DAGS II, LLC, et al v. Huntington National Bank, et al

Filing

OPINION and JUDGMENT filed : AFFIRMED. Decision for publication. Danny J. Boggs, Eric L. Clay, and Jeffrey S. Sutton (AUTHORING), Circuit Judges.

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RECOMMENDED FOR FULL-TEXT PUBLICATION
Pursuant to Sixth Circuit I.O.P. 32.1(b)
File Name: 17a0166p.06

UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT

DAGS II, LLC; G2BK, LLC,
Plaintiffs-Appellants,

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v.
HUNTINGTON NATIONAL BANK; FOURTEEN
CORPORATION,
Defendants-Appellees.

No. 16-2332

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Appeal from the United States District Court
for the Western District of Michigan at Grand Rapids.
No. 1:13-cv-00393—Robert Holmes Bell, District Judge.
Argued: June 22, 2017
Decided and Filed: July 27, 2017
Before: BOGGS, CLAY, and SUTTON, Circuit Judges.
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COUNSEL
ARGUED: Dennis W. Bila II, BILA & ASSOCIATES, PLLC, Harbor Springs, Michigan, for
Appellant. Jeffrey G. Raphelson, BODMAN PLC, Detroit, Michigan, for Appellees. ON
BRIEF: Dennis W. Bila II, BILA & ASSOCIATES, PLLC, Harbor Springs, Michigan, for
Appellant. Jeffrey G. Raphelson, James J. Walsh, Amanda J. Frank, BODMAN PLC, Detroit,
Michigan, for Appellees.
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OPINION
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SUTTON, Circuit Judge. This case presents a mixed question of law and math. Baker
Lofts borrowed money from Huntington National Bank to convert an abandoned furniture

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DAGS II, et al. v. Huntington Nat’l Bank, et al.

factory into residential and commercial real estate. The venture did not go well. Baker Lofts
defaulted on its loan payments. Huntington, through a subsidiary, foreclosed on the building.
And the assignee of Baker Lofts’ legal claims filed a lawsuit against Huntington to prevent it
from collecting Baker Lofts’ unpaid debt and to recover the other collateral that Huntington had
taken to satisfy the debt. A bench trial distilled all of these events into two questions: Was the
building worth more than Baker Lofts’ debt when Huntington foreclosed? And, if so, by how
much? Because the district court correctly concluded that Baker Lofts’ debt exceeded the value
of the foreclosed building and because the excess permitted Huntington to take possession of the
other property securing its loans, we affirm the judgment in Huntington’s favor.
I.
In 2004, Baker Lofts, LLC, purchased the abandoned Baker Furniture Company building
in Holland, Michigan, with plans to renovate it into a commercial and residential space.
Huntington National Bank provided the financing. Loans of more than $5 million were secured
by two mortgages (2004 and 2005) on the Baker Lofts building and by some of its personal
property, including a tax-increment-financing agreement (which provided reimbursement
payments from the City of Holland once Baker Lofts completed the renovations), rental income
from the building, and Baker Lofts’ liquor license.
Baker Lofts defaulted on its loans in 2011. Huntington assigned the 2005 mortgage to its
subsidiary, Fourteen Corporation, and Fourteen foreclosed through a public auction. Fourteen’s
Notice of Foreclosure stated that “[t]he balance owing on the Mortgage is $5,254,435.04,” but it
did not mention the senior 2004 mortgage, which Huntington also had retained. Trial Ex. 23 at
2–3. Fourteen, the only bidder at the sheriff’s sale, purchased the property for $1,856,250.
Huntington released its interest in the 2004 mortgage, after which Fourteen sold the property to
GR Developments, LLC, for $2,355,000.
Having deducted the amount paid at the sheriff’s sale from Baker Lofts’ overall debt,
Huntington thought that the company still owed it about $3.5 million. To satisfy that debt,
Huntington invoked its security interests in the remaining collateral.

At a public sale,

Huntington bought the rights to Baker Lofts’ tax-increment-financing agreement for $1,107,000.

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It began collecting the rents owed to Baker Lofts. And it asserted its security interest in the
liquor license, which Baker Lofts had sold to G2BK before it declared bankruptcy.
DAGS II (the assignee of Baker Lofts’ legal claims) and G2BK sued Huntington and
Fourteen, seeking a declaratory judgment that the sheriff’s sale of the building had extinguished
all of Baker Lofts’ debt and that Huntington’s claims to the remaining debt and collateral were
invalid.

They also raised conversion and tortious interference damages claims due to

Huntington’s collection of the tax-increment-financing agreement, the Baker Lofts rents, and the
liquor license, a replevin claim to regain control of the financing agreement, and a claim for
damages under Michigan’s secured transactions statute.

All of the claims turned on this

allegation: that Huntington had no right to collect from Baker Lofts after foreclosing on its
building.
The district court initially granted summary judgment to Huntington and Fourteen
because the plaintiffs had failed to establish that the two companies should be treated as a single
entity, which precluded the possibility that Fourteen’s foreclosure had discharged a debt owed to
Huntington. We reversed on appeal because there were genuine disputes of material fact about
whether to pierce the corporate veil between Fourteen and Huntington. On remand, the district
court held a four-day bench trial and again ruled in Huntington’s favor. Even if Huntington and
Fourteen were treated as the same entity, the court held, the plaintiffs’ claims were meritless
because Baker Lofts still owed Huntington $2,257,549.94 after the sale of its building, which in
turn entitled Huntington to foreclose on the tax-increment-financing agreement, the liquor
license, and the other collateral.
II.
The dispute turns on whether Fourteen’s foreclosure extinguished all of Baker Lofts’ debt
to Huntington.

Under Michigan law, when a creditor forecloses by advertisement, the

borrower’s debt is reduced to the extent of the “true value” of the property, even if the actual
foreclosure sale price was lower than that. Mich. Comp. Laws § 600.3280. While the statute
applies only to single-mortgage foreclosures, Michigan courts have extended the rule to
multiple-mortgage foreclosures when the creditor forecloses on the junior mortgage while still

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holding the senior mortgage. See Bd. of Trs. of Gen. Ret. Sys. v. Ren–Cen Indoor Tennis
& Racquet Club, 377 N.W.2d 432, 436 (Mich. Ct. App. 1985); FDIC v. Torres, No. 311277,
2014 WL 309787, at *8 (Mich. Ct. App. Jan. 28, 2014) (per curiam); see also Restatement
(Third) of Prop.: Mortgages § 8.5 reporter’s note (Am. Law Inst. 1996) (listing cases from other
States that have adopted the rule); id. § 8.5 cmt. (c)(2). A little background explains the
principle.
The price a property fetches at a foreclosure sale often is lower than the property’s fair
market value. BFP v. Resolution Trust Corp., 511 U.S. 531, 537–38 (1994); Restatement (Third)
of Prop.: Mortgages § 8.3 cmt. (a). Normal “market conditions . . . simply do not obtain in the
context of a forced sale.” BFP, 511 U.S. at 538. The mortgage-holding creditor has a “distinct
bidding advantage” over other purchasers because it can “credit bid” without putting up new
cash. Restatement (Third) of Prop.: Mortgages § 8.3 cmt. (a). “[U]nsophisticated potential
bidders [often] have little idea as to the nature of the real estate being sold” because the notice of
public sale often appears in “legal newspapers with limited circulation.” Id. And potential
bidders may find it difficult to inspect a property that remains, until the sale, under the control of
uncooperative debtors. Id. In view of these risks, Michigan prevents unjust windfalls by
ensuring that a debtor’s deficiency is reduced by the “true value” of the foreclosed property if the
creditor continues to pursue the debt after foreclosing. Mich. Comp. Laws § 600.3280.
All of this means that two numbers resolve this case: the amount of the debt and the true
value of Baker Lofts’ building at the point of sale.

If the debt sufficiently exceeded the

building’s value, Huntington could pursue payment and foreclose on the remaining collateral. If
Huntington could foreclose on the remaining collateral, all of the plaintiffs’ claims (for
declaratory judgment, damages, and replevin) disappear. And if the plaintiffs have no valid
claims, any dispute about whether to pierce the corporate veil between Huntington and Fourteen
disappears as well, as there is nothing to recover on either side of the veil.
We apply clear error review to the district court’s factual findings and fresh review to its
conclusions of law. Max Trucking, LLC v. Liberty Mut. Ins., 802 F.3d 793, 803 (6th Cir. 2015).
For the reasons that follow, the district court did not clearly err as a matter of fact in finding that

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the debt exceeded the value of the building and did not err as a matter of law in holding that the
plaintiffs’ claims all fail as a result.
The amount of the debt.

The debt comes from three notes with these outstanding

balances: Loan 133 ($2,106,311.53), Loan 141 ($2,530,524.87), and Loan 158 ($548,356.66).
R. 56 at 4–5. Those add up to $5,185,193.06. From that number, the district court subtracted the
tax-increment-financing payments that Huntington received and should have credited towards
the debt before the sheriff’s sale: $572,643.22. That left an outstanding debt of $4,612,549.84 on
the date of sale.
That finding does not add up, say the plaintiffs, because one of the trustees of the trust
that controlled Baker Lofts never signed Loans 141 and 158. But the district court had two good
reasons for including those loans nonetheless. One was that the plaintiffs admitted these debts in
their complaint. The first time they contested the amount of indebtedness was three years into
the case—and not until the second day of trial. The district court denied leave to amend the
complaint well into the twelfth hour of the case, noting the prejudice to the defendants and the
lack of any good explanation by the plaintiffs for failing to read the documents before then. See
Head v. Timken Roller Bearing Co., 486 F.2d 870, 873–74 (6th Cir. 1973). That was not an
abuse of discretion.
The other reason was that Huntington in truth did loan Baker Lofts the money included in
Loans 141 and 158. In this setting, unjust enrichment and quantum meruit would have precluded
a finding that Baker Lofts did not owe the money. See Tkachik v. Mandeville, 790 N.W.2d 260,
266 (Mich. 2010) (unjust enrichment); Ordon v. Johnson, 77 N.W.2d 377, 383 (Mich. 1956)
(quantum meruit). All of this adds up to the reality that the district court did not err in fact or in
law in finding that the total debt owed on the date of the foreclosure sale was $4,612,549.84.
The value of the Baker Lofts building. The district court found that the “fair sheriff’s sale
value” of Baker Lofts’ building was $2,355,000. R. 149 at 28. No clear error mars that
determination either. Fourteen acquired the building at the foreclosure sale for $1,856,250. But
$2,355,000 was the price a third party buyer eventually paid when Fourteen resold the building
less than a year later. Unlike its purchase at the sheriff’s sale—in which Fourteen may have

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unfairly scared off other bidders with the outstanding debt on the senior mortgage—Fourteen had
every incentive to fetch the highest possible price when it sold the property.

And the

$2.3 million valuation aligned, the district court added, with the appraisal of the more credible
defendant expert and with the prior, pre-litigation appraisal of the plaintiffs’ own expert.
The plaintiffs offer two rejoinders. They first point to the testimony of three real estate
investors who valued the property at over $5.5 million, and to the testimony of their expert
appraiser who valued the property at $5.1 million. But the district court did not clearly err in
rejecting this testimony. Each of the three investors said they based their estimates on financial
information given to them by the plaintiffs; they did not independently investigate the revenues
and liabilities of the building for themselves. As the district court rightly pointed out, moreover,
“[i]t is one thing . . . , in hindsight, [for them to] say that they would have bid $5 million. But it
is another thing to make a formal offer in that amount, after . . . conducting all of the necessary
due diligence on the property.” R. 149 at 27–28. That was reason enough for the district court to
reject their estimates.
Nor was it clear error to decline to accept the testimony of the plaintiffs’ appraiser, Todd
Schaal. In preparation for his duties as an expert witness, Schaal used the “direct capitalization”
valuation method to reach a $5.1 million estimate. According to The Appraisal of Real Estate,
which Schaal and the defendants’ expert acknowledge as the authoritative source for appraisal
practice, the direct capitalization method “convert[s] an estimate of a single year’s income
expectancy into an indication of value in one direct step.” Trial Ex. PP at 5. But that method has
optimal utility with stable property and “may be less useful” when, as Schaal acknowledged is
the case here, a property has “income or expenses that are expected to change in an irregular
pattern over time.” Id.
It gets worse. Schaal’s appraisal conflicts with his own pre-litigation appraisal of the
same property, in which he used “discounted cash flow” analysis—an “appropriate tool for
valuing any pattern of regular or irregular income,” id. at 9, and the method used by
Huntington’s expert appraiser—to arrive at an estimate between $1.8 and $2.2 million. Schaal
did not explain the change in methodology to the district court’s satisfaction, and has not done so
to ours.

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That brings us to the plaintiffs’ second objection—that the district court erred by
determining the “fair sheriff’s sale value” rather than the “true value” of the property, per Mich.
Comp. Laws § 600.3280, or the “fair market value,” per our prior opinion in this case, DAGS II,
LLC v. Huntington Nat’l Bank, 616 F. App’x 830, 831 (6th Cir. 2015). But that’s a distinction
without any difference, at least as applied here. “[T]rue value” at a fair sheriff’s sale, “fair
market value” at a sheriff’s sale, and “fair sheriff’s sale value” all capture the same, correct idea:
the value of the property when the mortgagee and other buyers stand on equal footing at the
foreclosure sale. See Rubin v. Fannie Mae, 587 F. App’x 273, 276 (6th Cir. 2014); Mich. Comp.
Laws § 600.3228. Novel though it may be, the district court’s use of its chosen phrase “for lack
of a better term,” R. 149 at 7 n.3, simply clarifies that the inquiry focuses on preventing double
recovery for the mortgagee by determining the price an arm’s-length buyer would have paid at
the time it foreclosed, see Ren–Cen, 377 N.W.2d at 436.

The district court’s error in

nomenclature, if indeed it was one, was not an error in law or logic or math.
Plus, even if Michigan requires the amount of the deficiency to be reduced by the “fair
market value” of the property outside the context of a forced sale, the record shows that the
property’s fair market value was likely $2,355,000 (the highest bid when Huntington resold the
building with every incentive to fetch the best price) and at most $3,080,000 (the valuation set by
Huntington’s expert appraiser). Either way, the amount neither exceeds the debt nor reduces it
enough to make Huntington’s collection of the financing agreement and the liquor license
unlawful. The district court did not clearly err in finding that the relevant value of the Baker
building was $2,355,000.
The plaintiffs make one last objection.

They argue that it doesn’t matter whether

Huntington’s outstanding debt was more or less than the value of the Baker building. Under the
“equitable merger” doctrine of Ren–Cen, 377 N.W.2d at 435–36, they say, their liabilities under
the senior 2004 mortgage were extinguished when Fourteen foreclosed on the 2005 mortgage
and purchased the property at the sheriff’s sale. But Ren–Cen applied this equitable doctrine to
prevent a double recovery where the value of the foreclosed property exceeded the amount of
debt secured by two mortgages. The court reasoned that, if the creditor could obtain a property
worth $3,000,000 by foreclosing the $500,000 junior mortgage and still pursue payment on the

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$1,100,000 senior mortgage, the creditor would receive an impermissible windfall. Id. at 433,
436. No such windfall occurs, however, when the outstanding debt exceeds the property’s value.
See Torres, 2014 WL 309787, at *8. Quite to the contrary. Application of the doctrine here
would result in a windfall for the debtor. The equitable principles that gave birth to this doctrine
do not extend to this distinct setting.
Having upheld both of the district court’s relevant rulings—the amount of the debt and
the value of the building—we are left with one last step to this proof. If we subtract the value of
the Baker Lofts’ building ($2,355,000) from the amount of the debt ($4,612,549.84), that leaves
$2,257,549.84, the amount Baker Lofts still owed Huntington after it foreclosed on the building.
Three consequences follow from that finding. The foreclosure did not extinguish Baker Lofts’
debt. Huntington was entitled to foreclose on the tax-increment-financing agreement (worth
$1,107,000) and demand the Baker Loft liquor license (worth less than the remainder). And
plaintiffs’ claims for damages, replevin, and declaratory judgment arising from lawful collection
actions therefore must fail.
For these reasons, we affirm.