With chain of title broken, bank’s foreclosure fizzles

DETROIT — A bank that was assigned a mortgage interest in a couple’s property did not have standing to foreclose by advertisement because the bank that previously owned the mortgage note never recorded its assigned interest, the Michigan Court of Appeals ruled.

The panel relied on the Michigan Supreme Court’s decision in Kim v. JP Morgan Chase Bank, which held that under state law “a mortgagee cannot validly foreclose a mortgage by advertisement before the mortgage and all assignments of that mortgage are duly recorded.”

In the case of Sobh v. Bank of America, the prior bank’s failure to record its assigned interest was a break in the chain of title, the Court of Appeals said in ruling that overturned the trial court’s dismissal of plaintiffs’ effort to stop the foreclosure proceedings.

The plaintiffs, Cheryl and Sam Sobh, borrowed about $510,000 from Washington Mutual Bank, and gave Washington Mutual a mortgage interest in their Grosse Ile property.

In 2008, Chase acquired Washington Mutual’s assets, including the plaintiffs’ mortgage, via a voluntary purchase and assumption agreement. Apparently, Chase did not record its interest in the plaintiffs’ mortgage.

Chase assigned its interest in the mortgage note to Bank of America in 2010. The plaintiffs stopped making payments on their mortgage in 2009.

In early 2011, Bank of America initiated foreclosure by advertisement proceedings. The plaintiffs filed a complaint to stop the foreclosure. The defendants, including Bank of America, moved for summary disposition. The Wayne County Circuit Court granted the defendants’ motion and dismissed the plaintiffs’ claims.

On appeal, the Court of Appeals noted that the plaintiffs’ argument was “difficult to decipher,” but that it appeared to be based on whether the defendants had standing to foreclose under state law. Even though the trial court did not address or decide the standing issue, the panel said it would review the claim because the “issue is one of law for which all relevant facts are available.”

For a foreclosure by advertisement to be valid, the foreclosing party must satisfy certain prerequisites, the Court of Appeals explained.

Here, the issue was whether the defendants satisfied those requirements. That statute says: “If the party foreclosing a mortgage by advertisement is not the original mortgagee, a record chain of title shall exist prior to the date of sale … evidencing the assignment of the mortgage to the party foreclosing the mortgage.”

The chain of title is “[t]he ownership history of a piece of land …,” the court said, citing Black’s Law Dictionary.

“In Kim, as here, the plaintiffs had a Washington Mutual mortgage,” the panel said, noting that the Kim plaintiffs’ mortgage was acquired by Chase by a purchase and assumption agreement — “the exact same agreement by which Chase acquired plaintiffs’ mortgage in this case.”

In Kim, Chase never recorded its interest in the plaintiffs’ mortgage but still foreclosed by advertisement. “Similarly, in this case, there is no indication that once Chase acquired plaintiffs’ mortgage it recorded an assignment of its interest,” the court observed.

“Indeed, in both Kim and the instant case it appears that Chase did not record the mortgage interests it received from Washington Mutual,” the Court of Appeals wrote, noting that Kim and this case are factually identical “up until the point at which, in the instant case, Chase assigned its interest in the mortgage to Bank of America,” which was the foreclosing entity.

The panel also explained that, in Kim, the court said that because the Washington Mutual mortgage was acquired by Chase as part of a voluntary purchase and assumption agreement, Chase did not acquire the mortgage by operation of law. Therefore, because Chase acquired Washington Mutual’s mortgages voluntarily and not by operation of law, the mortgages were subject to the requirements of state law, the Kim court held.

Accordingly, the Kim court concluded that, because Chase never recorded its interest the plaintiffs’ mortgage before foreclosing, the foreclosure was “voidable.”

According to the Court of Appeals, the same result is warranted in this case as in Kim.

“Chase’s failure to comply with [state law] prior to assigning its interest to Bank of America accordingly resulted in a break in the chain of title because Chase never recorded its assignment from Washington Mutual before assigning it to Bank of America,” the panel said.

Therefore, the legal requirement was not satisfied because “a record chain of title” did not “exist prior to the date of sale,” the court explained.