Significant Change Affecting Suits on Guarantees and Foreclosure by Advertisement
A recent Michigan Court of Appeals case, Greenville Lafayette, LLC v. Elgin State Bank (Case No. 308450), calls into question a lender’s right to foreclose by advertisement, while simultaneously bringing a lawsuit on a guaranty.
Under Michigan’s one-action rule (MCL 600.3204(1)(b)), a foreclosure by advertisement action is permitted only if an “action or proceeding has not been instituted, at law, to recover the debt secured by the mortgage or any part of the mortgage.” Before Greenville, this one-action rule, however, has not generally barred a lender from simultaneously proceeding against a guarantor and foreclosing on mortgaged property. In the pivotal case, United States v. Leslie, 421 F.2d 763 (6th Cir. 1970), the Sixth Circuit Court of Appeals held that the Michigan one-action rule did not bar the mortgagee from foreclosing on the mortgaged realty owned by the borrower corporation and separately commencing a civil action for a money judgment against the individual guarantors of the mortgage debt. In arriving at this conclusion, the Sixth Circuit indicated that the guaranty is an obligation separate from the mortgage note, that it is not the “debt” to which the statute refers, and that the statute was not enacted to protect guarantors of a note.
The legality of the practice of simultaneously foreclosing the mortgage by advertisement and suing the guarantors is called into question, however, by the Michigan Court of Appeals’ recent decision in Greenville, issued on April 17, 2012. In Greenville, the mortgagee bank sued on two guaranties securing a mortgage debt. While the lawsuit on the guaranties was pending, the mortgagee bank notified the mortgagor of its intent to foreclose by advertisement. In response, the mortgagor sued, arguing that the mortgagee bank’s actions were prohibited by Michigan’s one-action rule. Consistent with United States v. Leslie, the trial court disagreed, granting the defendant bank’s motion for summary judgment. The Court of Appeals reversed, distinguishing the case from United States v. Leslie on the basis that the plain language of the mortgage contract specifically provided that the “indebtedness” includes the guaranties. As a result, the mortgage contract made the guaranty a part of the debt (under the statute) and not a separate obligation. Because the mortgagee bank had already sued on the debt (by suing to recover on the guaranties) and that suit remained pending, the Court of Appeals concluded that the mortgage was barred from foreclosing by advertisement.
It is relatively standard practice for mortgage documents to define the debt secured by the mortgage as including a guaranty of the mortgage indebtedness. While that language has the advantage of expanding the obligations secured by the mortgage, such language could eliminate the option of simultaneously suing a guarantor and foreclosing by advertisement under the holding in Greenville. From the perspective of guarantors, Greenville will require a careful review of lenders’ enforcement activities in foreclosing by advertisement and bringing a simultaneous lawsuit on a guaranty.
If you have questions about this ruling and its potential implications, please contact any of our real estate attorneys.