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.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
Specific Questions relating to this article should be addressed directly to the author.
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