“Vacuous” Landlord Lien Claim: There Are Limits to Advocacy

Huntington Nat’l Bank v. Bruinsma (In re Kentwood Pharmacy, L.L.C.) 478 B.R. 602 (Bankr. W.D. Mich. 2012) –

In Kentwood, the landlord argued that it had a possessory landlord’s lien on the debtor’s assets that was senior to a secured bank claim, arguing that a Michigan Supreme Court case declining to determine whether there was a common law landlord’s lien before adoption of the UCC meant that “the only ‘legitimate conclusion’ is that a common law landlord’s lien exists.”  The landlord’s arguments appear to have exasperated the court, leading to a detailed discussion of the value of the court’s time (which it concluded was $1,400 per hour) in the context of considering sanctions.

The simple question in this case was whether a common law landlord’s lien exists in Michigan.  The bankruptcy trustee had sold the debtor’s assets free and clear of all liens, with liens transferring to the sale proceeds.  When the trustee proposed to distribute the proceeds (less an agreed upon surcharge) to the debtor’s secured lender, the landlord objected, asserting that it had a senior landlord’s lien under Michigan law.

In responding to the objection, the lender relied primarily on:

  • a 1952 federal district court case holding that Michigan law does not create a landlord’s lien for payment of rent “in every situation,” and
  • a statement in a treatise on Michigan real property law that “no Michigan cases have been discovered that consider whether a common-law landlord’s lien for unpaid rent exists in Michigan.”

The landlord relied primarily on two cases:

  • The first was an 1683 decision (characterized as “ancient” by the court), which the Kentwood court found stood for the proposition that in appropriate circumstances a subtenant may be liable to pay rent to the prime landlord under equitable principles even though there is no privity between the two parties.
  • The second was a 1935 case that similarly dealt with whether a subtenant should pay the prime landlord or its creditors.  The Kentwood court found that the case stood for the proposition that a landlord has an equitable lien on rent owing by a subtenant where the tenant is insolvent.

The Kentwood court agreed with the 1952 case cited by the lender that the cases giving a landlord an equitable lien in the special circumstance of rent owed by a subtenant did not lead to the conclusion that there was a general landlord’s lien on all assets of the tenant.

Accordingly, on the substance of the issues before the court, it ruled that the landlord did not have a lien and the bank was entitled to the sale proceeds.  The court was emphatic in its conclusion that “no such landlord’s lien exists.  Indeed, the court further holds that no such landlord’s lien has ever existed under Michigan law.”

The court went on to state (emphasis in original):

This court has also 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.

Nothing has been found that supports the Landlord’s vacuous assertion.  The court believes no authority exists.  Further, no statutory landlord’s lien has been adopted in Michigan.  This court’s independent research can be characterized as “chasing an apparition.”

After venting its frustration, the court proceeded to discuss the possibility of sanctions under Bankruptcy Rule 9011 (counterpart to FRCP Rule 11).  In considering how to determine the amount of monetary sanctions, the court included an extended discussion of the cost of a federal judge’s time.  Beginning with $600 per hour in 1982, and indications that this had inflated to $900 by 1998, the court adjusted the original $600 per hour based on the consumer price index and concluded that its time was worth $1,400 per hour.

Surprisingly (given the tenor of its discussion), the court decided not to issue an order to show cause why sanctions should not be imposed, indicating that it hoped a stern warning would suffice (emphasis in original):

Notice is given to [landlord’s] attorney:  if you make this court chase a legal apparition again, whether in this adversary proceeding or in some future case or adversary proceeding, bring your checkbook.  The going rate for waste of this court’s time will be $1,400 per hour.

If asked, most Michigan attorneys would probably respond that there is no common law landlord’s lien in Michigan.  However, the court did not find this position to be a slam dunk, instead finding itself “called upon to predict what the Michigan Supreme Court would decide if presented with this issue.”

On the one hand, it sounds like the arguments made by the landlord’s attorney were very weak.  On the other hand, the attorney was not arguing in the face of clearly established precedent.  This case signals a warning that there may be bounds to advocacy that are far short of a blatant disregard for existing law.

Vicki R. Harding, Esq.

About BankruptcyRealEstateInsights

Vicki R. Harding was a partner in the Detroit office of Pepper Hamilton LLP who moved to Arizona seeking warmer weather. Ms. Harding continues to handle commercial transactions with an emphasis on real estate and bankruptcy issues (but no longer owns a snow shovel).
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