Court of Appeals Expands on Authority of Receivers in Sale of Lands Encumbered By Existing Liens

In Stock Bldg. Supply, LLC v. Crosswinds Cmtys., Inc., 317 Mich. App. 189, 199 (2016), the Court of Appeals was presented with an interesting question of whether the courts have authority to discharge a mortgage pursuant to a sale by a receiver. The Court of Appeals found that the trial court could approve a sale by the receiver “free and clear of all claims, liens and encumbrances without redemption periods, with the proceeds received therefrom to be distributed in accordance with the same priorities as held prior to consummation of such sales,” so long as proper notice was given.

In this case, Church & Church LLC (“Church”) was a contractor hired for a Birmingham housing project. Church was not paid for the work that it did, so it placed construction liens on the parcels which it worked on.  Church also received a mortgage interest of $20,000 on each of four other parcels.

Another contractor who was also not paid for work done, moved to foreclose on its construction liens.  It named Church as a party of interest due to the fact that Church had construction liens and mortgages on the property.  Citizens Bank, as senior mortgage holder, then moved to foreclose on all mortgages on the property, including the mortgages belonging to Church.  Citizens Bank also moved to appoint a receiver, which the trial court agreed to do.

After a receiver was appointed, Citizen Bank and Church agreed that Church would discharge its construction liens on the property in exchange for $55,000.  The settlement agreement between these two parties expressly stated that this settlement would have no effect on the remaining mortgages held by Church on the other units.

Thereafter, the receiver sold the remaining units “free and clear of all claims, liens and encumbrances without redemption periods, with the proceeds received therefrom to be distributed in accordance with the same priorities as held prior to consummation of such sales.”  The sale of the units was approved by the court and notice of the sale was sent to Church.  Church did not challenge the sales until about three years later, when it asserted that it maintained mortgages on those units.  Church argued that the trial court did not have the authority to discharge mortgages through anything other than foreclosure, and that a settlement involving its construction liens had no effect on the mortgages because they were different interests.

The Court of Appeals disagreed with Church and upheld the sales of the units, including the discharge of Church’s mortgages on those units.  In doing so, the Court of Appeals relied heavily on the Construction Lien Act (MCL 570.1123), which states in part:

The receiver may petition the court for authority to sell the real property interest under foreclosure for cash or on other terms as may be ordered by the court. The sale may be by private or public sale and shall be held in the manner directed by the court. A sale under this subsection shall become final upon the entry of an order of confirmation by the court, unless the court allows a period for redemption. The redemption period, if allowed, shall not exceed 4 months.

The Court of Appeals broadly read this statute to mean that the trial court has the power to approve a receiver sale that discharges junior liens.  Furthermore, the Court of Appeals held that mortgages are a type of lien that may be discharged in a sale by the reciever.

 

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