Michigan Court of Appeals: Lenders Cannot Foreclose by Advertisement While Filing Suit Against a Guarantor if Guaranty is Referenced in Mortgage

In a recent opinion, Greenville Lafayette, LLC v Elgin State Bank, the Michigan Court of Appeals issued a key decision regarding foreclosing by advertisement while concurrently suing guarantors.¹

In Greenville Lafayette, the lender sought to collect on two commercial guarantees, and while the action regarding the guarantees was pending, the lender began foreclosure by advertisement.  The borrower sought an injunction and a declaratory judgment against the lender, arguing that the lender was not entitled to proceed with foreclosure while an action against the guarantors was pending.  The trial court granted the lender’s motion for summary disposition and held that as a matter of law, the lender was entitled to foreclose by advertisement notwithstanding the existing legal action against the guarantors.  The borrower appealed.

The issue before the Court of Appeals was whether MCL 600.3204(1) permits foreclosure by advertisement concurrently with collection on a guaranty.

The Court of Appeals in Greenville Lafayette recognized that Michigan law allows a lender to foreclose by advertisement and simultaneously proceed against a guarantor when the guaranty is a separate obligation from the mortgage note.  (The Court of Appeals referenced US v Leslie, 421 F2d 763, 766 (CA 6, 1970)).  However, the court noted that the facts in Leslie were similar, but distinguishable.  In Leslie, the government commenced an action against guarantors of a note, and thereafter filed a separate action for foreclosure by advertisement.  The court in Leslie held that the government was permitted to maintain both actions because the guaranty was an obligation separate from the mortgage note, and the statute was intended to prevent a borrower from losing the mortgaged property and being held personally liable at the same time.

In Greenville Lafayette, the borrower argued that its case was distinguishable, given the fact the mortgage specifically defined “indebtedness” as including the guarantees, and as a result, the guarantees were not separate obligations from the mortgage note.  The Court of Appeals agreed.

The Court of Appeals stated that the mortgage contract must be interpreted and read as a whole according to its plain language.  The Court of Appeals noted that the plain language of the mortgage specifically included the guarantees in the indebtedness language of the mortgage, and therefore, was not separate from the mortgage note.

Because the facts in Greenville Lafayette were distinguishable from the current state of the law as demonstrated by Leslie, the Court of Appeals held that the action that was instituted against the guarantors constituted an action to recover the debt that was secured by the mortgage, and therefore, the foreclosure by advertisement that was concurrently instituted was invalid pursuant to the one action rule provided by MCL 600.3204(1).

Lenders must keep this ruling in mind when drafting mortgage documents.  Best practices likely dictate separating the guaranty from the mortgage debt, so that a lender may simultaneously pursue the guaranty and foreclose.

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[1] Greenville Lafayette, LLC v Elgin State Bank, per curiam Court of Appeals decision for publication, decided April 17, 2012 (Docket No. 308450).