|August 9, 2012|
Previously published on August 7, 2012
The United States Bankruptcy Court for the Western District of Michigan recently held in a published opinion that no statutory or common law landlord’s lien exists under Michigan law. Rather, in order for a landlord to assert a valid lien on the personal property of its tenant, the tenant must have consensually agreed to grant a security interest in the property and the landlord must have perfected such interest in accordance with Article 9 of the Uniform Commercial Code. In re Kentwood Pharmacy, LLC, --- B.R. ---, 2012 WL 2899383 (Bankr. W.D. Mich. July 17, 2012).
In Kentwood Pharmacy, the debtor’s lender held a validly perfected security interest in all of the debtor’s personal property, including such property located at property leased by the landlord to the debtor. After the debtor filed for relief under Chapter 7 of the Bankruptcy Code, the trustee sold the debtor’s assets free and clear of any liens, claims and other encumbrances, with the liens and security interests of secured parties attaching to the proceeds in the same rank and priority as prior to the sale. Thereafter, the trustee filed a motion seeking authority from the court to distribute the proceeds to the lender. The debtor’s landlord, however, objected to the distribution, arguing that it held a common law possessory landlord’s lien on the debtor’s property located on the leased real estate, and thus the proceeds of such property. Importantly, the lease agreement between the debtor and the landlord did not grant the landlord a consensual lien to be perfected in accordance with Article 9.
After the lender commenced an adversary proceeding for a declaratory judgment with respect to the priority of its security interest, the lender filed a motion for judgment on the pleadings. The landlord, seemingly without any basis and relying on what the court termed an “opaque” position, filed a cross motion for judgment on the pleadings.
Ruling in favor of the lender, the court undertook a comprehensive chronological review of authority regarding landlord’s liens under Michigan law. Based on this authority and the distinguishing circumstances therein, the court concluded that not only does no common law landlord’s lien currently exist under Michigan law, but also that no such landlord’s lien has ever existed under Michigan law. The court further stated that it had “spent many hours to attempt to find any authority that even marginally supports the [landlord’s] asserted ‘legitimate conclusion’ that a broad common law (or equitable) lien covering a lessee’s personalty is recognized in Michigan.” However, according to the court, nothing was located that even remotely supported the landlord’s “vacuous” assertion. Finally, the court classified the independent research it conducted based on the landlord’s hollow arguments as “chasing an apparition.” In sum, the court held that it was extremely confident that if called upon to decided this issue, the Michigan Supreme Court would agree that no broad landlord’s lien in Michigan exists other than consensual liens arising under the UCC.
Lenders, landlords, tenants and even practitioners for that matter have long assumed that Michigan law does not provide for a common law possessory landlord’s lien. The decision in Kentwood Pharmacy reaffirms this belief and can be distilled into the following basic principles:
(i) A landlord has no right to a common law possessory lien on a tenant’s personal property under Michigan law.
(ii) The Michigan legislature has not enacted a statutory landlord’s lien with respect to the property of a tenant.
(iii) Article 9 of the UCC provides the only means by which a landlord may assert a lien on, or security interest in, the property of a tenant under Michigan law.
Although the Kentwood Pharmacy decision provides some reassurance to lenders that their collateral cannot be held hostage by a landlord or their security interest subordinate to a landlord’s lien, it is nonetheless still advisable for lenders to request subordination, non-disturbance and attornment agreements from their borrower’s landlords. Landlords, on the other hand, should view Kentwood Pharmacy as a cautionary tale and thus ensure that all current leases and amendments grant the landlord a security interest in the personal property of the tenant that will need to be perfected in accordance with Article 9 of the UCC.