Lender’s Credit Bid Of Entire Debt At Foreclosure Sale Results In Forfeiture Of Rights To Additional Collateral

The Sixth Circuit Court of Appeals recently affirmed the decisions of the courts below and held in an unpublished opinion that a secured lender's credit bid at a Michigan foreclosure sale extinguished all of the Chapter 13 debtor's indebtedness to the lender, thereby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). 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.

In Miller, the lender extended a loan to the debtor pursuant to a promissory note governed by Wisconsin law. As security for the loan, the debtor granted the lender a mortgage on certain real property in Wisconsin. The Michigan mortgage provided that it secured repayment under the promissory note, as well as any other obligations, debts and liabilities of the debtor to the lender. The lender also extended a second loan pursuant to a promissory note governed by Wisconsin law. The second promissory note was secured by the debtor's residence, as well as three parcels of land, all of which were located in Michigan.

After the debtor defaulted under the notes and mortgages by failing to make payments, the lender commenced a judicial foreclosure proceeding in Wisconsin state court, and shortly thereafter commenced a foreclosure by advertisement proceeding with respect to the Michigan property. The debtor, who at the time was a resident of Wisconsin, did not defend the Wisconsin foreclosure proceeding, nor did he contest the foreclosure by advertisement in Michigan. Approximately one month after the foreclosures were commenced, the debtor filed for relief under Chapter 13 in Wisconsin. However, the debtor voluntarily dismissed his bankruptcy case, sold his Michigan residence, and paid the proceeds to the lender. During that period, the lender obtained a foreclosure judgment in Wisconsin, and also recommenced its foreclosure by advertisement in Michigan with respect to the three parcels of land. At the sheriff's sale in Michigan, the lender credit bid the entire amount of the debt owed by the debtor to purchase the property.

Five days before the redemption period of one year was scheduled to expire with respect to the remaining Michigan property and before the Wisconsin foreclosure sale could occur...