Sixth Circuit Swan Creek Opinion
On June 15, 2018, the U.S. Court of Appeals for the Sixth Circuit affirmed a decision of the U.S. District Court for the Eastern District of Michigan, holding that rents collected by a receiver during the redemption period following a non-judicial foreclosure are property of the lender, even if the borrower ultimately redeems the property.1 In 2015, the lender obtained, over the borrower’s objection, a receiver for a troubled mobile home park in the Detroit area. The property was foreclosed in 2016. Under Michigan’s non-judicial foreclosure law, a borrower is entitled to redeem a commercial property for six months after the foreclosure sale. On the eve of the expiration of this period, the borrower redeemed the property by paying the redemption amount. The redemption payment left a deficiency of approximately $650,000 on the loan.
However, during the period in which the receiver was managing the property, the receiver collected significant rents and other proceeds, which the borrower argued was its property once the redemption occurred. The borrower filed a motion seeking the termination of the receiver and requesting that the court distribute all of the funds held by the receiver to itself. The lender objected to the motion, relying chiefly on the loan documents and Michigan’s assignment of rents statute. After a hearing and supplemental briefing by both parties, the District Court entered an order denying the motion to distribute the funds to the borrower, finding that, among other things, the loan documents and Michigan law provided for an assignment of rents, which gave the lender an exclusive right to the rents collected up until the redemption of the property, and that the lender’s ownership right in the rents was not affected by the redemption of the property. The borrower timely appealed.
In its opinion affirming the District Court’s order, the Sixth Circuit found that its recent case In re Town Center Flats, LLC, 855 F.3d 721 (6th Cir. 2017) was applicable to this matter and, in fact, described exactly what should happen in this case. In Town Center, the issue was whether an assignment of rents, which provided for rents to be given to the lender in case of default, was an absolute transfer of ownership of the rents or was simply an additional security interest. The Sixth Circuit determined that it was an absolute transfer of ownership. In Town Center, that result meant the rents were not part of the borrower’s bankruptcy estate. Applying the Town Center rationale to this case, the Sixth Circuit found that the assignment of rents provided for in the loan documents was a transfer of ownership of the rents to the lender for all time periods prior to the redemption. Therefore, the rents were the lender’s property, even though the receiver had held them during the case. The Sixth Circuit further agreed with the lender that the borrower had waived its argument that the lender was required to seek the excess funds on a monthly basis in order to keep them, because the borrower had failed to make that argument in the District Court. Finally, the Sixth Circuit held that the borrower’s counsel’s representation on the record at the hearing that the lender was owed more than the amount of rents held by the receiver supported the District Court’s decision that the rents were the lender’s property. In combination with Town Center, this case further clarifies the rights of secured lenders with respect to assigned rents under Michigan law.
1 WBCMT 2003-C9 Island Living LLC v. Swan Creek Limited Partnership, Case No. 17-2374. A link to the opinion may be found here: http://www.opn.ca6.uscourts.gov/opinions.pdf/18a0302n-06.pdf.