FYI: 7th Cir Rejects Narrow Reading of TCPA Consent

The U.S. Court of Appeals for the Seventh Circuit recently concluded that a consumer's consent to receive promotional information from a retailer is sufficient consent under the federal Telephone Consumer Protection Act, 47 U.S.C. § 227, et seq. ("TCPA") to receive other mass marketing texts. 

 

The primary issue the Seventh Circuit addressed was the scope of the consent the consumer provided when she gave her cell phone number to the retailer.  The consumer argued that she only provided her cell phone to receive special discount offers, and did not consent to "mass marketing" text messages. 

 

The Seventh Circuit rejected the argument, and determined that the marketing texts were part of the "exclusive information and special offers" she consented to receiving.  The Court determined that the texts at issue were all related to the same subject matter covered by the consumer's consent, and the consumer could not attempt to parse her consent to receive some promotional information but not others. 

 

A copy of the opinion is available at:  Link to Opinion

 

A retailer used a vendor's software text-messaging platform to connect with its customers.  The store used a variety of methods to obtain its customers' cell phone numbers.  The customers could opt in the store's "Text Club" by providing their cell phone numbers to employees while in the store, they could text the store's name to a number posted in the stores, or they could fill out a card provided by the store.  The card specifically stated that the information would be used solely for providing "exclusive information or special offers." 

 

The vendor's text-messaging platform used a simple system to deliver text messages.  The numbers received via text were automatically loaded into the vendor's platform.  The numbers given to store employees or received on the card were manually entered into the platform. 

 

The retailer could then manage its promotional texts by accessing the vendor's web interface.  Employees could log in to the interface and draft messages to be sent to the text club members.  The store had the ability to send the texts immediately or set a future date and time for the messages to be sent.  The store had collected over 20,000 customers for its text club messages.

 

The plaintiff brought a putative class action complaint against the retailer, alleging the store violated the TCPA by using an automatic telephone dialing system ("ATDS") to send texts without the express consent of the recipient. The trial court certified a class of individuals with a series of Illinois area codes who had received automated texts from the store in the proceeding four years. Both parties then moved for summary judgment.  The trial court denied the plaintiff's motion for summary judgment, and granted the store's motion, concluding that the software platform the vendor used did not qualify as an ATDS under the TCPA.  The plaintiff appealed the granting of summary judgment, and the store cross-appealed the certification of the class.

 

On appeal, the Seventh Circuit quickly confirmed that text messages to cell phones constitute "calls" under the TCPA and, thus, the prohibitions provided by the TCPA applied to the text messages at issue. 

 

The trial court based its granting of the retailer's motion for summary judgment on the conclusion that the plaintiff had not sufficiently established the vendor's platform was an ATDS under the TCPA. 

 

As you may recall, the TCPA prohibits making any call without the prior express consent of the recipient using any ATDS to any cell number.  See 47 U.S.C. § 227(b)(1)(A)(iii).  The trial court concluded that the vendor's platform did not qualify as an ATDS based on the affidavit from one of the vendor's employees who stated that human intervention was required "nearly" every step of the way, from entering the new numbers into the platform, to determining when the texts would be sent to the consumers.

 

On appeal, the Seventh Circuit concluded that the trial court erred in granting summary judgment on the basis that the vendor's platform was not an ATDS.  According to the Seventh Circuit, the affiant's use of the word "nearly" demonstrated that human intervention was not necessary at the precise point of action prohibited by the TCPA: using technology to "push" the texts to an aggregator that sends the messages out simultaneously to hundreds or thousands of cell phone users at a pre-determined date and time.

 

The Seventh Circuit then addressed the issue the trial court did not address: the plaintiff's consent to receive text messages. 

 

The Appellate Court first looked at the evolution of consent under the TCPA.  The Court observed that the FCC explained in its 1992 Order that "persons who knowingly release their phone number have in effect given their invitation or permission to be called at the number which they have given, absent instructions to the contrary." 7 FCC Record at 8769, ¶ 31.  According to the Seventh Circuit, the FCC explained that "telemarketers will not violate our rules by calling a number which was provided as one at which the called party wishes to be reached." Id.

 

The Seventh Circuit then looked at another order from 2012 in which the FCC determined texts and calls that include or introduce an advertisement or constitute telemarketing require express written consent. See 47 C.F.R. § 64.1200(a)(2). Then, the Court looked at an FCC 2015 Order where the FCC clarified that the existence of a consumer's wireless number in another person's wireless phone, standing alone, does not demonstrate consent to autodialed texts. That Order also clarified that consent could be revoked "at any time and through any reasonable means." 30 FCC Rcd at 7989-90, ¶ 47.

 

Turning to the facts, the Seventh Circuit noted that plaintiff gave her cell phone number to the store on "several" different occasions. First, plaintiff signed up for what she characterized as a "frequent buyer card." The retailer also produced a "VIP" Card and a "CLIENT LIST" card with plaintiff's name and cell phone number. Both of the cards contained the following disclaimer: "INFORMATION PROVIDED TO [the company] IS USED SOLELY FOR PROVIDING YOU WITH EXCLUSIVE INFORMATION AND SPECIAL OFFERS. [The company] WILL NEVER SELL YOUR INFORMATION OR USE IT FOR ANY OTHER PURPOSE." 

 

The retailer also provided system notes reflecting plaintiff's request for a sales associate to call her when a particular pair of shoes arrived back in stock. Finally, according to the Court, the record established, and plaintiff admitted, that she texted the store's name to the vendor in order to opt into the text program.

 

Based on these facts, the Seventh Circuit concluded that plaintiff had provided her consent to receive the texts.  Plaintiff argued that she had only provided her consent to receive texts regarding discounts, but did not consent to "mass marketing" materials.  The Court rejected this argument, concluding that plaintiff's interpretation of "consent" was too narrow. The court relied on a Ninth Circuit decision that concluded "an effective consent is one that relates to the same subject matter as is covered by the challenged calls or text messages." 

 

The Court also cited an Eleventh Circuit ruling that concluded that by "voluntarily providing his cell phone number" to the defendant, the plaintiff gave his prior express consent to be contacted. 

 

Based on these rulings, the Seventh Circuit concluded that plaintiff had provided the consent required under the TCPA. 

 

The Seventh Circuit distinguished the few cases the plaintiff cited in support of her position that her consent was limited.  In those cases, according to the Seventh Circuit, the courts concluded that the consent the consumer provided did not provide "carte blanche" consent to receive all calls or texts.  The Court concluded that those cases actually supported its conclusion that the calls or texts at issue have to be tied to the purpose for which the consent was provided.

 

As to the class certification issue, the Seventh Circuit affirmed the trial court's certification of a class consisting of individuals with certain Illinois area codes who had received automated texts from the store in the proceeding four years.  The Appellate Court concluded that all of the requirements for certifying a class had been satisfied.  With its ruling on summary judgment, however, the Court determined that the entry of summary judgment was appropriate as to the class, but would not be effective as to any class members who could demonstrate that they never provided their consent to the store. 

 

Accordingly, the Seventh Circuit affirmed the trial court's granting of summary judgment and certification of a class.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

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FYI: Ill App Ct Holds Reverse Mortgage Borrower Had Mortgageable Interest Following Intestate Death of His Spouse

The Appellate Court of Illinois, First District, recently ruled that the mortgagee of a reverse mortgage loan held an interest in the secured property to the extent that the borrower inherited an interest in the property following the non-borrower's spouse's intestate death. 

 

Accordingly, the Court reversed the trial court's dismissal of the reverse mortgagee's foreclosure complaint and remanded the matter for further determination of the borrower's inherited interest in the subject property.

 

A copy of the opinion is available at:  Link to Opinion

 

The borrower and his spouse purchased the subject property as joint tenants.  Some years later, the borrower quit claimed his interest to his spouse, but the couple continued to reside together at the subject property until the spouse's death.  As noted by the Court on appeal, the trial court record appears to indicate that the spouse died intestate leaving the borrower and a daughter - the defendant heir in the foreclosure action - as the only heirs.

 

The quit claim deed from the borrower to the wife did not provide the complete legal description for the subject property, but did identify the property by the common address.

 

Subsequent to the death of the wife, the borrower entered into a reverse mortgage which was eventually assigned to the plaintiff mortgagee in the foreclosure action. 

 

Following the borrower's death, the mortgagee initiated its foreclosure action.  The defendant heir to the borrower and spouse moved to dismiss the foreclosure complaint arguing that at the time the reverse mortgage was executed the borrower had no interest in the subject property to convey due to the quit claim deed, and therefore, the reverse mortgage was void and the foreclosure complaint should be dismissed.

 

In response, the mortgagee argued that the quit claim deed failed for lack of a sufficient description of the property being conveyed, and alternatively, that even if the quit claim deed were valid, the borrower still had a mortgageable interest in the subject property due to the intestate death of his wife.  In support of its position that the quit claim deed was insufficient, the mortgagee submitted an affidavit from an attorney with the title company who opined that the description in the quit claim deed was ambiguous on its face. 

 

The trial court rejected the mortgagee's arguments - specifically determining that the quit claim deed was valid, and that the mortgagee's affidavit was "self-serving" - and granted the heir's motion to dismiss the foreclosure action with prejudice as to the mortgagee's claims for foreclosure, quit title, reformation and declaratory judgment. 

 

The trial court also denied a request for sanctions filed by the heir pursuant to Illinois Supreme Court Rule 137 in which she argued that the foreclosure complaint was not well-grounded in fact or law.

 

The mortgagee appealed the dismissal and the heir appealed the denial of sanctions.

 

On appeal, the Appellate Court agreed with the lower court's determination that the quit claim deed sufficiently identified the subject property to validly convey the borrower's interest to the spouse.  In doing so, the Court noted that Illinois courts presume that the grantor of a quit claim deed intends to convey the property he or she owns, but if the land cannot be located from the description in the deed, the deed is void for uncertainty. 

 

However, the Court also noted that the "description is sufficient if it allows a competent surveyor to identify it with reasonable certainty."  And, the deed will not be declared void for uncertainty "if it is possible, by any reasonable rules of construction, to ascertain from the description, aided by extrinsic evidence, what property it is intended to convey." Brunotte v. DeWitt, 360 Ill. 518, 528 (1935). 

 

Here, the Appellate Court determined that although the legal description in the quitclaim deed was "truncated, it is not inaccurate."  Despite omitting several lines of the correct legal description, the Court found that the record indicated that it was undisputed that the subject property existed at the time the quitclaim deed was executed and that the borrower owned it at that time. 

 

Relying upon the presumption that the borrower intended convey the property he owned at that time, and extrinsic evidence which provided the full legal description for the subject property, the Court concluded that the quitclaim deed contained a sufficient legal description and was not void for uncertainty. 

 

As an aside, the Appellate Court explained that the fact that the borrower continued to reside at the subject property with his spouse following the conveyance by quitclaim deed was not probative of his intent.  Further, the Court noted, the fact that the borrower represented in his application for the reverse mortgage that he owned the subject property in fee simple was also not indicative of whether or not he intended to convey the subject property by quitclaim deed because it was plausible that the borrower - a layman - assumed he had inherited the property outright after his wife's death.  The Court also found that the affidavit of the title attorney submitted by the mortgagee in support of its argument that the quitclaim deed was ambiguous added no substance to the analysis because the affiant had no personal knowledge of the making of either the quitclaim deed or reverse mortgage.

 

The Appellate Court did, however, agree with the mortgagee's alternative argument that the spouse died intestate, leaving the borrower with a mortgageable interest in the subject property at the time the reverse mortgage was executed. 

 

As you may recall, under the intestacy laws of Illinois, the spouse's real and personal estate would be divided equally between the borrower and the heir, after payment of all just claims against the spouse's estate.  Further, in Illinois "a cotenant can mortgage his or her interest in a jointly held property."  Cadle Co. II v. Stauffenberg, 221 Ill. App. 3d 267, 269 (1991).  If the cotenant attempts to mortgage more than his share, the mortgage "stays in force for the actual interest of the mortgagor." Thus, the Court held, the borrower owned a half-interest in the subject property which he had a right to mortgage to the extent of his interest.

 

The Court criticized the heir's prevarication on the issue of whether or not the spouse died with or without a will.  As noted by the Court, that the heir's mere speculation that the spouse may have had a will at the time of her death is not well-taken considering that the heir "is in a good position to know whether her mother had a will, and certainly has an interest to know."  The heir's failure to introduce any evidence to the contrary allowed the mortgagee to argue on information and belief that the spouse died intestate -  it need not do anything further to prove a negative (the non-existence of a will).  The Court also noted that the fact that the spouse's estate had never been fully sorted out was not the fault or in the control of the mortgagee. 

 

Ultimately, the Court determined that factual issues existed as to whether the spouse died with or without a will, and as a consequence the interests in the subject property inherited by the borrower, which warranted further discovery.  Accordingly, the Court held that the trial court's granting of the motion to dismiss was in error and remanded the case for further proceedings on the mortgagee's claims.

 

As to the trial court's denial of sanctions requested by the heir, the First District upheld the trial court's ruling that sanctions were not appropriate.

 

Illinois Supreme Court Rule 137 provides that an attorney's signature on a pleading indicates that to the best of the attorney's knowledge "after reasonable inquiry" the pleading is "well grounded in fact and is warranted by existing law."  If a trial court finds that a violation of this rule occurred, the court may impose sanctions on the offending party including attorneys' fees. 

 

Initially, the Appellate Court rejected the heir's argument that the trial court erred in not requiring the mortgagee to provide a written response to her petition for sanctions and for failing to provide a written explanation for its denial.  In doing so, the Court noted that there are no such requirements provided for under Rule 137, and that the Court will not read these requirements into the rule. 

 

Further, the Court rebuffed the heir's arguments that the case was an "open-and-shut case" either factually or legally, and that the multiple amended pleadings submitted by the mortgagee were not an abuse of the judicial process or vexatious and harassing. 

 

Accordingly, the Appellate Court reversed the trial court's dismissal of the foreclosure complaint, upheld its denial of a sanctions award, and remanded the matter for further proceedings consistent with its opinion.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

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FYI: SCOTUS Holds Class Plaintiffs Cannot Voluntarily Dismiss Claims to Appeal Denial of Class Cert

The Supreme Court of the United States recently held that class action plaintiffs cannot stipulate to a voluntary dismissal with prejudice, then appeal the trial court's prior interlocutory order striking their class allegations because a voluntary dismissal does not qualify as a "final decision" under 28 U.S.C. §1291 and improperly circumvents Federal Rule of Civil Procedure 23(f).

 

A copy of the opinion is available at:  Link to Opinion

 

A group of purchasers of Microsoft's Xbox 360 gaming console filed a putative class action alleging that the Xbox was designed defectively because it scratched game discs "during normal game-playing conditions." The trial court denied class certification, finding that "individual issues of damages and causation predominated over common issues." The plaintiffs' petitioned the U.S. Court of Appeals for the Ninth Circuit for leave to appeal the denial, which was denied. The plaintiffs then settled individually.

 

Two years later, a group of plaintiffs represented by some of the same counsel as in the first case filed another putative class action based on the same design defect as the first action.  The trial court in the second action denied class certification, concluding that the doctrine of "comity required adherence to the earlier certification denial therefore struck [the] class allegations."

 

The plaintiffs petitioned the Ninth Circuit under Rule 23(f) for permission to appeal the order striking the class allegations, the "functional equivalent" of an order denying class certification, arguing that the order effectively killed their case because of the small size of their individual claims compared to the cost of litigating to final judgment. The Ninth Circuit denied the petition.

 

Instead of settling their claims individually as in the first action, petitioning the trial court to certify the order for immediate appeal, or litigating their case and trying to persuade the trial court to reconsider its denial of class certification prior to final judgment and then appealing the final judgment, the plaintiffs moved to dismiss their case with prejudice.

 

The plaintiffs argued that they would appeal the order striking their class allegations after the trial court entered its final order dismissing the case. Microsoft stipulated to the dismissal, but took the position that plaintiffs had no right to appeal the order striking the class allegations after the voluntary dismissal with prejudice.

 

The Ninth Circuit concluded that it had jurisdiction to hear the appeal pursuant to § 1291, rejecting Microsoft's argument that the voluntary dismissal tactic improperly "circumvented Rule 23(f)."  It then "held that the District Court had abused its discretion in striking [the] class allegations" because it had misinterpreted "recent Circuit precedent … and therefore misapplied the comity doctrine."

 

Microsoft filed a petition for a writ of certiorari, which was granted, asking the Supreme Court of the United States to resolve a split among the federal courts of appeals over the question of whether "federal courts of appeals have jurisdiction under § 1291 and Article III of the Constitution to review an order denying class certification (or … an order striking class allegations) after the named plaintiffs have voluntarily dismissed their claims with prejudice."

 

The Supreme Court began by explaining that "[u]nder §1291 of the Judicial Code, federal courts of appeals are empowered to review only 'final decisions of the district courts[,]'" and its application of this "finality rule" was controlled by its 1978 ruling in Coopers & Lybrand v. Livesay and Federal Rule of Civil Procedure 23(f).

 

In Coopers & Lybrand, the Supreme Court held that "death knell" doctrine did not require "mandatory appellate jurisdiction" over a trial court's interlocutory order "striking class allegations or denying a motion for class certification."  Instead, the Court held, a trial court applying this doctrine should consider whether denying class certification "would end a lawsuit for all practical purposes because the value of the named plaintiff's individual claims made it 'economically imprudent to pursue his lawsuit to a final judgment and [only] then seek appellate review" of the refusal to certify the class.

 

If the denial order sounded the "death knell," it was appealable under §1291. However, if "the plaintiff had 'adequate incentive to continue [litigating], the order [was] considered interlocutory" and an immediate appeal was impossible. The Court clarified that just because an interlocutory order denying class certification "may induce a party to abandon his claim before final judgment is not sufficient reason for considering [it] a 'final decision' within the meaning of §1291."

 

The Supreme Court explained that after its ruling in Coopers & Lybrand, class action plaintiffs had a difficult time obtaining immediate appellate review of an adverse class certification ruling because there were only two options: (a) obtain an order from the trial court under §1292(b) certifying that the order "involves a controlling question of law as to which there is a substantial ground for difference of opinion and that an immediate appeal from the order may materially advance the ultimate termination of the litigation[;]" or (b) "satisfy the extraordinary circumstances test applicable to writs of mandamus."

 

In 1998, however, the Court approved Federal Rule of Civil Procedure 23(f) in response to Coopers & Lybrand.  The present Rule 23(f) gives the courts of appeals unfettered discretion to allow a "permissive interlocutory appeal" of an order granting or denying class certification.

 

The Supreme Court noted that Rule 23(f) thus removes the power of the trial court to defeat any opportunity to appeal a class certification ruling, while also denying a right to appeal that might be prone to abuse.

 

The Supreme Court did not reach the Article III standing question because it concluded that § 1291 does not confer jurisdiction under the facts presented, reasoning that "[b]ecause respondents' dismissal device subverts the final-judgment rule and the process Congress has established for refining that rule and for determining when nonfinal orders may be immediately appealed, … the tactic does not give rise to a 'final decision[n]' under § 1291."

 

The Court explained that the "voluntary-dismissal tactic, even more than the death-knell theory, invites protracted litigation and piecemeal appeals."

 

The Supreme Court rejected the argument that Rule 23(f) was irrelevant because it only addresses interlocutory orders and the case involved a final judgment, reasoning that "[i]f respondents' voluntary-dismissal tactic could yield an appeal of right, Rule 23(f)'s careful calibration—as well as Congress' designation of rulemaking 'as the preferred means for determining whether and when prejudgment orders should be immediately appealable, … would be severely undermined.'"

 

Accordingly, the Ninth Circuit's judgment was reversed and the case remanded for further proceedings. 

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

Alabama   |   California   |   Florida   |   Georgia   |   Illinois   |   Indiana   |   Maryland   |   Massachusetts   |   Michigan   |   New Jersey   |   New York   |   Ohio   |   Pennsylvania   |   Texas   |   Washington, DC   |   Wisconsin

 

 

NOTICE: We do not send unsolicited emails. If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention. Thank you.

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FYI: 6th Cir Holds Michigan Assignment of Rents Removes Rental Income from Bankruptcy Estate

The U.S. Court of Appeals for the Sixth Circuit recently concluded that Michigan's assignment of rents statute sufficiently deprived the assignor of the ownership of the rents such that the rents could not be included in the assignor's bankruptcy estate. 

 

The primary issue before the Court was whether Michigan's assignment of rents statute allowed the assignor to retain sufficient rights in the rents for the rents to be included in the assignor's bankruptcy estate.  The bankruptcy court determined that the debtor's assignment of the rents gave the assignee a security interest in the rents but did not change the ownership, and the assignor still maintained a property interest in the rents even after the assignment. 

 

The Sixth Circuit disagreed, concluding that an assignment of rents, if recorded and a default occurs, is a transfer of ownership rights in the rents and the assignor no longer has an interest in them. 

 

A copy of the opinion is available at:  Link to Opinion

 

The appellant debtor owned a multi-unit residential complex, and it financed the construction of the building with a $5.3 million loan that was later assigned to the appellee creditor.  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, the debtor "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 [debtor] 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 the debtor to collect and retain rents until an event of default, at which point the license would "automatically terminate without notice to [debtor]." Rents from the residential complex are the debtor's only source of income.

 

The debtor ultimately defaulted on the loan, and the creditor sent a notice of default. The notice complied with the terms of the agreement and with Mich. Comp. Laws § 554.231, which allows creditors to collect rents directly from tenants of certain mortgaged properties. The following day, the creditor recorded the notice documents in Macomb County, Michigan, completing the last step required by the statute to make the assignment of rents binding against both the debtor and the tenants of the property. 

 

Within a month of recording the notice documents, the creditor filed a complaint against the debtor, and requested the appointment of a receiver to take possession of the debtor's property.  Approximately one week later, the debtor filed for Chapter 11 bankruptcy relief. The parties reached an interim agreement to allow the debtor to continue to collect rents from the tenants of the complex, with $15,000 per month used to pay down the debt to the creditor and the remainder of the rents used for authorized expenses.

 

The creditor filed a motion to prohibit the debtor from using rents collected after the petition was filed. The debtor opposed the motion and pointed out to the bankruptcy court that the company would have no income to work with in its Chapter 11 reorganization plan if the rents were not part of the bankruptcy estate.

 

The bankruptcy court agreed with the debtor and denied the creditor's motion. The bankruptcy court determined that the assigned rents qualified as cash collateral in the bankruptcy estate, meaning, under Chapter 11, that the debtor must provide "adequate protection" to the creditor before using the cash. 

The creditor appealed to the trial court and argued that Michigan law established a transfer of ownership in the assigned rents from the debtor to the creditor. The trial court agreed with the creditor and vacated the bankruptcy court's decision. The debtor appealed to the Sixth Circuit.

 

On appeal, the Sixth Circuit identified the issues as first determining the extent of property rights held by the assignor and assignee of rents under Michigan law, and then second was whether the rights retained by the assignor are sufficient for the rents to be included in the assignor's bankruptcy estate. 

 

The Sixth Circuit began its analysis by first evaluating the evolution of Michigan's assignment of rents statute.  Originally, the traditional rule in Michigan was that an assignment of rents was unenforceable because it would interfere with a mortgagor's right of redemption.  As a result, the default rule in Michigan is that an assignment of rents is unenforceable. 

 

However, a statute enacted in 1925 created a right to assign rents for properties subject to trust mortgages.  Then, in 1953, Michigan enacted Mich. Comp. Laws § 554.231, which allowed the assignment of rents for additional categories of properties, including those "with any mortgage on commercial or industrial property." 

 

The Michigan statute specifically provides:

 

Hereafter, in or in connection with any mortgage on commercial or industrial property . . . it shall be lawful to assign the rents, or any portion thereof, under any oral or written leases upon the mortgaged property to the mortgagee, as security in addition to the property described in such mortgage. Such assignment of rents shall be binding upon such assignor only in the event of default in the terms and conditions of said mortgage, and shall operate against and be binding upon the occupiers of the premises from the date of filing by the mortgagee in the office of the register of deeds for the county in which the property is located of a notice of default in the terms and conditions of the mortgage and service of a copy of such notice upon the occupiers of the mortgaged premises.

 

Mich. Comp. Laws § 554.231.  The statute also contains a provision addressing the validity of the assignment:

 

The assignment of rents, when so made, shall be a good and valid assignment of the rents to accrue under any lease or leases in existence or coming into existence during the period the mortgage is in effect, against the mortgagor or mortgagors or those claiming under or through them from the date of the recording of such mortgage, and shall be binding upon the tenant under the lease or leases upon service of a copy of the instrument under which the assignment is made, together with notice of default as required by [the above section].

 

Mich. Comp. Laws § 554.232.

 

According to the Sixth Circuit, under Michigan law, the assignor of the rents no longer has a valid interest in the rents "once an assignee has: 1) entered into an agreement to assign rents; 2) recorded that agreement; and 3) default has occurred," because the assignee's rights "are perfected and binding against the assignor."  The Court cited to several Michigan cases for the general proposition that the assignment of rents is a complete transfer of ownership so long as the three requirements have been met.

 

One of the cases the Sixth Circuit relied on was from the Michigan Court of Appeals, in which that court held that a prior-perfected interest in assigned rents had priority over an interest held by a judgment creditor who sought to garnish rents. See Otis Elevator Co. v. Mid-America Realty Investors, 522 N.W.2d 732, 733 (Mich. Ct. App. 1994). The Sixth Circuit emphasized the holding from that court that the judgment creditor could not garnish the rents because the assignor no longer had an ownership interest in them.

 

The Sixth Circuit rejected the debtor's argument that the statute only authorized the assignment of a security interest, not the ownership rights.  According the Court, the language of the statute did not support such a narrow interpretation and courts interpreting the statute have consistently concluded that the statute authorizes the assignment of ownership of the rents. 

 

The Court also referenced the broad language in the debtor's assignment agreement that "irrevocably, absolutely and unconditionally" transferred the debtor's right in a "present, absolute and executed assignment of the Rents and of the Leases" from the debtor's property.  The court concluded this language evidenced the debtor's intent to transfer ownership in the assigned rents.

 

Next, the Sixth Circuit rejected the debtor's argument that it retained certain rights to the assigned rents.  The Court concluded that the language contained in Mich. Comp. Laws § 554.232 established that the rents were the property of the assignee during the discrete period from the time of the default until the time of potential future cure, if any. 

 

Finally, the Sixth Circuit ruled that even though it is well-established that the scope of a Chapter 11 bankruptcy was designed to be broad, the assigned rents at issue could not be included in debtor's estate.  The Court referenced several bankruptcy court rulings interpreting Michigan law that concluded the assigned rents under Mich. Comp. Laws § 554.231 should not be included in the debtor's estate.  The Sixth Circuit rejected the underlying bankruptcy court's policy concern that removing the sole stream of income for a debtor would eliminate relief under Chapter 11, and concluded that Michigan law is clear on the issue. 

 

Accordingly, the Sixth Circuit reversed the order of the bankruptcy court. 

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
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