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In re Town Center Flats, LLC

United States Court of Appeals, Sixth Circuit

May 2, 2017

In re: Town Center Flats, LLC, Debtor.
v.
ECP Commercial II LLC, Appellee. Town Center Flats, LLC, Appellant,

          Argued: March 8, 2017

         Appeal from the United States District Court for the Eastern District of Michigan at Detroit. No. 2:15-cv-11881-Bernard A. Friedman, District Judge.

         United States Bankruptcy Court for the Eastern District of Michigan at Detroit. No. 15-41307-Walter Shapero, Judge.

         ARGUED:

          Robert N. Bassel, Clinton, Michigan, for Appellant.

          Jeremy S. Friedberg, LEITESS FRIEDBERG, PC, Baltimore, Maryland, for Appellee.

         ON BRIEF:

          Robert N. Bassel, Clinton, Michigan, for Appellant.

          Jeremy S. Friedberg, LEITESS FRIEDBERG, P.C., Baltimore, Maryland, for Appellee.

          Before: CLAY, GIBBONS, and STRANCH, Circuit Judges.

          OPINION

          JANE B. STRANCH, Circuit Judge.

          This bankruptcy case centers on property rights in an assigned stream of rents. The extent of a debtor's rights in those rents under Michigan law determines whether the rents are properly included in a Chapter 11 bankruptcy estate. The bankruptcy court decided that an assignment of rents creates a security interest, but does not change ownership, and held that an assignor continues to have a property interest in the rents. Accordingly, the bankruptcy court included the rents in the bankruptcy estate. The district court vacated the order of the bankruptcy 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. Agreeing with the district court's reasoning, we hold that the debtor, Town Center Flats, LLC, did not retain sufficient rights in the assigned rents under Michigan law for those rents to be included in the bankruptcy estate. We therefore reverse the order of the bankruptcy court.

         I. BACKGROUND

         A. Factual History

         The parties do not dispute the underlying facts. Debtor Town Center Flats, LLC owns a 53-unit residential complex in Shelby Township, Michigan. Town Center financed construction of the building with a $5.3 million loan from KeyBank that was later assigned to ECP Commercial II LLC. The loan was secured with a mortgage and an agreement to assign rents to the creditor in the event of default. In the agreement to assign rents, Town Center "irrevocably, absolutely and unconditionally [agreed to] transfer, sell, assign, pledge and convey to Assignee, its successors and assigns, all of the right, title and interest of [Town Center] in . . . income of every nature of and from the Project, including, without limitation, minimum rents [and] additional rents . . . ." The agreement purported to be a "present, absolute and executed grant of the powers herein granted to Assignee, " while simultaneously granting a license to Town Center to ...


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