Michigan Court of Appeals Clarifies Merger Rule in Condominium Mortgage Case

On May 6th, 2014, the Michigan Court of Appeals clarified the merger rule in a case regarding a multi-unit condominium development dispute.

In The Reserve at Heritage Village Assn. v Warren et al, Docket No. 317830, the Michigan Court of Appeals addressed an appeal in a civil case revolving around a substantial amount of unpaid condominium assessments. The Court began with the facts of the case.

The Reserve at Heritage Village is a condominium complex with 205 units. In November 2005, Winnick Heritage Village, LLC ([']Winnick[']), acquired fee title to 150 units of the complex from Heritage Village Single Family, Inc. ([']HVSF[']), the developer of the complex. On November 29, 2005, Fifth Third Bank acquired a mortgage on 76 units of The Reserve at Heritage Village, which were owned by Winnick.1 In December 2005, HVSF sold the other 55 units to Canvasser Heritage, LLC ([']Canvasser[']). 

Fifth Third Bank assigned the mortgage to Warren, and on May 18, 2009, Winnick conveyed the 76 units to Warren by covenant deed, which provided that the transfer was [']without merger of the Mortgage dated as of November 29, 2005.[' On December 7, 2011, plaintiff recorded a lien for unpaid condominium assessments against Warren. 

Following the initiation of plaintiff’s lawsuit to collect the unpaid condominium assessments against Warren, filed on January 11, 2012, Warren assigned the mortgage to Reserve on April 18, 2012. Reserve then commenced foreclosure proceedings and purchased the 76 units on July 20, 2012, by sheriff’s deed.

After addressing the complex procedural history of the case, the Court's analysis on the merger issue followed.

Plaintiff contends that the equitable exception to the merger doctrine is not applicable and the trial court erred in concluding that the mortgage and fee title did not merge at the time of the conveyance from Winnick to Warren. We agree . . .

In Michigan, the equitable rule regarding merger is much the same as that in California: 

There is no doubt about the general rule that when the holder of a real estate mortgage becomes the owner of the fee, the former estate is merged in the latter. This rule is, however, subject to the exception that when it is to the interest of the mortgagee and is his intention to keep the mortgage alive, there is no merger, unless the rights of the mortgagor or third persons are affected thereby. [Anderson v Thompson, 225 Mich 155, 159; 195 NW 689 (1923).] 

Further: 

The intention is controlling. It is either expressed or is implied from the circumstances of the transaction. If it is to the interest of the mortgagee to keep the mortgage alive, the intention to do so will be implied; for it is presumed that a man intends to do that which is to his advantage. But if the intention to merge the estates is expressed, the fact that it is to his benefit to keep the mortgage alive is immaterial. [First National Bank of Utica v Ramm, 256 Mich 573, 575; 240 NW 32 (1932).] 

It is [']the expressed intention at the time of the transaction['] that is controlling. First Nat’l Bank, 256 Mich at 577. 

In Union Bank & Trust Co, NA v Farmwald Dev Corp, 181 Mich App 538, 547-548; 450 NW2d 274 (1989), this Court concluded that a third party’s rights [']were not affected by the intention to keep the mortgage alive inasmuch as it was already aware that its mortgage was junior to [the bank’s] mortgage.['] See also Titus v Cavalier, 276 Mich 117, 121; 267 NW 799 (1936) (concluding that where the individual knew he was receiving a junior mortgage, his rights were not affected by the intent to keep the mortgage alive); Clark v Federal Land Bank of St Paul, 167 Mich App 439, 445; 423 NW2d 220 (1987) (concluding that [']plaintiff’s rights were not affected by the intention to keep the mortgage alive, for she knew her judgment lien was subject to a first mortgage pursuant to the judgment of divorce[']). In Tower v Divine, 37 Mich 443, 446 (1877), the Michigan Supreme Court concluded that the junior mortgagee’s position was [']made no worse.['] . . .

Despite the express intent for nonmerger, we agree with plaintiff that the purpose of the exception to the general merger rule, as expressed in US Leather, Inc, 276 F3d at 787, does not apply in this case because Warren is not seeking to protect itself from the claims of junior lienholders for debts incurred by Winnick. Similar to Mitchell Automotive, who was seeking to avoid paying its own debt to USL and prefer the debt owed to its parent corporation, id. at 788, Warren is seeking to avoid paying its debt to plaintiff. A finding of nonmerger would allow Warren to avoid paying the debt it incurred to plaintiff. 

The trial court erred in finding that plaintiff was not a third party affected by the nonmerger because there were no assessments due at the time of the conveyance containing the nonmerger clause. Although it is necessary to consider the party’s intent for nonmerger at the time of transaction, First Nat’l Bank, 256 Mich at 577, the time for considering the effect on a third party is not limited to the time of the transaction. In US Leather, Inc, 276 F3d at 785, although the debt owed to USL existed at the time of the conveyance containing the nonmerger clause, the consent judgment was not entered until after the conveyance. Similarly, plaintiff did not obtain a lien for the unpaid condominium assessments until after the conveyance containing the nonmerger clause. Nonetheless, plaintiff is a third party affected by the nonmerger. 

The trial court’s finding that plaintiff was made no worse by the nonmerger is also erroneous. The trial court’s finding of nonmerger meant that Warren could foreclose and extinguish plaintiff’s lien. As the trial court found, it is unclear whether the foreclosure would extinguish the past-due assessments under MCL 559.158. 

In conclusion, despite the express intent to keep the mortgage alive, there was a merger of the mortgage and the fee title because a finding of nonmerger would affect the rights of plaintiff. See Byerlein, 182 Mich App at 48. Because the fee and the mortgage merged, Warren could not foreclose on the mortgage. The trial court abused its discretion in ordering that Warren could foreclose. We remand for the trial court to vacate and set aside Warren’s foreclosure and the subsequent sale.