Shurlow v. Bonthuis
| Decision Date | 01 April 1998 |
| Docket Number | Docket No. 107140,No. 14,14 |
| Citation | 576 N.W.2d 159,456 Mich. 730 |
| Parties | , 35 UCC Rep.Serv.2d 630 William D. SHURLOW and Shurhoff Development Company, a Michigan general partnership, Plaintiffs-Appellants, v. Thomas BONTHUIS, Defendant-Appellee. Calendar |
| Court | Michigan Supreme Court |
Marvin & Associates by Richard A. Marvin and Jon V. Coretti, Grand Rapids, for plaintiffs-appellants.
Law, Weathers & Richardson, P.C. by Douglas W. Van Essen and Ingrid A. Jensen, Grand Rapids, for Defendant-Appellee.
As a result of plaintiffs' failure to perfect their security interest in the lessee's personal property, defendant guarantor contends that he was discharged from any liability under two personal guaranty agreements. The circuit court granted defendant's motion for summary disposition and the Court of Appeals affirmed. We granted leave to appeal to determine whether a security interest in personal property given as collateral to secure payment under a lease agreement for which defendant executed a personal guaranty was subject to UCC filing requirements and, if so, whether the failure on the part of the plaintiffs to perfect their security interest in the personal property under state law constitutes impairment of the collateral so as to discharge the obligation of the guarantor and release him from further liability upon default of the lessee. We hold that the lien granted in the underlying lease agreement falls within the coverage of article 9 of the UCC and that § 9207 does not discharge the defendant's obligation under the guaranty agreements. We affirm in part and reverse in part the decision of the Court of Appeals and remand the case to the trial court for further proceedings consistent with this opinion.
The relevant facts of this case as set forth by the Court of Appeals 1 are:
In 1991, plaintiffs and the predecessors of Market Place Media, Inc.'s (MPM), entered into a series of commercial leases for office space. In these leases, the predecessors granted plaintiffs a landlord's lien covering personal property located on the leased premises. As an inducement for these leases, Bonthuis, an officer for the predecessors, executed two personal guaranty agreements promising to secure the predecessors' performance under the leases. However, plaintiffs failed to do anything to perfect their lien on the personal property in question. Additionally, MPM terminated Bonthuis' employment soon after its purchase of the business.
In 1993, MPM failed to pay rent due under the leases. As a result, plaintiffs filed suit in the district court against MPM and Bonthuis, and they received a judgment of possession and a money judgment for $9,354.32 against MPM and Bonthuis. Subsequently, plaintiffs filed this case against MPM and Bonthuis for additional damages. However, MPM and Bonthuis filed bankruptcy petitions seeking protection from their creditors under Chapter 7 of the Bankruptcy Code. As a result, the trial court stayed this case pending the resolution of the bankruptcies.
The bankruptcy trustee sold MPM's personal property for $34,929.50. Plaintiffs filed a claim against the bankruptcy estate for $22,758.93, claiming secured status pursuant to the landlord's lien in the lease and the district court judgment. Notwithstanding this claim, the bankruptcy court subordinated plaintiffs' claim to the interest of MPM's bankruptcy trustee. Because of this subordination, plaintiffs received no proceeds from the sale of MPM's personal property by the bankruptcy trustee. After the rejection of plaintiffs' claim in the bankruptcy court, Bonthuis withdrew his bankruptcy petition, and the trial court lifted the stay that had suspended the proceedings in this case.
Subsequently, Bonthuis moved for summary disposition under MCR 2.116(C)(8) and (10), claiming that plaintiffs' failure to file a financing statement in accordance with Article 9 of the Uniform Commercial Code, which would have perfected their landlord's lien, impaired the collateral consisting of MPM's personal property, and freed Bonthuis from any obligation under his personal guaranties. Plaintiffs argued that their landlord's lien was exempted from the coverage of Article 9 by M.C.L. § 440.9104(b); M.S.A. § 19.9104(b), so Bonthuis was not protected under Article 9 from plaintiffs' claims. Alternatively, plaintiffs argued that even if their landlord's lien fell within the coverage of Article 9, M.C.L. § 440.9207; M.S.A. § 19.9207 did not free Bonthuis from his obligations under the guaranty agreements. The trial court rejected plaintiffs' arguments and granted summary disposition in Bonthuis' favor.
It is from the Court of Appeals affirmance of the trial court's grant of defendant's motion for summary disposition that the plaintiffs now appeal.
We address first plaintiffs' claim that the lien granted in the underlying lease agreement was a landlord's lien and thus not subject to the provisions of the UCC under M.C.L. § 440.9104(b); M.S.A. § 19.9104(b). A landlord's lien is the right of a landlord to levy upon the goods of a tenant in satisfaction of unpaid rents or property damage. 2 Although landlords' liens may arise by statute, common law, or contract, 3 commonly these liens take the form of statutory liens that give the lessor the status of a preferred creditor with regard to the lessee's property. 4 It is without dispute that subsection 9104(b) excludes landlords' liens from article 9 coverage. 5 What is at issue in this appeal is whether subsection 9104(b) contemplates consensual security interests embodied in a contract, or whether it excludes only those landlords' liens that arise by operation of law or by common law. Arguing that Michigan recognizes neither statutory nor common-law landlords' liens, plaintiffs claim that the clear intent of the Legislature was to apply the exclusion of subsection 9104(b) to contractual landlord's liens such as the one at issue. 6 The standard of review is de novo with regard to questions of law. People v. Carpentier, 446 Mich. 19, 521 N.W.2d 195 (1994).
Article 9 of the UCC provides a comprehensive scheme by which security interests in personal property and fixtures are regulated. All transactions intended to create a security interest in personal property and fixtures are contemplated under this article. 7 Generally, security interests that are not consensual but that arise by operation of law are excluded under this article. 8 Substance predominates over form in determining article 9 applicability. 9 Thus, the determinative factor is not the form of the transaction as much as it is the intent of the parties in entering into the transaction. 10
The scope of article 9 of the UCC as embodied in § 9102 provides in part:
(1) Except as otherwise provided in section 9104 on excluded transactions, this article applies;
(a) To any transaction (regardless of its form) which is intended to create a security interest in personal property or fixtures including goods, documents, instruments, general intangibles, chattel paper or accounts; and also
(b) To any sale of accounts or chattel paper.
(2) This article applies to security interests created by contract including pledge, assignment, chattel mortgage, chattel trust, trust deed, factor's lien, equipment trust, conditional sale, trust receipt, other lien or title retention contract, and lease or consignment intended as security. This article does not apply to statutory liens except as provided in section 9310.
Despite the broad scope of § 9102, plaintiffs argue that article 9 is inapplicable to the lien in question because of an express provision in subsection 9104(b) excluding landlord's liens from article 9 coverage. 11
While a literal reading of subsection 9104(b) supports plaintiffs' argument, we cannot ignore the clear intent of article 9, which is to bring all consensual transactions within the scope of UCC coverage. Paragraph 12 of the underlying lease agreement between plaintiffs and the lessee's provided:
Lessor's Lien. In the event Lessee shall fail to pay the rent provided for herein or other wise default in the performance of Lessee's obligations hereunder, Lessor shall have a lien on the property of Lessee located on the Premises to secure the payment or performance due Lessor.
The UCC "is to be liberally construed and applied to promote its underlying purposes and policies." M.C.L. § 440.1102; M.S.A. § 19.1102. 12 In construing the act in accordance with its purposes, the text of each section should be read in the light of the purpose and policy of the rule or principle in question. 13 There is no dispute that the lien in question was a consensual contractual lien. To effectuate the intent of § 9102 to bring all consensual security interests in personal property and fixtures under article 9 coverage, it follows that article 9 applies to the lien in question. Indeed, comment 1 to § 9102 provides further support for this position by stating: "Section 9-104 excludes certain transactions where the security interest ... arises under statute or common law by reason of status and not by consent of the parties."
Courts in other jurisdictions addressing this same question have reached similar results. 14 See, e.g., In re King Furniture City, Inc., 240 F.Supp. 453 (E.D.Ark., 1965); In re Leckie Freeburn Coal Co., 405 F.2d 1043 C.A.6, 1969); Dunham's Music House, Inc. v. Asheville Theatres, Inc., 10 N.C.App. 242, 245, 178 S.E.2d 124 (1970); United States v. Globe Corp., 113 Ariz. 44, 50, 546 P.2d 11 (1976); Todsen v. Runge, 211 Neb. 226, 232-233, 318 N.W.2d 88 (1982). Plaintiffs argue that most of, if not all, these cases are distinguishable insofar as they involve states that enacted statutory landlords' liens or recognize common-law landlords' liens. However, plaintiffs' argument does not alter our view that article 9 encompasses the lien in question, nor does it persuade us that the...
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