Monday, February 13, 2012

BANKRUPTY CHAPTER SEVEN COURT OPINION ON LANDLORD, RENT, SECURITY DEPOSIT BY FLINT BANKRUPTCY ATTORNEY TERRY BANKERT 235-1970

FEDERAL COURT ORDER REVERSING THE LOWER BANKRUPTCY COURT AND REMANDING ( SENDING IT BACK TO THE BANKRUPTCY COURT) FOR FURTHER PROCEEDINGS IN BANKRUPTCY COURT




I. BANKRUPTCY ISSUES





LANDLORD SAYS HE SHOULD NOT HAVE TO RETURN BANKRUPTY DEBTOR SECURITY DEPOSIT



Appellant challenges the Bankruptcy Court’s Order of May 26, 2011, compelling

him to return the full amount of security deposits paid by tenants Appellees Kristin

Zzz, Kelsea Zzz, and Cody Yyy in connection with the rental property located

at 274 E. St. Clair, Romeo, Michigan (the “Romeo property”). Appellees did not

respond to Appellant’s Brief, and the time to do so has passed.



FLINT BANKRUPTCY LAWYER 235-1970



This post by Flint Bankruptcy Attorney Terry R. Bankert , 235-1970, principally from the case cited below and for social media and SEO.. Bankert comments CAP or cited [trb] Read the entire original opinion and seek competent legal counsel before you rely on this content.



THE FEDERAL COURT TELLS THE BANKRUPTCY COURT IT WAS WRONG.



The Court REVERSES the Bankruptcy Court and REMANDS for further

proceedings consistent with this order.



II. FACTS OF THE CASE



A. Brief Background



THE CAUSE BEGAN AS A CHAPTER SEVEN BANKRUPTCY



On November 8, 2010, Appellant John Robert Iwanski filed for Chapter 7

bankruptcy jointly with his wife Kay Ellen Collins.



DEBTOR FELL BEHIND ON MORTGAGE PAYMENTS



Prior to filing for bankruptcy, Mr. Iwanski fell behind on mortgage payments for an investment property, the Romeo property.



THE HOME WAS FORECLOSED



On October 8, 2010, the Mortgagee bank foreclosed on the Romeo property.



HOMEOWNER FILED FOR BANKRUPTCY



Mr. Iwanski filed for bankruptcy on November 8, 2010, to protect himself from creditors,

including a potential deficiency owed to the mortgage creditor regarding the Romeo

property.



TENANTS REMAINED IN THE DEBTORS HOME



Appellees Cody Yyy, Kristin Zzz, and Kelsea Zzz (collectively, the

“Tenants”) continued to occupy the Romeo property after the foreclosure and Mr.

Iwanski’s bankruptcy filing.



TENANT HAD SIGNED A SIX MONTH LEASE



Mr. Iwanski had signed six-month leases with the Tenants

for the Romeo property in September 2010.



TENANTS LEASE EXPIRED THEY STAYED AS A HOLD OVER TENANT



After the expiration of the leases in March 2011, the Tenants remained at the Romeo property as month-to-month holdover tenants.



BANKRUPTCY DISCHARGE ON 02/06/11



Mr. Iwanski received his bankruptcy discharge on February 16, 2011.



04/08/12 REDEMPTION PERIOD EXPIRED



On April 8, 2011, the redemption period expired for the foreclosed Romeo property.



04/19/12 BANK FILED FOR RELIEF FROM STAY



Soon after, on April 19, 2011, the Mortgagee bank filed a motion for relief from the automatic stay to allow it to take possession of the Romeo property. The Tenants filed written responses to the motion.



The Bankruptcy Court scheduled the motion for hearing on May 16, 2011.



Mortgagee’s counsel, Mr. Iwanski’s counsel, and the Tenants appeared. However,

based on the fact that he was not opposing the motion, Mr. Iwanski did not attend.

Because Mr. Iwanski was not present, the Court adjourned the hearing to May 23, 2011.



B. May 23, 2011 Hearing



The Court held a hearing on May 23, 2011, to consider the motion of the

Mortgagee bank to lift the automatic stay.



All the parties who appeared at the May 16 hearing appeared at this hearing, plus Appellant Mr. Iwanski.





At the hearing, the Bankruptcy Court took no sworn testimony, and admitted no

evidence.



MOTION TO LIFT AUTOMATIC STAY WAS LIFTED



The Mortgagee’s motion to lift the automatic stay was not opposed and was

granted. In connection with the motion, the Court inquired into who was entitled to rents

due regarding the Romeo property after the sheriff sale but before the expiration of the

redemption period.



ARGUED MICHIGAN LAW SAYS FORMER OWNER HAS RIGHT TO RENT UNTIL REDEMPTION PERIOD EXPIRES



Mr. Xxx’s counsel and the Mortgagee’s counsel stated that they

had researched the issue, and that they agreed that under Michigan law the former

owner (i.e., Mr. Xxx) is entitled to all rents due until the expiration of the redemption

period. Tr. at 3.



TESTIMONY THAT TENANTS BEHIND ON RENT



At the hearing, Mr. Xxx stated that the Tenants were behind in their rent and

that eviction proceedings had been initiated in state court. Tr. at 13.



TENANTS DEMANDED SECURITY DEPOSIT BACK



He also stated that Tenants were asking for their security deposits back despite the fact that they were still occupying the premises. Tr. at 14.





Mr. Xxx stated that Tenants Kristin Zzz and Kelsey Zzz had last paid

$100 in March 2011 toward the monthly rent of $475, and that they had paid nothing for

April and May.



The Zzz Tenants denied these allegations, stating “there’s no past

due rent owed to [Mr. Xxx] at all,” and “we have receipts for all our rent.” Tr. at 12,

13.



SECURITY DEPOSIT RETURN DENIED



They also demanded refund of their security deposit of $712.50. Tr. at 17.

Tenant Cody Yyy said that he last paid rent in February 2011. Tr. at 20. He

said he did not pay because he was not aware who owned the building on account of

Mr. Xxx’s foreclosure. He also said he was entitled to return of his security deposit

in the amount of $787.50. Tr. at 17.



MICHIGAN LAW ON RENTS DISTRIBUTION TIMING



Mr. Xxx’s counsel admitted that under Michigan law Mr. Xxx is entitled to

rent only until the expiration of the redemption period on April 8, 2011. Tr. at 14. Any

rent owed after that date would be payable to the Mortgagee bank.



SECURITY DEPOSIT CAN BE USED FOR UNPAID RENT



However, he also maintained that under Michigan law, Mr. Xxx is entitled to apply the Tenants’ security deposits to unpaid rent. Tr. at 18. He mentioned that because there is unpaid rent for at least March and April, Mr. Xxx is entitled to apply the Tenants’ security deposits to the rent.



BANKRUPTCY COURT ORDERED RETURN OF FULL SECURITY DEPOSIT



At the end of the hearing, the Bankruptcy Court ruled: “Mr. Xxx, I hereby

order you to refund to these tenants their full security deposits within seven days . . . .”

Tr. at 21.



The Bankruptcy Court issued a one-sentence order on May 26, 2011,

compelling the return of the security deposits for the reasons stated on the record.



III. WHAT IS THE STANDARD OF REVIEW WHEN THE FEDERAL COURT REVIEWED THE BANKRUPTCY COURT



COURT WILL ASK WAS THERE CLEAR ERROR ON THE PARTY OF THE BANKRUPTCY JUDGE



The Court reviews the Bankruptcy Court’s findings of fact for clear error and its

conclusions of law de novo. Batie v. Investors Credit Corp., 995 F.2d 85, 88-89 (6th Cir.

1993). If the Bankruptcy Court’s factual findings are silent or ambiguous as to an

outcome determinative factual question, the district court may not engage in its own

factfinding but, instead, must remand the case to the Bankruptcy Court for the

necessary factual determination. Hardin v. Caldwell, 851 F.2d 852, 857 (6th Cir. 1988).



IV. THE PARTIES ARGUMENT



On appeal, Mr. Xxx argues that the Bankruptcy Court’s order ignores the fact

that he was entitled to apply security deposits to unpaid rent, and that he had no

obligation to return security deposits until 45 days after the termination of occupancy by

Tenants.



He also argues that the May 23, 2011 hearing involved a number of

procedural irregularities, including that the Bankruptcy Court ruled without any evidence because nobody at the hearing was sworn in, and there was no opportunity for cross examination or discovery. Therefore, he says the Court’s order lacks an evidentiary basis. This Court agrees.



V. THE FEDERAL COURT ANALYSIS



MORTGAGE HOLDER IN MICHIGAN STAYS IN PROPERTY UNTIL REDEMPTION PERIOD ENDS



Michigan law clearly states that a mortgagor is entitled to possession of the

mortgaged property, and all the benefits of possession, until the expiration of the

redemption period.



The Michigan Supreme Court says, “[T]he bank ha[s] no legal right

of possession during the [ ] redemption period. . . It has been the definite and

continuous policy of this State to save to mortgagors the possession and benefits of the

mortgaged premises, as against the mortgagees, until expiration of the period of

redemption.” Kubczak v. Chemical Bank & Trust Co., 575 N.W. 2d 745, 747-48 (Mich.

1998).



The benefits of possession include the right to collect rent. Bennos v.

Waderlow, 289 N.W. 267, 269 (Mich. 1939) (“[I]t is settled law that, until after the

expiration of the equity of redemption through foreclosure proceedings, a mortgagee is

not entitled to the rents and profits of the sold or mortgaged premises.”).





There is no dispute that the redemption period for the Romeo property expired on

April 8, 2011. Tr. at 15. There is also no dispute that the Tenants continued to occupy

the property as of this date, and, indeed, were still occupying the property as of the May

23, 2011 hearing. Therefore, Mr. Xxx is entitled to all rents due on the Romeo

property through April 8, 2011.



Additionally, under the Michigan Landlord and Tenant Relationship Act of 1972,

M.C.L. §§ 554.601 et seq., a security deposit may be used for “all rent in arrearage.” Id.

§ 554.607.



A landlord is also entitled to retain a security deposit for 45 days after

termination of the occupancy, and to begin an action for a money judgment against the

former tenants during that time. Id. § 554.613. The landlord may retain the portion of

the security deposit necessary to satisfy any money judgment against the tenant. Id.





Lastly, it appears that this matter may have been subject to mandatory

abstention by the Bankruptcy Court. See 28 U.S.C. § 1334. Mr. Xxx states that

eviction proceedings were ongoing in state court at the time of the Bankruptcy Court’s

order, but the Bankruptcy Court did not give him the opportunity to file a motion

requesting abstention.



Without making any factual findings or stating the legal basis for its ruling, the

Bankruptcy Court simply ordered Mr. Xxx to return Tenants’ security deposits within

seven days of its order.



The Bankruptcy Court’s order does not take into account clear

Michigan law which states that the mortgagor is entitled to all rent due until the

expiration of the redemption period, and that the mortgagor may apply money from a

security deposit to unpaid rent.



The Bankruptcy Court’s order is “silent or ambiguous as to an outcome

determinative factual question.” Caldwell, 851 F.2d at 857.



This Court remands this matter to the Bankruptcy Court to make the appropriate factual findings.



Specifically, the Bankruptcy Court must determine what rent, if any, was owed by Tenants to Mr. Xxx at the end of the expiration of the redemption period on April 8, 2011.



If the Bankruptcy Court determines that Tenants were in arrears as of that date, it must allow Mr. Xxx to apply the necessary portion of Tenants’ security deposits to the unpaid rent.



Additionally, the Bankruptcy Court must give Mr. Xxx the opportunity to file an

abstention motion before proceeding to adjudicate these matters.



VI. THE FEDERAL COURT CONCLUSION



The Bankruptcy Court’s Order of May 26, 2011, is REVERSED. The matter is

REMANDED for further proceedings. IT IS ORDERED.,S/Victoria A. Roberts Victoria A. Roberts United States District Judge



[1]



UNITED STATES DISTRICT COURT EASTERN DISTRICT OF MICHIGAN SOUTHERN DIVISION,In Re: Chapter 7, John Robert Xxx, and, Case No. 10-74033, Kay Ellen Collins, Hon. Steven W. Rhodes,Debtors.

Case No. 11-12379,Appellant, Hon. Victoria A. Roberts,v.

Federal Home Loan Mortgage Corp., Cody Yyy, Kristin Zzz, and

Kelsea Zzz, Appellees.



[trb]

This post by Flint Bankruptcy Attorney Terry R. Bankert , 235-1970, principally from the case cited [1]. Bankert comments CAP or cited [trb] Read the entire original opinion and seek competent legal counsel before you rely on this content.

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