a pending Wisconsin judicial foreclosure action. The Bank also objected to confirmation of the Debtor’s chapter 13 plan which provided that the Bank would be paid $0.00 because the debt had been satisfied by the credit bid of the entire indebtedness in a Michigan foreclosure sale. The Bank also filed a proof of claim in the amount of $441,176 and the Debtor did not object to the Bank’s proof of claim.
Facts:
Debtor owned certain parcels of real property located in Wisconsin and Michigan. In 2006 the debtor borrowed $221,444 from Bank secured by a mortgage on real property located in Wisconsin which note and mortgage contained a cross-collateralization provision. Later in 2006 the Debtor borrowed an additional $100,000 secured by property located in Michigan. The $100,000 loan did not contain any cross-collateralization terms. Subsequently, the Debtor borrowed an addition $400,000 from the bank which stated that it was secured by the original 2006 Mortgage and contained no cross-collateral provision. In April 2008, Bank commenced a judicial foreclosure action against the Wisconsin property in Wisconsin state court and obtained a foreclosure judgment in the amount of $407,914. Also in April 2008, the Bank commenced a non-judicial foreclosure action against the Michigan property. After republishing the Michigan notice, the foreclosure sale on the Michigan property was held in August 2008 and the Bank, as the sole bidder at the sale, credit bid the sum of $413,560 representing the full amount owed by the Debtor to the Bank. In August 2009, the Debtor filed a chapter 13 petition in the United States Bankruptcy Court for the Western District of Michigan and a chapter 13 plan in which he treated the Bank as a secured creditor holding a claim secured by a mortgage on real property owned by the Debtor in Wisconsin but proposing to pay the Bank $0.00 because he contended that the Bank had been paid in full as a result of the prepetition non-judicial foreclosure of the Michigan property. The Bank filed a motion for relief from the automatic stay to seeking to undo the Michigan foreclosure which it contended was invalid due to the pending Wisconsin judicial foreclosure action. The Bank also objected to confirmation of the Debtor’s plan. The Bank also filed a proof of claim in the amount of $441,176 and the Debtor did not object to the Bank’s proof of claim. The Bankruptcy Court summarized the facts as follows: Boiled down, the controlling facts are fairly straightforward. The Debtor borrowed a large amount of money from the Bank. The Bank was given mortgages on real property located in Wisconsin and Michigan. After the Debtor defaulted, the Bank instituted a judicial foreclosure on the Wisconsin property and a foreclosure by advertisement on the Michigan property. The Bank, from its perspective, made a terrible unilateral mistake. It bid the entire amount of its debt in the Michigan foreclosure. The Debtor did not redeem the Michigan foreclosure deed and the Bank now owns the Michigan property. Because the value of the Michigan property is very likely less than what the Debtor owed the Bank, the Bank now wants to continue the Wisconsin foreclosure to reduce or eliminate its monetary loss. The Debtor’s perspective is far different. He asserts all debt owed to the Bank was fully satisfied as a result of the Michigan foreclosure. The Debtor takes the position that he owns the Wisconsin property free and clear of the Bank’s prior mortgage; the Wisconsin foreclosure action should be dismissed. The Bankruptcy Court granted the Bank limited relief from the automatic stay for the sole purpose of dismissing the Wisconsin foreclosure action with prejudice but otherwise denied the Bank’s stay relief motion. The Bankruptcy Court also denied the Bank’s objection to confirmation of the plan holding that 1. Michigan law, not Wisconsin law as argued by the Bank, governs the determination of the dispute between the Debtor and the Bank. 2. The Bank is legally prohibited from crediting the Debtor with an amount less than its full bid at the Michigan foreclosure sale. And, even if Wisconsin law applied, the result would be the same. 3. By virtue of its earlier inconsistent position, the Bank cannot argue that the foreclosure on the January 20, 2007, mortgage has no bearing on the 2006 Note. Even if the inconsistent position were permitted, by bidding the total of the two notes at the Michigan foreclosure sale, a surplus equal to the amount of the 2006 Note was created, which must be credited to the benefit of, or otherwise paid to, the Debtor. 4. The Bank cannot invalidate the Michigan foreclosure sale because Michigan prohibits judicial attacks on foreclosures absent a showing of fraud. Having so concluded, the Bankruptcy Court held that the Debtor owed the Bank nothing and that the Bank did not hold a “debt” or a “claim” against the Debtor and therefore lacked standing to object to confirmation of the Debtor’s plan.
Judge(s):
Harris, Rhodes and Shea-Stonum

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