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Sixth Circuit Holds Assignment of Rents Is Transfer of Ownership Under Michigan Law

Resolving conflicting holdings in the Eastern District of Michigan, the Sixth Circuit recently held that an assignment of rents is a transfer of ownership under Michigan law and the assignor retains no residual property rights in the assigned rents. The case is Town Center Flats, LLC v. ECP Commercial II LLC, Case No. 16-1812. The case involved a 53-unit residential complex in Shelby Township, Michigan. The debtor had agreed to assign its rents to the creditor in the event of a default under its loan documents. Before filing bankruptcy, the creditor took the necessary steps to record notice documents against the debtor. When the debtor filed bankruptcy, it argued that the assignment of rents merely created a security interest in favor of the creditor, not a transfer of ownership, and that the rents were available assets in its bankruptcy proceeding. The debtor further argued that since it was a single asset real estate entity and rents were its only source of income, an adverse ruling on this issue would doom its chances of reorganization. While acknowledging the policy implications of the debtor's argument, the Sixth Circuit held that Michigan law is clear that the assignment of rents is a transfer of ownership and that the debtor retains no residual property interest in the assigned rents after the transfer has been accomplished.

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