Town Ctr. Flats, LLC v. ECP Commercial II LLC (In re Town Ctr. Flats, LLC)
| Citation | 855 F.3d 721 |
| Decision Date | 02 May 2017 |
| Docket Number | No. 16-1812,16-1812 |
| Parties | IN RE: TOWN CENTER FLATS, LLC, Debtor. Town Center Flats, LLC, Appellant, v. ECP Commercial II LLC, Appellee. |
| Court | United States Courts of Appeals. United States Court of Appeals (6th Circuit) |
ARGUED: Robert N. Bassel, Clinton, Michigan, for Appellant. Jeremy S. Friedberg, LEITESS FRIEDBERG, P.C., Baltimore, Maryland, for Appellee. ON BRIEF: Robert N. Bassel, Clinton, Michigan, for Appellant. Jeremy S. Friedberg, LEITESS FRIEDBERG, P.C., Baltimore, Maryland, for Appellee.
Before: CLAY, GIBBONS, and STRANCH, Circuit Judges.
This bankruptcy case centers on property rights in an assigned stream of rents. The extent of a debtor's rights in those rents under Michigan law determines whether the rents are properly included in a Chapter 11 bankruptcy estate. The bankruptcy court decided that an assignment of rents creates a security interest, but does not change ownership, and held that an assignor continues to have a property interest in the rents. Accordingly, the bankruptcy court included the rents in the bankruptcy estate. The district court vacated the order of the bankruptcy court, finding that an assignment of rents is a transfer of ownership under Michigan law and thus the rents should not be included in the bankruptcy estate. Agreeing with the district court's reasoning, we hold that the debtor, Town Center Flats, LLC, did not retain sufficient rights in the assigned rents under Michigan law for those rents to be included in the bankruptcy estate. We therefore reverse the order of the bankruptcy court.
The parties do not dispute the underlying facts. Debtor Town Center Flats, LLC owns a 53–unit residential complex in Shelby Township, Michigan. Town Center financed construction of the building with a $5.3 million loan from KeyBank that was later assigned to ECP Commercial II LLC. The loan was secured with a mortgage and an agreement to assign rents to the creditor in the event of default. In the agreement to assign rents, Town Center "irrevocably, absolutely and unconditionally [agreed to] transfer, sell, assign, pledge and convey to Assignee, its successors and assigns, all of the right, title and interest of [Town Center] in ... income of every nature of and from the Project, including, without limitation, minimum rents [and] additional rents...." The agreement purported to be a "present, absolute and executed grant of the powers herein granted to Assignee," while simultaneously granting a license to Town Center to collect and retain rents until an event of default, at which point the license would "automatically terminate without notice to [Town Center]." Rents from the residential complex are Town Center's only source of income.
On December 31, 2013, Town Center defaulted on its obligation to repay the loan. On December 22, 2014, ECP sent a notice of default and a request for the payment of rents to all known tenants of the Town Center property. The notice complied with the terms of the agreement and with Mich. Comp. Laws § 554.231, which allows creditors to collect rents directly from tenants of certain mortgaged properties. The following day, ECP recorded the notice documents in Macomb County, Michigan, completing the last step required by the statute to make the assignment of rents binding against both Town Center and the tenants of the property.
On January 23, 2015, ECP filed a complaint in the Circuit Court for Macomb County alleging breach of contract, initiating foreclosure on the mortgage, and requesting appointment of a receiver to take possession of the Town Center property. Approximately one week later on January 31, 2015, Town Center filed for Chapter 11 bankruptcy relief. At the time Town Center filed its petition, Town Center owed ECP $5,329,329 plus attorney's fees and costs. The parties have reached an interim agreement to allow Town Center to continue to collect rents from the tenants of the complex, with $15,000 per month used to pay down the debt to ECP and the remainder of the rents used for authorized expenses.
Town Center's bankruptcy petition resulted in an automatic stay on the state-court case filed by ECP. See 11 U.S.C. § 362(a) (). In February 2015, ECP filed a motion to prohibit Town Center from using rents collected after the petition was filed. Town Center opposed the motion and pointed out to the bankruptcy court that the company would have no income to work with in its Chapter 11 reorganization plan if the rents were not part of the bankruptcy estate. The bankruptcy court agreed with Town Center and denied ECP's motion. The bankruptcy court determined that the assigned rents would qualify as cash collateral in the bankruptcy estate, meaning, under Chapter 11, that Town Center must provide "adequate protection" to ECP before using the cash. In re Buttermilk Towne Ctr., LLC , 442 B.R. 558, 565 (B.A.P. 6th Cir. 2010).
ECP appealed to the district court and argued that Michigan law established a transfer of ownership in the assigned rents from Town Center to ECP. The district court agreed with ECP and vacated the bankruptcy court's decision. Town Center appealed to this court. ECP moved to dismiss the appeal for lack of jurisdiction, arguing that the decisions of the lower courts were not final because the bankruptcy case is still open. A motions panel of this court decided that additional proceedings in the bankruptcy court would be purely ministerial and that we have jurisdiction over an appeal from a final order. We therefore reach the merits to decide whether the assigned rents are property of ECP or are part of Town Center's bankruptcy estate.
This court has jurisdiction under 28 U.S.C. § 158(d)(1) over appeals of final orders from district courts that have reviewed bankruptcy court decisions. We review the decision of the bankruptcy court "rather than the intermediate decision of the district court." Lowenbraun v. Canary (In re Lowenbraun) , 453 F.3d 314, 319 (6th Cir. 2006). Findings of fact are reviewed for clear error and conclusions of law are reviewed de novo. Id.
Property rights are determined under the law of the state in which the real property is located, which in this case is Michigan. Using state law to define rights promotes the "[u]niform treatment of property interests by both state and federal courts," which serves to "reduce uncertainty, to discourage forum shopping, and to prevent a party from receiving ‘a windfall merely by reason of the happenstance of bankruptcy.’ " Butner v. United States , 440 U.S. 48, 55, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979) (quoting Lewis v. Mfrs. Nat'l Bank of Detroit , 364 U.S. 603, 609, 81 S.Ct. 347, 5 L.Ed.2d 323 (1961) ). When the highest court of a state has not spoken directly on an issue, this court must make an Erie guess as to how that court would resolve it and may look to decisions of intermediate state appellate courts as persuasive authority. Conlin v. Mortg. Elec. Registration Sys., Inc. , 714 F.3d 355, 358–59 (6th Cir. 2013) ; see also Erie R.R. Co. v. Tompkins , 304 U.S. 64, 78, 58 S.Ct. 817, 82 L.Ed. 1188 (1938). Once property rights have been determined under state law, "federal bankruptcy law dictates to what extent that interest is property of the estate." Bavely v. United States (In re Terwillinger's Catering Plus, Inc.) , 911 F.2d 1168, 1172 (6th Cir. 1990) (quoting N.S. Garrott & Sons v. Union Planters Nat'l Bank of Memphis (In re N.S. Garrott & Sons) , 772 F.2d 462, 466 (8th Cir. 1985) ).
We begin by analyzing the extent of property rights held by the assignor and assignee of rents under Michigan law. We then answer the ultimate question—whether the rights retained by the assignor are sufficient for those rents to be included in the bankruptcy estate.
As with many issues of property rights, the history of the legal doctrine sheds light on the traditional legal rule, which serves to illuminate more recent developments. The traditional rule in Michigan, created by statute in 1843, was that an assignment of rents was unenforceable because it would interfere with a mortgagor's right of redemption. Smith v. Mut. Ben. Life Ins. Co. , 362 Mich. 114, 106 N.W.2d 515, 518 (1960). The default rule in Michigan is therefore that an assignment of rents is unenforceable. Id . A 1925 statute subsequently created a right to assign rents for properties subject to trust mortgages. Id . at 518–19. The Michigan Supreme Court determined that the statute made the "[c]ollection of rents ... not merely an incident to the right of possession of the land, but ... a distinct remedy and additional security." Security Trust Co. v. Sloman , 252 Mich. 266, 233 N.W. 216, 219 (1930). Central to this case, a 1953 statute titled "Assignment of Rents to Accrue from Leases as Additional Mortgage Security" extended the ability to assign rents to additional categories of property:
Hereafter, in or in connection with any mortgage on commercial or industrial property ... it shall be lawful to assign the rents, or any portion thereof, under any oral or written leases upon the mortgaged property to the mortgagee, as security in addition to the property described in such mortgage. Such assignment of rents shall be binding upon such assignor only in the event of default in the terms and conditions of said mortgage, and shall operate against and be binding upon the occupiers of the premises from the date of filing by the mortgagee in the office of the register of deeds for the county in which the property is located of a notice of default in the terms and conditions of the mortgage and service of a copy of such notice upon the occupiers of the mortgaged premises.
Mich. Comp. Laws § 554.231.
The Michigan statute also contains a provision about the validity of...
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