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LLC v. Swan Creek Limited Partnership

United States District Court, E.D. Michigan, Southern Division

October 23, 2017

WBCMT 2003-C9 ISLAND LIVING, LLC, Plaintiff,
v.
SWAN CREEK LIMITED PARTNERSHIP, Defendant.

          ORDER DENYING DEFENDANT'S MOTION TO TERMINATE THE RECEIVERSHIP AND DISTRIBUTE PROCEEDS (ECF #44)

          MATTHEW F. LEITMAN, UNITED STATES DISTRICT JUDGE

         In this action, Plaintiff WBCMT 2003-C9 Island Living (“Island Living”) alleges that Defendant Swan Creek Limited Partnership (“Swan Creek”) breached its payment obligations under a promissory note. The note was secured by a mortgage on a mobile home park owned and operated by Swan Creek.

         During the course of these proceedings, the Court appointed a receiver to operate the park. In discharging his duties, the receiver collected rents from tenants of the park.

         Island Living ultimately foreclosed on the park, and it placed the highest bid at the foreclosure sale. Then, just prior to the end of the statutory redemption period, Swan Creek exercised its redemption rights and reclaimed the park. At the time of Swan Creek's redemption, the receiver had roughly $650, 000 (in rents and other charges) in his possession that he had collected during his operation of the park. Swan Creek insists that Island Living has no right to these funds.

         Swan Creek has now filed a motion in which it seeks an order (1) terminating the receivership and (2) directing that the funds the receiver had collected at the time of the redemption be distributed to Swan Creek. (See ECF #44.) For the reasons explained below, the Court DENIES the motion.

         I

         A

         In November 2003, Swan Creek obtained a $4.35 million loan from lender LaSalle Bank, N.A. to purchase a mobile home park in New Boston, Michigan. (See ECF #1-4.) Swan Creek executed three documents in connection with the loan: a Promissory Note (see id.); a Mortgage (see ECF #1-5); and an “Assignment of Leases and Rents” (the “Assignment of Rents”) (see ECF #1-6) (collectively, the “Loan Documents”). Island Living later acquired LaSalle Bank's interests (as lender) in the Loan Documents after a series of assignments. (See ECF #1-8; see also First Am. Compl. at ¶¶ 18-20, ECF #11 at Pg. ID 300-02.)

         Several aspects of the Loan Documents are relevant to Swan Creek's motion. First, in the Assignment of Rents, Swan Creek assigned to the lender all right, title, and interest in all present and future rents collected from tenants of the park:

Section 1.1 Property Assigned. Borrower hereby absolutely and unconditionally assigns and grants to Lender the following property, rights, interests and estates, now owned, or hereafter acquired by Borrower:
. . .
(c) Rents. All rents, additional rents, revenues, income, issues and profits arising from the Leases and renewals and replacements thereof and any cash or security deposited in connection therewith and together with all rents, revenues, income, issues and profits from the use, enjoyment and occupancy of the Property, and all royalties, overriding royalties, bonuses, delay rentals and any other amount of any kind or character arising under any and all present and all future oil, gas and mining Leases covering the Property and any part thereof, and all proceeds and other amounts paid or owing to Borrower under or pursuant to any and all contracts and bonds relating to the construction, erection or renovation of the Property, whether paid or accruing before or after the filing by or against Borrower of any petition for relief under the Bankruptcy Code (collectively, the “Rents”).

(Assignment of Rents at § 1.1, ECF #1-6 at Pg. ID 94-95.)

         Second, the Assignment of Rents granted Swan Creek a revocable license to collect the rents and sums due from tenants of the park:

Section 2.1 Present Assignment and License Back. The parties intend that this Assignment grants a present, absolute, and unconditional assignment of the Leases, Rents, Leave 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. Such assignment and grant shall continue in effect until the Debt is paid in full and all of the Other Obligations are fully satisfied. Subject to the provisions set forth herein and provided there is no Default, Lender grants to Borrower a revocable license to enforce the Leases and collect the Rents as they become due (excluding, however, any Lease termination, cancellation or similar payments which Borrower agrees shall be held in trust and turned over to Lender for credit to principal under the Loan) . . . .

(Id. at § 2.1, Pg. ID 96.)

         Third, the Assignment of Rents provides that Swan Creek's license to collect rents terminates in the event of a default (as defined by the Loan Documents), and in the event of such a default, the lender has the exclusive right to collect the rents:

Section 3.1 Remedies of Lender. Upon or at any time after the occurrence of … an Event of Default . . . the license granted to Borrower in Section 2.1 of this Assignment shall be automatically revoked, and Lender shall immediately be entitled to possession of all Rents and sums due under any Lease Guaranties, whether or not Lender enters upon or takes control of the Property.
***
Section 6.2 Assignee's Rights. Notwithstanding anything herein to the contrary, Assignee shall be entitled to all the rights and remedies conferred by (MCLA 554.231, et seq.), (MCLA 554.211, et seq.) to the extent applicable, and (MCLA 554.81, et seq.) Upon the occurrence of an Event of Default and without any action by Assignee, Assignor shall have no further right to collect or otherwise receive such Rents, which will be the absolute and sole property of Assignee, pursuant to those statutes.

(Id. at §§ 3.1, 6.2, ECF #1-6 at Pg. ID 97, 103.)

         Fourth, like the Assignment of Rents, the Mortgage provides that in the event of Swan Creek's default, the rents would belong to the lender:

Lender shall be entitled to all the rights and remedies conferred by (MCLA 554.231, et seq., (MCLA 554.211 et seq.) to the extent applicable, and (MCLA 554.81, et seq.). 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 the absolute and sole property of Lender pursuant to those statutes.

(Mortgage at § 52(b), ECF #1-5 at Pg. ID 82.)

         Each of the Loan Documents have a choice of law provision that specifies that the agreements are governed by Illinois law. (See Promissory Note at § 10.7, ECF #1-4 at Pg. ID 38; Mortgage at § 35, ECF #1-5 at Pg. ID 77-78; Assignment of Rents at § 5.7, ECF #1-6 at Pg. ID 102.) The Loan Documents also provide that they are subject to certain of Michigan's mortgage and assignment of rent statutes. (Se ...


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