State Bank v. Miller (In Re Miller)State Bank v. Miller (In Re Miller)
OPINION
In this appeal, the State Bank of Florence (“Bank”) appeals an order of the bankruptcy court denying its motion for relief from stay to continue a foreclosure action against Richard K. Miller (“Debt- or”), and denying its objection to confirmation of the Debtor’s chapter 13 plan. For the reasons that follow, the order of the bankruptcy court is AFFIRMED.
I. ISSUES ON APPEAL
The issues presented by this appeal are (1) whether the bankruptcy court erred when it undertook a determination of whether the Bank holds a claim against the Debtor despite the Debtor’s lack of written objection to the Bank’s proof of claim; (2) whether the bankruptcy court erred in determining that Michigan, not Wisconsin, law applies to the dispute between the Debtor and Bank; (3) whether the bankruptcy court erred when it determined that the Bank’s bid in a Michigan foreclosure extinguished the debt owed by the Debtor to the Bank and prevents the Bank from continuing a judicial foreclosure action in Wisconsin; (4) whether the bankruptcy court abused its discretion when it denied the Bank relief from stay; (5) whether the bankruptcy court erred when it determined that the Bank lacks standing to object to confirmation of the Debtor’s plan; and (6) whether the bankruptcy court deprived the Bank of its due process rights under the Fifth Amendment to the United States Constitution.
II. JURISDICTION AND STANDARD OF REVIEW
The Bankruptcy Appellate Panel of the Sixth Circuit has jurisdiction to decide this appeal. The United States District Court for the Western District of Michigan has authorized appeals to the Panel, and neither party has timely elected to have this appeal heard by the district court. 28 U.S.C. § 158(b)(6), (c)(1). A final order of the bankruptcy court may be appealed as of right pursuant to 28 U.S.C. § 158(a)(1). For purposes of appeal, an order is final if it “ends the litigation on the merits and leaves nothing for the court to do but execute the judgment.”
Midland Asphalt Corp. v. United States,
Because it neither confirmed the plan nor dismissed the case, the bankruptcy court’s order denying the Bank’s objection to confirmation of the Debtor’s plan is not final.
Davis v. Green Tree Servicing, LLC (In re Davis),
The bankruptcy court’s findings of fact are reviewed under the clearly erroneous standard.
Riverview Trenton R.R. Co. v. DSC, Ltd. (In re DSC, Ltd.),
The bankruptcy court’s legal conclusions are reviewed
de novo. Solis v. Laurelbrook Sanitarium & Sch., Inc.,
However, the bankruptcy court’s ultimate decision denying relief from stay under 11 U.S.C. § 362 is reviewed for an abuse of discretion.
Spierer v. Federated Dept. Stores, Inc. (In re Federated Dept. Stores, Inc.),
III. FACTS
A. The Loans and Mortgages
The Debtor is a lifelong resident of the area on the Michigan/Wisconsin border near Iron Mountain, Michigan. By 2006, he owned several parcels of real property in the area including one in Wisconsin (“Wisconsin Property”) and three in Michigan — the “Moon Lake Property,” the “Cabin Property,” and three contiguous parcels known as the “3-40 Acre Parcels.”
In 2006, the Debtor began suffering from a serious medical condition, became unemployed and eventually permanently disabled. As a result, he sought and obtained loans from the Bank. In order to secure the lоans, the Debtor gave the Bank mortgages covering all of his real property except the Cabin Property.
The Debtor signed his first promissory note with the Bank on October 16, 2006, in the original principal amount of $221,444.29 (“2006 Note”). The 2006 Note was secured by a mortgage dated October 16, 2006, on the Wisconsin Property. The mortgage contains a provision, referred to by the Bank as a cross-collateralization provision, which provides that it serves as
On January 20, 2007, the Debtor signed another promissory note with the Bank in the principal amount of $400,000 (“2007 Note”). The 2007 Note states that it is secured by a January 20, 2007, mortgage, the October 20, 2006, mortgage, and a January 20, 2006, mortgage. 3 The 2007 Note does not contain a cross-collateralization provision. The properties listed on the January 20, 2007, mortgage are the 3-40 Acre Parcels and the Moon Lake property.
The Debtor remained unemployed, and by 2008 he had defaulted on the loans. Through its Vice President and senior credit officer in charge of foreclosure of mortgages, Clyde Nelson (“Nelson”), the Bank began foreclosure proceedings in both Wisconsin and Michigan.
B. The Wisconsin Foreclosure Proceedings
In April 2008, the Bank, through Wisconsin counsel, commenced a judicial foreclosure action on the Wisconsin Property. 4 On May 14, 2008, the Debtor filed a petition for relief under chapter 13 in the Bankruptcy Court for the Eastern District of Wisconsin. On June 18, 2008, the Debt- or voluntarily dismissed his chapter 13 case in order to sell his Moon Lake Property. Shortly thereafter, the Moon Lake Property was sold, and the Debtor paid all net proceeds to the Bank. 5 Following that sale, the Bank believed the Debtor owed unpaid balances on the 2006 and 2007 Notes in the total amount of $413,560.27.
Following the dismissal of the Debtor’s first chapter 13 case, the Bank continued its Wisconsin judicial foreclosure action. On July 15, 2008, the Bank obtained a foreclosure judgment from the Wisconsin state court for $407,914.04, plus attorney’s fees and costs. The judgment apparently provided that the Wisconsin property would be sold unless the Debtor satisfied the judgment within 12 months. The Debtor did not appear at or defend the judicial foreclosure. He did not satisfy the
C. The Michigan Foreclosure Proceedings
The Bank retained Michigan counsel to commence a Michigan non-judicial foreclosure by advertisement on the 3-40 Acre Parcels pursuant to the January 20, 2006, and January 20, 2007, mortgages. On April 10, 2008, two notices of foreclosure sales were published scheduling the foreclosure by advertisement sales regarding the two Michigan properties. Each of the notices stated “no other legal or equitable proceedings have been instituted to recover the debt secured by this Mortgage and the power of sale in the Mortgage hаs become operative by reason of default.” (Bankr. Ct. Doc. # 151-6, at 13-14.) No sale went forward at that time.
On July 31, 2008, the Bank published a new notice of foreclosure on the January 20, 2007, mortgage on the 3-40 Acre Parcels. That notice scheduled the foreclosure sale for August 8, 2008. 7 Again, the notice contained the statement that “no other legal or equitable proceedings have been instituted to recover the debt secured by this Mortgage and the power of sale in the Mortgage has become operative by reason of default.” (Bankr. Ct. Doc. # 151-6, at 11.)
The foreclosure sale proceeded as advertised on August 8, 2008, and the sole bidder — the Bank — -credit bid $413,560.27. 8 The Bank’s credit bid represented the full amount owed by the Debtor to it. Following the sale, a Sheriffs Deed was recorded, drafted by an attorney for the Bank. The deed stated that the property was sold to the Bank for $413,560.27, and contained an affidavit of the auctioneer, the Dickinson County Sheriffs Department, attesting that the bid had been made by “the [Bank] and that said sale was in all respects open and fair; and that [the sheriff] did strike off and sell said lands and tenements to said bidder, which purchased thе said lands and tenements fairly, and in good faith, as deponent verily believes.” (Bankr. Ct. Docket # 124, Miller’s Exhibit List, Ex. 1.) No party sought to avoid the foreclosure sale following its completion, and the one year redemption period, as extended by 11 U.S.C. § 108, ran approximately 60 days postpetition.
The 2007 mortgage that was foreclosed upon at this sale includes a provision that “any surplus funds, after payment in full of the sums then due under this Mortgage and expenses of the sale, including attorney’s fees as provided by law” will be paid to the Debtor. (Bankr. Ct. Doc. # 151, Ex. U, at 6.)
On August 3, 2009, in the Western District of Michigan, the Debtor filed a voluntary petition for relief under chapter 13 of the Bankruptcy Code as well as a chapter 13 plan in which he treated the Bank as a secured creditor holding a claim secured by a mortgage on real property owned by the Debtor in Wisconsin. The Debtor subsequently amended his plan several times, each time proposing to pay the Bank nothing because he contends that the Bank has been paid in full as a result of its prepetition non-judicial foreclosure of a real property mortgage in Michigan. At that foreclosure, the Bank credit bid an amount equal to the entire amount owed by the Debtor to the Bank.
On July 21, 2010, the Bank filed a proof of claim in the Debtor’s case asserting a claim for $441,176.37. 9 The Debtor has not filed an objection to the Bank’s proof of claim.
On July 26, 2010, the Bank filed a renewed 10 motion for relief from the automatic stay “for the purpose of filing an action to undo and reverse a foreclosure by advertisement on certain Michigan real estate securing the Bank’s claim and also to proceed with a foreclosure sale of Debtor’s Wisconsin residence.” (Bankr. Ct. Doc. # 105, at 1.) In its motion, the Bank asserted that the Michigan foreclosure by advertisement sale was prohibited by Michigan law because the Wisconsin foreclosure was pending, and that the Bank should be granted relief from the stay to file suit to undo the Michigan foreclosure. 11 Additionally, the Bank argued that Wisconsin law, not Michigan law, determines whether the debt reflected in the promissory notes was extinguished by the Michigan foreclosure sale, and therefore, the Bank should be granted relief from stay to allow the Wisconsin court to decide the issues involving the Wisconsin foreclosure judgment. The Bank maintained that “[w]hen the Bank forеclosed by advertisement on the Michigan real estate, it could do so only for the indebtedness secured by the Michigan real estate. The loan secured by the Wisconsin residence ... simply was not part of the Michigan foreclosure and could not be extinguished by the Michigan foreclosure.... ” (Bankr. Ct. Doc. # 121, Bank’s Supplemental Brief in Advance of Confirmation/Stay Hearing, at 6-7.) In response to the renewed motion, the Debtor asserted that the Bank had not shown “cause” for relief from the stay because it has no remaining claim against him.
The bankruptcy court scheduled a final hearing on the renewed motion for August 18, 2010. The bankruptcy court commenced the hearing on the renewed motion as scheduled. However, during the hearing the court determined to “continue the hearing and consolidate it, for the purposes of judicial economy and to avoid the possibility of inconsistent results, with the chapter 13 plan confirmation hearing. (Scheduling Order, Aug. 23, 2010, Bankr.
First, it should be noted that the major issue to be determined is the amоunt of the debt, if any, owed by the Debtor to the Bank as of the filing date. Second, an ancillary issue is whether any debt owed by the Debtor to the Bank has been incurred or increased after the filing. Third, is the Bank entitled to relief from stay or not? Fourth, should the Debtor’s plan, as now filed or as may be timely amended, be confirmed?
(Scheduling Order, Aug. 23, 2010, Bankr. Ct. Doc. # 114, at 1.) The bankruptcy court further noted that the evidentiary hearing would continue on September 7, 2010, and directed that any amended plan be filed by not later than September 1, 2010.
On August 25, 2010, the Debtor filed a third amended plan (the “Amended Plan”). 12 The Amended Plan provides in part:
1.The entire debt owing to the [Bank] is paid in full. In particular, the [Bank] shall have no claim in this case for any money owing on either of the above referenced two notes [the 2006 and 2007 Notes]. In addition, any claim for interest, taxes or insurance re: the foreclosure of the 3-40 acre parcels of land is also precluded in accord with Bank of Three Oaks v. Lakefront Properties, Mich.App 551,444 N.W.2d 217 (1989).
2. The [Bank] shall discharge and release any and all mortgages given to secure repayment of the notes with regard to the Debtor’s property in Michigan and Wisconsin, in particular the [Wisconsin Property]....
3. In the event the [Bank] does not release [its] mortgage(s) on the Michigan and Wisconsin property, the Debtor may petition the Court to enforce a release of the mortgage(s) and ask to be awarded actual costs and attorney fees incurred for such purposes.
(Bankr. Ct. Doc. # 113, at 2-3.) The Bank timely filed an objection to confirmation of the Amended Plan. To date, no plan has been confirmed.
Beginning on August 18, and continuing on September 7, 2010, the bankruptcy court held an evidentiary hearing on the Bank’s renewed motion and objection to confirmation at which the following facts were elicited through Nelson’s testimony and numerous exhibits admitted into evidence. 13
E. Bankruptcy Court’s Findings of Fact
At the conclusion of the evidentiary hearing on September 7, 2010, the bankruptcy court took the Bank’s renewed mo
Based upon the testimony and exhibits admitted into evidence-at the hearing, the bankruptcy court’s opinion detailed the background facts, various loans and mortgages, and the circumstances of the Wisconsin and Michigan foreclosures. With respect to the circumstances of the Michigan foreclosure, Nelson testified regarding the Bank’s credit bid at the Michigan foreclosure sale. He testified first that the Bank retained Attorney Kruppstadt to handle the foreclosure of the Debtor’s property in Michigan. The foreclosure notice advertising the sale for August 8, 2008, was then prepared by Kruppstadt. Nelson and Kruppstadt discussed the amount owed by the Debtor to the Bank. Nelson advised Kruppstadt that the Debt- or owed the Bank a total of $413,560.27 on the 2006 Note and 2007 Note. Nelson, Kruppstadt, and the Bank’s Wisconsin counsel then discussed bidding that amount on behalf of the Bank at the foreclosure sale. During their discussions, Kruppstadt advised Nelson that the 2006 Note was not, in his opinion, secured by “any Michigan mortgage.”
Kruppstadt then, as the sole bidder at the sale on behalf of the Bank, credit bid $413,560.27. Nelson testified that he understood a credit bid in a Michigan foreclosure sale to be one where a creditor purchases the property at the sheriffs sale without any money actually being transferred. Rather, the creditor bids a certain amount and credits that money against the debtor’s account. Such a bid would achieve the same result as if a third party bid at the sale and paid the money. Nelson acknowledged that if a third party had bid $413,560.27 at the sale, the Bank would have cancelled both the 2006 and 2007 Notes and discharged all of the Debtor’s mortgages following the redemption period. Nelson further testified that because the Debtor did not redeem the property and the redemption period had passed, the Bank had become the owner of the 3-40 Acre Parcels.
Nelson also testified that it was his position that the 2006 Note was not secured by the 3-40 Acre Parcels sold at the Michigan foreclosure sale, and therefore, the proceeds of the sale did not go toward paying the 2006 Note in any manner. Rather, the Bank credited only the amounts owing on the 2007 Note, which was seсured by the mortgage on the 3-40 Acre Parcel. Responding to questions concerning what the Bank then did with the surplus from the Michigan foreclosure sale, Nelson stated that the Bank “did nothing with it ... it’s my belief that Attorney Kruppstadt made a mistake with the bid price, and that’s why — that’s why we’re here.... [I]t was determined that the mistake was made by Attorney Kruppstadt. It was not our intention to have any surplus at the sale. That was made clear to Mr. Kruppstadt.” (Transcript of hearing, Sept. 17, 2010, Bankr. Ct. Doc. # 130, at 63-5.)
In addition, Nelson testified that while the Bank used the proceeds of the Debt- or’s sale of his Moon Lake Property to pay down a portion of the outstanding balance on the 2007 Note, it had not waived the remaining indebtedness on that note since the sale of the Moon Lake Property.
Based on this testimony, the bankruptcy court found that the decision regarding the credit bid was made by Nelson and the Bank’s Miсhigan and Wisconsin foreclosure attorneys, that the Debtor did not take any part in the foreclosure, and that the Bank was the sole participant which exclusively controlled the foreclosure process. As such, the bankruptcy court found that any mistakes in the process were unilateral on the part of the Bank. Furthermore, despite having been advised by counsel that the 2006 Note was not secured by the January 20, 2007, mortgage, which was foreclosed upon at that sale, the Bank bid an amount at the sale equal to the full remaining amount owed to it by the Debtor. Finally, the bankruptcy court found that the Bank failed to credit the full amount of its bid to satisfy the Debtor’s loans, but rather credited the Debtor a lessor amount equal to the remaining balance on the 2007 Note only, and that the Bank did not pay any surplus amount to the Debtor.
Nicely summarizing the facts, the bankruptcy court stated:
Boiled down, the controlling facts are fairly straightforward. The Debtor borrowed a large amount of money from the Bank. The Bank was given mortgages on real property located in Wisconsin and Michigan. After the Debtor defaulted, the Bank instituted a judicial foreclosure on the Wisconsin property and a foreclosure by advertisement on the Michigan property.
The Bank, from its perspective, made a terrible unilateral mistake. It bid the entire amount of its debt in the Michigan foreclosure. The Debtor did not redeem the Michigan foreclosure deed and the Bank now owns the Michigan property. Because the value of the Michigan property is very likely less than what the Debtor owed the Bank, the Bank now wants to continue the Wisconsin foreclosure to reduce or eliminate its monetary loss.
The Debtor’s perspective is far different. He asserts all debt owed to the Bank was fully satisfied as a result of the Michigan foreclosure. The Debtor takes the position that he owns the Wisconsin property free and clear of the Bank’s prior mortgage; the Wisconsin foreclosure action should be dismissed.
In re Miller,
F. Bankruptcy Court’s Conclusions of Law
In its detailed, thorough, and ably articulated opinion, the bankruptcy court concluded the following:
1. Michigan law, not Wisconsin law as argued by the Bank, governs the determination of the dispute between the Debtor and the Bank.
2. The Bank is legally prohibited from crediting the Debtor with an amount less than its full bid at the Michigan foreclosure sale. And, even if Wisconsin law applied, the result would be the same.
3. By virtue of its earlier inconsistent position, the Bank cannot argue that the foreclosure on the January 20, 2007, mortgage has no bearing on the 2006 Note. Even if the inconsistent position were permitted, by bidding the total of the two notes at the Michigan foreclosure sale, a surplusequal to the amount of the 2006 Note was created, which must be credited to the benefit of, or otherwise paid to, the Debtor.
4. The Bank cannot invalidate the Michigan foreclosure sale because Michigan prohibits judicial attacks on foreclosures absent a showing of fraud.
Having so concluded, the bankruptcy court held that the Debtor owed the Bank nothing, and therefore, the Bank did not hold a “debt” or a “claim” against the Debtor. As a result, the bankruptcy court opined that there was no reason to continue the Wisconsin foreclosure and granted the Bank “extremely limited relief from stay solely to permit the Bank to
dismiss with prejudice
the Wisconsin foreclosure lawsuit.”
In re Miller,
The Bank’s timely appeal of the bankruptcy court’s order followed. 14
IV. DISCUSSION
A. No Objection to Bank’s Proof of Claim
The first issue the Bank asserts on appeal is a procedural one: “Whether the Bankruptcy Court erred by sua sponte undertaking to analyze and decide whether the [Bank] had a claim when the Debtor filed no objection to the [Bank’s] proof of claim.” (Appellant’s Br. at 9.) The Bank asserts that pursuant to 11 U.S.C. § 502(a) and Federal Rule of Bankruptcy Procedure 3001(f), its claim, to which the Debtor did not file a written objection pursuant to Rule 3007(a), is deemed allowed and constitutes prima facie evidence of both the validity and amount of its claim. Pursuant to § 502(b), the Bank contends that the bankruptcy court may determine the enforceability and amount of the claim only if an objection is made. Because the Debtor did not file a written objection to the Bank’s proof of claim pursuant to Rule 3007(a), the Bank asserts that the bankruptcy court should not have determined whether the Bank has a claim аgainst the Debtor. Rather, the bankruptcy court should have addressed only whether cause exists to lift the stay, and permit the Bank to continue its Wisconsin foreclosure action.
The Bank further argues that because the Debtor’s amended plan, and presumably any objection he might have made to the Bank’s claim, sought the discharge of all mortgages granted on both the Michigan and Wisconsin properties, he would have been required to file an adversary proceeding rather than an objection to the allowance of claim alone. The Bank bases this argument upon Rule 3007(b) which provides that a “party in interest shall not include a demand for relief of the kind specified in Rule 7001 in an objection to the allowance of a claim, but may include the objection in an adversary proceeding.”
The Bank has forfeited its right to assert this procedural argument because it raised the argument for the first time on appeal.
See Kontrick v. Ryan,
Following the Bank’s assertion of its objection to the Debtor’s plan, without the procedural argument the Bank now raises for the first time, the bankruptcy court clearly stated in its scheduling order what would be addressed at the consolidated evidentiary hearing on the Bank’s objection to confirmation and motion for relief from stay: “First, it should be noted that the major issue to be determined is the amount of the debt, if any, owed by the Debtor to the Bank as of the filing date.” (Scheduling Order, Aug. 23, 2010, Bankr. Ct. Doc. #114, at 1.) The consolidation of matters, such as the motion for relief from stay and objection to confirmation asserted here, was expressly authorized. Fed. R. Bankr.P. 7042 and 9014. Federal Rule of Civil Procedure 42, which applies in contested matters, Fed. R. Bankr.P. 7042 and 9014, grants broad discretion to the bankruptcy court to decide how cases are to be tried “ ‘so that the business of the court may be dispatched with expedition and economy while providing justice to the parties.’ ”
Iron-Oak Supply Corp. v. Nibco, Inc. (In re Iron-Oak Supply Corp.),
In fact, the Bank briefed that very issue in specific response to the bankruptcy court’s scheduling ordеr in the Bank’s “Supplemental Brief in Advance of Confirmation/Stay Hearing.” At no time did the Bank raise the Debtor’s lack of written objection to its proof of claim, or the need for the Debtor to initiate an adversary proceeding, as an issue. Rather, fully aware of the issues to be decided, the Bank participated in the evidentiary hearing and introduced exhibits and testimony designed to show that a debt was still owed to it by the Debtor. Only after the bankruptcy court decided that there was no longer any debt owed
to
the Bank, has
Additionally, because the Bank did not raise this issue before the bankruptcy court, it is waived.
See Dealer Computer Servs., Inc. v. Dub Herring Ford,
B. Choice of Law
The Bank asserted before the bankruptcy court that Wisconsin law must be applied to the dispute between the Bank and the Debtor because the promissory notes executed by the Debtor contain a provision that the notes would be governed by Wisconsin law where not preempted by federal law. On appeal, the Bank again asserts the language of the promissory notes as grounds for applying Wisconsin law.
Federal courts are split as to whether state or federal law supplies the choice of law rules in bankruptcy cases.
Compare Lindsay v. Beneficial Reinsurance Co. (In re Lindsay),
As with the Seventh Circuit in
Jafari,
we need not decide whether state or federal law supplies the choice of law rules in this dispute over the validity of the Bank’s foreclosure of real property located in Michigan and efforts to set aside the Michigan foreclosure due to the Bank’s unilateral error. Michigan substantive law applies either way. Under choice of law rules of the forum state — Michigan, it is clear that Michigan law governs the validity of a dispute involving real property located in Michigan.
See Timber-Lee Evangelical Free Church Christian Ctr. v. Baraga Cnty. Rd. Comm’n,
Under federal choice of law rules, in the absence of any established body of federal choice of law rules, we begin with the Restatement (Second) of Conflict of Laws.
Medical Mut. of Ohio v. deSoto,
C. “Undoing” the Michigan Foreclosure Sale
The Bank’s assertion that it should be permitted to seek to “undo” the Michigan foreclosure sale due to its overbid was thoroughly addressed by the bankruptcy court, and the Bank has not cited to this Panel any authority contrary to the bankruptcy court’s conclusion that the Bank cannot undo the sale. Contrary to the Bank’s assertions, the bankruptcy court concluded that the Bank did not violate the Michigan foreclosure statute by instituting the Wisconsin foreclosure prior to the Michigan foreclosure sale. The Michigan statute prohibits foreclosure by advertisement when another action at law has been instituted. 15 Citing to Wisconsin case law explaining that the foreclosure of ' a mortgage in Wisconsin is a proceeding in equity, the bankruptcy court concluded that the Wisconsin foreclosure proceeding was not a proceeding “at law,” but an equitable action. Additionally, because the Bank obtained its default judgment on July 15, 2008, prior to the Michigan sale on August 8, 2008, and did not move to enforce the judgment until a year later, the bankruрtcy court concluded the Bank may have “discontinued” its Wisconsin action prior to the Michigan sale. The Bank has not provided this Panel with any support for its assertion that it is entitled to “undo” the Michigan sale due to a violation of the Michigan foreclosure statute.
(1) [A] party may foreclose a mortgage by advertisement if all of the following circumstances exist:
(b) An action or proceeding has not been instituted, at law, to recover the debt secured by the mortgage ... or, if any action or proceeding has been instituted, the action or proceeding has been discontinued. ...”
The bankruptcy court also concluded that the Bank is estopped from challenging its own sale by virtue of taking control or possession of the property, and having its attorney prepare the deed and affidavit of the sheriff confirming the sale. Moreover, the Bank did not act to attack the sale for a year following the
D. Effect of Overbid
Having concluded that Michigan law governs the dispute, the bankruptcy court analyzed the effect of the Bank’s overbid, and concluded that the Bank is legally forbidden from crediting the Debt- or with an amount less than its full bid at the Michigan foreclosure sale. Citing to Michigan jurisprudence, as well as the “mainstream of American jurisprudence,” the bankruptсy court explained that if a mortgagee bids more than the value of property purchased, it, like any other purchaser at a mortgage foreclosure sale, is required to pay, or credit the mortgagor, the entire amount of the bid.
See e.g., Pulleyblank v. Cape,
E. Cross-Collateralization
The bankruptcy court also addressed and dismissed the Bank’s argument that the 2006 Note was not secured by the January 20, 2007, mortgage and that, therefore, the foreclosure on that mortgage has no bearing on the 2006 Note. The bankruptcy court rejected the argument on the ground that the Bank had previously presented sworn testimony that the loans were cross-collateralized by both the Wisconsin and Michigan property. Additionally, even if the Bank were permitted to raise the issue belatedly despite its prior inconsistent position, the bank
On appeal, the Bank asserts that regardless of any earlier testimony of Nelson, the 2006 Note is secured only by the mortgage on the Wisconsin Property, while the 2007 Note is secured by the mortgages on both the Wisconsin Property and the 3^£0 Acre Parcels, because only the mortgage on the Wisconsin Property contains cross-collateralization language. Additionally, the 2006 Note identifies only the mortgage on the Wisconsin Property as collateral. Therefore, the Bank asserts that the mortgage which was foreclosed upon in the Michigan sale (the January 20, 2007, mortgage) has “nothing to do with the [2006] Note” and therefore, the “Bank’s overbid at the Michigan foreclosure by advertisement could have no impact whatsoever on the Bank’s right to proceed with a foreclosure sale on Wisconsin real estate.” (Appellant’s Br. at 19.)
Our review of the record reveals that the notes and mortgages introduced into evidence at the hearing do in fact support the Bank’s position that the 2006 Note was not secured by the mortgage on the 3-40 Acre Parcels which was foreclosed upon in the Michigan foreclosure sale. The January 20, 2007, mortgage contains no cross-collateralization language, and the 2006 Note indeed identifies only the October 16, 2006, mortgage on the Wisconsin Property as collateral.
However, Michigan law states that any surplus proceeds from a foreclosure sale belong to the mortgagor. The Michigan Foreclosure of Mortgages by Advertisement statute states that “[i]f after any sale of real estate ... there shall remain ... any surplus money after satisfying the mortgage ... the surplus shall be paid over ... to the mortgagor.... ” M.C.L.A. § 600.3252. And, as the bankruptcy court noted, the Bank’s mortgage upon which it foreclosed provides a similar requirement. “Under the [Michigan] statutes, surplus proceeds are to be paid over to the mortgаgor, even though the mortgagee is the successful bidder. A mortgagee who bid on the property cannot escape liability to the mortgagor on the ground that he or she bid more than was necessary.” 10A Michigan Pleading and Practice § 74:46 (Thomson Reuters, 2d ed. rev. 2010). Therefore, as there is no question that the Bank overbid at the Michigan foreclosure sale, and the Bank is legally forbidden from crediting the Debtor with an amount less than its full bid at the sale, the Debtor has a right to the surplus proceeds.
F. Setoff Pursuant to 11 U.S.C. § 558
Having concluded that the Bank is legally forbidden from crediting the Debt- or with an amount less than its full bid at the sale, and that it has not done so, the bankruptcy court found that the Bank is owed no debt, holds no “debt” or “claim” against the Debtor, and lacks standing to object to the Debtor’s plan. Therefore, the bankruptcy court denied the Bank’s objection to confirmation of the Debtor’s plan. The bankruptcy court erred, however, in concluding that the Bank lacked standing to object to confirmation of the Debtor’s plan. As of the petition date, the Bank had a valid Wisconsin foreclosure judgment, and the Wisconsin mortgage upon which it was based had not been released. Additionally, as of the petition date, the redemption period in the Michigan foreclosure had not expired. Therefore, the Bank technically has standing to object to the Debtor’s amended plan.
Nevertheless, through his proposed amended chapter 13 plan, the Debt- or seeks to have the Bank’s claim ex
A setoff is defined as “[a] debtor’s right to reduce the amount of a debt by any sum the creditor owes the debtor; the counterbalancing sum owed by the creditor.” Blaok’s Law DICTIONARY 1496 (9th ed. 2009). It “allows entities that owe each other money to apply their mutual debts against each other, thereby avoiding ‘the absurdity of making A pay B when B owes A.’ ”
Citizens Bank of Md. v. Strumpf,
Section 558 provides:
The estate shall have the benefit of any defense available to the debtor as against any entity other than the estate, including statutes of limitations, statutes of frauds, usury, and other personal defenses. A waiver of such defense by the debtor after commencement of the case does not bind the estate.
This section preserves to the Debtor defenses, including setoff and recoupment, he would have had prepetition.
e.Spire Commc’ns, Inc. v. Morris Plumbing & Elec. Co. (In re e.Spire Commc’ns, Inc.),
“[A] right to setoff must be established under state law so that the debtor may then assert the setoff as a defense reserved by § 558.”
In re PSA, Inc.,
By virtue of his proposed amended plan provision, the Debtor raised setoff as a defense to the Bank’s claim. As both Michigan and Wisconsin recognize the Debtor’s right to such a setoff, both at law and in equity, we affirm the bankruptcy court’s conclusion that the Debtor owes the Bank nothing pursuant to the application of setoff under § 558.
See Wedgewood Ltd. P’ship I v. Township of Liberty, Ohio,
G. Relief from Stay and Objection to Confirmation
Under 11 U.S.C. § 362(d)(1) a party in interest may obtain relief from stay by showing “cause,” including the lack of adequate protection in property of such a party in interest. “Cause” for relief from stay is not defined by § 362(d)(1). Therefore, “courts must determine whether discretionary relief is appropriate on a case-by-case basis.”
Laguna Assocs. Ltd. P’ship v. Aetna Cas. & Sur. Co. (In re Laguna Assocs. Ltd. P’ship),
Having determined that any challenge to the Michigan foreclosure would be unsuccessful under Michigan law, and that, for all intents and purposes, the Wisconsin judgment is subject to being satisfied by the Debtоr’s assertion of setoff through his proposed plan, the bankruptcy court did not abuse its discretion in denying the Bank relief from stay to seek reversal of the Michigan foreclosure or to continue its Wisconsin foreclosure proceedings.
Additionally, the bankruptcy court properly overruled the Bank’s objection to confirmation of the Debtor’s plan as the Debt- or has a right to offset the Michigan sale credit bid of $413,560.27 against the Wisconsin judgment of $407,914.04, thereby satisfying the Wisconsin judgment. The bankruptcy court acted properly to deny the Bank the relief it sought to escape the results of its unilateral mistake.
The Bank raises a variety of inapposite arguments in an attempt to escape the results of its unilateral mistake at the Michigan foreclosure sale. The Bank asserts that the bankruptcy court’s actions violated its procedural due process rights because “(1) the Court erred by misapplying the law in denying the Bank’s motion to lift the automatic stay; (2) the Court has deprived the Bank of its due process rights by setting the amount of the Bank’s Wisconsin judgment to zero without providing the Bank process; and (3) the Bank was denied its due process right to have ‘a mеaningful hearing’ in front of a neutral arbiter.” (Appellant’s Br. at 38.)
Procedural due process requires that the Bank be afforded “ ‘notice and opportunity for hearing appropriate to the nature of the case’ ” before its property rights are terminated.
Pittman v. Cuyahoga Cnty. Dept. of Children and Family Servs.,
The goal is to minimize the risk of substantive error, to assure fairness in the decision-making process, and to assure that the individual affected has a participatory role in the process. The touchstone of procedural due process is the fundamental requirement that an individual be given the opportunity to be heard ‘in a meaningful manner.’
Howard v. Grinage,
In an attempt to show that it has been denied due process, the Bank simply rehashes why it believes the bankruptcy court’s conclusions were in error. Even assuming that the Bank has been denied a property right by the bankruptcy court’s order, the Bank has not been denied due process. The Bank was aware that the Debtor sought release of the Wisconsin mortgage in his amended chapter 13 plan. The Bank objected to the proposed plan and sought relief from stay. It was afforded numerous opportunities to present written legal arguments to the bankruptcy court, as well as a full evidentiary hearing at which it presented the testimony of its employee and numerous exhibits. The Bank also fully briefed the issues in connection with its motion to dismiss the Debtor’s case for improper venue, and submitted the same exhibits in an evidentiary hearing on that motion. Simply asserting that the bankruptcy court’s conclusions were in error does not demonstrate a denial of due process.
The Bank’s overarching due process argument appears to be that the bankruptcy court was not a “neutral arbiter.” In support of this argument, the Bank asserts that the bankruptcy court mischaracterized the facts, misstated the law, and ridiculed the Bank when it referred to the Bank’s argument as a “turnip defense”
18
and stated that the Bank played “fast and loose”
19
with the Michi
Without question, the bankruptcy court provided the Bank with more than sufficient due process. Evidence of this due process is found in the transcript of the evidentiary hearing held by the bankruptcy court, as well as in the bankruptcy court’s thorough published opinion.
V. CONCLUSION
The Bank made a unilateral mistake by bidding the entire amount owed to it by the Debtor at the Michigan foreclosure sale. It is required by Michigan law to pay, or credit, the Debtor the full amount of its bid. The Bank has conceded that the amount bid was the entire amount owed, and it has, therefore, been paid in full. Pursuant to 11 U.S.C. § 558, the Debtor is entitled to offset the Michigan sale credit bid of $413,560.27 against the Wisconsin judgment of $407,914.04, thereby satisfying the Wisconsin judgment. As such, the Debtor no longer owes the Bank any money, and the bankruptcy court did not abuse its discretion in denying the Bank relief from stay to seek to set aside the Michigan foreclosure sale and to proceed with executing on its Wisconsin foreclosure judgment. In addition, while the bankruptcy court technically erred in overruling the Bank’s objection to confirmation of the Debtor’s Amended Plan for lack of standing, such error is harmless because consideration of the merits of the objection would also result in overruling the objection as the Debtor is entitled to effect a setoff under his proposed plan. Therefore, the bankruptcy court did not err in overruling the Bank’s objection to confirmation of the Debtor’s Amended Plan.
For the foregoing reasons, the order of the bankruptcy court is AFFIRMED.
Notes
. We do not specifically address here the standards for discretionary appellate review set forth in 28 U.S.C. § 1292(b) because, while instructive, we are not constrained by them.
In re Taranto,
.While the Bank introduced a copy of the application for a line of credit at the hearing on its motion for relief from stay, it did not introduce a copy of the resulting credit agreement. Because the Debtor in fact granted a mortgage on the 3-40 Acre Parcels as collateral for the agreement, the bankruptcy court found that the line of credit, referred to as “Note 2” by the bankruptcy court, was funded, in whole or in part. The bankruptcy court further determined that Note 2 was either paid in full by the Debtor or incorporated into a later loan by the Bank because the Bank offered no evidence that any amount remained owing on Note 2, and the Bank's proof of claim makes no reference to any amount owed under a line of credit. The Bank does not dispute this finding on aрpeal.
. The January 20, 2006, mortgage listed in the 2007 Note as collateral was not introduced into evidence at the hearing on the Bank’s motion for relief from stay or any other hearing in this case.
. As of December 21, 2007, the Wisconsin Property had an appraised value of $284,000.
. The Bank did not offer any proof as to the payment made following the sale of the Moon Lake Property; however, in pre-hearing pleadings, the Bank stated that the sale reduced the Debtor's debt by approximately $315,000.
.In its earlier opinion denying the Bank's motion to dismiss for improper venue,
. The Bank published this notice approximately two weeks after the Wisconsin court issued its foreclosure judgment on the Wisconsin Property.
. As of December 21, 2007, the 3-40 Acre Parcels had an appraised value of $300,000.
. The proof of claim has not been amended; however, there appears to be no dispute that the total bid at the Michigan foreclosure of $413,560.27 is the total amount owed by the Debtor to the Bank. This was also confirmed by Nelson’s testimony.
. The Bank first filed a motion for relief from stay on October 15, 2009. On November 19, 2009, the bankruptcy court denied the Bank's motion without prejudice to its refiling “after the Bank sells the Michigan real property that it purchased at the foreclosure sale, and the court determines the factual and legal issues regarding the amount of the debt.”
.M.C.L.A. 600.3204(l)(b) provides that a foreclosure by advertisement may be had only if "[a]n action or proceeding has not been instituted, at law, to recover the debt secured by the mortgage or any part of the mortgage. ...”
. The Debtor filed a fourth amended plan on March 30, 2011. That amendment does not address any issues regarding the Bank’s claim.
. Shortly after the Debtor filed his chapter 13 petition, the Bank moved to dismiss the case for improper venue. The hearing on the Bank’s motion to dismiss for improper venue involved many of the same exhibits and witnesses involved in the later hearing on thе Bank’s motion for relief from stay and objection to confirmation. In connection with the Bank’s motion to dismiss for improper venue, the parties also briefed the issue of the debt, if any, owed by the Debtor to the Bank. In its opinion finding venue to be proper and denying the Bank’s motion to dismiss, the bankruptcy court declined to determine the validity or amount of the Bank’s claim because a final determination regarding the Bank’s claim was not necessary to the venue issue. The bankruptcy court’s opinion regarding venue is published at
. The Bank sought a stay pending appeal which was denied by the bankruptcy court. Additionally, following the bankruptcy court’s order, the Debtor sought approval of appointment of special counsel to pursue a cause of action against the Bank for fraud, breach of contract, abuse of process, violation of state and/or federal banking laws and/or regulations, and intentional infliction of emotional distress. After initially denying the Debtor's request, upon reconsideration, the bankruptсy court granted the motion, with conditions, to appoint special counsel. (See Bankr. Ct. Doc. # 177.)
. Mich. Comp. Laws Ann. § 600.3204(l)(b) provides:
. Unlike setoff under § 553, setoff under § 558 does not require that the mutual debts both be prepetition obligations.
See In re PSA, Inc.,
. As the Debtor's right to setoff is available under either Wisconsin or Michigan law, we need not determine which state's substantive law applies. See Restatement (Second) of Conflict of Laws § 229, comment, e ("Issues which do not affect any interest in the land, although they do relate to the foreclosure, are determined ... by the law which governs the debt for which the mortgage was given.”).
. The bankruptcy court referred to the Bank’s contention that
“if
this had been a mortgage on Wisconsin real estate and
if
it had foreclosed that mortgage judicially in Wisconsin,
then,
perhaps, a Wisconsin court would have saved the Bank from its unilateral mistake of overbidding by finding that the ‘fair value' of the property exceeded the amount of the debt under a particular Wisconsin statute,” as the “turnip defense.”
In re Miller,
. The bankruptcy court stated that any asserted fraud in the Michigan foreclosure procedure was on the part of the Bank which was playing “fast and loose” with the procedure by publishing notices of foreclosure in Michigan which stated, despite the Wisconsin foreclosure proceedings, that no legal or equitable proceedings had been instituted to recover the debt secured by the mortgage.