Michigan Supreme Court on Kim v JPMorgan Chase: If the FDIC wanted to transfer by operation of law, it should have

On December 21, 2012, the Michigan Supreme Court released its opinion on Kim v JPMorgan Chase. Back in February, we reviewed the opinion by the Michigan Court of Appeals in which MCOA held that since the FDIC assigned Washington Mutual's assets to JPMorgan Chase rather than transferred them by operation of law, JPMorgan Chase needed to record each assigned mortgage in order to foreclose, rendering any foreclosure void ab initio. MSC agreed that FDIC transferred Washington Mutual's assets to JPMorgan Chase by assignment, not by law, but that any resulting foreclosure is voidable, not void.

The Kims took out a loan with Washington Mutual secured by a mortgage on the property securing the loan. When Washington Mutual went under, the FDIC appointed JP Morgan Chase as the receiver, acquiring all of Washington Mutual's loans and loan commitments without assignment. JP Morgan Chase's purchase and assumption of the Washington Mutuals's assets and liabilities from the FDIC was memorialized by a Purchase and Assumption Agreement. However, each mortgage that JP Morgan Chase was acquiring was not specifically assigned and recorded. When the Kims defaulted on the loan, JP Morgan Chase foreclosed on the property.

While the trial court dismissed the case, finding that the FDIC transferred Washington Mutual's assets by operation of law, MCOA disagreed. The majority of the MSC agreed, stating that the FDIC had a few different methods of transferring assets and chose one that did not pass the assets by operation of law, even though the FDIC itself characterized the transfer as one by operation of law. Three justices dissented, stating that they would characterize the transfer of assets as a transfer by operation of law.

MSC disagreed that the foreclosure was void ab initio, however, ruling that defects or irregularities in a foreclosure proceeding result in a foreclosure that is voidable, not void ab initio. A void contract has no legal effect, while a voidable contract is valid until annulled--it can be affirmed or rejected. To undo the foreclosure, the Kims will have to prove to the trial court that they were prejudiced by JPMorgan Chase's failure to record an assignment.