MARY BETH KELLY, J.
This case involves the issue of the priority of competing liens between a court-appointed receiver and the holder of a first-recorded mortgage on real property located in DeWitt, Michigan. The receiver, Thomas Woods, seeks to recover receivership expenses before the holder of the first-recorded mortgage, Dart Bank, satisfies its mortgage interest. In affirming the circuit court's order placing a first-priority lien on the property in the amount of the receiver's expenses, the Court of Appeals relied, in part, on this Court's decisions in Bailey v. Bailey
Before Michigan became a state, English courts developed the general rule that a receiver is entitled to be paid for his or her services on a first-priority basis. In 1846, Michigan revised and consolidated its statutes. Included within the revised statutes was 1846 RS, ch 130, § 10, which provided that the purchaser of a sheriff's deed following a foreclosure by advertisement holds the same title that the mortgagor had at the time the mortgage was executed and that only prior subsisting liens affected the purchaser's interest. In all material respects, the statute has remained unchanged since 1846 and currently exists as MCL 600.3236. Following adoption of the pertinent foreclosure-by-advertisement statute in 1846, this Court applied the English common-law rule in situations not involving foreclosure by advertisement. So far as we can discern, the common-law rule has never been applied in Michigan to divest the purchaser of a sheriff's deed of the purchaser's statutory right of priority.
This case requires us to determine whether this general common-law rule permitting
We decline to extend the common-law rule to the situation before us. Rather, we hold that MCL 600.3236 controls and, by its plain language, requires that any liens preexisting the mortgage that is the subject of the foreclosure remain in the same order of priority as they existed at the time of the mortgage's execution. Assuming a receiver's lien postdates the mortgage subject to foreclosure under MCL 600.3236, as the receiver's lien does here, it is clear that the receiver's interest under the lien will be subordinated to the interests of the purchaser and any prior lienholders. Further, it is clear from our caselaw that a mortgagee may waive its right of first-priority satisfaction of its lien. Thus, we also hold that a mortgagee that forecloses consistently with MCL 600.3236 may waive its statutory right of priority and, if that occurs, the receiver may be entitled to compensation before the mortgagee, but only if the mortgagee's waiver is explicitly and unequivocally given.
Because the Court of Appeals in this case failed to recognize the applicability of MCL 600.3236 and erroneously extended the holdings in Bailey and Fisk to support its conclusion that even in the absence of affirmative consent, Dart could nevertheless be required to pay the receiver's costs and fees, we reverse the judgment of the Court of Appeals and remand this case to the circuit court for entry of an order releasing the escrow funds in favor of Dart.
The real property involved in this action was previously owned by Rudaford Sterrett, Jr., and secured by a single mortgage held by Dart, which was duly recorded on August 8, 2003. Upon Sterrett's death in April 2007, the real property was bequeathed to Lori Jean Kosmalski. At that time, the property was valued at $350,000, and the mortgage balance was less than $170,000.
In September 2007, Nastassia Price and Erin Duffy-Price instituted an action against Kosmalski to collect a judgment in an unrelated lawsuit. When they learned that Kosmalski had inherited the real property from Sterret, they moved for the appointment of a receiver to seize and sell the real property in order to satisfy all or part of the judgment against Kosmalski. Dart was not provided notice of Price and Duffy-Price's motion for receivership.
In April 2008, the circuit court granted Price and Duffy-Price's request for receivership and appointed Thomas Woods as receiver.
Approximately one month before the receiver's appointment, Kosmalski had defaulted on the mortgage, and Dart initiated foreclosure proceedings by advertisement in mid-April 2008.
In October 2009, the receiver filed a motion seeking to hold Dart liable for payment of the costs and fees incurred in the administration of the receivership. The receiver claimed $41,874.57 in total expenses, which reflected the costs incurred in repairing, maintaining, and attempting to sell the property, fees for his professional services, and costs for attorney fees incurred as a result of the receiver's motions to enforce the receivership order. At the motion hearing, the receiver argued that because Dart had acquiesced in the receivership and the receiver's expenditures, he was entitled to reimbursement of his costs and fees from Dart. Dart responded that it could not be charged with the receiver's costs and fees when it had not consented to those surcharges.
The circuit court accepted the receiver's argument and entered an order on November 5, 2009, approving the receiver's final report and granting the receiver a lien on the net proceeds from the sale of the property in the amount of $41,874.57, which was given priority over Dart's preexisting mortgage. The lien order further required that the receiver relinquish possession of the property to Dart and discharged the receiver and canceled his bond.
Dart appealed as of right the circuit court's order granting the receiver a first-priority lien over the property, arguing that a receiver is not entitled to any greater rights than the original owner would have had and, therefore, the receiver took
We granted leave to appeal to consider, in relevant part, "whether the statutory right of first priority belonging to the holder of the recorded mortgage, MCL 600.3236, overrides the common-law rule that a receiver's costs and fees are entitled to first priority" and "whether a mortgagee must affirmatively consent to the appointment of a receiver to be required to pay the receiver's costs and fees...."
Whether the circuit court had the authority to order the holder of a first-recorded mortgage to pay for the expenses of a receivership to which it did not explicitly consent is a question of law that this Court reviews de novo.
Dart asserts that it has a statutory right to first priority under MCL 600.3236 and that its mortgage interest cannot be made subordinate to subsequently incurred receivership expenses. The receiver, on the other hand, argues that a common-law rule grants a receiver's expenses first priority, despite the existence of any preexisting liens on the property. Resolution of this dispute first requires an understanding of the common-law principles that have developed on the issue of the priority of payment of receivers' liens.
It is well established that our common law is descended from England,
We noted this common-law rule in In re Dissolution of Henry Smith Floral Co.
One year later in Detroit Trust Co. v. Detroit City Service Co.,
Henry Smith, Detroit Trust Co., and Rite-Way Tool, therefore, applied the common-law rule that the receiver invokes here: that a receiver's unpaid fees and compensation, which are in the nature of "administrative costs," may be paid from the property or funds held in receivership before those funds are made available to prior creditors. None of those cases, however, involved foreclosure by advertisement. And while the pertinence of the common-law rule seems apparent, the Court of Appeals erred by failing to recognize that a provision of the foreclosure-by-advertisement statute, MCL 600.3236, is directly applicable to this matter and that no Michigan case has applied the common-law rule in this context.
Notwithstanding the receiver's contrary assertion, the plain language of MCL 600.3236 creates a statutory right of priority.
MCL 600.3236 describes the legal effect of a sheriff's deed obtained at a foreclosure sale upon the expiration of the applicable redemption period.
The first clause under this provision describes the legal effect and operation of a deed upon the mortgagor's failure to exercise its statutory right of redemption following foreclosure. The first clause of MCL 600.3236 makes plain that if property is not redeemed within the applicable statutory window, then the deed becomes "operative," vesting in the grantee "all the right, title, and interest which the mortgagor had at the time of the execution of the mortgage...." This clause refers to those rights that existed at the time that the mortgage subject to foreclosure was executed. The grantee thus succeeds to the same rights — no greater and no fewer — as those held by the mortgagor when the mortgage was executed. By logical implication, this first clause renders absolute the mortgagee's title to the property it purchased in a foreclosure proceeding, extinguishing any "right, title, and interest" created subsequent to the creation of the mortgage being foreclosed upon, which includes liens created after the execution of the mortgage.
The last clause of MCL 600.3236, which is central to the legal question in this case, makes plain, however, that any interests preexisting the execution of the subject mortgage will not be prejudiced by a foreclosure sale. Specifically, the pertinent language of this clause provides that "no person having any valid subsisting lien upon the mortgaged premises... created before the lien of such mortgage took effect, shall be prejudiced by any such sale, nor shall his rights or
When read as a whole, then, MCL 600.3236 requires that any interests in property created after the mortgage subject to foreclosure was executed will be extinguished upon expiration of the redemption period after a sheriff's sale; however, any interests preexisting the mortgage's execution will not be affected by "any such sale," and the grantee under a sheriff's deed will take the property subject to those preexisting interests. Accordingly, we hold that MCL 600.3236, by its plain language, requires that after a sheriff's sale and expiration of the redemption period, any lien preexisting the mortgage that was the subject of the foreclosure sale remains in the same order of priority as at the time of that mortgage's execution.
Because Dart foreclosed on the property by advertisement, MCL 600.3236 applies, and its application makes clear that Dart's first-recorded mortgage has first priority, given that no other liens existed when the mortgage was executed. By operation of MCL 600.3236, any liens created after the execution of Dart's mortgage in 2003, which includes the receiver's lien created by order of the circuit court in 2009, could not prejudice Dart's priority interest.
Relying on Bailey
Application of the statute to the facts of this case mandates that Dart, as the holder of a first-recorded mortgage, be entitled to satisfaction of its mortgage interest from the proceeds of the foreclosure sale on a first-priority basis. Dart's first-recorded mortgage took effect on August 8, 2003. Dart validly foreclosed on its mortgage, the property was not redeemed within the extended redemption period, and Dart became the legal and equitable titleholder of the real property under the sheriff's deed on August 26, 2009. The receivership lien was subsequently created on November 5, 2009, by order of the circuit court. Because a purchaser of a sheriff's deed takes
Further, although the receiver's lien in this case could not prejudice Dart's priority interest, we acknowledge the need for guidance with regard to priority and payment of receivers' liens. Circuit courts appointing receivers should be cognizant of MCR 2.622(D), which permits a circuit court, "on application of the receiver," to set the compensation of the receiver, and to require the party requesting the receivership to bear the costs associated with it. But regardless of whether a circuit court chooses to exercise its discretion under the court rule, the circuit court, at the time it appoints a receiver, should nevertheless make provision for the payment of receivership expenses and should be aware of the order of priority of any competing interests and other relevant collateral issues that could affect a receiver's compensation. This is particularly important in the context of foreclosure by advertisement, when, as in the present case, a receiver's lien may be extinguished by operation of MCL 600.3236. Not only did the circuit court in the instant case fail to consider the effect of MCL 600.3236 on the receiver's lien, it also failed to consider the court rule. By application of MCR 2.622(D), the receiver might nonetheless have received compensation for the expenses incurred in his administration of the receivership despite the order of priorities, potentially avoiding a situation like that here. That is, had the circuit court exercised its discretion under the court rule, Price and Duffy-Price, as the parties requesting the receivership, might have been liable for payment of the receivership expenses out of their own funds and the receiver might not have been deprived of any compensation.
Because MCL 600.3236 operates to preserve the order of priority following expiration of the applicable redemption period, it necessarily follows that the order of priority for any liens preexisting the mortgage that is the subject of the foreclosure will remain as it did at the time of the mortgage's execution. Because this statutory provision cannot be reconciled with the common-law rule and because the common-law rule has never been applied to a foreclosure by advertisement under MCL 600.3236, we decline to extend the common-law rule in this case and, consequently, the statute controls. We therefore reverse the judgment of the Court of Appeals imposing on Dart the costs of the receivership and remand this case to the
YOUNG, C.J., and MARKMAN and ZAHRA, JJ., concurred with MARY BETH KELLY, J.
CAVANAGH, J. (dissenting).
I respectfully dissent from the majority's conclusion that a mortgagee only waives its rights to superior priority under MCL 600.3236 if the mortgagee expressly consents to a receivership or the reordering of priorities. Rather, I would hold that a mortgagee may also waive its superior priority rights if the mortgagee acquiesces to and benefits from the receivership.
In support of its conclusion that a receiver may only obtain superior priority in relation to a mortgagee "when the mortgagee has unequivocally waived this statutory right of first priority [under MCL 600.3236]," the majority cites Bailey v. Bailey, 262 Mich. 215, 247 N.W. 160 (1933), and Fisk v. Fisk, 333 Mich. 513, 53 N.W.2d 356 (1952). Ante at 515. However, in my view, Bailey and Fisk provide that a waiver may also occur by way of acquiescence.
In Bailey, a receiver was appointed for a hotel, which was subject to a mortgage. All parties involved sought to have the receiver operate the hotel during the summer of 1931, but the receiver refused unless the mortgagees consented to his borrowing money and obtaining a first lien with priority over the mortgagees. The mortgagees agreed. Subsequently, the real estate market collapsed, but the mortgagees did not seek to foreclose and instead cooperated with the receiver in his efforts to sell the property. No acceptable offers were received, however.
In determining whether the receiver held priority over the mortgagees for his costs, Bailey initially focused on the fact that the mortgagees consented to the receiver's superior priority:
However, this Court also stated that even if the mortgagees had not given prior, specific consent to the receiver's priority, their conduct would nevertheless have precluded them from seeking to obtain priority over the receiver because "[t]he mortgagees dealt with the receiver promptly and in an effort to save loss to themselves by keeping the hotel a going concern, and receivership was used in an attempt to effect sale of the property." Id. Accordingly, because the mortgagees "availed
Also, in Fisk this Court considered a situation in which the parties had agreed to the appointment of receivers over the corporation at issue while the parties settled a dispute regarding who owned the corporation. This Court held that, when the primary purpose of a receivership is to preserve and protect the property involved in a controversy, "it logically follows that he who ultimately establishes his right to the property thus held is the one who benefits from the property having been protected and preserved." Fisk, 333 Mich. at 516, 53 N.W.2d 356, citing Bailey, 262 Mich. 215, 247 N.W. 160. Fisk also noted that both parties had agreed to the appointment of the receivers and, "by doing so, appellant in effect waived any complaint he might otherwise make regarding the propriety or legality of the appointment and its effect upon the question of who was to bear the receivership expenses." Fisk, 333 Mich. at 516, 53 N.W.2d 356 (citation omitted).
In my view, Bailey and Fisk indicate that although consent by the mortgagee is one method by which a receiver may obtain superior priority, acquiescence by a mortgagee is also sufficient to grant a receiver's expenses priority over a preexisting mortgage. Bailey and Fisk supported this conclusion by reasoning that the receivership is intended to protect and preserve the property held by the receiver and because a mortgagee or an eventual owner of the receivership property benefits from the receiver's expenditures, it is proper to impose those expenses on the party that benefits. See Bailey, 262 Mich. at 219-220, 247 N.W. 160 (stating that because the mortgagees "availed themselves of any possible advantage of the receivership, they will not be heard to say that the property in the hands of the receiver is not chargeable with the receiver's expense and administration costs, even though it may result practically in a corresponding loss to them"). Thus, in my view, the majority incorrectly states that acquiescence by a mortgagee with knowledge of the receivership is insufficient to provide the receiver superior priority. See ante at 514 (claiming that this interpretation would require an "extension of the rule articulated in Bailey and Fisk"), and ante at 513 (claiming that this interpretation is "wholly unsupported by our jurisprudence"). Rather, Bailey specifically supports this conclusion.
Applying Bailey and Fisk to this case, I believe that, at a minimum, Dart Bank acquiesced to the receivership. Specifically, Dart never objected to the receiver's actions, despite its knowledge of the receiver's efforts. This Court has long recognized the inherent authority of a court of equity to appoint a receiver under appropriate circumstances, see McDonald, 351 Mich. at 575-576, 88 N.W.2d 398, and Dart does not argue that the receivership in this case was improper. Moreover, the Court of Appeals has held that entities that are not parties to a receivership order but are nevertheless affected by the receivership order need not be served with
Furthermore, although Dart was not a party to the receivership order entered on April 10, 2008, and Dart initiated a foreclosure by advertisement on April 15, 2008 — before it was aware of the receivership — Dart admitted that it had received actual notice of the receivership only three days later, on April 18, 2008. Moreover, the majority's notation that "`[m]ere knowing silence generally cannot constitute waiver,'" ante at 514 n. 45, quoting Quality Prods. & Concepts Co. v. Nagel Precision Inc., 469 Mich. 362, 365, 666 N.W.2d 251 (2003), is irrelevant because Dart did not merely stand mute when it learned of the receivership. Rather, in a letter acknowledging the receivership, Dart's attorney stated that it "would be willing to work with [the receiver] ... in terms of arranging for a sale of the property so that this mortgage can be paid." Also, Dart's subsequent interaction with the receiver during the year between its acknowledgement of the receivership and the sheriff's sale substantiates Dart's willingness to work with the receiver. Additionally, during the October 14, 2009, hearing in the trial court, Dart's attorney admitted that Dart "acquiesced to the fact that there was a receiver out there...." The trial court, the receiver, and Dart agreed that the property was in terrible condition and, although the expenses of repairing it were high, they were necessary in this case. Furthermore, the receiver provided reports documenting his expenditures related to repairing the property in hopes of returning it to a saleable condition, and Dart never acted to formally challenge any specific expenditure by the receiver related to the property's repair. Thus, in my view, Dart's conduct was sufficient to establish that Dart had knowledge of and acquiesced to the receivership. Accordingly, in my view, Dart clearly engaged in "affirmative conduct" that was sufficient to show that Dart "waived a known right," ante at 515 n. 45, just as did the parties in Bloomfield Estates Improvement Ass'n, Inc. v. City of Birmingham, 479 Mich. 206, 214, 737 N.W.2d 670 (2007); Sampeer v. Boschma, 369 Mich. 261, 265, 119 N.W.2d 607 (1963); and Smith v. First United Presbyterian Church, 333 Mich. 1, 11, 52 N.W.2d 568 (1952).
Additionally, as mortgagee, Dart benefited from the receiver's efforts to repair, preserve, and protect the property because the repairs increased the property's value. Therefore, the receiver's efforts improved Dart's chances of recovering the full amount of its mortgage when the receiver sold the property. The fact that the receiver was not able to sell the property at a suitable price does not undercut this analysis because Bailey held that the receiver's costs take priority "even though it may result practically in a corresponding loss to [the mortgagee]." Bailey, 262 Mich. at 219-220, 247 N.W. 160. Accordingly, as stated in Bailey, Dart should not "be heard to say that the property in the hands of the receiver is not chargeable with the receiver's expense" when the mortgagee "availed [itself] of any possible advantage of the receivership...." Id. at 219, 247 N.W. 160.
Finally, as the ultimate owner of the property through the foreclosure process, Dart also benefited from the receiver's
Thus, I would affirm the judgment of the Court of Appeals because, in my view, Dart waived its statutory right to superior priority under MCL 600.3236 because it had knowledge of the receivership, acquiesced to the receivership, and benefited from the receiver's efforts to repair, preserve, and protect the property.
MARILYN KELLY and HATHAWAY, JJ., concurred with CAVANAGH, J.
The rule articulated in Gray has been relied on in other cases. See Uhl v. Wexford Co., 275 Mich. 712, 715, 267 N.W. 775 (1936) (holding that a validly appointed receiver takes the assets of the property subject to those interests that existed between the parties at the time of his or her appointment); Franklin Co. v. Buhl Land Co., 264 Mich. 531, 535, 250 N.W. 299 (1933) (holding that because the plaintiff's receiver was appointed after the commencement of the suit, the defendant's setoff of its judgment against the plaintiff did not lead to a preference over other creditors because a receiver takes the assets subject to equities existing between the parties at the time of his or her appointment); and Stram v. Jackson, 248 Mich. 171, 176, 226 N.W. 888 (1929) (holding that the purchaser of mortgaged property stands in the shoes of the mortgagor and can urge no defense to the mortgage not open to mortgagor); see also Rickman v. Rickman, 180 Mich. 224, 248, 250, 146 N.W. 609 (1914) (holding that a plaintiff who brings suit before the filing of a bill of dissolution of a firm acquired priority over other creditors, including the receiver, who takes only the rights of the firm and is affected by all claims, liens, and equities which would prevail against the firm).
Moreover, the additional caselaw cited by Justice CAVANAGH in support of his contention that this Court has recognized waiver based on acquiescence is distinguishable from the present matter. See Bloomfield Estates Improvement Ass'n, Inc. v. City of Birmingham, 479 Mich. 206, 219, 223, 737 N.W.2d 670 (2007) (holding that a party is not precluded from enforcing a deed restriction despite the party's failure to contest a prior violation as long as the prior violation was of a "less serious character" than the subsequent one when a contrary rule would "create increasing chaos in the enforcement of deed restrictions"); Sampeer v. Boschma, 369 Mich. 261, 263, 266, 119 N.W.2d 607 (1963) (holding that the defendants had waived strict compliance with a procedural rule requiring the court to file and serve on both parties a pretrial statement when defense counsel had knowledge of the procedural irregularity and to which no objection was made at the time); and Smith v. First United Presbyterian Church, 333 Mich. 1, 11, 52 N.W.2d 568 (1952) (holding that by "vigilant[ly]" maintaining the single-residential character of subdivision property in accordance with the general subdivision plan, the purchaser "acquiesced in the general plan ... and waived any right she or her grantees would have to act outside of it"). Those same policy concerns, factual circumstances, and affirmative conduct by the party deemed to have waived a known right are clearly not at issue in the present matter. These cases, therefore, fail to demonstrate Dart's intentional relinquishment of its statutory right of first priority.
See, also, Cohen v. Cohen, 125 Mich.App. 206, 215, 335 N.W.2d 661 (1983) (upholding a receiver's fees because the fees were not "excessive" and were "reasonable in light of the actions the receiver was required to take in order to protect the property"), and 65 Am. Jur. 2d, Receivers, § 220, p. 777 ("The general rule is that the compensation of a receiver, where the receivership proceedings are not sought by a mortgagee, is subordinate to the lien of the mortgage, at least where the mortgagee receives no benefit therefrom.") (emphasis added).