Insights

Recently, the Michigan Supreme Court was called upon to interpret the phrase “by operation of law” in connection with a transfer of loans. Ultimately, the high court relied heavily on the voluntary nature of the transaction to find that the transfer was not “by operation of law.” The court’s discussion, along with a strongly argued dissent, provides insight into a phrase that is often used in state statutes with little or no guidance.

In the case, two borrowers received a mortgage loan from Washington Mutual Bank. Washington Mutual collapsed during the economic downturn and the Federal Deposit Insurance Corporation transferred the loan to JPMorgan Chase Bank, N.A., under a purchase and assumption agreement. JPMorgan eventually notified the borrowers that it was foreclosing on their property. After the sheriff sold the property, the borrowers sued JPMorgan to set the sale aside. Among other things, the borrowers argued that JPMorgan failed to comply with Michigan’s foreclosure-by-advertisement law because JPMorgan did not record a chain of title evidencing its assignment of the loan. JPMorgan argued that it was not required to record an assignment because it acquired the loan “by operation of law.” The trial court granted summary judgment to JPMorgan and the borrowers appealed. The appellate court reversed, finding that the sheriff’s sale was void because JPMorgan failed to record an assignment. JPMorgan appealed.

The Supreme Court of Michigan found that JPMorgan was required to record an assignment because it did not take the loan by “operation of law.” Under the Michigan statute, a foreclosing party who is not the original mortgagee may foreclose by advertisement if the party records a chain of title evidencing the assignment of the mortgage to the party. Prior case law and a Michigan Attorney General Opinion allow for an argument that recordation is not required when an assignment occurs by operation of law.

The high court stated that a transfer by operation of law is one that occurs “unintentionally, involuntarily, or through no affirmative act of the transferee.” The high court found that JPMorgan did not acquire the loan from the FDIC by operation of law, as it was a voluntary transaction and JPMorgan was not forced to acquire the loan. As a result, JPMorgan was subject to the recordation requirement.

Highlighting the difficulty of interpreting that phrase, several dissenting justices would have found that the transfer of the loan occurred by operation of law and JPMorgan was not required to record an assignment. The dissenting justices felt that the transaction fell within the statute authorizing the FDIC to transfer assets “by operation of law.” Further, the dissenting justices argued that a transfer by operation of law is not limited to only involuntary transfers.

The high court found the foreclosure sale to be voidable, and remanded the case for a determination of the consequences of JPMorgan’s failure. In particular, the trial court was to determine whether the borrowers were prejudiced by the failure. If so, the foreclosure sale was to be set aside.

Kim v. JPMorgan Chase Bank, N.A., 2012 Mich. LEXIS 2220 (Mich. December 21, 2012)

Clayton C. Swears is a partner in the Hanover, Maryland office of Hudson Cook, LLP. Clay can be reached at 410-865-5419 or by email at cswears@hudco.com.