Huntington Nat'l Bank v. Bruinsma (In re Kentwood Pharmacy, L.L.C.)

475 B.R. 602

56 Bankr.Ct.Dec. 218

In re KENTWOOD PHARMACY, L.L.C., Debtor.The Huntington National Bank, Plaintiff,

v. Thomas A. Bruinsma, Chapter 7 Trustee, Defendant/Cross–Plaintiff,andTulip Investments, LLC, Defendant/Cross–Defendant.

Bankruptcy No. 10–13397.

Adversary No. 11–80238.

United States Bankruptcy Court, W.D. Michigan.

July 17, 2012.

Nicole L. Mazzocco, Esq., and Robert H. Skilton, Esq., Grand Rapids, MI, attorneys for The Huntington National Bank.

Donald R. Visser, Esq., Kentwood, MI, attorney for Tulip Investments, LLC.

Steven L. Rayman, Esq., Kalamazoo, MI, attorney for Thomas A. Bruinsma, Chapter 7 Trustee.

OPINION REGARDING VALIDITY OF ASSERTED LANDLORD'S LIEN

JAMES D. GREGG, Chief Judge.

I. JURISDICTION

This court has jurisdiction over this bankruptcy case. 28 U.S.C. § 1334. This case and all related proceedings have been referred to this court for decision. 28 U.S.C. § 157(a); Local Rule 83.2(a) (W.D.Mich.). This adversary proceeding is a statutory core proceeding because the plaintiff seeks to determine the validity, extent, or priority of a lien. 28 U.S.C. § 157(b)(2)(K).

II. ISSUES

Does a common law landlord's lien exist in Michigan? Is The Huntington National Bank entitled to a declaratory judgment that its security interest in the debtor's assets has priority over Tulip Investments, LLC's asserted common law landlord's lien? Is Tulip Investments, LLC entitled to a declaratory judgment that its asserted common law landlord's lien has priority over The Huntington National Bank's security interest? Should this court impose sanctions on its own initiative?

III. PROCEDURAL HISTORY AND ASSERTED FACTS

On November 10, 2010, Kentwood Pharmacy, L.L.C. (“Debtor”) filed a voluntary petition for relief under chapter 7 of the Bankruptcy Code. Thomas A. Bruinsma (“Trustee”) was appointed as trustee of the Debtor's estate.

For a number of years prior to the petition date, The Huntington National Bank (“Bank”) and the Debtor had a credit relationship. As of the petition date, the Debtor owed the Bank approximately $3,419,072.95 pursuant to numerous loan documents. The Debtor is also the guarantor of a debt owed to the Bank by Mulder Properties, LLC (“Mulder”). As of the petition date, Mulder owed the Bank approximately $621,511.42. These debts are secured by a lien on substantially all of the Debtor's assets. The Bank properly perfected its security interest in the Debtor's assets, the “collateral,” by filing a Uniform Commercial Code (“UCC”) Financing Statement on July 18, 2003, and a timely continuation of that statement on June 26, 2008. On June 2, 2011, the Bank filed a timely proof of claim in the Debtor's bankruptcy case. (Claim No. 76.) The Trustee does not contest the validity and perfection of the Bank's lien which has attached to substantially all of the Debtor's assets.

Tulip Investments, LLC (“Tulip” or the “Landlord”) leased real property to the Debtor pursuant to a lease dated December 4, 2007. The Landlord filed a proof of claim in the Debtor's bankruptcy case on June 13, 2011, asserting a claim in the amount of $1,492,816.34 for breach of lease. (Claim No. 78.) The proof of claim indicates that $338,758.88 of the Landlord's claim is secured by virtue of a landlord's lien. The Landlord asserts that its written lease with the Debtor intentionally omitted a consensual landlord's lien provision. It alleges, however, that it holds a possessory landlord's lien on the Debtor's property located at the leased premises under Michigan common law.

On November 23, 2010, the Trustee moved to sell the Debtor's assets free and clear of all liens pursuant to 11 U.S.C. § 363.¹ At a hearing on November 29, 2010, this court considered the sale motion and authorized the Trustee to sell substantially all of the Debtor's assets. A court order approving the sale was entered on December 1, 2010. (Dkt. 59.) On April 4, 2011, the Trustee filed a Motion to Authorize Distribution of Sale Proceeds seeking authority to distribute the sale proceeds and postpetition receivables collections, less an agreed upon 8% surcharge, to the Bank. (Dkt. 136.) The Landlord objected to the Trustee's motion based upon its asserted possessory landlord's lien. (Dkt. 170.)

A hearing on the Trustee's motion to distribute the sale proceeds occurred on May 10, 2011. Following argument of the parties, this court ordered the Trustee to distribute all of the sale proceeds and receivables collections, subject to the 8% surcharge, to the Bank with $350,000 of the sale proceeds escrowed until the validity of the landlord's lien was determined. As a result of the prior court order, and the escrow of the remaining sale proceeds, a determination was required: Does the Bank or Tulip get the remaining proceeds?

On May 18, 2011, the Bank filed this adversary proceeding. The Bank's complaint seeks a declaratory judgment that no common law landlord's lien exists under Michigan law. Further, the complaint requests that this court enter a declaratory judgment that the Bank's lien has priority over any interest in the sale proceeds asserted by the Landlord. Therefore, the Bank contends it is entitled to the remaining sale proceeds, less any unpaid surcharge to be retained by the Trustee.

On June 6, 2011, the Trustee filed his Answer and a Cross–Claim against the Landlord. Assuming a landlord's lien exists, the cross-claim seeks to avoid the Landlord's asserted lien as a preference under § 547(b), as a statutory lien under § 545, or under the Trustee's § 544 strong-arm powers. If Tulip does not hold a valid lien, the Trustee's cross-claim will be unnecessary.

On August 17, 2011, the Bank filed its motion for judgment on the pleadings. The Bank's position is very simple and straightforward—there is no common law landlord's lien under Michigan law. Therefore, according to the Bank, the Landlord has no secured claim against the Debtor's assets, and that alone justifies judgment on the pleadings.

On September 2, 2011, the Landlord surprisingly filed a cross motion for judgment on the pleadings. In contrast to the simple and straightforward position of the Bank, politely stated, the Landlord's position is opaque. The Landlord asserts that because in Shurlow v. Bonthuis, 456 Mich. 730, 576 N.W.2d 159 (1998), the Michigan Supreme Court declined to determine whether the court had earlier recognized a common law landlord's lien, see S.S. Kresge Co. v. Twelve Seventy–Five Woodward Ave. Corp., 270 Mich. 218, 258 N.W. 252 (1935), the only “legitimate conclusion” is that a common law landlord's lien exists.

On December 29, 2011, the Bank responded to the Landlord's cross motion reiterating its position that no such lien exists. However, assuming for the sake of argument that such a lien exists, the Bank properly questions whether judgment on the pleadings in favor of the Landlord is legally correct because a myriad of factual and legal issues exist. For example: How is a landlord's lien created? Did the Landlord take the necessary steps to create such a lien? What property is covered? What is the priority of any competing liens? Do the Trustee's various avoidance cross-claims prevent the Landlord from obtaining the sale proceeds?

On March 6, 2012, argument took place regarding the parties' cross motions for judgment on the pleadings. At the conclusion of the hearing, the court directed the parties to file supplemental legal memoranda. The court took the cross motions under advisement.

IV. DISCUSSION

A. Standard for Judgment on the Pleadings.

Federal Rule of Civil Procedure 12(c), made applicable to this adversary proceeding by Federal Rule of Bankruptcy Procedure 7012(c), permits a party to move for judgment on the pleadings after the pleadings are closed, but early enough not to delay trial. The standard to grant a judgment on the pleadings is the same as that for a motion to dismiss made under Federal Rule of Civil Procedure 12(b)(6). Roger Miller Music, Inc. v. Sony/ATV Publishing, LLC, 477 F.3d 383, 389 (6th Cir.2007).

“ ‘For purposes of a motion for judgment on the pleadings, all well-pleaded material allegations of the pleadings of the opposing party must be taken as true, and the motion may be granted only if the moving party is nevertheless clearly entitled to judgment.’ ” Tucker v. Middleburg–Legacy Place, LLC, 539 F.3d 545, 549 (6th Cir.2008) (quoting JPMorgan Chase Bank, N.A. v. Winget, 510 F.3d 577, 581 (6th Cir.2007)). “A Rule 12(c) motion ‘is granted when no material issue of fact exists and the party making the motion is entitled to judgment as a matter of law.’ ” Winget, 510 F.3d at 582 (quoting Paskvan v. City of Cleveland Civil Serv. Comm'n, 946 F.2d 1233, 1235 (6th Cir.1991)).

Applying this standard, the Landlord's motion must be denied. Even assuming that a landlord's lien may exist, there are simply too many factual and legal issues to be determined, including the amount of the debt, the amount of the asserted lien, coverage of any such lien, and the priorities between the lien holders. Whether application of the standard for judgments on the pleadings will permit this court to grant the Bank's motion will depend upon the court's analysis of whether a common law landlord's lien exists in Michigan.

B. Does a Common Law Landlord's Lien Exist in Michigan?

The Bank primarily relies upon two authorities to support its conclusion that Michigan does not recognize a common law landlord's lien. In re Bromel–Knapp, 106 F.Supp. 519, 521 (E.D.Mich.1952) (“Michigan law does not create a general priority for the payment of rent” or “give landlords a lien for the payment of rent in every situation.”); John G. Cameron, Michigan Real Property Law: Principles & Commentary (“Cameron”), § 20.67, 1161 (3d ed. 2005) (“[N]o Michigan cases have been discovered that consider whether a common-law landlord's lien for unpaid rent exists in Michigan.”).

The Landlord principally relies upon two old cases (one which the court considers to be “ancient”) to support...