Finance, Insolvency & Restructuring Alert - Michigan Court Authorizes Receiver Sale Of Real Property Free And Clear Of Redemption Rights

During the last four years, real estate lenders collecting defaulted commercial loans from financially distressed borrowers have often sought court appointment of receivers with the power to sell mortgaged real estate free and clear of liens and redemption rights in states that recognize redemption rights, including Michigan. Receiver sales free and clear of these liens and rights are often less cumbersome and expensive than judicial and, in states that permit them, nonjudicial mortgage sales and are greatly favored by purchasers who are able to obtain marketable title to the real estate on their closing and are not required to wait for redemption rights to expire.

In a substantial number of these cases, mortgagors will object to a receiver's motion to sell real estate free and clear of their redemption rights, arguing that such a sale is a disguised mortgage foreclosure sale for the sole benefit of the first mortgagee or that it is a "judicial sale" that is subject to the mortgagor's redemption rights. These arguments are sometimes made even though the objecting parties would have no realistic chance of redeeming the property from a mortgage foreclosure sale made subject to their redemption rights. In these circumstances, the objectors often have the ulterior motive of forcing a settlement of any deficiency claim that the mortgagee may have against the borrower and any guarantors by threatening to derail the receiver sale process. When faced with a stiff challenge, the mortgagor may prefer to release or reduce any deficiency claim rather than run the risk of having the receiver's sale motion denied.

One of the states that continue to recognize redemption rights of mortgagors and lienors is Michigan. In Michigan, mortgagees may foreclose by judicial action and, if they do, the redemption rights for all benefited parties and with respect to all types of property is six months following the sale. MCL 600.3140. The redemption rights of mortgagors and lienors on a nonjudicial sale will depend upon the nature of the property (e.g., commercial, farmland, etc.) and the remaining percentage of the indebtedness due to the foreclosing mortgagee. MCL 600.3240. Typically with respect to commercial property, the redemption period will be six months. Although Michigan law is clear that a circuit court has the equitable power to permit a receiver to sell real estate free and clear of liens, the caselaw is less clear with respect to redemption rights. See...