855 F.3d 721
6th Cir.2017Background
- Town Center Flats, LLC owned a 53-unit rental complex and financed it with a mortgage and an agreement assigning rents to its lender (later ECP) upon default.
- The assignment instrument used broad, present-language: it purported to "irrevocably, absolutely and unconditionally" transfer "all right, title and interest" in rents to the assignee, while allowing Town Center to collect rents until default.
- Town Center defaulted; ECP served tenants with the statutorily required notice and recorded the notice under Mich. Comp. Laws §§ 554.231–232, completing statutory perfection before Town Center filed Chapter 11.
- After Town Center’s bankruptcy petition, the bankruptcy court deemed the assigned rents part of the estate (cash collateral); the district court reversed, holding the assignment transferred ownership under Michigan law.
- The Sixth Circuit reviews state-law property rights (Erie/Butner) and must decide whether, under Michigan law, the perfected assignment left Town Center with sufficient rights for the rents to be estate property.
Issues
| Issue | Town Center's Argument | ECP's Argument | Held |
|---|---|---|---|
| Whether a perfected assignment under Mich. Comp. Laws § 554.231 transfers ownership of rents or creates only a security interest | The statute’s title and phrase "as security" show the legislature intended only a security interest; thus assignor retains ownership rights | Michigan precedent and § 554.231 permit an ownership transfer once the agreement is recorded and default occurs; assignee holds rents | Assignment, when completed and perfected under § 554.231, transfers ownership of the assigned rents to the assignee |
| Whether assigned rents are property of the bankruptcy estate | Town Center retains contingent or residual rights (e.g., right to collect if it cures default), so rents are estate property (and thus cash collateral) | Town Center retained no present property interest in perfected rents; thus rents belong to ECP and are not estate property | Because Town Center had no sufficient residual property rights under Michigan law, the rents are not part of the bankruptcy estate |
Key Cases Cited
- Butner v. United States, 440 U.S. 48 (Sup. Ct. 1979) (state law governs property interests in bankruptcy)
- United States v. Whiting Pools, Inc., 462 U.S. 198 (Sup. Ct. 1983) (broad scope of bankruptcy estate but secured interests may reduce debtor’s ownership)
- Smith v. Mutual Benefit Life Ins. Co., 106 N.W.2d 515 (Mich. 1960) (historical treatment of assigned rents and assignor’s redemption rights)
- Security Trust Co. v. Sloman, 233 N.W. 216 (Mich. 1930) (statutory assignment of rents places assignee "in the shoes" of mortgagor until debt paid)
- Otis Elevator Co. v. Mid-America Realty Investors, 522 N.W.2d 732 (Mich. Ct. App. 1994) (perfected, prior assignment of rents divests assignor of interest and defeats creditor garnishment)