Foreclosing Lender Left Holding The Bag, Unwittingly Screwing Itself By Forfeiting All Rights To Additional Loan Collateral When Credit-Bidding Full Amount Of Judgment In Forced Sale Of One Parcel

From a client alert from the law firm Barnes & Thornburg:

• The Sixth Circuit Court of Appeals recently affirmed the decisions of the courts below and held in an unpublished opinion that a secured lender's credit bid at a Michigan foreclosure sale extinguished all of the Chapter 13 debtor's indebtedness to the lender, thereby precluding the lender from executing on a prepetition foreclosure judgment obtained against the debtor in Wisconsin. State Bank of Florence v. Miller (In re Miller), 2013 WL 425342 (6th Cir. Feb. 5, 2013).(1)
  
  The decision in Miller reminds lenders that foreclosure sales and credit bids in connection therewith require careful planning, especially where multiple parcels of property are at issue.(2)

For more details, see Lender’s Credit Bid Of Entire Debt At Foreclosure Sale Results In Forfeiture Of Rights To Additional Collateral.

(1) Initially, the United States Bankruptcy Court for the Western District of Michigan determined that the lender's credit bid for the total amount of the debt satisfied the entire debt. In re Miller, 442 B.R. 621, 628-37 (Bankr. W.D. Mich. 2011). The bankruptcy court lifted the automatic stay only to allow the lender to, among other things, dismiss the Wisconsin action with prejudice and turnover the Wisconsin property to the debtor free and clear of any mortgages and claims.

The lender appealed to the Sixth Circuit Bankruptcy Appellate Panel, but the BAP found that the bankruptcy court below got it right. State Bank of Florence v. Miller (In re Miller), 459 B.R. 657 (B.A.P. 6th Cir. 2011).

(2) The appeals court stated:

• The rule is clear in both jurisdictions that a purchaser who overbids at a sheriff's sale based on a unilateral mistake must accept the consequences of that decision, unless the purchaser can show fraud or other improper inducement in the making the bid. Miller was not involved in the Michigan foreclosure by advertisement, and the Bank has not alleged that Miller or anyone else defrauded the Bank or induced it to overbid the price for the Michigan parcels.

The appeals court also pointed out that, under Wisconsin law, a distinction is to be made between a purchase overbid and a purchase underbid:

• Where a purchaser underbids the price so as to shock the conscience of the court, the trial court may set aside the completed execution sale in order to protect the debtor, "who has little or no control over the amount bid, and to insure that the property being sold is not given away or sold to the prejudice of the debtor." Id. at 702.
  
  But "the test used for an underbid is inapplicable to an overbid." Id. at 703. Where the purchaser bids too much for the property, he acts at his own peril and will be held to the amount of his bid."