WBCMT 2003-C9 Island Living, LLC v. Swan Creek Limited Partnership

Filing 63

ORDER Denying Defendant's 44 Motion to Terminate the Receivership and Distribute Proceeds. Signed by District Judge Matthew F. Leitman. (HMon)

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF MICHIGAN
SOUTHERN DIVISION
WBCMT 2003-C9 ISLAND
LIVING, LLC,
Plaintiff,

Case No. 14-cv-14243
Hon. Matthew F. Leitman

v.
SWAN CREEK LIMITED
PARTNERSHIP,
Defendant.
_________________________________/
ORDER DENYING DEFENDANT’S MOTION TO TERMINATE THE
RECEIVERSHIP AND DISTRIBUTE PROCEEDS (ECF #44)
In this action, Plaintiff WBCMT 2003-C9 Island Living (“Island Living”)
alleges that Defendant Swan Creek Limited Partnership (“Swan Creek”) breached
its payment obligations under a promissory note. The note was secured by a
mortgage on a mobile home park owned and operated by Swan Creek.
During the course of these proceedings, the Court appointed a receiver to
operate the park. In discharging his duties, the receiver collected rents from tenants
of the park.
Island Living ultimately foreclosed on the park, and it placed the highest bid
at the foreclosure sale. Then, just prior to the end of the statutory redemption period,
Swan Creek exercised its redemption rights and reclaimed the park. At the time of

1 

Swan Creek’s redemption, the receiver had roughly $650,000 (in rents and other
charges) in his possession that he had collected during his operation of the park.
Swan Creek insists that Island Living has no right to these funds.
Swan Creek has now filed a motion in which it seeks an order (1) terminating
the receivership and (2) directing that the funds the receiver had collected at the time
of the redemption be distributed to Swan Creek. (See ECF #44.) For the reasons
explained below, the Court DENIES the motion.
I
A
In November 2003, Swan Creek obtained a $4.35 million loan from lender
LaSalle Bank, N.A. to purchase a mobile home park in New Boston, Michigan. (See
ECF #1-4.) Swan Creek executed three documents in connection with the loan: a
Promissory Note (see id.); a Mortgage (see ECF #1-5); and an “Assignment of
Leases and Rents” (the “Assignment of Rents”) (see ECF #1-6) (collectively, the
“Loan Documents”). Island Living later acquired LaSalle Bank’s interests (as
lender) in the Loan Documents after a series of assignments. (See ECF #1-8; see also
First Am. Compl. at ¶¶ 18-20, ECF #11 at Pg. ID 300-02.)
Several aspects of the Loan Documents are relevant to Swan Creek’s motion.
First, in the Assignment of Rents, Swan Creek assigned to the lender all right, title,
and interest in all present and future rents collected from tenants of the park:
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Section 1.1 Property Assigned.
Borrower hereby
absolutely and unconditionally assigns and grants to
Lender the following property, rights, interests and estates,
now owned, or hereafter acquired by Borrower:
...
(c) Rents. All rents, additional rents, revenues,
income, issues and profits arising from the Leases and
renewals and replacements thereof and any cash or
security deposited in connection therewith and together
with all rents, revenues, income, issues and profits from
the use, enjoyment and occupancy of the Property, and all
royalties, overriding royalties, bonuses, delay rentals and
any other amount of any kind or character arising under
any and all present and all future oil, gas and mining
Leases covering the Property and any part thereof, and all
proceeds and other amounts paid or owing to Borrower
under or pursuant to any and all contracts and bonds
relating to the construction, erection or renovation of the
Property, whether paid or accruing before or after the
filing by or against Borrower of any petition for relief
under the Bankruptcy Code (collectively, the “Rents”).
(Assignment of Rents at § 1.1, ECF #1-6 at Pg. ID 94-95.)
Second, the Assignment of Rents granted Swan Creek a revocable license to
collect the rents and sums due from tenants of the park:
Section 2.1 Present Assignment and License Back.
The parties intend that this Assignment grants a present,
absolute, and unconditional assignment of the Leases,
Rents, Leave Guaranties and Bankruptcy Claims,
Proceeds, and Other Rights and shall, immediately upon
execution, give Lender the right to collect the Rents and
other sums due under the Lease Guaranties and to apply
them in payment of the Debt. Such assignment and grant
shall continue in effect until the Debt is paid in full and all
of the Other Obligations are fully satisfied. Subject to the
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provisions set forth herein and provided there is no
Default, Lender grants to Borrower a revocable license to
enforce the Leases and collect the Rents as they become
due (excluding, however, any Lease termination,
cancellation or similar payments which Borrower agrees
shall be held in trust and turned over to Lender for credit
to principal under the Loan) . . . .
(Id. at § 2.1, Pg. ID 96.)
Third, the Assignment of Rents provides that Swan Creek’s license to collect
rents terminates in the event of a default (as defined by the Loan Documents), and
in the event of such a default, the lender has the exclusive right to collect the rents:
Section 3.1 Remedies of Lender. Upon or at any time
after the occurrence of … an Event of Default . . . the
license granted to Borrower in Section 2.1 of this
Assignment shall be automatically revoked, and Lender
shall immediately be entitled to possession of all Rents and
sums due under any Lease Guaranties, whether or not
Lender enters upon or takes control of the Property.
***
Section 6.2 Assignee’s Rights. Notwithstanding anything
herein to the contrary, Assignee shall be entitled to all the
rights and remedies conferred by (MCLA 554.231, et
seq.), (MCLA 554.211, et seq.) to the extent applicable,
and (MCLA 554.81, et seq.) Upon the occurrence of an
Event of Default and without any action by Assignee,
Assignor shall have no further right to collect or otherwise
receive such Rents, which will be the absolute and sole
property of Assignee, pursuant to those statutes.
(Id. at §§ 3.1, 6.2, ECF #1-6 at Pg. ID 97, 103.)

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Fourth, like the Assignment of Rents, the Mortgage provides that in the event
of Swan Creek’s default, the rents would belong to the lender:
Lender shall be entitled to all the rights and remedies
conferred by (MCLA 554.231, et seq., (MCLA 554.211 et
seq.) to the extent applicable, and (MCLA 554.81, et seq.).
Upon the occurrence of an Event of Default and without
any action by Lender, Borrower shall have no further right
to collect or otherwise receive such Rents, which will be
the absolute and sole property of Lender pursuant to those
statutes.
(Mortgage at § 52(b), ECF #1-5 at Pg. ID 82.)
Each of the Loan Documents have a choice of law provision that specifies that
the agreements are governed by Illinois law. (See Promissory Note at § 10.7, ECF
#1-4 at Pg. ID 38; Mortgage at § 35, ECF #1-5 at Pg. ID 77-78; Assignment of Rents
at § 5.7, ECF #1-6 at Pg. ID 102.) The Loan Documents also provide that they are
subject to certain of Michigan’s mortgage and assignment of rent statutes. (See, e.g.,
Mortgage at Pt. II, ECF #1-5 at Pg. ID 81-83; Assignment of Rents at § 6.2, ECF
#1-6 at Pg. ID 103.)
B
Under the Promissory Note, Swan Creek was required to make a final balloon
payment of $3,691,016.83 on December 1, 2013. (See Promissory Note at Ex. A,
ECF #1-4 at Pg. ID 44.) Swan Creek did not make that payment. (See First Am.
Compl. at ¶¶ 22-24, ECF #11 at Pg. ID 303-04.) In a letter dated January 16, 2014,

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the loan servicer notified Swan Creek that it was in default due to its failure to make
the balloon payment. (See id. at ¶ 25, Pg. ID 304.)
Prior to Swan Creek’s default, interest accrued on Swan Creek’s loan at the
note interest rate of $289.77 per day. (See Promissory Note at § 2, ECF #1-6 at Pg.
ID 28; First Am. Compl. at ¶ 26, ECF #11 at Pg. ID 304.) After the default, an
additional $510.18 in default interest accrued each day. (See First Am. Compl. at ¶
26, ECF #11 at Pg. ID 304.) As of July 1, 2014, Swan Creek owed a total of a
$3,932,758.92 in unpaid principal and interest. (See id.)
C
Island Living filed this action on November 4, 2014. (See ECF #1.) Island
Living also moved for the appointment of a receiver to operate the mobile home park
and to collect rents from the park’s tenants. (See ECF #2.) It thereafter filed a First
Amended Complaint on November 26, 2014. (See ECF #11.) In the First Amended
Complaint, Island Living asserts claims for breach of contract and injunctive relief.
(See id.)
On January 9, 2015, this Court entered an order granting Island Living’s
request to appoint a receiver. (See ECF #15.) By subsequent order, the Court
appointed CFLane Receiver, LLC, through its authorized agent Victor Roth, as the
Receiver. (See ECF #18.) That order authorized the Receiver to distribute funds in

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excess of the park’s operating expenses to Island Living in order to satisfy all of
Swan Creek’s financial obligations under the Loan Documents:
Should the Receiver have funds in excess of the
anticipated Operating Expenses, including an appropriate
reserve in an amount to be approved by Plaintiff, for the
Mortgaged Property, the Receiver shall provide all such
funds, on a monthly basis, to Plaintiff. All such funds shall
be applied to the amount owed to Plaintiff by the
Defendant under the Mortgage for the Mortgaged
Property. To the extent that there are any funds that
exceed amounts due to Plaintiff under the Loan
Documents, such funds shall be subject to further order of
the Court.
(Id. at ¶ 11, Pg. ID 360-61.)
The order also required the Receiver to “submit to this Court for its in-camera
inspection and serve on the parties who have filed appearances a monthly accounting
of all receipts and disbursements concerning the performance of its duties under this
Order, and a final accounting within 90 days after termination of the receivership.”
(Id. at ¶ 13, Pg. ID 362.)
Finally, the order required Island Living to “file status reports with the Court
on the last business day of every month until such time as the receivership
terminates. . . .” (Id. at ¶ 20, Pg. ID 363.) Pursuant to that order, each month, Island
Living filed with the Court (1) a report detailing actions it had taken with respect to
the mobile home park and (2) a report from the Receiver (the “Monthly Reports”).
(See, e.g., ECF ## 19-43.)
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The Monthly Reports explained that Island Living was conducting property
assessments, engaging in sales discussions, and conducting research related to a
potential sale of the park. Below is a sampling of the information that was included
in the Monthly Reports:
 February 2015 report: On December 22, 2014, Island Living first published
its Notice of Mortgage Foreclosure Sale by advertisement. (See ECF #19.)
The disclosure sale was originally scheduled for January 22, 2015, but Island
Living adjourned the sale “to allow for the completion of third-party reports
(e.g., environmental reports) and to obtain necessary internal approvals for
bidding instructions.” (Id.)
 April 2015 report: The foreclosure sale was delayed after Island Living
“discovered that there are approximately 50 mobile homes on the Property
which may be owned by an affiliate of the Defendant.” (ECF #21.) Island
Living was “actively investigating how to address these homes in light of the
pending foreclosure sale.” (Id.)
 May 2015 report: Island Living contacted the owner of the fifty homes at
issue (a Swan Creek affiliate) to discuss how to address these homes in the
foreclosure process. (See ECF #22.)
 August 2015 report: Island Living’s counsel communicated with counsel for
the Swan Creek affiliate that owned the fifty homes concerning the
foreclosure and its effect on the homes. (See ECF #25.)
 September 2015 report: Island Living, Swan Creek, and Swan Creek’s
affiliate “discussed a potential collaborative sale of the property and the
homes following foreclosure” and “these discussions continue[d].” (ECF
#26.)
 November 2015 report: Island Living’s discussions with Swan Creek and
Swan Creek’s affiliate continued, and Island Living was “seek[ing]
documents which show which individual(s) are allowed to enter into such an
agreement on behalf of Borrower and the Borrower-affiliated owner of the
homes.” (ECF #28.)
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 February 2016 report: Island Living, Swan Creek, and Swan Creek’s
affiliate continued to discuss a collaborative sale, and the Receiver was
awaiting an appraisal for the park. (See ECF #31.)
 May 2016 report: The “Receiver obtained and provided to the parties an
appraisal of the Property on May 23, 2016” and “[t]he parties [were] currently
reviewing the appraisal.” (ECF #34.)
 June 2016 report: Swan Creek made an offer to purchase the park on June
13, 2016, and Island Living rejected that offer on June 23, 2016. (See ECF
#35.)
 July 2016 report: Island Living and Swan Creek’s affiliate scheduled a
meeting with the appraiser to discuss the appraisal of the park. (See ECF #36.)
Island Living also “received an inquiry from another potentially interested
purchaser of the Property, and has provided information to that party.” (Id.)
 August 2016 report: The Receiver advised Island Living that two bids for
repairs due to safety issues were underway. (See ECF #37.) Island Living
notified Swan Creek of the repairs. (See id.)
D
In November 2016, Island Living commenced foreclosure (by advertisement)
proceedings against the park. (See ECF #40.) The Sheriff’s sale for the park was
held on December 1, 2016. (See ECF #41.) Island Living was the highest bidder at
the sale, and it purchased the park for $4,105,012.89. (See id.)
Under Michigan law, the Sheriff’s sale was followed by a six-month
redemption period during which Swan Creek had the option to redeem the park from
Island Living. See Mich. Comp. Laws § 600.3240(7). The redemption period was
set to expire on June 1, 2017. On May 26, 2017, Swan Creek exercised its right to
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redeem the park by paying Island Living the redemption amount of $4,209,062.41.1
(Ex. G to Pl’s Supp. Br., ECF #60-8 at Pg. ID 1298.)
Even after Swan Creek paid Island Living the redemption amount, Swan
Creek still owed in excess of $650,000 under the Promissory Note. (See Pl’s Supp.
Br., ECF #60 at Pg. ID 1167-68; Tr. of July 27, 2017 Hearing, ECF #57 at Pg. ID
1131-372.) This amount was comprised primarily of default interest that had accrued
as a result of Swan Creek’s default. (See Def’s Second Supp. Br., ECF #61 at Pg.
ID 1402.)
E
After Swan Creek redeemed the park, the Receiver still held roughly $650,000
in its account (the “Funds”). (See Ex. I to Pl’s Supp. Br., ECF #60-10 at Pg. ID 130506.) A portion of the Funds represented rents that the Receiver collected from
tenants of the park.

1

Under Michigan law, the redemption amount is “the amount that was bid for the
entire premises sold [at the Sheriff’s sale], interest from the date of the sale at the
interest rate provided for by the mortgage,” and certain fees specified by the statute.
Mich. Comp. Laws § 600.3240(2).
2
During the portion of the hearing cited above, counsel for Swan Creek
acknowledged that the amount claimed owing by Island Living under the Loan
Documents was “in the ballpark” of the amount actually due under the Loan
Documents (Tr. of July 27, 2017 Hearing, ECF #57 at Pg. ID 1134), but he
subsequently argued that Island Living was not entitled to that amount because it
unreasonably delayed commencing the foreclosure. (See id. at Pg. ID 1134-35.)
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On March 10, 2017, Swan Creek filed the instant motion in which it seeks an
order terminating the receivership and requiring the Funds to be distributed to Swan
Creek. (See ECF #44.) Swan Creek argues, among other things, that Island Living
improperly drove up the amount of interest accruing under the Loan Documents by
unreasonably delaying the foreclosure. (See id.) Swan Creek therefore insists that
the Funds should be returned to it rather than applied to satisfy the artificiallyinflated balance owing under the Loan Documents.
The Court held a hearing on the motion to terminate the receivership and
distribute funds on July 27, 2017. At the conclusion of the hearing, it ordered the
parties to submit supplemental briefs. The Court invited the parties to address in
their supplemental briefs, among other things, whether it should hold an evidentiary
hearing concerning Swan Creek’s assertion that Island Living unreasonably delayed
foreclosing on the park. Island Living and Swan Creek filed their supplemental
briefs on September 8, 2017. (See ECF ## 60, 61.) Neither party requested an
evidentiary hearing.
II
“[A] district court has broad powers in fashioning relief in an equity
receivership proceeding . . . .” Liberte Capital Grp., LLC v. Capwill, 462 F.3d 543,
551 (6th Cir. 2006). “In addressing claims on the receivership estate brought before

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it, the district court may consider both the merits of the individual claim and the
equities attendant to the situation.” Id. at 552.
III
The question now before the Court is whether Island Living or Swan Creek is
entitled to the Funds.3 Swan Creek argues that it is entitled to the Funds for two
alternative reasons: (1) Island Living’s “delay in pursuing foreclosure precludes its
ability to recover” the Funds and (2) Island Living’s “right to [the Funds] was
terminated on May 26, 2017, when Swan Creek made the redemption payment” and
redeemed the park. (Def’s Second Supp. Br., ECF #61 at Pg. ID 1396-97.) The
Court addresses each of these contentions separately below.
A
Swan Creek first argues that the Funds should not be used to satisfy its
remaining debt under the Loan Documents because Island Living unreasonably
inflated that debt by delaying the foreclosure process. Swan Creek contends that a
substantial amount of default interest occurred during Island Living’s unreasonable
delay and that it would be improper to hold Swan Creek responsible for that

3

As Swan Creek acknowledges in its motion to file a supplemental brief (see ECF
#53), pursuant to the terms of the Court’s order appointing the Receiver, the
receivership terminated with the sale of the park. (See ECF #18 at ¶ 19.) As a result,
Swan Creek’s request to terminate the receivership is moot.
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additional interest. (See Def’s Mot. to Terminate, ECF #44 at Pg. ID 923-24; Def’s
Second Supp. Br., ECF #61 at Pg. ID 1397-1400.)
The parties devote substantial briefing to the legal question of whether a
borrower in default may resist a lender’s collection efforts on the basis that the lender
unreasonably delayed in commencing the foreclosure proceedings and thereby
improperly inflated the amount of the interest owed. (See Def’s Second Supp. Br.,
ECF #61 at Pg. ID 1397-1400; Pl’s Supp. Br., ECF #60 at Pg. ID 1177-81.) Swan
Creek cites cases from outside of Michigan and Illinois in which courts have held
that a lender may not recover all accrued interest where it has unreasonably delayed
in initiating foreclosure proceedings or committed other misconduct in connection
with the foreclosure process. Island Living counters that its alleged delay is no
defense to its claim for accrued interest. Island Living contends that the broad
language of the Loan Documents gave it substantial discretion to choose the timing
of the foreclosure and that Swan Creek may not resist paying all amounts due under
the Loan Documents based upon any alleged delay in the foreclosure process. (Pl’s
Supp. Br., ECF #60 at Pg. ID 1177-81.)
The Court need not decide the legal question of whether Swan Creek may
invoke Island Living’s alleged delay as a defense to Island Living’s claim for all
interest owing under the Loan Documents. The Court may avoid that legal question

13 

because, even if a delay defense is available to Swan Creek, Swan Creek has not
established that there was an unreasonable delay here.
The Monthly Reports reveal that Island Living was not merely biding its time
and watching interest accrue between Swan Creek’s default and the commencement
of foreclosure proceedings.

Instead, Island Living was, among other things,

conducting environmental assessments of the mobile home park, exploring a sale of
the park to a third party, discussing a possible transaction involving Swan Creek,
and obtaining an appraisal of the park. Swan Creek has not contested the accuracy
of the Monthly Reports, nor has it presented evidence that it urged Island Living to
begin the foreclosure process prior to the time that Island Living did so. Under all
of these circumstances, the Court cannot conclude that Island Living unreasonably
delayed commencing the foreclosure process.
Indeed, Island Living’s conduct here is far different from the conduct of the
lenders in the cases cited by Swan Creek in which courts have found unreasonable
delay. In the primary case cited by Swan Creek, Citimortgage, Inc. v. Gueye, the
New York state trial court found an unreasonable delay where the lender did
essentially nothing for seven years after the borrower’s default. 38 N.Y.S.3d 830
(Table) (N.Y. Sup. Ct. 2016). Likewise, in Pierce v. Emigrant Mortgage Co., 2007
WL 4800725, at *7-8 (D. Conn. Dec. 27, 2007), the district court precluded a lender
from recovering all accrued interest where an attorney delayed commencing
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foreclosure proceedings for a number of years and ignored the borrower’s
communications concerning efforts to cure the default.

Finally, in Eminent

Mortgage Co. v. Crismara, 2008 WL 2551039, at *11-12 (D. Conn. June 23, 2008),
the district court found an unreasonable delay where the lender waited to foreclose
while it engaged in forum shopping for its claims against the borrower. None of
these circumstances are present in this case.
In sum, Swan Creek has not persuaded the Court that Island Living
unreasonably delayed the foreclosure process.
B
Swan Creek also argues that its redemption of the park in May 2017
“terminated” Island Living’s right to the Funds.

This argument is easiest to

understand when set forth in the following steps:
Step 1:

The Loan Documents “preserved the applicability of Michigan’s
mortgage and assignment of rent statutes.” (Def’s Second Supp.
Br., ECF #61 at Pg. ID 1394-95.)

Step 2:

Under Michigan’s assignment of rents statute, the assignment
“must be connected to a mortgage.” (Id. at Pg. ID 1395.)

Step 3:

Once a mortgage is satisfied through redemption, the lender is no
longer entitled to collect rents pursuant to an assignment of rents.

Step 4:

Swan Creek satisfied the Mortgage when it paid the redemption
amount. (See id.)

Step 5:

When Swan Creek satisfied the Mortgage by making the
redemption payment, that terminated Island Living’s right to
collect rents pursuant to the Assignment of Rents.
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Step 6:

Because Island Living had no post-redemption right to collect
rents after Swan Creek made the redemption payment, the
Receiver should have paid the Funds (which, again, consist
largely of rents) to Swan Creek.

There is a fundamental flaw in this argument. It fails to acknowledge that –
under the express terms of the Mortgage,4 the Assignment of Rents,5 and Michigan
law – Island Living owned the rents that were paid before the redemption even
though these rents were in the possession of the Receiver. See In Re Town Ctr. Flats,
LLC, 855 F.3d 721, 727 (6th Cir. 2017) (holding that under Michigan law, an
assignment of rents transfers ownership of the rents to the assignee and that the
assignor holds no residual property rights in the rents). Swan Creek did not
retroactively divest Island Living of its ownership of the rents when Swan Creek
made the redemption payment. Nor did Swan Creek retroactively reinstate its
license to collect rents under the Assignment of Rents – which terminated upon its
default – by making the redemption payment. Moreover, the fact that the Receiver
had not yet transferred the rents to Island Living before Swan Creek made the

4

See Mortgage at § 52(b), ECF #1-5 at Pg. ID 82 (“Upon the occurrence of an
Event of Default and without any action by Lender, Borrower shall have no further
right to collect or otherwise receive such Rents, which will be the absolute and sole
property of Lender pursuant to those statutes.”).
5
See Assignment of Rents at § 3.1, ECF #1-6 at Pg. ID 97 (“Upon or at any time
after the occurrence of … an Event of Default . . . Lender shall immediately be
entitled to possession of all Rents and sums due under any Lease Guaranties, whether
or not Lender enters upon or takes control of the Property.”).
16 

redemption payment did not diminish Island Living’s already-vested right to the
rents. Indeed, the Receiver was, in effect, holding the rents for Island Living.
Simply put, at the time Swan Creek made the redemption payment, Island Living
was already entitled to all rents that the Receiver had previously collected, and those
rents therefore rightfully belong to Island Living.
This case is materially distinguishable from the primary case on which Swan
Creek relies, 1040 South Main St. Holdings, L.L.C. v. LARS Assocs. No. 12-12143,
2012 WL 6047454 (E.D. Mich. Dec. 5, 2012). In that case, upon the borrower’s
default, the lender directed the tenants at the mortgaged property to send any rental
payments to its office. See id. at *1. The borrower later redeemed the mortgage, and
the lender sought to continue receiving rents paid after the redemption to satisfy the
borrower’s debt. See id. A judge of this Court held that the lender was not entitled
to those rents and explained that “once the redemption of the property has been
accomplished, the [lender] is no longer entitled to the rental income.” Id. at *4. Here,
sharp in contrast, the rents at issue were paid before Swan Creek redeemed the
Mortgage, and, as explained above, Island Living plainly did have the right to the
rents at the time they were paid. Thus, 1040 South Main St. Holdings, L.L.C., does
not support Swan Creek’s claim to the Funds.

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IV
For all of the reasons stated above, IT IS HEREBY ORDERED that Swan
Creek’s Motion to Terminate Receivership and Distribute Funds (ECF #44) is
DENIED.

s/Matthew F. Leitman
MATTHEW F. LEITMAN
UNITED STATES DISTRICT JUDGE

Dated: October 23, 2017

I hereby certify that a copy of the foregoing document was served upon the parties
and/or counsel of record on October 23, 2017, by electronic means and/or ordinary
mail.
s/Holly A. Monda
Case Manager
[phone]

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