Real Property Notes Blog

2nd Mortgagee’s Claim to Surplus Proceeds Has Priority Over Claim by Mortgagor’s Estate

In a published opinion, the Michigan Court of Appeals has decided for the first time that, when there are surplus proceeds from a sheriff’s sale on foreclosure of a mortgage by advertisement, upon competing claims made by a junior lienholder of the property and by the mortgagor (or here, the mortgagor’s estate), the surplus proceeds are paid first to junior lien holders in order of thier priority and the balance, if any, to the mortgagor.  In re $55336.17 Surplus Funds (Parker v PNC Bank).

The statute does not explicitly state how competing claims are resolve; however, reading the statute as a whole, the court ruled that it was apparent that junior lien holders were to be paid out of any surplus proceeds.  The court rejected the estate’s argument that the lien holders were extinguished by the senior mortgage foreclosure and thus became general creditos.  The court also rejected the argument that such lien holders needed to make a claim against the estate in accordance with the Estates and Protected Individuals Code.

Registering the New Co-Owner: The Attorney’s Perspective

Community Association News, the monthly magazine published by the Michigan Chapter of the Community Associations Institute, contains Steve Sowell’s latest article to be published, “Registering the Co-Owner:  The Attorney’s Perspective.”  The articles advises management companies and associations on how to properly set up their records upon the change of ownership of a condominium unit.

Properly Perfected Assignment of Rents: Rents Not Part of Bankruptcy Estate

The United States Court of Appeals for the Sixth Circuit (which includes Michigan) has held that, if a creditor has properly perfected an assignment of rents prior to the filing of a bankruptcy case, the rents are not property of the estate.

In Town Center Flats, LLC v ECP Commercial II LLC (In re Town Center Flats), the debtor owned a 53-unit residential apartment complex, which construction had been financed through a mortgage and assignment of rents.  Rents from the tenants were the debtor’s only source of income.

The debtor defaulted on its obligation under the loan and the creditor properly perfected the assignment of rents by notifying the tenants and recording a notice with the register of deeds.  The debtor then filed a Chapter 11 bankruptcy.

The creditor filed a motion to prohibit use of the rents collected after the filing.  The debtor opposed the motion, claiming that the rents were cash collateral and pointing out that, without the rents, it had no income to fund a plan of reorganization.  The bankrupcty court agreed and entered an order allowing use of the rents.  The creditor appealed, arguing that, due to the perfection of the assignment of rents, the rents no longer belonged to the debtor and were not part of the bankruptcy estate.

The district court agreed and vacated the bankruptcy court’s decision.  The debtor appealed to the Sixth Circuit Court of Appeals, which affirmed.

Applying Michigan law, the court held that once the assignment of rents had been perfected, the debtor “no longer had an interest in the rents,” citing Otis Elevator v Mid-America Realty Investors, 522 NW2d 732 (Mich. Ct. App 1994).

The court noted that excluding assigned rents from the bankruptcy estate in a single-asset real estate case such as this one would effectively foreclose Chapter 11 relief from these kinds of debtors, but held that Michigan law is clear on the matter.

© Steve Sowell 2018