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From Banking and Finance Law Daily, April 8, 2015

Michigan’s foreclosure procedures not violative of constitutional due process

By Thomas G. Wolfe, J.D.

In reviewing Michigan’s foreclosure-by-advertisement procedures, the U.S. Court of Appeals for the Sixth Circuit recently ruled that the state’s procedures do not violate the due process protections afforded by the Fifth and Fourteenth Amendments to the U.S. Constitution. In affirming the dismissal of mortgage borrowers’ constitutional claims against Fannie Mae, Mortgage Electronic Registration Systems, Inc. (MERS), BAC Home Loans Servicing, LP, and Bank of America, N.A., the Sixth Circuit determined that Michigan’s foreclosure procedures provided the mortgage borrowers with adequate notice and an opportunity to be heard “at a meaningful time and in a meaningful manner” (Garcia v. Federal National Mortgage Association, April 7, 2015, Merritt, G.).

Notably, although the federal trial court determined that Fannie Mae was not a “state actor” for constitutional purposes when it foreclosed upon the mortgage borrowers’ home, the Sixth Circuit declined to address whether either Fannie Mae and/or the intervening Federal Housing Finance Agency could be considered a “state actor” and what restrictions constitutional due process might impose on the FHFA in its direction of Fannie Mae. Instead, in affirming the lower court’s dismissal of the borrowers’ claims, the federal appellate court concluded that “[e]ven if the Due Process Clause constrains the Federal Housing Finance Agency in its direction of Fannie Mae, its compliance with Michigan’s foreclosure-by-advertisement procedures satisfied the requirements of the Due Process Clause.”

A concurring opinion by Circuit Judge Bernice B. Donald asserts that the majority should have disposed of the case on the “state actor” issue, concluding that “on the threshold issue of state action, Plaintiffs’ constitutional claims fail.”

Background. In 2003, Angel and Estela Garcia obtained a home loan from a mortgage lender, and the lender granted the mortgage to MERS as the lender’s nominee. In January 2011, MERS assigned the mortgage to BAC Home Loans Servicing, LP. In July 2011, BAC Home Loans Servicing merged into Bank of America, and Bank of America became the mortgage holder.

According to the court’s opinion, the Garcias did not dispute falling behind on their mortgage payments and defaulted on their mortgage loan. In addition to attending a workshop by a community agency to prevent foreclosure, the Garcias met with Bank of America representatives in 2011 to discuss their default. Although Bank of America offered the Garcias a loan modification, the factual record showed that the Garcias never executed or returned the necessary loan modification documents to the bank.

In October 2012, after Bank of America properly complied with Michigan’s foreclosure-by-advertisement procedures, the Garcias’ property was subject to a sheriff’s sale. Since Bank of America itself was the high bidder and purchased the property, the bank then executed a quitclaim deed to Fannie Mae. In June 2013, after the statutory redemption period under Michigan law expired for the Garcias, Fannie Mae then filed an action in Michigan state court to obtain possession of the property.

Complaint; procedural context. In October 2013, the Garcias filed an action in Michigan state court against Fannie Mae, MERS, BAC Home Loans Servicing, and Bank of America. In their complaint, the mortgage borrowers asserted four claims. Three of the claims were based on violations of Michigan law: (1) a “quiet title” claim; (2) a claim alleging an illegal/improper foreclosure and sheriff’s sale; and (3) failure to comply with Michigan’s foreclosure-by-advertisement procedures. The fourth claim alleged that Michigan’s foreclosure-by-advertisement procedures violated the Garcias’ due-process rights under the Fifth and Fourteenth Amendments.

The defendants successfully removed the case to the U.S. District Court for the Western District of Michigan. The Federal Housing Finance Agency was allowed to intervene in the matter. While the federal district court dismissed all of the mortgage borrowers’ claims, the Garcias appealed only the dismissal of their constitutional claim.

Constitutional principles. After outlining the history and nature of the right of “equitable redemption” and the right of “statutory redemption” of real property under American jurisprudence, the Sixth Circuit’s majority opinion emphasized that procedural due process “at its core requires notice and an opportunity to be heard at a meaningful time and in a meaningful manner.” Further, due process is required to “prevent, to the extent possible, an erroneous deprivation of property,” the court related.

The federal appellate court observed that it found “no Supreme Court opinion ruling on what procedures satisfy due process in this foreclosure context.” At the same time, however, the Sixth Circuit noted that “lower courts, scholars, Congress, and agencies” have recognized that agencies are subject to due-process constraints when they foreclose mortgages.

Notice. Keeping these constitutional principles in mind, the Sixth Circuit addressed the adequacy of notice under Michigan’s foreclosure procedures. The court concluded that the notification provisions of Michigan’s foreclosure statutes (Michigan Compiled Laws §600.3205 et seq.) “are not at odds with notions of due process under both common law and Supreme Court precedent.”

The Sixth Circuit determined that the notification provisions of the Michigan foreclosure statutes provided sufficient notice to the Garcias of “the default, foreclosure, and sale, as well as notice regarding how to cure the default, notice of an opportunity to seek a loan modification, and notice of how to redeem the property.” Moreover, the court underscored the fact that the Garcias did not dispute that they received the required statutory notice of the foreclosure and subsequent sheriff’s sale by both notice posted on the property and notice in the local newspaper.

Hearing. The Sixth Circuit conveyed that the mortgage borrowers’ main argument was that, “despite actual notice of default and a six-month redemption period before foreclosure … due process entitles them to a judicial hearing before foreclosure.”

While the Sixth Circuit noted that it did not find any U.S. Supreme Court cases addressing the right to a hearing in the foreclosure context, the court indicated that there is general precedent to the effect that “the postponement of a structured judicial hearing is not a denial of due process if there is adequate opportunity after the foreclosure for such a hearing.” Further, the federal appellate court observed that the Fifth and Eighth Circuits have held that “where a borrower defaults on a mortgage where the security interest is held by the government, a hearing is not required.”

Accordingly, the Sixth Circuit determined that the Michigan statutory provisions pertaining to foreclosure procedure provided “adequate process in both the period following notice of the default but prior to any sale of the property, and then further opportunity by giving the homeowner another six months to set aside the sale if there has been ‘fraud or irregularity’ in the process.” In the court’s view, this “ability to bring an action before expiration of the statutory redemption period satisfies the requirement that there be a hearing ‘at a meaningful time and in a meaningful manner’ before permanent deprivation of property that the homeowner does not yet own free and clear of debt due to the existence of a mortgage on the property.”

The case is No. 14-1687.

Attorneys: Jason D. Jenkinson for Angel and Estela Garcia. Steven R. Smith and Jena M. Valdetero (Bryan Cave, LLP) for BAC Home Loans Servicing, LP, Bank of America, N.A., Fannie Mae, and Mortgage Electronic Registration Systems, Inc. Howard N. Cayne, Asim Varma, and Michael A. Johnson (Arnold & Porter LLP) for the Federal Housing Finance Agency.

Companies: BAC Home Loans Servicing, LP; Bank of America, N.A.; Fannie Mae; Federal Housing Finance Agency; Mortgage Electronic Registration Systems, Inc.

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