Town Center Flats, LLC v. ECP Commercial II LLC (In re Town Center Flats, LLC)

Michigan law enables a lender to short circuit an attempted reorganization.

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Case No. 16-1812, 2017 WL 1573827 (6th Circuit, May 02,2017) Published
Assignment of Rents conveys ownership of rents to assignee upon default. Debtor has no interest in rents after default, and rents are not property of Debtor's estate in subsequent Chapter 11 proceeding.
Procedural context:
Pre-petition, assignee of rents issued notice of default, notified tenants to pay rents to assignee, and recorded notice documents in public records. Bankruptcy Court held that Debtor retained interest in rents subject to assignee's security interest. District Court reversed. On further appeal, Sixth Circuit reversed the Bankruptcy Court.
Prior to Debtor filing Chapter 11, mortgage lender who held assignment of rents declared a default under the loan documents, send a copy of the notice of default and request for payments to all of the tenants, and recorded a copy of the notice of default in the appropriate public records. About one month later, Debtor filed for relief under Chapter 11 and claimed interest in rents as property of the estate subject to assignee's security interest. The Bankruptcy Court, applying Michigan law, concluded that the assignment of rents creates a security interest but does not change ownership, such that Debtor retained interest that was property of the estate. The Sixth Circuit reversed, holding that under Michigan law, an assignment or rents operates to convey absolute title to the assignee upon event of default, leaving Debtor with no interest in the rents. Thus, rents are not property of estate and are not subject to administration by Bankruptcy Court.
Clay, Gibbons and Stranch (on brief for the Court)

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