Don't Bet the Business

After a commercial loan default, lenders sometimes debate about when a mortgage foreclosure should be pursued? When to foreclose is often a business decision, but there is a legal component too. 

Can a lender bring an action to enforce other security, such as a guaranty or an assignment of rents, which may be necessary for the appointment of a receiver, but without also foreclosing a mortgage? Stated differently, would a judicial foreclosure be legally barred if brought in a later action? 

For years some attorneys have insisted just that – if you sue to enforce other rights as a lender, you must also foreclose your mortgage or lose that right. On March 17, the Michigan Court of Appeals in Marketplace of Rochester Hills Parcel B, LLC, et al v Comerica Bank put the question to rest.

In that case an action was brought by a bank against loan guarantors. The case was contentious with claims and counter-claims back and forth. The matter eventually was settled and dismissed after the parties accepted a case evaluation.

Later, the borrower sued the bank, insisting that the bank was improperly asking the borrower’s tenants to pay rents directly to the bank. The borrower claimed the bank could no longer assert rights under the mortgage because it should have, but did not, bring those claims in the prior lawsuit.

The bank countered that while the prior settlement released the guarantors it did not release the borrower from its obligations under the mortgage. The bank also claimed the borrower had waived its res judicata argument because it agreed in the mortgage that the bank could pursue its successive remedies. The trial court agreed with the bank and dismissed the lawsuit.

On appeal, the Michigan Court of Appeals concluded that the bank was not required to pursue it foreclosure rights in the original lawsuit because the compulsory joinder rule in MCR 2.203 (A) did not apply since the prior case, which was principally based on the guaranty (as well as a receivership), concerned a different transaction or occurrence than a potential foreclosure action. 

While both cases concerned the bank’s claim that the borrower had defaulted on the loan, the appellate court concluded that this single fact did not mean that the same facts were essential to maintain both actions. Put simply, a claim against a guarantor and a claim to foreclose a mortgage require a different set of proofs. Accordingly, the appellate court held that neither MCR 2.203(A) nor res judicata required a lender to foreclosure its mortgage as part of an action to pursue other collateral, such enforcement of a guaranty.  

For borrowers and lenders, the court’s ruling provides some clarity of the law and possible direction when mapping strategy when a loan default occurs or is threatened. Indeed, sometimes just knowing your options can make all the difference in the world.