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WBK Industry News - Litigation Developments

Sixth Circuit Affirms Lender’s Interest over Residual Collateral after Foreclosure

On July 27, 2017, the U.S. Court of Appeals for the Sixth Circuit affirmed the district court’s ruling that the borrowers’ debt exceeded the value of the foreclosed property, which permitted the lender to take possession of other property securing two mortgages.

Dags II, LLC v. Huntington Nat’l Bank involved a foreclosure of a building through a sheriff’s sale.  The price obtained for the property in the sale of the property subsequent to the foreclosure was lower than the outstanding debt.  To collect on the rest of the debt, the lender invoked its security interest in the remaining collateral.  Plaintiffs brought suit to prevent the lender from collecting on the remaining collateral because, they argued, the debt was extinguished by the foreclosure.

On appeal, the Sixth Circuit decided whether the district court clearly erred in calculating (1) the amount of debt owed and (2) the amount deductible from that debt as a result of the foreclosure.  Since the Court held there was no clear error in either of the district court’s calculations.  It affirmed the district court’s decision in favor of the lender based on the finding that the foreclosure had not satisfied the debt and the lender could assert interest over the rest of the collateral.

While deciding that the district court did not clearly err in its calculations, the Sixth Circuit first clarified that the “fair sheriff’s sale value” was not different from the “true value” under Michigan law.  The Court explained, “‘true value’ at a fair sheriff’s sale, ‘fair market value’ at a sheriff’s sale, and ‘fair sheriff’s sale value’ all capture the same, correct idea: the value of the property when the mortgagee and other buyers stand on equal footing at the foreclosure sale.”  A subsidiary of the lender purchased the property at the sheriff’s sale for $1,856,250, and subsequently sold the property to a third party for $2,355,000.  The district court found the “fair sheriff’s sale value” to be the subsequent sale price of the property—$2,355,000.  Therefore, the Court found no clear error in how the district court determined the “fair sheriff’s sale value” of the property in order to calculate whether the debt had been satisfied through the foreclosure.

Secondly, the Court also clarified that the “equitable merger” doctrine does not apply when the outstanding debt exceeds the property’s value.  It instead only applies to prevent a double recovery where the value of the foreclosed property exceeds the amount of debt secured and the creditor continues to pursue payment from the borrower.

The full text of the opinion may be found here.