WBCMT 2003-C9 Island Living v. Swan Creek Limited Partnership

• Court: Court of Appeals for the Sixth Circuit
• Decided: June 15, 2018
• Docket: 17-2374
• Status: Unpublished

Opinion

NOT RECOMMENDED FOR FULL-TEXT PUBLICATION File Name: 18a0302n.06

No. 17-2374

UNITED STATES COURT OF APPEALS FOR THE SIXTH CIRCUIT FILED WBCMT 2003-C9 ISLAND LIVING, LLC ) Jun 15, 2018 a Michigan limited liability company, ) DEBORAH S. HUNT, Clerk ) Plaintiff-Appellee, ) ) ON APPEAL FROM THE UNITED v. ) STATES DISTRICT COURT FOR ) THE EASTERN DISTRICT OF ) MICHIGAN SWAN CREEK LIMITED PARTNERSHIP, ) ) Defendant-Appellant.

Before: BOGGS and GRIFFIN, Circuit Judges; HOOD, District Judge.1

HOOD, District Judge. This case involves a debtor mobile-home-park developer, who

agreed to an assignment of rents and increased interest in the event it defaulted on its mortgage,

but upon default, decided that the default interest was more than it wished to pay. This appeal is

the result of the debtor’s attempt to avoid paying that interest through its motion to terminate the

receivership and obtain the rents held by the receiver but already assigned to and owned by its

creditor. For the reasons stated herein, the order denying the motion to terminate the receivership

is AFFIRMED.

1 The Honorable Joseph M. Hood, United States District Judge for the Eastern District of Kentucky, sitting by designation. Case No. 17-2374 WBCMT 2003-C9 Island Living, LLC v. Swan Creek Ltd. P’ship

I.

The Appellant, Swan Creek Limited Partnership (“Swan Creek”), borrowed $4.35 million

from La Salle Bank (“the Lender”) in November 2003. The loan is evidenced by a Promissory

Note (the “Note”), an Assignment of Leases and Rents, and a Mortgage. It is undisputed that Swan

Creek failed to make the final balloon payment of nearly $3.7 million, and on December 1, 2013,

Swan Creek was in default under the terms of the Note. In June 2014, the Appellee, WBCMT

2003-C9 Island Living, LLC (“Island Living”) assigned the Lender’s interest in the Note,

Mortgage, and Assignment of Rents in full, and Island Living stepped into the place of the original

lender.

In November 2014, Island Living requested that the District Court appoint a Receiver,

which Swan Creek opposed. The District Court appointed a Receiver to operate the property (the

“Receiver Order,” R. 18), including collecting all rent, revenues, and other benefits of the property,

and managing the day-to-day operations of the property. The Receiver Order permitted the

Receiver to take possession of the funds collected from the operation of the property. It further

provided that if the Receiver had funds in excess of the operating expenses (excluding a reserve at

an amount to be determined by the Receiver) that such funds would be provided to Island Living

to be applied to the amounts owed by Swan Creek under the Note. Specifically, the district court

ordered that:

Should the Receiver have funds in excess of the anticipated Operating Expenses, including an appropriate reserve in an amount to be approved by Plaintiff, for the Mortgaged Property, the Receiver shall provide all such funds, on a monthly basis, to Plaintiff. All such funds shall be applied to the amount owed to Plaintiff by the Defendant under the Mortgage for the Mortgaged Property. To the extent that there are any funds that exceed amounts due to Plaintiff under the Loan Documents, such funds shall be subject to further order of the Court.

2 Case No. 17-2374 WBCMT 2003-C9 Island Living, LLC v. Swan Creek Ltd. P’ship

R. 18, Receiver Order, PID 360-61. The Receiver held all of the funds in excess of the operating

expenses for the duration of the receivership.

Island Living pursued a non-judicial foreclosure in December 2014, and, ultimately, on

December 1, 2016, Island Living foreclosed on the property and purchased it at the Sheriff’s sale

for $4,105,012.89. Just prior to the close of the redemption period, Swan Creek redeemed the

property for $4,209,062.41, which represented the principal amount paid at the Sheriff’s sale as

well as the regular interest that accrued from the date of the sale until the redemption on May 26,

2017. After the redemption, Swan Creek owed Island Living more than $650,000, comprising

primarily default interest.

The loan documents assigned all rights in future and existing leases, agreements, and rents

affecting the mortgaged property to the lender. The Assignment of Rents stated that:

The parties intend that this Assignment grants a present, absolute, and unconditional assignment of the Leases, Rents, Lease Guaranties, and Bankruptcy Claims, Proceeds, and Other Rights, and shall immediately upon execution give Lender the right to collect the Rents and other sums due under the Lease Guaranties and to apply them in payment of the Debt.

R. 1–6, Assignment of Rents § 2.1, PID 96. The Assignment of Rents states that Swan

Creek’s license to collect rents terminated upon its default. It further provided that the Assignment

of Rents terminated upon the satisfaction or discharge of the Mortgage.

The Note specifically provided that “neither Borrower nor any Principal shall be personally

liable to pay the Principal Amount, or any other amount due, or to perform any obligation, under

the Loan Documents, and Lender agrees to look solely to the Property and any other collateral

heretofore, now, or hereafter pledged by any party to secure the Loan . . . .” R. 1–4, Note ¶ 11,

PID 38-39. This exculpation provision was incorporated into the Mortgage.

3 Case No. 17-2374 WBCMT 2003-C9 Island Living, LLC v. Swan Creek Ltd. P’ship

Swan Creek argues that (1) the Receiver Order required the Receiver to apply the funds in

excess of the operating expenses to the outstanding debt on a monthly basis; (2) that doing so

would have resulted in a lower amount owed at the time of the redemption; (3) that the mortgage

was extinguished upon the redemption; (4) and, accordingly, Swan Creek should now receive the

funds the Receiver held during the receivership. The district court, however, held that the rents

the Receiver collected must be turned over to Island Living, because the payments had already

vested in Island Living under the Assignment of Rents, and the redemption did not retroactively

eliminate Island Living’s right to collect the rents.

II.

This court has jurisdiction to hear this appeal pursuant to 28 U.S.C. § 1292(a)(2).

The parties agree that in a receivership proceeding, the lower court has “broad powers and

wide discretion” in choosing a distribution plan. Norwest Bank Wis., N.A., 245 F. App’x. 488, 491

(6th Cir. 2007) (citing S.E.C. v. Basic Energy & Affiliated Res. Inc., 273 F.3d 657, 668 (6th Cir.

2001). This is an appeal of an order regarding the distribution of receivership funds; therefore the

abuse-of-discretion standard applies.

III.

a. Monthly Distributions

Swan Creek argues that the district court abused its discretion in finding that the Receiver

was holding the excess funds for the benefit of Island Living and awarding those funds to Island

Living because Swan Creek did not “receive credit” for the rents collected during the receivership.

Swan Creek claims the Receiver was required to distribute the excess funds monthly to Island

Living pursuant to the Receiver Order. Island Living claims that Swan Creek did not raise this

argument in the lower court and should not be permitted to do so now. Swan Creek maintains that

4 Case No. 17-2374 WBCMT 2003-C9 Island Living, LLC v. Swan Creek Ltd. P’ship

it did raise the argument in its Supplemental Brief below when it argued that Island Living

unreasonably delayed foreclosure and purposefully did not collect the funds during the

receivership in an effort to inflate (through the accruing default interest) the amount due at the

time of the redemption. Although this is related, it is not the same argument. Swan Creek did not

argue, and the district court did not consider, whether the Island Living was required to seek

distributions from the Receiver on a monthly basis. Swan Creek was, obviously, aware of the

Receiver Order at the time it made the Motion to Terminate the Receivership, and could have

raised this argument, but chose to waive it. As we have previously stated:

Propounding new arguments on appeal in attempting to prompt us to reverse the trial court—arguments never considered by the trial court—is not only somewhat devious, it undermines important judicial values. . . . In order to preserve the integrity of the appellate structure, we should not be considered a ‘second shot’ forum, a forum where secondary, back-up theories may be minted for the first time.

Isaak v. Trumbull Sav. & Loan Co., 169 F.3d 390, 396 n. 3 (6th Cir. 1999) (quoting Estate of Quirk

v. Comm’r of Internal Revenue, 928 F.2d 751, 758 (6th Cir. 1991)). Accordingly, we will not

consider whether Island Living was required to seek monthly distributions from the Receiver, lest

it extinguish its right to collect those funds. Swan Creek waived that argument by failing to raise

it below.

b. The Redemption Payment

Swan Creek claims that Island Living’s right to the excess funds was extinguished upon

receipt of the redemption payment, pursuant to Michigan law and our prior case law. The pertinent

Michigan statute allows an assignment of rents to accrue from leases as a mortgage security in

addition to the property described in the mortgage. Mich. Comp. L. § 554.231. Upon payment of

the redemption amount, the mortgage is deemed satisfied. Mich. Comp. L. § 600.3244

5 Case No. 17-2374 WBCMT 2003-C9 Island Living, LLC v. Swan Creek Ltd. P’ship

The district court properly concluded that the Assignment of Rents and Mortgage provided

a vested interest to Island Living in the rents held by the receiver during the receivership. These

documents evidence that Swan Creek “absolutely and unconditionally assigns and grants to

Lender” the right to receive the leases, rents, lease guaranties, and proceeds from the property; it

also states, “Lender shall immediately be entitled to possession of all Rents and sums due under

any Lease Guaranties . . . .” R. 1-6, Assignment of Rents, PID 94–98 . In the Assignment of

Rents, Borrower Swan Creek “absolutely, unconditionally and irrevocably waives any and all

rights to assert any setoff, counterclaim or crossclaim of any nature whatsoever with respect to the

obligations of Borrower.” Id. at PID 98. The Mortgage is equally clear as to the effect of a default:

“Upon the occurrence of an Event of Default and without any action by Lender, Borrower shall

have no further right to collect or otherwise receive such Rents, which will be absolute and sole

property of Lender pursuant to those statutes.” R. 1-5, Mortgage, PID 82.

Swan Creek primarily relies on one case for the proposition that Island Living should not

receive the excess funds collected during the receivership. In re Town Center Flats, LLC, 855 F.3d

721 (6th Cir. 2017) presents very similar facts under a different procedural posture. In that case,

Town Center, a residential-apartment complex, defaulted on a loan secured by a mortgage on the

apartment building and an agreement to assign the rents from that building to the creditor in the

event of a default. Id. at 723. The question presented was whether the assignment of rents created

only a security interest, but not an ownership interest, such that the rents could be included in the

bankruptcy estate. See id. at 724. We affirmed the district 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. . . . [T]he debtor, Town Center Flats, LLC, did not retain sufficient rights in

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the assigned rents under Michigan law for those rents to be included in the bankruptcy estate.” Id.

at 722. More specifically, we noted that:

Michigan courts generally discuss assignments of rents under § 554.231 as ownership transfers. The Michigan Supreme Court held that this statute puts the assignee “in the shoes of the mortgagor until the debt is paid, with all his rights to the rents and profits as long as he, under the general law of mortgages, could enjoy them.” Smith, 106 N.W.2d at 520 (quoting Sloman, 233 N.W. at 220). In 1994, the Michigan Court of Appeals held that a prior-perfected interest in assigned rents had priority over an interest held by a judgment creditor who sought to garnish rents. Otis Elevator Co. v. Mid-America Realty Investors, 206 Mich.App. 710, 522 N.W.2d 732, 733 (1994). The judgment creditor “could not garnish rents because [the assignor] no longer had an interest in the rents.” Id. Once an assignee has: 1) entered into an agreement to assign rents; 2) recorded that agreement; and 3) default has occurred, then the assignee’s rights “are perfected and binding against the assignor” and the assignor “no longer ha[s] a valid property interest in the rents.” Id. at 734. The assignor has the legal right to collect the rents directly from tenants once notice of the default has been filed in the county’s register and served on the tenants. MICH. COMP. LAWS §§ 554.231, 554.232. Michigan courts have generally treated the assignment of rents as a transfer of ownership once the agreement has been completed and recorded and a default has occurred.

Id. at 725. Swan Creek cherry-picked one sentence from the In re Town Center opinion to support

its argument that it is entitled to the rents collected during the period of default: “[i]f an assignor

cures the default according to the agreement’s terms, then the assignor is able to start collecting

rents again.” Id. at 727. That is a blatant misreading of the holding of the case, completely ignoring

the words “start” and “again” in that sentence. In the same paragraph, a few lines below, we

address the exact situation presented here:

[I]f the rents are thought of as payments that occur during the discrete time period between the event of default and a (potential) future cure, then [the creditor] has the sole interest in those payments and [the debtor] has no interest in them. This holds true even if [the

7 Case No. 17-2374 WBCMT 2003-C9 Island Living, LLC v. Swan Creek Ltd. P’ship

debtor] later cures the default. We find the latter conceptualization of a discrete period to be more aligned with the text of the statute.

Id. at 727.

The district court’s ruling is in conformity with our holding in In re Town Center. The

district court properly held that “under the express terms of the Mortgage, the Assignment of Rents,

and Michigan law—Island Living owned the rents that were paid before the redemption even

though these rents were in the possession of the Receiver[,]” an interpretation that is “aligned with

the text of the statute.” R. 63, Receiver Order, PID 1459; see In re Town Ctr. Flats, LLC, 855 F.3d

at 272.

Nor does the fact that the rents were collected and held by the Receiver rather than

distributed to Island Living make any difference. As noted above, the assignment of rents

effectuated a transfer of ownership upon default under Michigan law. In re Town Ctr. Flats, LLC,

855 F.3d at 725 (6th Cir. 2017). “The rights of the parties were neither changed nor affected by

the receivership.” Kennison v. Kanzler, 4 F.2d 315, 317 (6th Cir. 1925). The district court

correctly held that the “Receiver was, in effect, holding the rents for Island Living. Simply put, at

the time Swan Creek made the redemption payment, Island Living was already entitled to all rents

that the Receiver had previously collected, and those rents therefore rightfully belong to Island

Living.” R. 63, Op. and Order Denying Mot. to Terminate Receivership, PID 1460.

c. Amount of Funds to which Island Living is Entitled

Finally, Swan Creek argues the district court erred because “nothing in the record supports

the lower court’s conclusion that anything was due and owing after [Island Living] received the

redemption payment.” Appellant Br. p. 24. The district court held a hearing in which it addressed

this issue directly. R. 57. At that hearing, the district court asked counsel for Swan Creek if its

argument was whether “the amount due under the loan document exceeds the 4.2 [million] . . .

8 Case No. 17-2374 WBCMT 2003-C9 Island Living, LLC v. Swan Creek Ltd. P’ship

because [Island Living] artificially inflated it. . . . Or the other argument [that], no, they’ve already

been paid in full everything they are entitled to under the loan documents.” Id. at PID 1133. Swan

Creek argued the former, conceding that pursuant to the loan documents, including default interest,

Island Living was owed something “in the ballpark” of $4.8 million (prior to the redemption), but

that the amount was inequitable due to Island Living’s alleged delay; on appeal Swan Creek now

argues the latter. See id. at PID 1133–34; see also Appellant Br. p. 24. The district court, after

holding a hearing, and partly as a result of Swan Creek’s admissions at that hearing, determined

that Swan Creek owed in excess of $650,000, an amount greater than the excess funds held by the

Receiver and owned by Island Living at the time of the redemption. We cannot conclude that the

district court abused its discretion in so doing.

IV.

For the reasons stated above, we AFFIRM the district court’s Order denying Swan Creek’s

motion to terminate receivership and distribute funds.