MICHIGAN REAL PROPERTY REVIEW - Honigman · 2014. 4. 30. · 2. While the right to collect rents is...

MICHIGAN REALPROPERTY REVIEW

Vol. 21, No. 2 Summer, 1994

CONTENTS

The Uses of a Receivership Over Real Property ....................................................................41by Lawrence M. Dudek

Single-Asset Chapter 11 Real Estate Cases: Bad Faith,New Debtor Syndrome, and Other Pitfalls ............................................................................49

by Lisa Sommers Gretchko

Analyzing Lease Tax Clauses in Response toPotential Tax Restructuring ..................................................................................................61

by Alan M. Hun,itZ and Kenneth F. Posner

Michigan’s New Seller Disclosure Act: Seller Beware .............................................................71by Gregg A. Nathanson

Alcan and Bell Petroleum: The Federal Courts ReconsiderJoint and Several Liability in Superfund Cases .......................................................................81

by Jack D. Shumate

Appellate Court Overturns EPA’s Lender Liability Rule ..........................................................87by Peter D. Holmes

Legislative Status Report ......................................................................................................90by Gregory L. McClelland and Deborah A. Lee

Recent Decisions .................................................................................................................98by Joseph Lloyd

Continuing Legal Education ...............................................................................................100by Jack D. Shumate and Arlene R. Rubinstein

Michigan Environmental Statutes and Regulations (2nd Edition) ......................... Inside Back Cover

Published by theReal Property Law Section

State Bar of Michigan


Vol. 21, No. 2 Summer, 1994

The Michigan Real Property Review is the official journal of the Real PropertyLaw Section of the State Bar of Michigan. The Review is published quarterly andis a significant part of the Section’s program of publications, seminars, conferences,legislative liaison and other undertakings for the professional education anddevelopment of its members and the Bar.

The Section encourages interested members of the Bar to contribute articles and otherpublishable material relating to real property law and of interest to the profession.Manuscripts are reviewed by attorneys experienced in the subject matter covered by eacharticle.

Readers are invited to submit articles, comments and correspondence to George J.Siedel, Editor, 5211 Business Administration Building, University of Michigan, AnnArbor, Michigan 48109-1234. The publication of articles and the editing thereof are atthe discretion of the Editor. A cumulative index of articles is printed annually in the Winterissue of the Review.

Articles in the Review may be cited by reference to the volume number, abbreviatedtitle of the publication, the appropriate page number and the year of publication as, forexample, 14 Mich Real Prop Rev 35 (1987).

Publications Committee, Real Property Law SectionGeorge J. Siedel, Editor, Ann Arbor

Robert R. Nix, II, DetroitLawrence D. McLaughlin, Detroit

Stephen E. Dawson, Bloomfield HillsThomas C. Simpson, Bloomfield Hills

Ronald T. Barrows, Grosse PointeJack D. Shumate, Detroit

Copyright © 1994Real Property Law Section

of the State Bar of Michigan

The views, opinions and conclusions expressed in the l~ichi~n l~alP~view are those of only the respective authors and do not necessarily reflect the positionor opinion of the State Bar of Michigan, the Real Property Law Section, the lVlichi~lan Reall~’ol~rt~ l~v~, its editor or the Publications Committee of the Section. The publicationin the Review of articles, letters and other materials does not constitute and should not beconstrued to be an endorsement of any views, opinions or conclusions which may beexpressed or implied. The Review is prepared and published as a part of the legal educationactivities of the Real Property Law Section, for the benefit of its members and the Bar. Inpublishing the Review, the Real Property Law Section does not purport to engage in or torender legal or professional services. If legal advice or se~ces are desired or appropriate,an attorney should be consulted.

The lVlid~lan ~ Prol~rt~ ~ is published by the Real Property Law Sectionof the State Bar of Michigan. An annual subscription to the IR~vi~ corrln~nces inSeptember of each year and ends in August of the following year. Four issues are publishedeach year. The subscription price is $25 annually, payable in advance. Orders forsubscriptions should be sent, with the above-stated payment, to Mi,:~i~lan RealI~vi~,w, Real Property Law Section, State Bar of Michigan, 306 Townsend Street, Lansing,Michigan 48933.

MICHIGANPROPERTY REVIEW

Published by theReal Property Law Section, State Bar of Michigan

OFFICERS OF THE SECTION:

CHAIRPERSON CHAIRPERSON-ELECT

THOMAS C. SIMPSON100 W. Long Lake Rd.Suite 2O0Bloomflelds Hills 48304

ROBERT R. NIX, !!One Detroit Center500 Woodward Ave., #2500Detroit 48226

VICE-CHAIRPERSON

LAWRENCE D. McLAUGHLIN2290 First National Bldg.Detroit 48226

SECRETARY

C. ROBERT WARTELL28400 Northwestern Hwy.3rd FI. Essex CentreSouthfield 48034-1839

COUNCIL OF THE SECTION:

W’dliam B. AckerSuite 600 Columbia Center201 W. Big Beaver RoadP.O. Box 4300Troy 48099-4300

Gail A. Anderson215 S. Washington SCl., Suite 200Lansing 48933-1812

Ronald T. BarrowsP.O. Box 36958Grosse Pte. 48236-0958

David W. Barry32270 Telegraph Rd., Suite 200Birmingham 48025

James N. Candler, Jr.One Detroit Center500 Woodward Avenue, #4000Detroit 48226

Michael W. Maddin3rd FI. Essex Centre28400 Northwestern Hwy.Southfield 48034

SANDRA LEA MEYER35th Floor400 Renaissance CenterDetroit 48243-1504

Carol Ann MartinelliSuite 305, 900 Wilshire Dr.Troy 48084-1600

Patrick E. Meats248 Louis CampauPromendade NW, Suite 200Grand Rapids 49503

Robmt D. Mollhagen1400 N. Woodward Ave., Suite 250Bloomfield Hills 48304

Reuben/%. Munday1300 F~t National Bldg.Detroit 48226

Sheldon P. Winkelman2290 F’~t National Bldg.Detroit 48226

James M. MarquardtOne First of America ParkwayKalamazoo 49009(Representing Land TitleStandards Committee)

Gem~ge J. Siedel5211 Business AdministrationAnn Arbor 48109-1234(Editor, Real Property Review)

Jack D. Shumate150 W. Jefferson, Suite 900Detroit 48226-4430(Representing ContinuingLegal Education Committee)

Patrick J. KeatingDetroit

Maurice S. BinkowDetroit

James W. DraperDetroit

David S. SnyderSouth field

William B. DunnDetroit

Allen SchwartzDetroit

Stepl~n A. Bromb~r~Birmingham

Richard E. RabbideauDetroit


EX-OFFICIO MEMBERS

/PAST CHAIRPERSON OF THE SECTION)

COMMISIONER LIAISON

William F. AnhutYpsilanti

Ga~ A. TabackSouth field

Peter A. NathanWest Palm Beach, Florida

Carl A. HasselwanderTroy

James M. Tervo~icago, Illinois

Nyai D. DeemsGrand Rapids

James R. BrownGrand Rapids

Stephen E. DawsonBloomfield Hills

MICHIGAN REAL PROPERTY REVIEW Summer, 1994 -- Page 41

THE USES OF A RECEIVERSHIPOVER REAL PROPERTY

by Lawrence M. Dudek*

The use of a receivership over real property isavailable in state circuit court where "allowed by law.’UThere are a number of specific statutory provisionswhich permit the appointment of a receiver over realproperty, including the use of a receiver as an aid inthe enforcement of an assignment of rents, to preventwaste, and to complete construction of a project uponwhich construction liens have been filed. The use of areceiver can also be an important tool to utilize inconnection with mortgage foreclosure proceedings.2

!. USE OF A RECEIVER AS AN AID IN THEEXERCISE OF AN ASSIGNMENT OF RENTS.

The State of Michigan is a "lien" state; the grantingof a mortgage does not transfer title to the mortgagee,but, instead, provides the mortgagee with a lien againstthe mortgaged property.3 The mortgagor has an equityof redemption, which permits the mortgagor toredeem the property from the lien of the mortgage bymaking payment of the indebtedness owed under themortgage.4

In addition to the equity of redemption, the Stateof Michigan provides for a statutory right ofredemption following a foreclosure sale.s During thestatutory redemption period, the mortgagor (and any

party claiming an interest in the property through themortgagor) may redeem the property from theforeclosure sale.6 The redemption price is an amountequal to the amount bid at the sale together withinterest from the time of the sale at the rate set forthin the mortgage.7 In order to redeem, it may also benecessary to make payment of any amounts advancedby the purchaser at the sale for taxes or insurancepremiums for the property,s

Prior to the expiration of the statutory redemptionperiod, the mortgagor is entitled to the rights andincidents of possession of the mortgaged property,including the right to collect rentals from tenants of theproperty.9

In response to the need of commercial lenders, theMichigan legislature enacted Act No. 210 of the PublicActs of Michigan of 1953, entitled "Assignment ofRents to Accrue As Additional Security," MCL 554.231,MSA 25.1137(1), which provides that a mortgageemay, in conjunction with a mortgage on certaincommercial or industrial property, other than anapartment building of less than six apartments, obtainan assignment of rents from the mortgaged propertyas additional security.1°

Summer, 1994 q Page 42 MICHIGAN REAL PROPERTY REVIEW

In order to be enforceable, the assignment must berecorded.~1 The right of the mortgagee to collect rentsfrom the occupants of the property will typically betriggered upon the existence of an event of defaultunder the terms of the mortgage or the assignment,and compliance with any notice or other requirementsin the mortgage or assignment.

The assignment becomes binding upon theoccupants of the mortgaged property from the datethat the mortgagee files a notice of default with theregister of deeds and serves the notice and a copy ofthe assignment upon the occupants of the property’.12

The exercise of the assignment has the effect ofsevering one incident of possession (the right to collectthe stream of rental payments) from other incidents ofpossession, such as the right to manage the propertyand the responsibility to make payment of theexpenses associated with the management andoperation of the property. Deprived of the right tocollect rental payments, the mortgagor may lack thefinancial ability to pay the operating costs for theproperty.

Problems with the enforcement of the assignmentof rents can result if the occupants of the propertycease making any rental payments, because of concernas to which party is entitled to receive the rents.Tenants may become concerned about incurringliability to pay the rents twice by making payment tothe wrong party.

Additional problems can result if the mortgagorfails to cooperate with the exercise of the assignmentof rents or actively interferes with the mortgagee’sexercise of the assignment.

Under such circumstances the mortgagee mayseek the appointment by a court of a receiver to aidin the enforcement of the assi~qnment of rents. Thenature of the mortgagee’s right’s under an assignmentof rents and the ability to obtain the appointment ofa receiver to aid in its enforcement was set forth by theMichigan Supreme Court in Smith v Mutual BenefitLife Insurance Company~s, as follows:

1. The collection of rents is not merely anincident to the right of possession of the mortgagedproperty, but is a distinct remedy and additionalsecurity held by the mortgagee.

2. While the right to collect rents is security, theright is a direct assignment of rents and not a mortgageof the rents.

$. The assignment becomes effective against themortgagor at once upon default and prior to themortgagee’s initiation of foreclosure proceedings.

4. The mortgagee becomes entitled to collect therents upon default and performance of the statutoryconditions, which include recording and service of thenotice of default and a copy of the assignment on theoccupants of the mortgaged property.

5. A court will give aid, in an appropriate mannerand on just terms, to conserve the rents of themortgagee by appointing a receiver over themortgaged property.

6. Under the Act, a receiver may be appointed tocollect the rents and to apply them to the accruedinterest, maintenance costs, insurance, and taxes. Ifthere remains a deficiency following a sale, the receivermay continue to collect the rents following the sale andto make payments on the deficiency until expiration ofthe statutory redemption period.~4

II. USE OF A RECEIVER TO PREVENT WASTERESULTING FROM NONPAYMENT OFTAXES OR INSURANCE PREMIUMS.

In addition to the appointment of a receiver to aidin the exercise of an assignment of rents, such anappointment is also proper where necessary to preventthe commission of waste, such as the mortgagor’sfailure to pay real estate taxes or insurance premiumsfor the mortgaged property. MCL 600.2927, lVISA27A. 2927 permits the parties to a mortgage to providethat the failure of the mortgagor to pay real propertytaxes or insurance premiums will be deemed waste andthat a receiver may be appointed to prevent waste.~5

The statute which permits the parties to definewaste to include nonpayment of taxes and insurancewas first enacted in 1937. There are a number of casesdecided prior to the effective date of the statute whichhold that it is only appropriate to appoint a receiver fornonpayment of taxes where a tax sale is imminent orlikely to occur prior to the expiration of the statutoryredemption period.~6 Arguably, the statute preemptsthe holding of these earlier cases and evidences alegislative intent to permit the appointment of areceiver for nonpayment of taxes even if there is nodanger of a tax sale prior to the expiration of thestatutory redemption period.17

In any event, a court is not required to appoint areceiver solely because the parties have agreed to such


relief by contract; the decision to appoint a receiverultimately lies with the sound discretion of the court’sexercise of its equitable powers.18 In ruling upon arequest for a receiver, the court can be expected toconsider all of the attendant facts and circumstances.

The factors to be considered could include theamount of any unpaid taxes or insurance premiums,the length of time for which any payments of taxes orinsurance have been past due, and whether themortgagor has experienced difficulties in theenforcement of the assignment of rents. The courtmight further consider the value of the mortgagedproperty which secures the debt; the amount of anylikely deficiency which will exist following a sale; thenature of the recourse, if any, available to themortgagor for any deficiency; and the likelihood thatany deficiency will be collectable from the mortgagoror any guarantors.

In determining whether to appoint a receiver, thecourt might also consider whether the mortgagor hasbeen guilty of any misconduct or mismanagement,such as misappropriating rents for purposes other thanpreservation of the property, and the managementabilities and capabilities of the mortgagor. In the finalinstance, the determination whether to appoint areceiver will lie in the sound discretion of the trialjudge.19

There is a wide range of responsibilities whichmight be conferred upon a receiver appointed to aidin the enforcement of the assignment of rents. Areceiver could be appointed for the very limitedpurpose of collecting rents from the tenants, makingpayment of expenses, including taxes and insurance,and reporting to the court and the parties. At the otherextreme, a receiver could be afforded full authority tomanage the property, to negotiate and enter intoleases with occupants of the property, to make tenantimprovements and to enforce the rights of the owneragainst occupants of the property.

Initially, the scope of the receiver’s rights andresponsibilities will be determined by the ability of amortgagee and mortgagor to reach a consensualagreement. If the mortgagor and mortgagee are unableto agree upon the scope of the receiver’sresponsibilities, the.court will probably consider a numberof factors, including those upon which the decision wasmade to appoint a receiver.

!II. USE OF A RECEIVER AS ANCILLARY TOFORECLOSURE PROCEEDINGS.

As a general rule, it is said that a receiver isavailable only as ancillary relief and that there is noindependent remedy of the right to a receiver.2° Arequest for appointment of a receiver may be soughtas ancillary relief in a pending judicial foreclosureaction. The remedy of a receiver should also beavailable where the mortgagee seeks to foreclose byadvertisement if the appointment is necessary to aid inthe enforcement of an assignment of rents or toprevent waste.21

Although foreclosure by advertisement may not beused if there is a lawsuit pending for recovery of thedebt secured .by the mortgage, an action forappointment of a receiver does not constitute such anaction for recovery of the debt.22 Therefore, themortgagee may concurrently pursue foreclosure byadvertisement and the appointment of a receiver to aidin the enforcement of the assignment of rents andprevent waste. If a receiver is appointed over themortgaged property prior to a foreclosure sale, it willbe necessary to obtain the approval of the court beforeproceeding to sale.28

The use of a receiver as an adjunct to foreclosureby advertisement can be an especially effective meansfor a mortgagee to preserve the value of the propertyprior to the foreclosure sale and expiration of thestatutory redemption period. In addition to the useof a receiver ancillary to mortgage foreclosureproceedings, there is statutory authorization for theappointment of a receiver in connection with aconstruction lien foreclosure action.

IV. USE OF A RECEIVER TO COMPLETECONSTRUCTION WHERE CONSTRUCTIONLIENS HAVE BEEN FILED.

The State of Michigan Construction Lien Act24 (the"CLA") authorizes the court to appoint a receiver,under certain circumstances, over property againstwhich a construction lien has been filed.~ A requestfor appointment of a receiver may be made by aconstruction llen claimant or by a mortgagee if theimprovement covered by the lien has not beencompleted,z~

The court may appoint a receiver upon findingthat: (i) a substantial unpaid construction lien exists, or(ii) that the mortgage is in default and the lien claimantand/or mortgagee "are likely to sustain substantial lossif the improvement is not completed."27

Summer, 1994 n Page 44 MICHIGAN REAL PROPERTY REVIEW

The court-appointed receiver may petition thecourt to permit completion of construction of theimprovement in full or in part, to borrow money tocomplete the construction, and to grant security, byway of mortgage or otherwise, for the borrowing.28The receiver may also petition the court for authorityto borrow funds for other purposes, "including suchpurposes as preserving and operating the realproperty. ~ The type of security that the court mightauthorize could include a mortgage lien or anassignment of rents as additional security.

The court is to determine the priority of anysecurity granted by the receiver, and may authorize thegrant of a lien which will prime an existing mortgageand other liens against the property,s° This will behelpful where the priority of the construction loanmortgage over the construction liens is in dispute andthe construction lender is willing to advance additionalfunds only if repayment is secured by a lien with priorityover the construction liens. In that instance, theconstruction lender can (with the approval of the court)make a new loan to the receiver and be granted asuper-priority lien as to proceeds advanced under thenew loan.

In order to appoint a receiver under the CLA, thecourt is required to make a finding that the "valueadded to the real property which will result from theconstruction is likely to exceed the cost of theadditional construction."sl In determining the cost ofthe additional construction, the court is to includedirect costs, all estimated overhead and administrativecosts, and the cost of any interest expense on the fundswhich are borrowed to complete construction,s2

A party seeking the appointment of a receiverunder the CLA to complete construction should beprepared to establish that the value added will exceedthe cost of the additional construction. This will requireexpert testimony or other proofs of the "as is" valueof the improvement, the cost of the constructionproposed to be completed, and the projected value ofthe project once the work is completed. In manyinstances of income-producing property, the valueshould be enhanced by completing construction in anamount greater than the cost of completingconstruction.

The ability to secure the appointment of a receiverin connection with a construction lien action is avaluable tool which can be used to preserve andincrease the value of the security available to the

mortgagee and lien claimants, without being requiredto await the conclusion of the foreclosure action.

V. EFFECT OF BANKRUPTCY FILING ON AREAL PROPERTY RECEIVERSHIP.

An owner of real property can prevent a mortgageor construction lien foreclosure sale by filing a petitionfor relief under Chapter 11 of the Bankruptcy Code.ssUpon the filing of a petition for relief, the mortgagorbecomes a debtor in possession under the BankruptcyCodes4 and the automatic stay arising pursuant toSection 362(a), 11 USC 362(a), will prevent aforeclosure sale from taking place until such time as thestay is lifted. The automatic stay provision and otherprovisions of the Bankruptcy Code will affect the abilityof the mortgagee to enforce an assignment of rentsand the right of a court-appointed receiver overproperty owned by the debtor to continue actingas such.

The mortgagor, as debtor in possession, may seekpermission of the bankruptcy court to use the rentalincome of the mortgaged property as cash collateral,ssThere is a split of authority as to whether the debtorretains any interest in the rents where the mortgageehas performed all actions necessary to collect the rentsprior to the bankruptcy filing. These actions include therecording of a notice of default and service of the noticetogether with a copy of the assignment on theoccupants of the mortgaged property.

in re P.M.G. Properties~ held that theassignment of rents became effective against themortgagor immediately upon default and would notpermit use of the rents as cash collateral even thoughthe mortgagee had not recorded or served the requirednotice of default prior to the bankruptcy filing. Thecourt further stated that it was presumed that themortgagor would use the rents to preserve theproperty.

In re Mount Pleasant Limited Partnerships~held that where the mortgagee has complied with allof the recording and notice requirements (i.e., noticeof default has been recorded and served on theoccupants of the property together with a copy of theassignment) and any other contractual requirementsare complied with, the debtor has lost the legal rightto collect the rents. Under such circumstances, therents do not become property of the estate and are notavailable for use as cash collateral even if the debtor isable to provide adequate protection of the mortgagee’sinterest in the rents.


Finally, In re Coventw Commons A~odates~suggests that even if the mortgagee has complied withall of the recording and notice requirements, the debtordoes have an interest in the rents and may use the rentsas cash collateral if able to provide adequate protectionto the mortgagee.

The question of whether the debtor retains aninterest in the rents after all of the statutoryrequirements have been complied with is certain togenerate additional litigation before it is fully resolved.

If a state or federal court receiver has beenappointed prior to the bankruptcy filing, theBankruptcy Code will affect the ability of the receiverto continue as such. A court-appointed receiver overproperty owned by a debtor which has filed forChapter 11 is deemed a custodian of the property.39Pursuant to Section 543 of the Bankruptcy Code, thereceiver, as custodian, is obligated to deliver to thedebtor in possession (or trustee) any property of thedebtor "that is in such custodian’s possession, custody,or control on the date that such custodian acquiresknowledge of the commencement of the case."~° Thereceiver is further obligated to file an accounting of anysuch property.41

Section 543(d)(1) of the Bankruptcy Codeauthorizes the court to excuse a custodian fromcomplying with the turnover provisions of 543(a) "ifthe interests of creditors...would be better served bypermitting a custodian to continue in possession,custody, or control of such property .... ,,42 In makingthis determination the court will consider "(1) thelikelihood of a reorganization, (2) the probability thatfunds required for reorganization will be available, and(3) whether there were instances of mismanagement bythe debtor.’’~3

Where the mortgaged property is the only assetowned by the debtor and the value of the property isless than the amount of the indebtedness owed to themortgagee, the court should continue the receivershipif it provides the most likely vehicle of enhancing thevalue of the property. One court recognized that themortgagee is more likely to advance additional fundsfor tenant improvement or operating expenses ifthe receivership is continued, and that such aconsideration may be a basis to excuse the receiverfrom the turnover requirement.~

VI. CONCLUSION

The ability to obtain a court-appointed receiverover real property may provide a useful remedy in

connection with mortgage or construction lienforeclosure proceedings brought with respect tocommercial properties. The appointment of a receiverprovides a means to preserve and protect the value ofthe improved real property which acts as security forthe debt. Such a receivership provides a vehicle for theenforcement of an assignment of rents and for the useof the rental income to preserve the value and ongoingoperation of the property for the benefit of all personshaving an interest in the property. The receivershipmay, in some instances, be used as a means to enhanceand maximize the value of the property -- for example,by completing construction of a project whenauthorized to do so by the court. The potentialavailability of a receivership should be considered inmany instances of commercial mortgage or lienforeclosure proceedings.

ENDNOTES

© 1994 by Lawrence M. Dudek

MCL 600.2926-.2927, MSA 27A.2926-.2927.

Michigan law provides two methods of foreclosing amortgage. A mortgagee can proceed with a judicialforeclosure, by filing a complaint in a court havingjurisdiction. MCL 600.3101, MSA 27A.3101. Amortgagee can foreclose by advertisement if the mort-gage includes a power of sale which permits the propertyto be sold by public auction in the event of a default bythe mortgagor in the terms and conditions of themortgage, MCL 600.3201, MSA 27A.3201, and themortgage and all assignments of the mortgage have beenrecorded. MCL 600.3204(3), MSA 27A.3204.

This principle is well recognized as set forth in the 1877decision of the Michigan Supreme Court in Wagar vStone, 36 Mich 363, 366 (1877):

it has become the well settled doctrine in this state thata mortgage conveys no title to the mortgagee. It is buta security for the debt, and until the title passes upon aforeclosure and sale of the property, the mortgagee hasno legal interest in the land, and is not entitled topossession. (citations omitted)

The mortgagor is entitled to the possession during theproceedings taken to foreclose the mortgage and until asale has been made and the title of the purchaser hasbecome absolute, and until the title has become absoluteupon a foreclosure of the mortgage, an action ofejectment cannot be maintained by the mortgagee, hisassigns or representatives, to recover possession of themortgaged premises.

Nso see: McKeighan v Citizens Commercial &Savings Bank, 302 Mich 666, 5 NW2d 524 (1942);Equitable Trust Co. v Milton Realty Co., 263 Mich673, 249 NW 30 (1933)

Summer, 1994 -- Page 46 MICHIGAN REAL PROPERTY REVIEW

5o

10.

While the mortgagor may sell and convey the equity of 11.redemption by a separate and distinct contract entered

12.into in good faith and for good consideration, anyagreement by the mortgagor to do so will be viewed 13.suspiciously by a court of equity and will be carefullyscrutinized. The exchange must be fair, frank, honest 14.

and without fraud, misconduct, undue Influence,apprehension or unconscionable advantage of the 15.poverty, distress or fears of the mortgagor. Russo vWnlbers, 116 Mich App 323, 323 NW2d 383 (1982). 16.

17.The redemption period following a foreclosure pursuantto a Judgment of foreclosure is 6 months. MCL 600.3140,MSA 27A.3140. Where the foreclosure Is !~y 18.advertisement and the mortgage was executed on orafter January 1, 1965, on commercial or Industrialproperty, or multifamlly residential property In excess of 19.four units, the redemption period is slx months. Different

20.periods will apply to other mortgages. MCL 600.3240(3),MSA 27A.3240.

Titus v ~, 276 Mlch 117, 267 HW 799 (1936).

MCL 600.3140, MSA 27A.3140 (judicial foreclosure);MCL 600.3240, MSA 27A.3240 (foreclosure byadvertisement).

MCL 600.3140, MSA 27A.3140 (judgment In judicialforeclosure action may provide that redemption priceincludes amounts advanced by the purchaser for taxesor insurance); MCL 600.3240, MSA 27A.3240 (whereforeclosure by advertisement, the purchaser mayfile an affidavit and receipts with regard to all taxes andInsurance premiums paid and the redemption pricewill include these amounts).

The right of the mortgagor to continue to collect therents arises out of the fight to possession. As set forthin the early decision of Wagar v Stnne, supra at 366:

Since the passage of this act (PA 1843, No. 62), whichprevents the mortgagee from obtaining possession untilhe has acquired an absolute title to the mortgagedpremises, the mortgage binds only the lands. The rentsand profits of the land do not enter Into or form any partof the security. At the time of giving the security bothparties understand that the mortgagor will, and that themortgagee will not, be entitled to the rents, issues orprofits of the mortgaged premises, until the title shallhave become absolute upon a foreclosure of the mort-gage. Until the happening of this event, the mortgagorhas a clear right to the possession and to the Incomewhich he may derive therefrom, and the legislature bythe passage of this statute contemplated that he shouldhave such possession and income to aid him In payingthe debt.

Also see: Freeman v Massachusetts Mutual LifeIns. Co., 81 F2d 698 (6th Clr 1936).

MCL 554.231, MSA 25.1137(1).

21.

22.

23.

24.

25.

MCL 554.232, MSA 25.1137(i).

MCL 554.231(2), MSA 26.1137(1).

362 Mich 114, 106 NW2d 515 (1960).

Also see: Bennos v Waderlow, 291 Mich 595, 289NW 267 (1940).

MCL 600.2927(2), MSA 27A.2927(2)

See, for example, 600.2927(2), MSA 27A.2927(2).

Cameron, Michigan Real Property Law, (2d Ed 1993)§18.72.

Nusbaum v Shapiro, 249 Mlch 252, 228 NW 785(1930).

]ZCj2.~ v Ozeran, 255 Mlch 477, 238 NW 218 (1931).

Lewis v City of Grand Rapids, 222 F Supp 349 (WDMlch 1963); National Lumberman v Lake ShoreMachinery Co., 260 Mlch 440 (1932).

The dispute In Smith v Mutual Benefit involved theright to receive rents coming due after the foreclosuresale where there existed a deficiency following the sale.The mortgage was non-recourse. An assignment of rentshad been granted as additional security pursuant to thestatute. The mortgagor filed suit to seek an Injunctionagainst any attempt by the mortgagee to continue col-lection of rents following the sale. The mortgagee fileda counterclaim seeking the appointment of a receiver tocollect the rents. The trial court appointed a receiver,even though It does not appear that the request of themortgagee for appointment of a receiver was ancillaryto any other requested relief.

Foreclosure by advertisement Is not available if there Isany lawsuit pending for recovery of the debt which issecured by the mortgage, unless the suit Is discontinuedor a judgment entered and a walt of execution returnedunsatisfied In whole or In part. MCL 600.3204, MSA27A.3204. An action on the debt that will prohibitforeclosure by advertisement includes =proceedings Inwhich judgment may be rendered and execution Issuedagainst a debtor’s property." Michigan Land TitleStandard 16.13. An action for appointment of areceiver does not constitute an action on the debt thatwill prevent use of foreclosure by advertisement.Calvert Associates v Harris, 469 F Supp 922(ED Mlch 1979).

Kuschinski v Equitable & Central Trust Co., 277Mich 23, 268 NW2d 797 (1936), citing in re Petitionof Chaffee, 262 Mlch 291, 247 HW 186 (1933).Michigan Land Tire Standard 16.10.

MCL 570.1101 et ~e~.q., MSA 26.316(101).

MCL 570.1122, MSA 26.316(122); Michigan BankMidwest v D.J. Reynaert, Inc., 165 Mlch App 630(1988).


26. MCL 570.1122(1), MSA

27. MCL 570.1122(1), MSA

28. MCL 570.1123(1), MSA

29. MCL 570.1123(1), MSA

30. MCL 570.1123(1), MSA

31. MCL 570.1123(I), MSA

32. MCL 570.1123(1), MSA

33. Section 362(a)(5) of the

26.316(122). 38.

26.316(122).

26.316(123).

26.316(123).

26.316(123).

26.316(123).

26.316(123).

Bankruptcy Code, 11 USC 39.

362(aX5), operates as a stay of "any act to create,perfect, or enforce against property of the debtor anylien to the extent that such lien secures a claim that arosebefore the commencement of the case under this title."

34. A debtor in possession is empowered to continue theopemtlon of the debtor’s buslness and is further grantedthe powers that a trustee has under the BankruptcyCode. 11 USC ~1107, 1108.

35. For an excellent discussion on the ability of the debtorto use rents as cash collateral, see Moreno and Eisele,"Assignment of Rents in Bankruptcy Under MichiganLaw," 19 Mlch Real Prop Rev. 137 (1992).

36. 55 Bankr. 864 (Bankr. E.D. Mich. 1985).

40.

41.

42.

43.

44.

In re Coventry Commons Assodates, 134 B.R.606 (Bankr. E.D. Mich. 1991) and 149 B.R. 109 (Bankr.E.D. Mlch 1992). Judge Rhodes stated that the debtorretains an Interest in the rents even where the mortgageehas complied with all statutory requirements, becausethe right to collect the rents would revert to the mort-gagor if the property were redeemed by payment of theindebtedness prior to the foreclosure or bypayment of the redemption price after sale during thestatutory redemption period. 134 B.R. at note 7, p. 610.

in re Foundry of Barrington Partnership, 129B.R. 550, 558 (Bankr. N.D. IlL 1991); In Re PoplarSprings Apartments of Atlanta, Ltd., 103 B.R.146, 149 (Bankr. S.D. Ohio 1989)

11USCA 543(bX1).

11 USCA 543(bX2).

See in Re Poplar Springs Apartments of Atlanta,Ltd., 103 B.R. 146, 149 (Bankr. S.D. Ohio 1989); Inre Sundance Corp., 83 B.R. 746, 749 (Bankr. Mont.1988); in re CCN Realty Corp., 19 B.R. 526, 528-529 (Bankr. S.D.N.Y. 1982).

In Re Poplar Springs Apartments of Atlanta, Ltd.,103 B.R. 146, 150 (Bankr. S.D. Ohio 1989).

in re Foundry of Barrington Partnership, 12937. 144 Bankr. 727 (Bankr. W.D. Mich. 1992). B.R. 550, 558 (Bankr. N.D. Ill. 1991).


SINGLE-ASSET CHAPTER 11 REAL ESTATE CASES:BAD FAITH, NEW DEBTOR SYNDROME,

AND OTHER PITFALLS

by Lisa Sornrners Gretchko*

The current real estate market has left some realestate developers extremely overextended. The over-building of the 1980’s, the economic downturn, andthe continuing conservatism on the part of manylenders has resulted in "see-through" buildings,negative cash flows, and the developer’s inability torefinance.

In an effort to hold onto their real estate, severaldevelopers have resorted to Chapter 11 bankruptcy,hoping that the bankruptcy court will force the lenderto refinance in the context of a confirmed Plan of

Reorganization. However, the tactic of usingbankruptcy as the ultimate trump card with the lenderusually upsets the lender, who is anxious to get eitherits money, or "its" property.

While some believe that entities possessing a singleasset consisting of distressed real estate are simplyineligible for reorganization under Chapter 11 of theBankruptcy Code, bankruptcy courts located inMichigan have not reached this conclusion.1 Indeed,several single-asset Chapter 11 real estatebankruptcies have reorganized successfully,z However,

* Lisa Sommers Gretchko is the current chair of the Debtor-Creditor Committee of the Real Property Law Section.She is a partner in Pepper, Hamilton & Scheetz and she specializes in bankruptcy and commercial litigation.She has represented secured creditors, unsecured creditors’ committees, debtors and trustees, and has litigatedmany of the issues which arise in the context of bankruptcy law. In her commercial litigation practice, Ms. Gretchkohas experience in real estate litigation. She is a frequent lecturer for ICLE on various topics, and her article onthe impact of bankruptcy on commercial real estate leases-was published in the Winter, 1992, issue of theMichigan Real Property Review.

Ms. Gretchko received her BA with honors from the University of Michigan in 1976 and was a member of thePhi Beta Kappa Honor Society. She received her JD, cure laude, from the University of Detroit in 1978, whereshe was awarded the National Order of the Barrister and elected a member of the Justice Frank Murphy HonorSociety. In addition, Ms. Gretchko was an associate editor of the University of Detroit Journal of Urban Lawin law school.


other single-asset Chapter 11 real estate bankruptcieshave been unsuccessful, and have been dismissed for"bad faith,~ or have had the automatic stay lifted orannulled. Often, the difference between the successand failure of a single-asset Chapter 11 real estate casedepends upon the debtor’s pre-bankruptcyplanning -- which sometimes includes dismembermentof a real estate empire, creation of a new entity intowhich a single, troubled real estate project istrausferred, or a Chapter 11 bankruptcy filed minutesbefore a foreclosure sale. All of these maneuvers raisered flags for bankruptcy courts. Since August 12,1992, federal courts in Michigan have issued severalwritten opinions either dismissing single-asset Chapter11 real estate cases, or granting the lender some sortof relief from the automatic stay, based on a findingthat the bankruptcy was filed in bad faith.3 Dismissalof the bankruptcy case or relief from the automatic stayenables the mortgagee to foreclose. Each of thesedecisions is a victory for the mortgagee and a defeatfor the debtor; and each case is very instructive.

In order to successfully represent either a debtor ora mortgagee in a single-asset Chapter 11 real estatecase, it is important for the practitioner to understandthese recent decisions. As debtor’s counsel, theattorney must try to steer clear of facts andcircumstances which courts have found to constitute abad-faith bankruptcy filing. As lender’s counsel, theattorney should understand these cases and beprepared to use them to gain appropriate relief.

1. In re Laguna Associates Limited Partner-ship, 147 B.R. 709 (Bankr. E.D. Mich. 1992),issued on August 12, 1992, granted a lender relieffrom the automatic stay due to the debtor’s bad-faithfiling of a single-asset Chapter 11 real estate case. Theproperty at issue was a 384-unit apartment complex.Before bankruptcy this apartment project was ownedby Beztak Company, a Michigan co-partnership(~Beztak"). 147 B.R. at 710.

Aetna Casualty and Surety Company ("Aetna")held, inter alia, a first mortgage to secure repaymentof its $19.5 million loan given to finance theacquisition and construction of the apartmentcomplex. 147 B.R. at 710. Aetna’s mortgage recitedthe importance of the knowledge, experience,background, and creditworthiness of Beztak and itspartners. 147 B.R. at 711. The loan agreementpermitted one transfer of the property from Beztak toanother entity on certain conditions, including thefollowing: (1) there was no default, (2) Aetna received

at least 30 days’ prior written notice of the transfer,plus, inter alia, (3) evidence satisfactory to Aetnathat the proposed transfer met Aetna’s standards ofcredit-worthiness, or alternatively, certain of Beztak’spartners retained at least a 5% general partnershipinterest in the transferee, together with practicalcontrol over the business and management of theapartment project. 147 B.R. at 711.

On February 28,1992, Beztak sent Aetna a letterpurporting to constitute the 30-day notice required totransfer the project to Laguna Associates LimitedPartnership ("Laguna Associates"). 147 B.R. at 711.Laguna Associates had been formed on February 11,1992 (the date that the Michigan Department ofCommerce accepted the required filing). Although theCertificate of Limited Partnership was received by theMichigan Department of Commerce on February 10,1992, it recited that it was signed "as of January 2,1992." 147 B.R. at 711. The Certificate of LimitedPartnership named Beztak as the sole limited partner(and owner of a 99% interest) and named a corporation"Laguna General, Inc." ("Laguna General") as the solegeneral partner. 147 B.R. at 711. Laguna General hadno assets. 147 B.R. at 713.

The letter recited that Laguna Associates was a"permitted transferee" under the loan agreement, andstated that the transfer was for estate planningpurposes. 147 B.R. at 711-712. An executed butunrecorded quitclaim deed was enclosed with the letter.Although the deed was stated to be "Effective as ofJanuary 3, 1992," it was acknowledged by a NotaryPublic on February 19, 1992. 147 B.R. at 712. Thedeed recited that $10.00 in consideration was paid forthe transfer. 147 B.R. at 712.

Since Beztak had not paid the real property taxesfor the years 1990 and 1991, Beztak was in defaultunder the loan agreement as of the date of the letter.147 B.R. at 712. Beztak’s February 28, 1992 letterto Aetna, with its enclosures, did not supply Aetna withany of the required evidence from which Aetna coulddetermine whether the transferee met Aetna’scustomary credit and experience standards. 147 B.R.at 713. Since none of the required Beztak partnersowned a 5% general partnership interest in LagunaAssociates, Aetna argued that Laguna Associates wassubject to Aetna’s credit review and that LagunaAssociates was not a "permitted transferee" asdefined in the loan documents since it was self-evidentthat Laguna Associates would not meet Aetna’s creditrequirements. See 147 B.R. at 713. Although some of


the required partners at Beztak were shareholders inLaguna General (the sole general partner of LagunaAssociates), their interest as shareholders was notequivalent to a general partnership interest. 147 B.R.at 713. On March 5, 1992 -- just 9 days after theFebruary 28, 1992 letter to Aetna -- the quitclaimdeed was recorded, transferring the project to LagunaAssociates. 147 B.R. at 712. The next day, March6, 1992, Laguna Associates filed a voluntary Chapter11 petition. 147 B.R. at 712.

Shortly after Laguna Associates filed bankruptcy,Aetna filed a Motion for Relief of the Automatic Stayfor "cause" under 11 U.S.C. §362(d)(1) arguing, interalia, that Laguna Associates filed bankruptcy in badfaith, as indicated by the transfer of the property fromBeztak to Laguna Associates on the eve of bankruptcy.In its argument, Aetna relied, in part, upon the "NewDebtor Syndrome" -- a pattern of facts recognized byother circuits as providing a basis for either dismissinga bankruptcy petition or granting relief from theautomatic stay.

The New Debtor Syndrome has been identified asa certain pattern of conduct evidencing bad faith. Thecase most often relied upon is In re YukonEnterprises, Inc., 39 B.R. 919, 921 (Bankr. C.D.Cal. 1984). The factors consistently focused upon inthe case law include the following (147 B.R. at 716):

(1) transfer of distressed real property into anewly created or dormant entity, usually apartnership or corporation;

(2) transfer occurring within close proximityto the filing of the bankruptcy case;

(3) no consideration being paid for the trans-ferred property other than stock in thedebtor;

(4) the debtor having no assets other than therecently transferred, distressed property;

(5) debtor having no or minimal unsecureddebts;

(6) debtor having no company and no on-going business; and

(7) debtor having no means, other than thetransferred property, to service the debton the property.

In granting Aetna’s motion, Judge Shapero firstheld that Aetna had the initial burden of showing that

"cause" exists for granting relief from the automaticstay. However, once Aetna made a prima facieshowing of "cause," the burden of going forwardshifted to the debtor, and the debtor had the ultimateburden of persuasion pursuant to 11 U.S.C. §362(g).147 B.R. at 714. The court rejected the debtor’snotion that Aetna had a heavy burden of proof in orderto establish that the case was filed in bad faith. 147B.R. at 715.

The court ruled that in determining whether thebankruptcy was filed in bad faith, the court couldconsider any factors which evidence an intent toabuse the bankruptcy process, or that the bankruptcypetition was filed to delay a secured creditor’slegitimate effort to enforce its rights. 147 B.R. at 716.The court then found that whether bad faith existed inthis case was best analyzed according to the elementsof the New Debtor Syndrome as set forth in Yukon,supra, (147 B.R. at 717), because it included, interalia, the following salient facts (147 B.R. at 718):

(1) a flawed eleventh-hour attempt of Beztakand its partners to transfer the property tothe debtor;

(2)a transferee, asset-less debtor, whichappeared to have been created solely forthe purpose of holding the property and,by inference, for essentially isolating itfrom the remaining operations of Beztakas transferor;

(3) a situation wherein the property cannotsupport its expenses and required debtpayments;

(4) the filing of bankruptcy in dose proximityto the transfer or attempted transfer of theproperty;

(5) the fact that the day-to-day managementof the property remains in the samemanagerial hands (an entity associated withBeztak) regardless of the transfer;

(6) the apparent lack of consideration beingpaid for the transfer other than the trans-ferred interests in the Debtor; and,

(7) harm to Aetna -- namely a loss of itsbargained-for relationship with Beztak, thetransferor.

Therefore, Judge Shapero concluded that Aetnahad established a prima facie case of bad faith, and that


the debtor failed to carry its burden of going forwardand its ultimate burden of persuasion on the good faithissue. Consequently, Judge Shapero found that "causerexisted for granting Aetna relief from the automaticstay, and the automatic stay was lifted. However, JudgeShapero granted the debtor’s request for a stay pend-ing appeal.

Laguna Associates appealed to the United StatesDistrict Court for the Eastern District of Michigan(where it was assigned Case Number 92-75390). OnApril 12, 1993, District Judge Edmunds affirmed JudgeShapero’s ruling, holding that his finding that LagtmaAssociates filed bankruptcy in bad faith was not anabuse of discretion as it was well supported by therecord. (Judge Edmunds’ Opinion, pg. 10.) Ju~dgeEdmunds also confirmed Judge Shapero’s ruling on theburden of proof issue, and held that the great weightof authority supports the notion that once Aetna madea prima facie showing of "cause" for relief from theautomatic stay (i.e., that the petition was filed in badfaith), Laguna Associates had the burden of proof toshow that it filed for bankruptcy in good faith. (JudgeEdmunds’ Opinion, pg. 12.)

The debtor appealed to the Sixth Circuit Court ofAppeals. Oral argument was held in May, 1994; theopinion had not yet been issued as this article wentto print.

2. On October 22, 1992, District Judge Edmundsissued a written appellate opinion in in re SevenLakes of Northville, Case No. 92-76146 (E.D.Mich. October 22, 1992). Seven Lakes involveda bankruptcy filing shortly before a foreclosure sale.Seven Lakes of Northville was a Michigan limitedpartnership that owned a 350-acre parcel of land inNorthville Township, Michigan. Alexander HamiltonLife Insurance Company of America and HomeFederal Service Corporation, the holders of the firstmortgage on the property, filed a foreclosure action instate court in March, 1991 due to the debtor’smonetary and non-monetary defaults. After months oflitigation, the lenders obtained a judgment, and thestate court ordered the foreclosure sale. The sale wasscheduled for August 5, 1992. (Judge Edmunds’Opinion, pgs. 1-2.)

A few days before the scheduled sale, D & TConstruction Company, a general partner of the debtor,("D & T") filed an involuntary Chapter 11 bankruptcypetition against the debtor. The lenders then fileda motion seeking three alternative types of relief:(1) dismissal of the debtor’s bankruptcy for lack of

good faith, (2) relief from the automatic stay, or(3) abstention. The lenders’ motion was supported byseveral exhibits, including an affidavit from thedebtor’s other general partner which stated that theproperty generated no cash flow and that unless thedebtor received a cash infusion, the debtor was unlikelyto reorganize. (Judge Edmunds’ Opinion, pg. 2.)

On October 1, 1992, the bankruptcy court held ahearing on the lenders’ motion, at the end of which thecourt granted the lenders relief from the automaticstay; an order to this effect was entered on October 13,1992. On October 14, 1992, the bankruptcy courtentered its Memorandum and Order denying theEx-Parte Motion of D & T for a Stay Pending Appeal.D & T then brought its Motion for a Stay PendingAppeal before Judge Edmunds of the United StatesDistrict Court. (Judge Edmunds’ Opinion, pp. 2-3.)

Judge Edmunds first ruled that the bankruptcycourt’s denial of the stay pending appeal was entitledto deference and was to be reviewed according to the"abuse of discretion" standard. (Judge Edmunds’Opinion, pg. 3.) Judge Edmunds then applied thefollowing standards for a stay pending appeal:

(1) There must be a strong showing of alikelihood of success on the merits of theappeal;

(2) The appellant will suffer irreparable harmunless the stay is granted;

(3) The other parties will not suffersubstantial harm if the stay is granted; and,

(4) The public interest will be served bygranting the stay.

(Judge Edmunds’ Opinion, pp. 3-4.)

Judge Edmunds affirmed the bankruptcy court’sdenial of D & T’s request for a stay pending appeal,finding that D & T could not make the required strongshowing of a likelihood of success on the merits of theappeal. (Judge Edmunds’ Opinion, pgs. 7-8.) D & Targued that a real estate venture never has cash flowduring the development stage, and that if cash flow isrequired for a Chapter 11, a real estate venture isvirtually ineligible for Chapter 11. The court rejectedthis argument, stating:

This argument is not valid. A real estatepartnership could reorganize under Chapter11 if it had binding loan or other cash infusion


commitments. In this case, the Debtor had nosuch binding commitments .... The bankruptcycourt found that the stay was not intended toprotect the debtor while the debtorcontinues to speculate in an uncertain market.Chapter 11 is intended to provide a timeperiod for a debtor to reorganize. Where thereis no possibility of a reorganization, theautomatic stay should be lifted. (Judge Edmunds’Opinion, pg. 5.)

Judge Edmunds noted that neither D & T nor thedebtor had submitted a credible plan of reorganization(Judge Edmunds’ Opinion, pg. 6.), but instead seemedto be hoping for new financing. A mere hope ofrefinancing was simply not enough. (Judge Edmunds’Opinion, pg. 7.) Judge Edmunds also denied the staypending appeal because she found that D & T broughtits Motion for a Stay Pending Appeal for the purposeof delay. (Judge Edmunds’ Opinion, pg. 7.) Theautomatic stay was lifted with respect to the property.

:3. On December 8, 1992 Bankruptcy Judge Rhodesissued a written opinion in In re Ocean BeachProperties, 148 B.R. 494 (Bankr. E.D. Mich.1992), granting relief from an automatic stay. OceanBeach involved two related general partnershipsnamed Ocean Beach Properties and Ocean ShoreInvestments, respectively. These two generalpartnerships owned three undeveloped parcels on anisland off the eastern coast of Florida. 148 B.R. at 495.First National Bank and Trust Company of theTreasure Coast was the primary secured lender ("Bank").148 B.R. at 495. The property had never generatedincome, nor was any income expected in the shortterm. 148 B.R. at 497. The debtors had not yetobtained all the permits necessary to develop theproperty. 148 B.R. at 498. Moreover the debtorsrequired approximately $3 million to finish the projectand to place buildable lots on the market for sale. 148B.R. at 498. The Bank sought to foreclose; the debtorsfiled bankruptcy on the eve of foreclosure. 148 B.R.at 495. The Bank then filed a Motion for Relief fromthe Automatic Stay for "cause" under 11 U.S.C.§362(d)(1), alleging that the debtors’ bankruptcywas filed in bad faith and therefore "cause" existedfor granting relief from the automatic stay. 148 B.R.at 495.

Judge Rhodes first held that under 11 U.S.C.§362(g)(2) the debtors had the burden of showing thatbankruptcy was filed in good faith. 148 B.R. at 495.

Next, Judge Rhodes concluded that he should evaluatethe evidence before him based on the 3-prong testarticulated in in re Winshall Settlor’s Trust, 758F.2d 1136, 1137 (6th Cir. 1985), namely:

(1) Whether the debtors have assets;

(2) Whether the debtors have an ongoingbusiness to reorganize; and

(3) Whether there is a reasonable probabilitythat the debtors can propose a viable planof reorganization. 148 B.R. at 496.

After concluding that the debtors had assets (whichwas a complex issue in the context of this case), thecourt considered whether the debtors had an ongoingbusiness to reorganize. The Bank argued that thedebtors had no on-going business to reorganize be-cause no income had ever been received from thisbusiness, nor would any be received in the short term.148 B.R. at 497. Judge Rhodes acknowledged that inthis circumstance it was difficult to find that the debtorshad a business to reorganize:

As noted in Winshall Settlor’s Trust, thepurpose of Chapter 11 is to reorganize thebusiness. It is certainly true that reorganizationmight in appropriate cases consist of eitherrehabilitation of the debtors’ business or theorderly liquidation of the debtors’ assets. Thelaw as it has developed under Chapter 11permits either course of action or acombination of both courses of action ....Nevertheless, neither rehabilitation nor anorderly liquidation is involved in this case. Thiscase involves two entities which resemblestart-up operations with insufficient capital,which invoke Chapter 11 in an effort to gettheir business to the point where it will becomeoperational with income to pay its debts. TheCourt concludes that such a use of Chapter 11is questionable. The Court is not prepared tohold that such is always inappropriate, becausethe Court concludes that in certaincircumstances, it may, nevertheless, beappropriate to allow such a business thebenefit of Chapter 11. Therefore, this Courtholds that the most persuasive evidence thatan enterprise with no current income has anongoing business for the purposes of Chapter11, is evidence of a reasonable possibility ofreorganization. 148 B.R. at 497.

Judge Rhodes then analyzed the final and pivotalissue: whether there was a reasonable probability that

Summer, 1994 -- Page 54 MICHIGAN REAL PROPF.~TY REVIEW

the debtors could reorganize. After reviewing theevidence, Judge Rhodes concluded that the debtorsfailed to establish any reasonable prospect forreorganization. 148 B.R. at 498. Although they hadmade substantial progress in obtaining some (but notall) of the permits necessary to develop the project, theevidence failed to show that the debtors had any firmplans for obtaining the $3 million in financing whichwas needed to finish the project. 148 B.R. at 498. Thecourt found that the debtors’ hopes for future financingwere not credible because the debtors had failed toraise required financing in the past, even amqngpartners who had a stake in the project. 148 B.R. at498. Moreover, the property was in a remote locationon the island, near a nudear power plant and far awayfrom shopping and other facilities. 148 B.R. at 498.Considering all of these facts, Judge Rhodes condudedthat the debtors did not have any reasonable prospectof reorganization. 148 B.R. at 498.

At the end of his opinion, Judge Rhodes confirmedthat enterprises that lack current income, such asstart-up enterprises, are generally not viablecandidates for a Chapter 11 reorganization:

The Court’s ultimate conclusion is thatalthough an enterprise without current incomemay be eligible for Chapter 11, such anenterprise faces substantial obstacles inestablishing a reasonable prospect ofreorganization, if only because it lacks a recordand a history of operation. In appropriatecircumstances, such a case might be a goodfaith filing, but the Court concludes there isinsufficient evidence of that in this case. 148B.R. at 499.

In a footnote at the condusion of the case, JudgeRhodes explained that his ruling was not motivated bythe fact that this was a single-asset real estate case orthat it was filed on the eve of foreclosure:

In this Court’s view, it is of no particular weightor moment in judging the good faith issue thatthe case involves a single asset, that the assetsare real estate, or that the case was filed on theeve of foreclosure. These factors are certainlyimportant in providing the context of issues tobe addressed, but by themselves do not playany substantial role in determining whether thecase was filed in good faith. In this Court’sview, the number of assets is insignificant,That the case was filed on the eve of

foreclosure only suggests that the debtor is inneed of financial reorganization. Likewise, themere fact that the case involves real estate asopposed to some other kind of asset isinsignificant. 148 B.R. at 499.

4. In In re Grand Traverse DevelopmentCompany Limited Partnership, 150 B.R. 176(Bankr. W.D. Mich. 1993), the secured creditor soughtrelief from the automatic stay and the debtorssought confirmation of a plan. In a complex opinion,Bankruptcy Judge Stevenson denied plan confirmationand granted the motion for relief from theautomatic stay.

The case involved three debtors: Grand TraverseDevelopment Company Limited Partnership("Partnership"), Grand Traverse DevelopmentCompany, Inc. ("Development Company") andGrand Traverse Condominium Developers, Inc.("Condominium Developers"). The Partnership ownedthe Grand Traverse Resort Hotel consisting of hotelrooms, restaurants and bars, conference and meetingrooms, retail stores and two golf courses. 150 B.R. at179. The Development Company was a Michigancorporation which held the liquor license for the GrandTraverse Resort Hotel’s bars and restaurants, andoperated all of the hotel business pursuant to anoperating agreement. 150 B.R. at 179. CondominiumDevelopers was the real estate development and salescomponent of the Grand Traverse Resort. 150 B.R.at 179.

The undersecured creditor of the debtors was theGeneral Retirement System of the City of Detroit("Retirement System"). 150 B.R. at 178. The GeneralRetirement System established a separate corporationnamed Grand Hotel Corporation ("Hotel Corp."). 150B.R. at 179. (General Retirement System and GrandHotel Corporation are hereinafter collectively called"GRS".) Retirement System held a secured note in theoriginal principal amount of approximately $37million. This note and other security documentswere assigned to Hotel Corp. In March of 1992,Massachusetts Mutual Life Insurance Company("Massachusetts Mutual") assigned its secured note inthe principal amount of $35 million and relatedsecurity documents to Retirement System. 150 B.R. at179. The debtors d~fault~d on these loans in January1992. Since the~parties were unable to resolve theirfinancial differences, GRS began a foreclosure actionin the Grand Traverse County Circuit Court. 150 B.R.at 179.


On April 16, 1992 m minutes before theforeclosure sale -- the debtors filed their first voluntaryChapter 11 petition. 150 B.R. at 179. In their April,1992 bankruptcy schedules the debtors listed GRS asbeing owed approximately $47 million. GRS, however,claimed to be owed approximately $82 million, as aresult of its direct loans to the debtors and its purchaseof the secured debt owing to Massachusetts Mutual.150 B.R. at 179.

One week after the debtors filed bankruptcy -- onApril 23, 1992 -- GRS filed a Motion for Relief fromthe Automatic Stay. 150 B.R. at 179. Shortlythereafter, GRS and the debtors appeared to reach aresolution of their controversy. On May 1, 1992 thedebtors filed a motion seeking to dismiss the Chapter11 proceeding. That Motion to Dismiss contained thefollowing language:

Although there is little or no possibility thatpre-petition unsecured creditors will be paidbecause the Debtor has no reasonablelikelihood of rehabilitation and aninability to effectuate a plan, GRS willcontinue The Grand Traverse ResortOperation fumishing the unsecured creditorsnew business and revenue. 150 B.R. at179-180.

On May 14, 1992, the court entered a stipulatedorder granting GRS relief from the automatic stay. OnJune 3, 1992, the court entered a dismissal orderbased upon the parties’ agreement that GRS wouldhire an experienced hotel management company torun the resort, the foredosure sale would proceed asscheduled, and the debtors would have an opportunityto redeem the property within the six-monthredemption period for a dollar figure significantly lessthan the total debt. 150 B.R. at 180.

Difficulties developed after entry of the June 3,1992 dismissal order. The debtors filed a lawsuit in theGrand Traverse County Circuit Court seeking torestrain the second fore~dosure sale. 150 B.R. at 180.That lawsuit alleged that the debtors had been fraudu-lently induced into entering into the security agreementwith GRS, and that GRS was not a true securedcreditor but, instead, was a partner. 150 B.R. at 180.The state circuit court apparently denied the debtors’request for temporary ~injunctive relief. 150 B.R. at180. On July 7, 1992 -- minutes before thesecond scheduled foreclosure sale -- the debtorsfiled their second voluntary Chapter 11 bankruptcypetition. 150 B.R. at 180.

Even though this was the debtors’ second journeyinto bankruptcy within three months, the second Chapter11 petition looked somewhat promising because thedebtors filed a proposed plan of reorganizationwith their second bankruptcy petition, and quicklyremoved their lawsuit against GRS from the GrandTraverse County Circuit Court to the Bankruptcy Court..150 B.R. at 180.

On July 15, 1992, eight days after the debtors’filed their second bankruptcy petition, GRS filed itsMotion for Relief from the Automatic Stay both for"cause" pursuant to 11 USC §362(d)(1), and for lackof equity and lack of need of the property for asuccessful reorganization under 11 USC §362(d)(2).150 B.R. at 182. Since the debtors represented thatthey could move swiftly toward confirmation of a plan,the court decided that it would hear GRS’ Motion forRelief from the Automatic Stay on a consolidated basiswith the debtors’ motion to confirm their plan. 150B.R. at 180. The debtors’ disclosure statement wasapproved on October 28, 1992. 150 B.R. at 180. Avaluation hearing was scheduled for late November, atthe conclusion of which the court determined that thethree parcels comprising the Resort property had anaggregate value of $24.8 million. 150 B.R. at 180.

On November 30, 1992, the court began theheating on GRS’ Motion for Relief from the AutomaticStay. By December 4, 1992 GRS had met its burdenof proving a prima facie case for relief from the stay.150 B.R. at 181. On December 15, 1992, minutesbefore commencing their defense to GRS’ Motion forRelief from the Automatic Stay, the debtors filed anamended plan of reorganization (their fourth). OnDecember 22, 1992 -- five days later -- the debtors’filed a fifth amendment to their plan of reorganization,which the court considered in its opinion. 150 B.R. at181. In order for the debtors’ fifth plan to be feasible,the secured daim of GRS had to be reduced from $82million to approximately $15.8 million. 150 B.R. at182. The debtors argued that, despite the apparentenormity of the task, if, inter alia, the debtors wontheir pending lawsuit against the GRS, and reduced thewalue of one of the parcels by $2.5 million, then GRS’secured claim would be reduced and the fifth amendedplan would be feasible. 150 B.R. at 182. Therefore,feasibility of the debtors’ plan assumed that the court’svaluation of the real property was in error. 150 B.R.at 184.

In early 1993, the court addressed GRS’ Motionfor Relief from the Automatic Stay, and granted it.


First, Judge Stevenson noted that since GRS had madea prima facie showing that it was entitled to relieffrom the automatic stay, 150 B.R. at 181, the debtorshad the burden of proof pursuant to 11 U.S.C.§362(g). 150 B.R. at 183. In order to cany this burdenunder 11 USC §362(d)(2), the debtors would have toprove that the property was necessary for theirreorganization and that an effective reorganizationwas in prospect. 150 B.R. at 183. The courtconcentrated on whether an effective reorganizationwas ~in prospect" and acknowledged that the debtors’burden on this issue becomes increasingly difficult, asbankruptcy proceedings progress. Due to thecircumstances of this case (i.e., the bankruptcy casehad been pending for six months and the confirmationhearing had been pending for two months), the courtheld that the debtors had a heavy burden of proof andmust show that confirmation of a plan is virtuallyguaranteed. 150 B.R. at 183.

Judge Stevenson concluded that the debtors’ability to reorganize rested entirely upon the outcomeof their lawsuit against GRS, and therefore the debtorscould not show that an effective reorganization was "inprospect." 150 B.R. at 183. In so ruling, thebankruptcy court rejected the debtors’ argument thatit was required to resolve the lawsuit between thedebtors and GRS before granting GRS’ motion forrelief from the automatic stay. 150 B.R. at 187. Basedon the legislative history of 11 U.S.C. §362(d), JudgeStevenson held that a lift of stay hearing was not theappropriate time in which to consider the merits of thedebtors’ lawsuit against GRS. 150 B.R. at 188. Thecourt then raised its foremost concern, namely whetherthe purpose of the automatic stay would be served,or hindered, by allowing the automatic stay to remainin force pending the bankruptcy court’s determinationon the merits of the debtors’ adversary proceedingagainst GRS (which was removed from state court tobankruptcy court when the debtors filed their secondbankruptcy). 150 B.R. at 189. Noting that theautomatic stay may be an inappropriate means ofbarring GRS’ exercise of its legitimate state lawremedies, 150 B.R. at 189, the court stated:

On the record already before the court it isclear that, even if the Debtors could establishthat they were entitled to a preliminaryinjunction at this point in time, the policies ofthe automatic stay would not be furthered bythe continuation of that stay as a surrogate fora preliminary injunction. What we have hereis a case of the tail wagging the dog.

Reorganization hinges completely upon theDebtors’ success in this adversary suit. If theDebtors can prevail in the adversaryproceeding, they can confirm any number ofplans. If the adversary proceeding fails, it haslittle hope of obtaining more than a liquidationor surrender of its assets. In such a situation,the Chapter 11 case serves as little more thanan attaching point for the adversaryproceeding which absent bankruptcy would bea state court case. The only advantage gainedby the Debtors by being in Chapter 11 is theautomatic stay. 150 B.R. at 190.

Since the only purpose of the automatic stay in thedebtors’ case was as a substitute for a preliminaryinjunction, the court concluded that was aninappropriate use of the automatic stay. 150 B.R. at191. Therefore, Judge Stevenson held that theappropriate remedy was to lift the automatic stay andremand the debtors’ lawsuit against GRS to state court,where the debtors could seek a preliminary injunction.150 B.R. at 191.

Having already ruled that the automatic stay shouldbe lifted pursuant to 11 U.S.C. §362(d)(2), the courtproceeded to lift the automatic stay for "cause" under11 U.S.C. §362(d)(1) due to the debtors’ bad faith. 150B.R. at 191. The court concluded that the debtors’initial cooperation in the second bankruptcyproceeding had deteriorated to tactics of desperationand delay. 150 B.R. at 193. After the valuation hearingthe debtors were consumed with fending off GRS,rather than moving forward toward confirmation ofany realistic plan. 150 B.R. at 194. The court notedthe debtors’ strategy of filing multiple last-minute plans.150 B.R. at 194. The court found that the severalinstances of inconsistency in the debtors’ positions andarguments constituted a "bellwether of bad faith." 150B.R. at 194. In the debtors’ first bankruptcy case, thedebtors stipulated that the liens of GRS were valid andenforceable; however, in their second bankruptcy thedebtors sought to divest GRS of its entire claim. 150B.R. at 195. In dismissing their first bankruptcy, thedebtors stipulated that a reorganization was notpossible; in the second bankruptcy the debtors insistedthat reorganization was possible and that the courtshould give them the chance to reorganize. 150 B.R.at 195. Based upon all these factors, the court grantedGRS’ Motion for Relief from the Automatic Stay for"cause" pursuant to 11 USC §362(d)(1). An order tothis effect was entered on February 8, 1993. OnFebruary 9, 1993, Judge Stevenson denied the


debtors’ motion for a stay of her February 8, 1993order. 151 B.R. at 795.

The debtors appealed to the United States DistrictCourt for the Western District of Michigan, and soughta stay pending appeal. In an 18-page opinion, (151B.R. 792 (W.D. Mich 1993)) District Judge Quistdenied the debtors’ motion for a stay pending appeal,concluding that the debtors did not demonstrate alikelihood of success on the merits (151 B.R. at 799)and that the other parties, and the public interest,would be harmed if a stay was issued, especially sincethe debtors admitted that they would "run out of cashshortly" and that they needed more than $1 million tokeep the Resort open through 1993. 151 B.R. at 800.On balance, the court ruled that the four factors for astay pending appeal4 militated against the debtors andtherefore Judge Quist declined to enter an orderstaying Judge Stevenson’s February 8, 1993 orderregarding lift of the automatic stay.

5. In re Trident Associates LimitedPartnership, Case No. 93-46907-G, issued onSeptember 30, 1993, granted a lender relief from anautomatic stay in a single-asset Chapter 11 real estatecase. The debtor’s only asset was a commercialbuilding in Farmington Hills, Michigan known as TriAtria Center. (Judge Graves’ Opinion, pg. 3.)Metropolitan Life Insurance Company ("Metropolitan")held, inter alia, a mortgage on the property to securerepayment of a $23 million loan. (Judge Graves’Opinion, pg. 3.) A default occurred under themortgage, namely failure to pay the 1990 and 1992real property taxes. (Judge Graves’ Opinion, pg. 3.)Metropolitan recorded a Notice of Default under themortgage with the Oakland County Register of Deeds,and thereafter began foreclosure by advertisement.(Judge Graves’ Opinion, pg. 3.) The foreclosure salewas originally scheduled for June 15, 1993, but wasadjourned to June 22, 1993.

Judge Graves found that the debtor’s pre-bankruptcy strategy "revealed a methodical plunge intobankruptcy." (Judge Graves’ Opinion, pg. 2.) On June14, 1993, a bankruptcy petition was prepared in thename of "Trident Associates Limited Partnership," andwas signed by a representative of "Trident General,Inc." as the general partner of the debtor. However,Trident General, Inc. was not yet formed on June 14,1993, when its representative signed the debtor’sbankruptcy petition; it was not incorporated until June15, 1993. (Judge Graves’ Opinion, pg. 2.) Also onJune 15, 1993, and without the permission of

Metropolitan as required, a certificate of Amendmentof the Limited Parmership was filed changing the nameof the limited partnership to "Trident AssociatesLimited Partnership." (Judge Graves’ Opinion, pg. 2.)Judge Graves noted that it appeared that the limitedpartnership was reconstituted to create a new entitywithout the required notice to Metropolitan. (JudgeGraves’ Opinion, pg. 3.)

The foreclosure sale was held at 10:00 a.m. onJune 22, 1993, and at 10:05 a.m. Metropolitan madea bid in the amount of $19 million. Metropolitan wasthe successful bidder. (Judge Graves’ Opinion, pg. 3.)Minutes later, at 10:09 a.m., the debtor filed itsChapter ll bankruptcy petition.

Metropolitan filed a motion seeking relief from theautomatic stay. The debtor admitted that it had noequity in the property and that it did not have any otherongoing business to reorganize. (Judge Graves’Opinion, pg. 5.)

After noting that it is rare for the Court to lift theautomatic stay for "bad faith," Judge Graves noted thatunder Society National Bank v Barrett, 964 F.2d588 (6th Cir. 1992), the determination of "bad faith"is to be made based upon the totality of thecircumstances. (Judge Graves’ Opinion, pg. 4.) JudgeGraves found that this case was "representative of thearchetype bad faith case" (Judge Graves’ Opinion, pg.4.), and that the facts of this case portrayed"unambiguous manifestations of bad faith." (JudgeGraves’ Opinion, pg. 5.) Judge Graves stated that thefact that this case was a singie-asset real estate case didnot, by itself, constitute cause for dismissal of thedebtor’s case; it did, however, "give rise to furtherinquiry." (Judge Graves’ Opinion, pg. 5.) Judge Gravesfound the timing of the debtor’s bankruptcy filingto be "pernicious" and an attempt to delayMetropolitan’s foreclosure efforts. (Judge Graves’Opinion, pg. 5.) Based on, inter alia, these findings,Judge Graves granted relief from the automatic stay.

The debtor appealed to the United States DistrictCourt (where it was assigned Case Number 93-CV-72996-DT). On November 19, 1993, District JudgeBarbara Hackett affirmed Judge Graves’ decision. Thedebtor appealed to the Sixth Circuit Court of Appeals;briefs have been filed and that appeal remains inprogress as this article goes to print.

6. On February 25, 1994 United States DistrictCourt Judge Gadola issued an Opinion and Orderaffirming the Bankruptcy Court’s dismissal of a single

Summer, 1994 -- Page $8 MICHIGAN REAL PROPERTY REVIEW

asset Chapter 11 bankruptcy case in In re GatewayNorth Estates, Civil Case No. 93-70519 (E.D. Mich.February 25, 1994). The debtor was a land-holdingcorporation whose only assets were three undevelopedparcels of real estate, two located in Florida, and onelocated in Michigan. (Judge Gadola’s Opinion, pg. 2.)On August 7, 1992 a Florida state court entered ajudgment of foreclosure regarding the Florida parcels;the sale was scheduled for October 6, 1992. (JudgeGadola’s Opinion, pg. 2.)

On October 1, 1992 the debtor filed a voluntarypetition for relief under Chapter 11 of the BankruptcyCode in the Bankruptcy Court for the Eastern Districtof Michigan. (Judge Gadola’s Opinion, pg. 2,) Aone-page proposed plan of reorganizationaccompanied the Chapter 11 petition. The planproposed to sell the Florida parcels and pay the saleproceeds to the Judes, who were apparently thesecured creditors. (Judge Gadola’s Opinion, pg. 2.) OnNovember 5, 1992 the United States Trustee filed amotion to convert the debtor’s Chapter 11 to aChapter 7 liquidation, or, alternatively, to dismiss thebankruptcy case. (Judge Gadola’s Opinion, pg. 1.) TheJudes concurred in this motion. On January 21, 1993the Bankruptcy Court granted the U.S. Trustee’smotion and dismissed the bankruptcy case after findingthat there was no hope for the debtor’s reorganization,and that the facts surrounding the debtor’s bankruptcywere inconsistent with the purposes of Chapter 11.(Judge Gadola’s Opinion, pg. 2.) The debtor appealedto the Federal District Court.

Judge Gadola ruled that bankruptcy court providesa safe harbor only so long as a Chapter 11 debtorcontinues to show evidence that an effectivereorganization of the enterprise is reasonably possible.(Judge Gadola’s Opinion, pg. 4.) Relying upon in reWinshall Settlor’s Tm~t, 758 F.2d 1136 (6th Cir.1985), Judge Gadola held that a debtor without assets,creditors, or ongoing business cannot effectively reha-bilitate itself. (Judge Gadola’s Opinion, pg. 4). Thecourt then found that the debtor had no assets otherthan the three parcels of undeveloped real estate --two of which were the subject of foreclosureproceedings. The debtor admitted that it had no em-ployees or income, and there was no evidence of anyongoing business. (Judge Gadola’s Opinion, pg. 4.)The debtor admitted that its sole purpose was to holdthe land until the optimum time to sell. (Judge Gadola’sOpinion, pg. 4.) Applying the factors set forth inWinshail, supra, Judge Gadola held that there wasno reasonable probability that this debtor could

reorganize. The Court also found that the debtor’sbankruptcy filing a mere five days before theforeclosure sale was in bad faith, and an obvious tacticto delay that sale. Therefore, Judge Gadola affirmedthe bankruptcy court’s dismissal of this case.

The debtor appealed to the Sixth Circuit Court ofAppeals. That appeal remains in progress as this articlegoes to print.

CONCLUSION

There is no foolproof way to ensure that a single-asset Chapter 11 real estate case will survive a motionfor dismissal or relief from the automatic stay based onbad faith. However, the cases discussed above are veryinstructive and enable the practitioner to distill severalfactors which render a single-asset Chapter 11 realestate case vulnerable to the lender’s motion fordismissal or relief from the automatic stay, such as:

1. Filing of the bankruptcy on the eve of a fore-closure, which is often held to constitute evidence ofan intent to delay or frustrate the legitimate efforts ofthe secured creditors to enforce their rights.

2. A transfer of distressed real estate into a newly-created or dormant entity, especially if there areanomalies in the formation of the new or dormantentity.

3. A transfer of the distressed real estate occurringwithin close proximity to the filing of the bankruptcy.

4. Anomalies in the transfer document such asback-dating the effective date, or little or noconsideration being paid for the transferred property.

5. Evidence that the transfer of the real estate tothe debtor was not an "arms length" transaction.

6. The debtor’s lack of means, other than thedistressed property, to service the debt on theproperty.

7. The debtor having few unsecured creditorswhose claims are relatively small.

It also appears that start-up entities are question-able candidates for Chapter 11 reorganization.

Debtor’s counsel in a single-asset Chapter 11 realestate case should carefully analyze the writtenopinions discussed in this article before filing a


bankruptcy petition to determine how many of the "redflags" are present, and to advise the debtor regardingthe likelihood of the lender receiving relief from theautomatic stay or dismissal of the bankruptcy case.Otherwise, the debtor risks incurring significant costswith no real benefit.

ENDNOTES

Judge Rhodes made his feeling on this subjectabundantly clear in footnote 3 of his opinion in in reOcean Beach Propertle~, 148 B.R. 494, 499 (Bankr.E.D. Mich. 1992):

in This court’s view, it is of no particular weight ormoment in judging the good faith issue that the caseinvolves a single asset, that the assets are real estate ....

These cases are beyond the scope of this article butinclude, Inter alia, e.g. In Re EastlMd PartnersLimited Partnerdflp, Case No. 91-03149-R (Dec. 8,

1992) in which Judge Rhodes issued an opinion con-firming the debtor’s plan of reorganization.

The status of the opinions in one case, In ReWashtenaw Huron lnve~tment~ Corp. No. 8,150 B.R. 31 (Bankr. E.D. Mich. 1993), affirmed byDistrict Judge Edmunds on April 12, 1993 in Case No.92-76851, was uncertain as this article went to print.Therefore those opinions will not be discussed inthis article.

4. The four factors are:

(a) Likelihood that the party seeking the stay will prevailon the merits of the appeal.

(b) The movant will suffer irreparable injury unless thestay is granted.

(c) Other parties will suffer no substantial harm if thestay is granted.

(d) The public interest will not be harmed if the stay isgranted.


ANALYZING LEASE TAX CLAUSES IN RESPONSE TOPOTENTIAL TAX RESTRUCTURING

by Alan M. Hurvitz and Kenneth F. Posner*

The enactment of 1993 PA 145 (Senate Bill 1) bythe Michigan legislature last year and the resultantpassage in March of Proposal A have caused a profoundchange in the manner in which revenue is generated bythe State of Michigan. Ad valorem real estate taxes leviedagainst commercial properties have been, in most in-stances, significantly reduced. Several existing taxeshave been increased to compensate for the loss inrevenue caused by the reduction in ad valorem real estatetaxes, including increases in the sales tax, real estate

transfer tax, and taxes on tobacco products. A new taxhas been created with respect to interstate telephonecalls. Finally, annual assessment increases are nowlimited to the lower of 5% or the rate of inflation untilreassessment upon sale or other transfer.

These changes to the Michigan tax structure havecaused many landlords and tenants doing business in theState of Michigan to review the tax clauses in their leasesto determine who will benefit from the reduction in real

* Alan M. Hurvitz is a partner in the Detroit offices of the law firm of Honigman Miller Schwartz &: Cohn, where hespecializes in commercial real estate matters, including development, financing, leasing, management, brokerage,and other related areas of real estate law. Mr. Hurvitz graduated from Wayne State University Law School in 1981.He is a member of the International Conference of Shopping Centers, the Commercial Leasing Committee of theReal Property Section of the State Bar of Michigan, and the Conveyancing Committee of the Real Property Divisionof the American Bar Association. Mr. Hurvitz has lectured at several seminars dealing with various real estate topics.

Kenneth F. Posner is a principal in the firm of Maroko, Landau and Posner in Farmington Hills, Michigan, wherehe specializes in real estate matter, including lease negotiation, lease enforcement, and other matters involving realestate transactions and litigation. Mr. Posner graduated from the University of Michigan Law School in 1982. Healso has a degree in Business Administration from Miami University (Ohio, 1978) and a master’s degree in Economicsfrom the University of Michigan (1980). He is admitted to ~ractice in both Michigan and Florida. He is a memberof the International Conference of Shopping Centers and the Commercial Leasing Committee of the Real PropertySection of the State Bar of Michigan, as well as several other sections of the Michigan and American Bar Association.He has published several articles and presented at several conferences on real estate related matters.


estate taxes, and who will be burdened by the increasesin existing taxes and the creation of new taxes. While itis hard to imagine a method by which a landlord couldpass through the 2% increase in sales tax, a tenant witha broad substitute tax clause in its lease might find itselfsubject to the increased transfer tax upon the sale of thecommercial development of which it is a part.Furthermore, a tenant signing a lease in the year beforea sale of the development occurs might experience atremendous increase in taxes as a result of areassessment upon sale, although the tenant receivednone of the benefit of lower taxes in previous years.

The tax restructuring has also caused many realestate attorneys to reexamine the tax clauses which theyare currently using when drafting or reviewing leases todetermine, in the first instance, whether the clauses aresufficiently clear with respect to each party’s obligationas to taxes other than ad valorem real estate taxes inorder that the intent of their client is properly reflected.The taxes and assessments for which a tenant may beheld responsible under a lease are generally determinedby the intent of the parties, as gathered from a construc-tion of the lease as a whole. Black vs. General WiperSupply Co., 305 N.Y. 386, 113 N.E.2d 528 (1953).If a lease merely specifies that a tenant will pay its shareof real estate taxes, the tenant may not have theresponsibility for taxes on rents, transfer taxes, water orsewer taxes, or any special assessments. On the otherhand, if the real estate tax clause has been broadlydrawn, it is possible that the tenant will be responsible fortransfer taxes, taxes on rents, income taxes, and even,through special assessments, the cost of construction ofportions of the development of which the tenant’spremises forms a part. Under Proposal A, specificattention should now be given to the allocation of costsupon the sale or transfer of the development in which atenant’s premises is located. Will the landlord be able topass through that portion of the transfer tax which wasenacted as a substitute for real estate taxes? Will a tenantbe responsible for its proportionate share of the largeincrease in taxes which may occur at the time of atransfer because of the reassessment provision? Will atenant under a gross lease be able to insist upon areduction in gross rent because of the reduced taxliability and resulting savings to the landlord?

While landlords have been creative in drafting realestate tax clauses in order to anticipate substitute taxproblems, few if any reported decisions are available.Most of the literature reflects a more practical oranalytical approach to the drafting or interpretation ofreal estate lease clauses. For example, Emmanuel B.

Halper’s 1991 article in The Practical Real EstateLawyer, pp. 49-68 (May 1991), is similar to thetreatment he provides in his treatise. Halper, E.,Shopping Center and Stores Leases, §§5.05-5.09 (LawJoumal Seminars - Press 1993). He provides a verydetailed and "helpful discussion of the drafting andinterpretation of real estate tax clauses, but very littlediscussion of the cases interpreting these clauses.

Similarly, in his treatise, Friedman on Leases,Milton C. Friedman provides exhaustive research on themultitude of issues that must be considered with respectto the drafting of the entire real estate tax provisions ofa lease, but provides little case background with respectto litigation regarding the interpretation of substitute taxor definitional clauses. Friedman, M., Friedman onLeases, §5.201, p. 117, note 24 (Practicing LawInstitute, 1990, supp. 1992). Finally, there are somehelpful practical guides that may assist in analyzingexisting or potential real estate tax clauses.1

Many of the issues raised by Proposal A will be casesof first impression in Michigan, and the exact languageset forth in a tax clause will probably be the determiningfactor in ascertaining the rights of the parties. Theimpact of Proposal A, however, reaches far beyond th~specific issues arising from the substance of the statute.Discussions as to possible alternative tax devices havecaused landlords, tenants, and their attorneys to realizethat the hypothetical situations often contemplated bylengthy and comprehensive tax clauses can be a reality.An attorney must take care to protect his client bycarefully drafting the real estate tax clause to contem-plate not only the current state of affairs, but what mayhappen in the future.

To assist the attorney in drafting a clear,comprehensive clause, either from the landlord’s ortenant’s viewpoint, we have collected several real estatetax clauses and have reviewed the clauses to determine,from both a landlord’s and a tenant’s viewpoint, how theclauses could be revised to be more inclusive or exclusive,as the case may be. We have not, however, analyzedthe clauses in terms of calculating a tenant’s pro ratashare, prorating taxes for the start and end of a leaseterm, and other important issues that should beevaluated when drafting such a clause.

DETROIT BOARD FORM

The Detroit Board Form lease does not contain anylanguage concerning the payment of real estate taxes orassessments. Generally, a court will not imply an

MICHIGAN REAL PROPERTY REVIEW Summer, 1994 n Page 63

obligation on the part of a tenant to pay taxes if the leaseis silent on the point, Greenberg v Madison Heights,124 Mich. App. 168, 170, n.2, :333 N.W.2d 614(198:3), although if real estate taxes increase as the resultof improvements made for the sole benefit of the tenant,the tenant may be found to be liable for such increase.Wycoffv Gavriloff Motors, Inc., :362 Mich. 582,107N.W. 2d 820 (1961). Unless the landlord intends that therent stated in the lease be inclusive of taxes, the landlordmust add a rider to the Detroit Board form containing aprovision requiring the tenant to pay taxes andassessments and contemplating the issues raised inthis article.

MODEL CLAUSE A

"Real Estate Taxes" means (i) all general orad valorem real estate taxes and (ii) assessments,both general and special, for publicimprovements for benefits, which shall, duringthe term hereof, be levied or assessed (and in thecase of any prior assessments, the installmentsthereof which shall be payable during the termhereof) against or upon the land, buildings andother improvements within the Tax Parcel;provided, however, that with respect to anyassessments levied against or upon the TaxParcel and the improvements thereon whichunder the laws then in force may be paid ininstallments, there will be included within RealEstate Taxes with respect to any tax year onlythe installments(s) of such assessment for suchtax year. In the event LANDLORD contests theamount of any Real Estate Taxes, the cost ofsuch contest will be deducted from any resultingreduction to determine Real Estate Taxes. Theterm Real Estate Taxes does not include anyincome, gross income, franchise, personalproperty, devolution, estate, inheritance orgift taxes.

Should any governmental taxing authorityacting under any present or future law,ordinance, or regulation, levy, assess, or imposea tax, excise and/or assessment (other than netincome or franchise tax) upon or against thislease, the execution hereof and/or the rentalspayable by TENANT to LANDLORD, either byway of substitution for or in addition to anyexisting tax on land and buildings or otherwise,and whether or not evidenced by documentarystamps or the like, TENANT agrees to beresponsible for and to pay such tax, exdse

and/or assessment, or to reimburseLANDLORD for the amount thereof, as thecase may be.

Landlord’s Perspective:

This clause has many of the characteristics of asophisticated real estate tax clause. The definition of realestate taxes includes both taxes and assessments. Alease clause which requires the tenant to pay taxes butis silent with respect to assessments may not obligate thetenant to pay any share of any assessments leviedagainst the property. Blake v Metropolitan (~hainStores, 247 Mich. 73, 225 N.W. 587 (].929).Furthermore, in terms of assessments, the clause speaksto assessments for both public "improvements andbenefits." Since an assessment may be levied for apurpose other than the construction of a publicimprovement, the landlord will at least have an argumentthat such assessment is included in the tenant’sobligations so long as the assessment is levied for apurpose which "benefits" the public. For example, in1986 San Francisco passed an ordinance whichrequired landlords to contribute to a job trainingprogram for unemployed residents based upon thesquare foot area of their developments. If the ordinancecharacterized the contribution as a special assessment,the developer should be able to pass on this cost to thetenant under this clause, since the purpose of theassessment was to benefit the public, although nophysical improvement was to be constructed.

On the other hand, the language in this examplemay not be broad enough if the new levy imposed by themunicipality is characterized as a "fee" or an"imposition," as opposed to an "assessment."Furthermore, the language defining taxes has beenlimited to general or ad valorem real estate taxes andgeneral and special assessments. This language may notcover other taxes which the landlord may wish toinclude, such as the Michigan Single Business Tax or thetransfer tax. Depending upon the utilities dause in thelease, this language may not even be broad enough toinclude sewer or water impositions. Given the creativitywhich the Michigan legislature demonstrated in findingways to replace the revenue lost by the real estate taxreductions, the landlord will want to have languagewhich covers any type of fees, impositions, or levieswhich the governing body may create in lieu of, or Inaddition to, existing real estate taxes.

The last sentence of the clause does contemplatesome other types of taxes. This sentence, typically

Summer, 1994 -- Page 64 MICHIGAN ~ PROPERTY REVIEW

referred to as a "substitute tax clause," has been draftedto include taxes which are either passed in substitutionof or in addition to existing taxes. This protects thelandlord in a situation where the existing real estate taxbase is unchanged, but a new tax is created or an existingtax is increased in lieu of raising real estate taxes. Afactual issue may arise in determining whether such newor increased tax was passed in lieu of an increase in realestate taxes, although the language in this model clausedoes not clearly mandate that the tax may only be passedthrough to the tenant if the tax is in lieu of an increasein real estate taxes. The language, however, has beennarrowly drafted to cover only certain classes of ta~es,i.e. taxes imposed against the lease, the execution of thelease, or the rentals by tenant to the landlord. Taxesimposed upon mortgages encumbering the shoppingcenter, increases in the Single Business Tax or thetransfer tax, the new telephone tax or taxes based on thenumber of parking spaces are only some of the classesof taxes which arguably would not be covered by thisclause.

Finally, this clause excludes, inter alia, grossincome and personal property taxes. This could excludethe landlord’s liability for Single Business Tax. TheSingle Business Tax could be characterized as a rent taxbecause it is calculated on gross rents. From a landlord’sviewpoint, a rent tax should be properly includable.

The exclusion for personal property could also causeunanticipated exposure to the landlord, unless the taxespayable upon the landlord’s maintenance machinery,on-site office equipment, and so forth are covered in thecommon area maintenance recovery clause.Furthermore, in some jurisdictions, pylon signs,monuments and other signs are taxed as personalproperty. Unless this is specifically covered elsewhere inthe lease, the landlord could wind up paying for thesetypes of taxes.

Tenant’s Perspective:

There are two different approaches that can betaken by a tenant in responding to a clause similar toModel Clause A. The first approach, which could betermed the "laundry list" approach, is to list all of thedifferent types of taxes that the tenant would excludefrom the definition of "substitute taxes." While Clause Aspecifically excludes "income, gross income, franchise,personal property, devolution, estate, inheritance, orgift taxes," other taxes to exclude are taxes on profits,gross receipts, rents, sales, use, occupancy, possession,single business, value added, transfer, corporate, real

estate transfer, documentary stamps, recording fees,facilities fees, and capital levies.

The other approach to limiting the definition oftaxes would be to create definitional criteria that can beapplied to any purported tax to determine whether ornot it meets the intention of the parties. From thetenant’s perspective, a tax should not be considered avalid charge under the lease unless that tax is imposedupon all commercial real property owners as a class. Adifferent criteria, that may also be used in conjunctionwith the prior criteria, would be to provide that in orderto qualify as a tax, the entire charge would have to betreated as a tax if the property where the premises arelocated was the landlord’s sole property and the incomefrom that property was the landlord’s sole income. Theuse of either of these approaches would provide greaterprotection than the short laundry list provided at the endof the first paragraph of Model Clause A.

The issue regarding assessments can be aparticularly sore point for tenants. While there may beno need to distinguish between general or ad valoremreal estate taxes on the one hand and general assess-ments on the other, tenants under a short term leaseshould be able to maintain that they should not beresponsible for "special assessments," as required underthis clause. While the tenant is arguably responsible forthe cost of providing governmental services on anon-going basis (of the type that would be associated witha general assessment), the tenant can rationallymaintain that special assessments affect the value of thelandlord’s continuing interest in the shopping center,well beyond the term of the lease. This is particularly trueif the special assessment relates to specific municipalservices to be provided to the landlord’s property (i.e.,mass transit, new roadways, etc.). The tenant, as atemporary user of the space, will not recognize anincrease in the value of its property as a result of theexpenditure of these funds. The landlord, on the otherhand, stands to reap long-term benefits. A compromisesolution with respect to special (or perhaps, general)assessments is to provide that any assessments duringthe last few years of the lease will be amortized over theoriginal term of the lease and chargeable only duringthose last few years.

With respect to the "substitute tax" provisionscontained in the second paragraph of this clause, thetenant should argue that it is entering into this leasebased upon certain projections regarding the currenttaxes upon the premises. The landlord, as developer, isin a better position to evaluate the likelihood of changes

MICHIGAN REAL PROPERTY REVIEW Summer, 1994 m Page 65

in the taxation of real property and, therefore, to protectitself in these regards. For this reason, the tenant shouldinsist upon the deletion of the phrase "in addition to"existing taxes. While it is reasonable for the landlord toprotect itself from a revamping of the tax system, thereis no reason that the landlord should obtain a windfallfrom the tenant with respect to the imposition of a newtax, not previously contemplated by the parties. Obvi-ously, the landlord will continue to insist that the new taxis merely an additional operating cost which is passedthrough to the tenant under this net lease situation.However, this should not prevent the tenant fromasserting its position.

MODEL ClaUSE B

A. Definition. Landlord shall pay or cause tobe paid all Real Estate Taxes (as hereinafterdefined) assessed or imposed upon the Landlord’sTract which become due or payable during theLease Term. As used in this section, the termReal Estate Taxes shall mean and include all realestate taxes, public and governmental chargesand assessments, including all extraordinary orspecial assessments, or assessments against anyof Landlord’s personal property now or hereaf-ter located in the Center, all costs, expenses andattorneys’ fees incurred by Landlord incontesting or negotiating with public authorities(Landlord having the sole authority to conductsuch a contest or enter into such negotiations)as to any of the same and all sewer and othertaxes and charges, but shall not include taxes onTenant’s business in the Premises, machinery,equipment, inventory or other personalproperty or assets of Tenant, Tenant agreeingto pay, before delinquency, all taxes upon orattributable to such excluded items withoutapportionment.

B. Other Taxes. Tenant’s proportionate shareof any governmental tax or charge (other thanincome tax) levied, assessed, or imposed onaccount of the payment by Tenant or receipt byLandlord, or based in whole or in part upon, therents in this Lease reserved or upon the Centeror the value thereof shall be paid by Tenant.


While this clause is broader than Model Clause A, itsuffers from many of the same deficiencies. The clauseincludes all "real estate taxes," but it is not clear what

would constitute a real estate tax. Is a transfer tax, or atax on rents, or a tax on mortgages, a real estate tax?The clause does include all public and governmentalcharges and assessments, but it is possible, given theorder of this sentence, that the clause could be construedto be limited to charges relating to assessments, and notthe types of taxes listed above. Assessments against thelandlord’s personal property are included, but arguablynot personal property taxes. The end of the clauseincludes "sewer and other taxes and charges," but it isnot clear if this Is meant to include other charges similarto sewer, such as water and other utility charges, orwhether it should be broadly construed. If broadconstruction is intended, what must such taxes andcharges relate tb in order to be includable? SingleBusiness Tax is probably not includable. Unlike ModelClause A, costs of a tax contest are includable regardlessof the success of the contest. There is not a substitute taxclause, but the "Other Taxes" clause would include thetypes of taxes typically covered by a substitute tax clause,although it is arguably limited to rents, levies upon thecenter itself, and the value of the center. Increases InIncome taxes, Single Business Taxes, or the creation ofa mortgage tax would not be covered by this clause.


Like Model Clause A, this clause should bestrengthened from the tenant’s perspective byspecifically excluding various items of tax. Unlike theprior clause, this clause specifically refers to "extra-ordinary" assessments. Such additional assessmentsshould be excluded for the same reasons set forth above.

This clause refers to assessments on the landlord’s"personal property." While it is standard for the tenantto agree to be responsible for all personal property taxesassociated with its own property, there is littlejustification for placing the burden for the landlord’spersonal property on the tenants. While many landlordsinsist that all of these taxes must be passed through in anet lease situation, the tenant may try to distinguishthese taxes from real property taxes associated with theuse or occupancy of the space.

The broad language in the middle of Section A,referring to "all sewer and other taxes and charges," isunnecessarily vague. In the first place, it is not clearwhether the tenant is agreeing to pay all sewer charges,as opposed to sewer taxes. In the second place, thislanguage could be interpreted broadly to include not onlyother "taxes," but other charges which might moreappropriately be identified or categorized as common


area maintenance expenses. The tenant’s objections tothis clause should focus upon this language and shouldrequire further specificity with respect to the particulartypes of taxes or charges contemplated by the parties, inthe absence of this clarification, the tenant runs the riskthat the ambiguity in the broad language will be inter-preted to Its disadvantage.

Finally, the "other taxes" clause is quite vague. Whileit could be interpreted to apply only to the rents underthe lease, the rents "upon" the center [sic], or the valueof the rents, It could also be interpreted to apply to anytax or charge "upon the center" or upon the "value~ ofthe center. This ambiguity presents a difficult problemfor the tenant. On the one hand, the tenant may benefitfrom the ambiguity construed against the drafter~ andapplying only to "rent taxes." On the other hand, if thelease provision is not clarified, the tenant runs the riskthat new taxes, such as the real estate transfer tax underProposal A, are interpreted to be "a government tax orcharge.., based in whole or in part upon.., the valuethereof." The tenant’s decision whether to requireclarification of these provisions depends upon thecontext in which the negotiations are taking place.

MODEL CLAUSE C

For the purposes of this Section, the word"Taxes" shall include all taxes attributable to:Improvements now or hereafter made to theShopping Center or any part thereof; orattributable to the present or future installationin the Shopping Center or any part thereof offixtures, machinery or equipment; all real estatetaxes, assessments, water and sewer and othergovernmental impositions and charges of everykind and nature whatsoever, nonrecurring aswell as recurring, special or extraordinary aswell as ordinary, foreseen, and unforeseen, andeach and every installment thereof, which shallor may during the term of this Lease be levied,assessed or imposed, or become due andpayable or become liens upon, or a~ise inconnection with the use, occupancy orpossession of, or any interest in, the ShoppingCenter or any part thereof, or any land,buildings or other improvements there, lessamounts paid, if any, as taxes to landlord or thetaxing authority by the occupants of any"Excluded Areas" (as hereinafter defined). Theword "Taxes" shall not include any charge, suchas water meter charge and sewer rent basedthereon, which is measured by the consumption

by the actual user of the item or service for whichthe charge is made. If at any time during theterm of this Lease, under the laws of any one ormore jurisdictions in which the Shopping Cen-ter is located, a tax, imposition, charge, assess-ment, levy, excise or license fee Is levied on,imposed against or measured, computed ordetermined, in whole or in part, by: (1) rentspayable hereunder (Fixed Minimum, Percent-age, Tax and/or additional); or (2) the value ofany lien placed against the Shopping Center oragainst the real property comprising the Shopping Center or any obligations secured thereby;or if any other tax (except income tax), imposi-tion, charge, assessment, levy, excise or licensefee, however described or denoted, shall belevied or imposed by any such jurisdiction, to theextent that the cost of any of the foregoing shallbe imposed, either directly or indirectly, onLandlord, such tax, imposition, charge, assess-ment, levy, excise or license fee, shall be deemedto be included as "Taxes" for the purpose of thissection.


This clause represents a more comprehensive clausethan the previous two. Taxes include all taxes, notmerely real estate taxes and general and special assess-ments. Water and sewer charges are specifically cov-ered, as are all governmental assessments, impositions,or charges which arise in connection with the use,occupancy, or any interest in the shopping center. Thislanguage should be broad enough to include, for ex-ample, the tax imposed by San Francisco relating to jobretraining, since landlord’s obligation for payment ofthis amount arose in connection with the landlord’sinterest in the shopping center. The language alsoseems broad enough to include taxes such as theMichigan Single Business Tax, the state transfer tax andthe telephone tax (to the extent calls relate to thedevelopment), as all arise as a result of the landlord’sinterest in the shopping center. The substitute taxlanguage is also very broadly drafted and does not relyon the new tax being imposed in lieu of real estate taxesor increases in real estate taxes.

There may be some concern, however, that thisclause is overly broad. For example, the Michigan SingleBusiness Tax is not clearly included and it is arguablewhether such a tax is properly includable in the broadcategories set forth in this clause. While positions couldbe taken that almost any type of tax, including income,

MICHIGAN REAL PROPERTY REVIEW Summer, 1994 n Page 67

franchise, transfer, and so forth, relating to the projector to the landlord’s ownership or income therefrom areincludable, by the use of suc.h broad and vague language,the landlord may cause a court to look critically at theclause and attempt to define the clause as narrowly aspossible.


While all of the issues discussed above should behandled in any negotiation with respect to this clause,several additional points need to be addressed. Thedefinition of the rent tax should be clarified. While mostshopping center leases define the rent to include allcharges under the lease (including not only fixed mini-mum rent, but also percentage rent, taxes, commonarea maintenance, sewer, insurance, etc.), there is noreason why these additional charges should also providea basis for the calculation of the tax. Arguably, thedetermination of the tax basis will be made by the taxingauthority, in deciding whether or not these charges are,in fact, the rental due to the landlord. Nonetheless, thetenant may be able to buttress its position vis-a-vis thelandlord, by maintaining that there is no reason why itshould pay taxes based upon items that are tantamountto services provided solely by the landlord.

The tax upon the value of liens placed upon theshopping center is dubious. There appears to be littlerational basis for tying the amount of the tax to theamount of equity that the landlord is willing to carry withrespect to a particular development. This type of taxwould provide an unreasonable incentive to the landlordto mortgage property which otherwise might remainunencumbered. Moreover, it provides the landlord witha great degree of control to affect the amount of taxes.When the landlord is responsible for the payment of thetaxes, the tenants could expect the landlord to takewhatever actions are necessary in order to keep them ata minimum. If, however, as in this clause, the landlordcan pass those taxes directly on to the tenant, there isvirtually no incentive to take whatever other actionsmight be necessary in order to reduce the tax obligation.

MODEL CLAUSE D

Tenant shall pay to Landlord its proportion-ate share of all taxes and assessments whichmay be levied or assessed by any lawful authorityduring the term of this Lease, or with respect toeach fiscal tax year falling in whole or in partduring the term of this Lease, against the land,buildings and improvements comprising the

Shopping Center, and of all other taxes whichLandlord becomes obligated to pay with respectto the regional retail development, irrespectiveof whether such taxes are assessed against realor personal property (including, withoutlimitation, the so-called "Michigan SingleBusiness Tax" of Landlord as the samepresently exists and as the same may be amendedin whole or in part from time to time). Theportion of such taxes and assessments allocatedto the common areas of the Shopping Center,and the portion of such taxes allocated to the"net building area" (gross building area less thesum of gross leasable floor area and commonareas) of the Shopping Center, shall bededucted from the total of such taxes andassessments and charged to Tenant inaccordance with the provisions of this Lease.Tenant’s proportionate share of the remainingtaxes and assessments shall be equal to theproduct obtained by multiplying such taxes andassessments by a fraction, the numerator ofwhich shall be the number of square feet of floorarea in the leased premises and the denomina-tor of which shall be the total number of squarefeet of gross leased and occupied floor area inthe Shopping Center. In the event that anypresent or future enactment of the State or anypolitical subdivision thereof or any govern-mental authority having jurisdiction thereovereither: (a) imposes a direct or indirect taxand/or assessment of any kind or nature upon,against or with respect to the rentals payable bytenants or occupants in the regional retaildevelopment to Landlord derived from theregional retail development or with respect tothe Landlord’s, or the individuals’ or entities’which form the Landlord herein, ownership ofthe land and buildings comprising the regionalretail development, either in addition to or byway of substitution for all or any part of the taxesand assessments levied or assessed against suchland and such buildings, including withoutlimitation, any net profits tax or any comparabletax imposed on any portion of Landlord’srevenues from the Shopping Center; and/or (b)imposes a tax or surcharge of any kind ornature, upon, against or with respect to theparking areas or the number of parking spacesin the Shopping Center, then in either or bothof such events, Tenant shall be obligated to payits proportionate share thereof as provided


herein. For purposes hereof, the term "regionalretail development" shall, in any event, bedeemed to include any land upon whichtemporary or permanent offsite utility systemsand any wooded area, lake, shoreline thereof orisland park serving the Shopping Center arelocated with all improvements situated thereon.


From a landlord’s perspective, there are few, if any,deficiencies in this clause. The clause would include alltaxes and assessments, as opposed to just real estatetaxes, levied against the shopping center, as well as anyother tax which landlord may be obligated to pay withrespect to the shopping center. The clause specificallyincludes the Single Business Tax, and the substitute taxclause is comprehensive, although a mortgage tax mightnot be covered specifically under the clause. Theshopping center has been broadly defined in this clausein order to include offsite areas for which the landlordwill have tax liability, even though such areas may not beincluded within the definition of the shopping center forother purposes of the lease. This is an importantconcept which is often overlooked when preparing theseclauses on behalf of the landlord. Furthermore, transfertax is not specifically mentioned, although same isarguably a tax which landlord would become obligated topay with respect to the shopping center.

The landlord will want the clause to be ascomprehensive as possible to preserve the integrity ofthe "net" deal which was originally made. In a nettransaction, it should be the understanding of the partiesthat the tenant, and not the landlord, is taking thebusiness risks of increased costs, so that it is thelandlord’s return on its investment, and not the tenant’scosts, which will remain constant during the term of thetransaction. A broad clause such as this clauseaccomplishes that goal.

While this is a fairly comprehensive clause, ModelClause E, below, offers more clarity in determining whatis intended to be covered under taxes.


This section requires the tenant to pay itsproportionate share of all taxes which the landlord"becomes obligated to pay .... " The tenant shouldinsist that its obligations to pay be contingent on thelandlord’s obligation. If the landlord does not, in fact,pay the taxes, then the tenant’s obligation should beremoved.

The use of the parenthetical phrase describing theMichigan Single Business Tax creates an unusualproblem for the landlord under this clause. Thisparenthetical language clearly contemplates the tax ~asit presently exists and as the same may be amended inwhole or in part from time to time." Clearly, the tenantexecuting this lease will be held to be responsible for anychanges in the Michigan Single Business Tax. Bynegative implication, however, changes in other taxesmay not be similarly treated. In other words, a courtmight infer that the lease’s failure to specify the effect ofamendments or changes in other taxes spelled out in theearlier sections makes those changes non-binding onthe tenant. While this position may have some facialappeal, it is unlikely that the argument would prevail overthe extremely broad definitional language earlier inthe clause.

The substitute tax language of this clause containsan explicit reference to an "indirect" tax. Without greaterspecification, this language could be used by a craftylandlord to pass through governmental charges, fees, orother expenses charged to the landlord personally, or inconnection with the landlord’s other business activities.

The clause’s reference to taxes upon the ownershipof the land and buildings by the "individuals or entitieswhich form the landlord" seems overbroad. There is littleconceptual basis for making the tenant responsible fortaxes incurred by the developer’s partners, share-holders, or beneficial owners. If a tax is not imposed atthe level of ownership of the shopping center, there isarguably little basis to pass that charge through to thetenant. While the ultimate responsibility for payment ofthe tax may lie with the shareholders or partners of theownership entity, the tax obligation should only beplaced upon the tenants of the shopping center if, infact, the obligation rests with the owner of thereal estate.

MODEL CLAUSE E

The term "Taxes" shall mean and include:

(a) any form of assessment (including,without limitation, special assessments),property tax (whether real or personal), licensefee, license tax, service or use fee or charge,commercial rental tax, levy, penalty, or othertax levied, assessed, or otherwise imposed or tobe levied, assessed or otherwise imposed by anyauthority having the direct or indirect power totax against any legal or equitable interest ofLandlord in the Premises or in the Center;

MICHIGAN REAl_ PROPERTY REVIEW Summer, 1994 -- Page 69

(b) any tax on Landlord’s right to receiverent or other income, or to conduct anybusiness at, from or in any portion or all of theCenter;

(c) any tax allocable to or measured by thearea of the Premises or the Center or the rentalpayable hereunder, including, withoutlimitation, any gross income tax or excise taxlevied by or permitted by any governmentalbody with respect to the receipt of such rental,or upon or with respect to the possession,leasing, operation, management, maintenance,alteration, repair, use or occupancy by Tenantof the Premises, or any portion thereof;

(d) any tax, assessment or fee upon thistransaction or upon any document to whichLandlord or Tenant is a party which creates ortransfers an interest or an estate in the Centeror in the Premises; and

(e) any tax, assessment or fee invoiced toLandlord or Landlord’s property that isrendered against an interest in the Center or theproperty or improvements thereon or thereinthat Landlord is unable to determine the partyresponsible for payment upon review of suchinvoice.

Notwithstanding the preceding paragraph:

(i) franchise, estate, inheritance,succession, capital levy, transfer, net incomeand excess profits taxes imposed upon Landlordshall be excluded from the definition of "Taxes"(except that real property taxes altered byinheritance, succession, transfer or sale of theCenter, or any portion thereof, shall not beexcluded from the definition of "Taxes").

(ii) with respect to any assessmentwhich may be levied against or upon the Centeror the Premises and which under the laws thenin force may be evidenced by improvement orother bonds, or may be paid in annualinstallments, there shall be included within thedefinition of "Taxes", with respect to any taxfiscal year, only the amount currently payableon such bond for such tax fiscal year, ashereinafter defined, or the current annualinstallment of such tax fiscal year.

The term "Taxes applicable to the Center"shall mean all Taxes levied, assessed or payable

in any tax fiscal year (as such year is determinedby applicable law) during the term hereof, againstthe land and improvements comprising theCenter, less the payments received by Landlordor paid on behalf of Landlord to taxingauthorities from or in connection with MajorStores, Non-Owned Buildings and OutsideBuildings, provided that the taxes applicable tothe partially completed and unoccupiedbuildings shall be excluded from the definition ofTaxes applicable to the Center and suchbuildings shall be excluded from the grossleasable floor area of the Center.

Landlord ~hall pay to the taxing authoritythe Taxes applicable to the Center, subject topayment or reimbursement by Tenant asprovided in this lease.


This clause is as comprehensive as Model Clause D,but offers more clarity with respect to the morequestionable types of taxes. The clause clearly includesincome taxes, rent taxes, and mortgage taxes. Thebroad list of exclusions, however, creates somecontradictions with the broad list of inclusions whichprecede it. For example, clause (d) would seeminglyclearly include a transfer tax, since a transfer tax is a taxupon a document (the deed) which "creates or transfersan interest or an estate in the center. ~ Clause (i) of theexclusions, however, seems to exclude a "transfer" taximposed upon landlord, except when a real property taxis "altered" by the transfer of the center, which is anunclear concept. This contradiction points out that,when granting tenant exclusions based on classificationsof taxes, merely including a boiler plate "laundry list~ oftenant exclusions may have unanticipated consequencesif the landlord does not carefully consider the effect ofeach and every class of exclusion, when compared to thebroad classifications included within the inclusion of"taxes." The comprehensive nature of the clause wouldseem to render a substitute tax clause unnecessary,although if some tax were passed in lieu of existing realestate taxes or increases in real estate taxes, and such taxwere not in some way related to the center, the landlordwould not be able to pass the tax through.


This clause is a tenant’s nightmare. The degree ofspecificity in this clause will require extensive negotiationby the tenant’s counsel, in order to obtain any significant


benefit. As indicated above, the ability to obtain theseconcessions will depend, in great degree, upon therelative bargaining position of the parties. Presumably,a landlord that has been this specific in identifying thetaxes it intends to pass along to the tenants, is unlikelyto be willing to modify this clause for a single tenant.

The explicit reference to penalties, in subparagraph(a) of this clause, should be particularly objectionable totenants. There is no apparent reason why the tenantshould agree to pay any taxes associated with thelandlord’s failure to comply with its tax obligations in atimely or complete manner. Any penalties or interestassociated with the landlord’s failure to comply with anytax provisions should be the sole responsibility of thedeveloper. Obviously, if the landlord is not responsiblefor the interest or penalties, it will have no incentive toavoid them in the future and will merely pass the chargesalong to the tenants.

The provision of paragraph (e), regarding taxeswhere the landlord is "unable to determine the partyresponsible," is curious. This does not appear to be ameaningful criterion for determining whether or not thecharge should be passed along to the tenants. Obviously,the ability to make this determination is solely within thelandlord’s control and, therefore, may be illusory.Perhaps, with some more specific drafting, the partiesmay be able to agree upon a definition of "intangible" or"indirect" taxes. That definition should not, however,leave all of the discretion with the landlord.

It is interesting that this model clause, whichcontains the broadest definition of taxes of all of theclauses, also contains the broadest exclusion of taxes, insubparagraph (i). In fact, this clause would exclude thetransfer tax which is a component of Proposal A. Thelanguage contained in the parenthesis in this section(which operates as a double negative) is ambiguous. It isnot clear whether the sale of the center "alters" realproperty taxes. This ambiguity may operate in thetenant’s favor.

The discussion regarding assessments insubparagraph (ii) may create more problems for thelandlord than the landlord might have intended. Inparticular, this language is limited to the "laws then inforce." There is no such limitation on the prior defini-tions of taxes, assessments, or fees in the definitionalsections. A tenant seeking to avoid obligations under anew tax, such as Proposal A, might argue that thislanguage clearly indicates that the parties contemplateda definition of taxes by reference to only those in forceat the time the lease was executed.

Unlike all of the other clauses, this clause containsan explicit obligation by the landlord to pay the taxes. Asindicated above, this obligation should be specified inany tax clause to which the tenant agrees.

CONCLUSION

The passage of Proposal A has focused attention onthe importance of careful drafting in lease tax clauses.While interest in further tax revision may subside inMichigan, a strong argument can be made that thelegislature will need to address this issue again soon, inorder to provide further revenue enhancement to localschool districts. As a result, it is likely that the next severalyears will bring new and innovative approaches totaxation.

In light of the issues that will be raised by theseanticipated efforts to create new tax revenues, landlordsand tenants should review their approach to tax issuesand the negotiation of lease tax clauses. This article hasprovided some "talking points" that both landlords andtenants can use in drafting a new generation of taxclauses to address these issues.

ENDNOTE

M.P. Chemodurow, Leasing Professional, June/July 1993,P.O. Box 5675, Scottsdale, Arizona 85261 ("Retoolingthe Tax Clause for the 1990’s"); Leasing Professional,April 1987, ("Special Real Estate Tax Issue").

MICHIGAN REAL PROPERTY REVIEW Summer, 1994 R Page 71

MICHIGAN’S NEW SELLER DISCLOSURE ACT:SELLER BEWARE

by Gregg A. Nathanson*

INTRODUCTION

The rules of the game have changed, when itcomes to selling residential real estate. Until recently,with few exceptions, the seller would not be liable forproblems with a home, so long as the seller did notmake any representation or warranty as to thecondition of the property and the purchaser agreed toaccept the home "as is." The most notable exceptionto this general rule is that the seller has a duty todisclose known, concealed defects.I On the whole,however, the seller did not have an affirmative dutyof disclosure.

All this has changed with the passage of Michigan’snew Seller Disclosure Act, Public Act No. 92 of 1993,MCL 565.951 et seq (the "Act").2 The Act, whichbecame effective on January 8, 1994, requires mostsellers of used homes to provide the purchaser with adetailed disclosure statement ("Disclosure Statement")before a binding purchase agreement is executed by

the seller.~ If the seller fails to provide the DisclosureStatement, the purchaser has the right to terminate anotherwise binding purchase agreement.4 If the sellerdelivers the Disclosure Statement timely, but a changein the condition of the property occurs any time beforeclosing, the seller must immediately disclose this changeto the purchaser, and the purchaser has the right toterminate the transaction,s The purchaser’s right oftermination expires when the deed is deliveredat closing.6

This article discusses the basic provisions of the Actand highlights certain of the Act’s problems andambiguities.

BACKGROUND

Michigan is not the first state to pass a mandatoryseller disclosure law. At least 18 other states have sometype of law requiring sellers of residential real estate todisclose information about the property to prospective

"Gregg A. Nathanson, Esq. is currently practicing law with Couzens, Lansky, Fealk, Ellis, Roeder & Lazar, P.C.,in Farmington Hills, Michigan, where he maintains a transactional practice with emphasis in real estate, corporateand general business law. Mr. Nathanson earned his undergraduate degree from the University of Michigan (1980)and his law degree from the New York University School of Law (1984).


buyers.~ In theory, mandatory disclosures benefit bothsellers and buyers (especially inexperienced buyers) byproviding reassurance about a home and byminimizing unpleasant surprises that can occur after abuyer takes possession,a Ensuring that at least arequired minimum amount of information is providedon the home results in better-informed buyers.9 This,in turn, means fewer disappointed buyers, fewerlawsuits and fewer disrupted sales.l° Everyone benefits,at least in theory.

WHAT THE ACT REQUIRES ¯

Standard Disclosure Form. The Act requiresmost sellers of used homes and/or their real estateagents to furnish the purchaser or the purchaser’sagent with a fully completed, fairly detailed DisclosureStatement before the purchase agreement is signed.The Act contains a standard form entitled "Seller’sDisclosure Statement," and everyone must use thesame form.1~ A copy of the form appears at the endof this Article.

Timing of Delivery. A completed DisclosureStatement must be delivered to the prospectivepurchaser before the seller executes a binding purchaseagreement, and the seller must indicate compliancewith the Act on the purchase agreement, an addendumor on a separate document.12 If the seller accepts anoffer to purchase before the purchaser receives theDisclosure Statement, the purchaser has the right toterminate the purchase agreement.~3 The purchaser’sright of termination may be exercised by deliveringwritten notice of termination to the seller withinseventy-two (72) hours after delivery of the DisclosureStatement, if the Disclosure Statement is personallydelivered to the purchaser, or within one hundredtwenty (120) hours after delivery of the DisclosureStatement, if the Disclosure Statement is delivered tothe purchaser by registered mail.~4 If, after the initialdisclosure, there are any changes in the condition ofthe property, the seller must immediately disclose thechange(s) to the purchaser.~S The purchaser then haseither seventy-two hours or one hundred twenty hoursafter receipt of notice of the change(s) to terminate thepurchase agreement, depending upon whether suchnotice was delivered to the purchaser by personalservice (72 hours) or registered mail (120 hours).~6In any event, the purchaser’s right to terminate thepurchase agreement under the Act expires when thedeed is delivered at closing.17

Contents of Disclosure Statement. TheDisclosure Statement requires the seller to disclose agreat deal of information concerning the condition ofthe property. All disclosures must be made in "goodfaith," based on the best information available andknown to the seller.Is If, at the time of disclosure, arequired item of information is unknown or unavailableto the seller, the seller may state that the informationis unknown. 19

The Disclosure Statement requires the seller torepresent whether a laundry list of householdappliances, systems and services are in workingorder.2° The seller also must disclose specific kinds ofinformation relating to both the dwelling structure andthe land. The seller must disclose problems such asevidence of water in the basement, roof leaks,heating, plumbing and electrical information,structural problems, history of infestation, flooding,encroachments, major casualty damage, environ-mental concerns and other specific kinds ofinformation valuable to a prospective purchaser.21 Acity, township, or county may require disclosures inaddition to those required by the Act.=~

WHEN DOES THE ACT APPLY?

The Act applies to most arms-length transfers ofresidential real estate in Michigan. The Act applies tothe transfer of any interest in real estate consisting ofone to four residential dwelling units.23 The transfermay be by sale, exchange, installment land contract,lease with an option to purchase, any other option topurchase, ground lease coupled with proposedimprovements by the purchaser or the tenant, ortransfer of stock in a residential cooperative.~4

The Act’s disclosure requirements do not apply toany of the following:

A. Transfers pursuant to court order,transfers by a trustee in bankruptcy andtransfers by eminent domain.

B. Transfers to a mortgagee by a mortgagorwho is in default.

Co Mortgage foreclosure sales.

Transfer by a nonoccupant fiduciary in thecourse of the administration of a decedent’sestate, guardianship, conservatorshipor trust.


E. Transfer from one co-tenant to one ormore co-tenants.

Transfers made to a spouse, parent,grandparent, child or grandchild.

Transfers between spouses resulting froma judgment of divorce.

Transfers or exchanges to or from anygovernmental entity.

Transfers made by licensed builders ofnewly constructed residential property thathas not been inhabited.2s

The most notable exception to the Act’s disclosurerequirements is for the sale of newly constructed homes.In Michigan, an implied warranty of habitability andfitness extends to the sale of new homes. Weeks vSlavik Builders, 24 Mich App 621,180 NW2d 503,aff’d, 384 Mich 257, 181 NW2d 271 (1970). Theimplied warranty of habitability and fitness runs only tothe first purchaser of a new home, however, and it doesnot extend to the sale of used homes. McCann vBrody-Built Construction, 197 Mich App 512,496NW2d 349 (1992); iv den, 442 Mich 935, 503NW2d 905 (1993). On the one hand, the Act containsan exemption from its disclosure requirements forbuilders of new homes, presumably because thosesellers are subject to implied warranties of habitabilityand fitness. On the other hand, the Act does not goso far as to codify these judicially created impliedwarranties, or state whether such implied warrantiescan be disclaimed.

LIMITATIONS ON LIABILITY

One key feature of the Act is that it limits theliability of sellers and real estate agents. Neither theseller nor the seller’s agent is liable for any error,inaccuracy, or omission of any information deliveredpursuant to the Act, as long as such error, inaccuracyor omission was not within the seller’s personalknowledge or was based entirely on informationprovided by pubic agencies or other independentexperts, and ordinary care was exercised intransmitting the information.26 The seller is notrequired to disclose information that could bediscovered only through inspection of inaccessible areasor only by someone with expertise in a science or tradebeyond the knowledge of seller.27 Apparently, aprofessional builder, architect or engineer selling theirown home may be held to a higher standard of care

in making disclosures. In establishing compliance withthe Act’s exemption from liability, the seller may relyupon an opinion or report prepared by a professionallicensed engineer, surveyor, geologist, pest controloperator, contractor or similar expert, if the purchaserrequested the report.=s Notwithstanding this permittedreliance, the seller cannot conceal knowledge of aknown defect or condition even if it contradictsinformation provided by a public agency or otherindependent expert.29

WHAT ABOUT BROKERS?

Real estate brokers approve of the Act. TheMichigan Association of REALTORS* supported theAct,a° and with good reason. As mentioned above, theAct limits the liability of real estate agents. An agentshall not be liable for any violation of the Act by a seller,unless the agent knowingly acts in concert with theseller to violate the Act.31 Moreover, the DisclosureStatement provides that all representations containedtherein are "made solely by the seller and are not therepresentations of the seller’s agent(s)," and that "in noevent shall the parties hold the broker liable for anyrepresentations not directly made by the broker orbroker’s agent."az Real estate brokers and real estatesalespersons hope the Act will reduce the possibility oflawsuits against them if an item disclosed on the formwas not correctly represented by the seller,a3 Even ifpurchasers pursue litigation, agents hope to spend lesstime, money and energy defending the action. Asnoted in a real estate agent newsletter, mandatoryproperty condition disclosures "are designed to reduceREALTOR® liability.TM

The Act’s protection of real estate agents fromliability should be read in conjunction with companionlegislation, Public Act No. 93 of 1993,35 which amendedportions of the Michigan Occupational Code dealingwith licensed real estate brokers and real estatesalespersons. Public Act No. 93 seeks to limit anagent’s liability in two important respects. First, the lawprotects real estate agents from liability for failing todisclose so-called psychological, non-physical defectsthat may tend to stigmatize the property. These"defects" include the fact that the former occupant ofthe property had a "handicap" such as AIDS, or thatthe property had been the site of a homicide, suicideor other illegal occurrence which had no material effecton the condition of the real estate.36 It is curious that,while brokers are immune from liability for failing todisclose psychological defects, the Seller Disclosure Actdoes not provide sellers with similar protection.


Public Act No. 93 also protects brokers bymandating agency disclosure requirements. The lawrequires all licensed real estate brokers andsalespersons to disclose to potential purchasers andsellers whether the agent works for the seller, thepurchaser, or both (as a dual agent) or neither (as atransaction coordinator).37 The agent must make thedisclosure, in writing, before the purchaser or sellershares any confidential information with that agent,asThis is expected to prevent lawsuits by purchasers whodisclose confidential information to someone they view

nt "as "their age , without realizing that the agent o~wesa legal allegiance to the seller.

THE ACT’S PROBLEMS AND AMBIGUITIES

No Penalty For Violations. The Act’s greatest"defect" is a lack of adequate remedies. If the seller failsto deliver a Disclosure Statement, the purchaser hasthe right to terminate the purchase agreement, andthat right of termination lapses at closing.39 That is theonly remedy the Act provides if the seller violates theAct. The transfer is not invalidated solely because offailure to comply with the Act.4° While the Act purportsto require certain disclosures to be made, it carries nopenalties for violations.4~

In fact, one could argue that the seller has anincentive to avoid compliance. If the seller does notgive a Disclosure Statement, the purchaser can backout before the closing. As a practical matter, however,the purchaser wants to buy the home. Most likely thepurchaser is selling another home, relocating or simply"in love with the house." By the time the purchaser hassigned and delivered a purchase agreement, thepurchaser has made a conscious and often emotionaldecision to buy the home. It is possible, but not likely,that the purchaser will back out simply because theseller failed to provide a Disclosure Statement. If theseller does not provide the Disclosure Statement, theseller’s worst case consequence is the purchaserbacking out of the transaction.

On the other hand, by furnishing a DisclosureStatement, the seller may increase his or her potentialliability to the purchaser. While the Act does notprovlde specific or independent remedies fornoncompliance, it does not "limit or abridge anyobligation for disclosure created by any other lawregarding fraud, misrepresentation or deceit.’’~2

Assume that the seller delivers a DisclosureStatement and contracts to sell the property in "as is"

condition. Generally, the purchaser bears the risk ofloss in an "as is" contract unless the seller fails todisclose concealed defects known to the seller. LenaweeCounty Board of Health v Messerly, 417 Mich 17,331 NW2d 203 (1982); Conahan v Fisher, 186 MichApp 48, 463 NW2d 118 (1990). An "as is" clause,however, does not preclude a purchaser from allegingfraud or misrepresentation. Messerly, supra at 32,fn 16; Conahan, supra at 49. Under the theory ofinnocent misrepresentation, for example, a statementby a seller of real estate, which proves to be untrue,could be the basis for an action for misrepresentationeven though it was made innocently. United StatesFidelity & Guaranty Co. v Black, 412 Mich 99,313NW2d 77 (198:£). With the use of a DisclosureStatement, it may be easier for a purchaser toestablish a cause of action for fraud, misrepresentationor innocent misrepresentation. To prove innocentmisrepresentation, for example, the purchaser/plaintiff merely has to prove that the representationcontained in the Disclosure Statement was untrue, andthat the plaintiff suffered damages as a result ofreliance on that representation. The seller could beliable irrespective of whether the seller acted in goodfaith in making the representation. United StatesGuaranty & Fidelity, supra at 116. Thus, if theseller does not make written representations to thepurchaser, it may be more difficult for the purchaserto prove a claim for misrepresentation.

If the Act is to have its intended force and effect,it should impose some sort of penalty upon the sellerfor noncompliance with the disclosure requirements. Itis curious that the legislative history identifies theabsence of penalties as a major argument against theAct,~3 yet the Act was not amended to address thisapparent weakness.

Since the Act has just recently taken effect, it is toosoon to know how the Michigan courts will interpretit. In fact, perhaps inadvertently and admittedlyinconsistent with the above analysis, it is possible thatthe courts in a given case will interpret the Act tostrengthen the doctrine of caveat emptor. Since alldisclosures must be made in good faith, the court maybe predisposed to assume that the seller who provideda Disclosure Statement acted in good faith in makingthe disclosures, thereby placing the burden upon thepurchaser to prove not only that the disclosure wasinaccurate, but that the seller made the disclosureintending to mislead or defraud the purchaser.

Pitfalls of Disclosing Changes to Property.Assume that the seller dutifully complies with the Act


and furnishes the purchaser with a DisclosureStatement before the purchase agreement is executed.If any change occurs in the structural/mechanical/appliance systems of the property from the date of thedisclosure form to the date of closing, the seller mustimmediately disclose the change to the purchaser.44The purchaser may terminate the purchase agreementwithin seventy-two hours or one hundred twenty hoursafter delivery to the purchaser of written notice of thechange.4s The Act does not state that the change mustbe material to permit the purchaser to terminate theagreement; there need only be a "change."

I worked on a transaction a few years ago wherethe water heater failed one day before closing.Fortunately, there was a buyer home warrantyprotection plan in effect. The sellers paid thedeductible, the company which issued the policy paidto install a new water heater, the purchasersobtained a brand new water heater at no additionalcost, and the transaction closed on schedule. Here, thesellers had contracted to purchase a new residence andreasonably expected to purchase the new residencewith proceeds from the sale of their old residence.Under the new Act, the seller would have been requiredto disclose the broken water heater problem to thepurchaser and permit the purchaser an opportunity torescind the transaction. The Act would have given thepurchaser an "out" at the seller’s expense, even thoughthe purchaser would not have suffered any harm as aresult of the nondisclosure.

This creates a "Catch 22" situation for the seller.If the seller complies with the Act, the seller couldjeopardize the sale, and perhaps risk breaching anagreement to purchase a new residence, all because ofa broken water heater which was replaced at no costto the purchaser. On the other hand, if the sellerviolates the Act, the purchaser’s right of terminationwould expire at closing, and the purchaser would havetrouble proving actual damages as a result of thenon-disclosure. Under this type of scenario, the Actunfairly benefits the purchaser at the seller’s expenseand thus encourages non-compliance.

Seller’s Duty to Inspect. The Act does notspecifically impose upon the seller an affirmative dutyto inspect, merely a duty to disclose information in"good faith." The information contained in theDisclosure Statement "shall be based upon the bestinformation available and known" to the seller.46 If theseller does not know the condition of an appliance,may the seller simply check "unknown" as to whether

the appliance is in working order, or does "good faith"require the seller to make some type of inquiry? Theseller does not violate the Act by failing to discloseinformation that could be obtained only throughinspection of inaccessible areas such as the foundationor insulation.4~ Does this mean the seller has a duty toexercise reasonable care to inspect accessible areas?The answer is not clear.

Other states which have passed seller disclosurelaws seem to hold sellers to a lesser inspectionstandard. In Illinois, for example, the seller disclosurestatute require sellers to disclose problems of whichthey "are aware.’’48 "Aware" means to have actualnotice or actual knowledge without any specificinvestigation or inquiry.~9 In Illinois the stated purposeof disclosure requirements is to provide prospectivepurchasers with information about material defects inthe property.~° Michigan’s statute, in contrast, seemsmore pro purchaser (consumer). Required disclosuresare not limited to "material defects." In fact, changestriggering the need to deliver an amended DisclosureStatement and offer the purchaser a preclosing rightof rescission are not even required to be "material."

The seller may be at risk, unless he or she conductsa thorough inspection of the property or hires anindependent inspector to conduct an inspection andincorporates the results of the inspection into theDisclosure Statement.

When to Deliver Disclosure Statement. TheDisclosure Statement shall be delivered to theprospective purchaser or the purchaser’s agent beforethe seller executes a binding purchase agreement withthe prospective purchaser.51 This creates a loopholewhere the seller can comply with the letter of the lawwhile defeating its spirit. Consider a typical "for sale byowner" situation. First, the purchaser delivers to theseller an offer to purchase. Next, the seller, having theidentity of a potential purchaser, delivers the DisclosureStatement. The next day the seller then accepts theoffer to purchase, thereby executing a bindingpurchase agreement, and indicates compliance withthe Act on the purchase agreement. This is areasonable scenario. Technically, the seller hascomplied with the Act, while effectively eliminating thepurchaser’s rights. If the purchaser receives theDisclosure Statement after delivering the offer topurchase, but before the seller "executes a bindingpurchase agreement," the purchaser is denied both theopportunity to have considered the informationcontained in the Disclosure Statement before making


the offer, and the right of rescission. While this couldnot be the intent of the Act, a plain reading of thelanguage of the Act permits this outcome. Aconscientious seller would be prudent to return theoffer to purchase to the purchaser, together with acompleted Disclosure Statement, have the purchaseracknowledge receipt of the Disclosure Statement onthe offer to purchase, and have the purchaser resubmitthe offer. The offer to purchase then would show thatthe purchaser received the Disclosure Statementbefore submitting the offer and, therefore, beforeexecution of a binding purchase agreement.

Disclosure Statement Not Part of ContractBetween Purchaser and Seller. The Discl~osureStatement specifically provides that it is ~a disclosureonly and is not intended to be part of any contractbetween the buyer and seller."sz Why not? Thepurchaser and seller are in privity and the Act requiresthe seller to make the disclosures contained in theDisclosure Statement to the purchaser. The Act goesso far as to permit a purchaser to rescind thetransaction if the Disclosure Statement is not received.A prudent purchaser may wish to add a provision tothe offer to purchase stating that the representationscontained in the Disclosure Statement areincorporated into the purchase agreement; however,the seller may likely object to such a provision.

Representations But Not Warranties. TheDisclosure Statement contains representations madeby the seller. The Disclosure Statement also states thatit is not "a warranty of any kind by the seller or anyagent representing the seller in this transaction, and itis not a substitute for any inspections or warranties thebuyer may wish to obtain." s3 The standard DisclosureStatement form also states in capital letters that"UNLESS OTHERWISE AGREED, ALL HOUSEHOLDAPPLIANCES ARE SOLD IN WORKING ORDEREXCEPT AS NOTED, WITHOUT WARRANTYBEYOND DATE OF CLOSING."~ The seller appearsto be representing, but not warranting, that allhousehold appliances are in working order as of thedate of closing. Who is protected by distinguishingbetween representations, which the seller is making,and warranties, which the seller is not making? Also,by using the phrase "without warranty beyond date ofclosing," does this imply that there is some type ofwarranty up to the date of closing?

A prudent purchaser may wish to state in the offerto purchase that the seller represents and warrants thecondition of all items as indicated in the Disclosure

Statement, and specify the remedies available if arepresentation proves to be untrue or a warranty isbreached. On the other hand, the seller will want todisclaim all warranties, express or implied; state that allrepresentation and warranties, if any, do not survivethe closing; and require the purchaser to acceptpossession of the property in "as is" condition.

Facsimile Delivery. The Act states that deliveryof a Disclosure Statement or amendment thereto shallbe by personal delivery, facsimile delivery or registeredmail.ss Manner of delivery is important, because itaffects the amount of time provided for the purchaserto terminate the purchase agreement. If a disclosure isdelivered after the seller executes a binding purchaseagreement, the purchaser has a fixed number of hoursafter such delivery to provide written notice oftermination to the seller. The purchaser has 72 hours,if the seller’s disclosure was delivered to the purchaserin person, or 120 hours, if the seller’s disclosure wasdelivered to the purchaser by registered mail.s~ Whatif the purchaser received the disclosure document byfacsimile delivery? The Act permits facsimile delivery,but does not indicate whether the purchaser will have72 hours or 120 hours to terminate the agreement. Aprudent seller will allow the purchaser the full 120hours to terminate if the seller’s delivery was made byfacsimile.

Waiver of Right to Terminate. A prudent sellermay provide in the purchase agreement that, if achange occurs in the condition of the property any timebefore closing, the purchaser cannot terminate theagreement so long as the problem is corrected atseller’s expense. This raises the question: does thepurchaser have the power to modify or waive its rightof termination as set forth in the Act? The Act doesnot address this issue. Since the purchaser’s rightterminates at closing, it seems reasonable that apurchaser could modify or waive the right to terminate.In this scenario, the seller would be advised to obtaina written waiver and to recite some type of validconsideration in exchange for obtaining the waiver.

CONCLUSION

The Seller Disclosure Act changes the rules of thegame when it comes to the sale of used homes inMichigan, because it imposes mandatory disclosureobligatiohs upon the seller. If the seller fails to satisfythese disclosure obligations, the purchaser mayrespond by terminating an otherwise binding purchaseagreement. The Act limits the liability of sellers, and

MICHIGAN REAL PROPERTY REVIEW Summer, 1994 N Page 77

real estate agents, while placing valuable informationin the hands of purchasers. The Act is not withoutambiguities and shortcomings, however, including alack of adequate remedies for seller noncompliance.Certain technical amendments to the Act also appearto be appropriate. In the final analysis, however, theAct’s ultimate impact on purchasers, sellers, real estateagents and attorneys will not be known until the Acthas been tested in the courts.

£NDNOTE$

1. Conahan v Fisher, 186 Mich App 48, 49; 463NW2d 118, 119 (1990).

2. MCLA 565.951 et seq.

3. MCLA 565.954(1). 34.4. MCLA 565.954(3). 35.5. MCLA 565.957. 36.6. MCLA 565.954(4).

37.7. National Association of REALTORS°, Political and State

Affairs Division, Property Condition Disclosure Matrix 38.prepared September 24, 1993. 39.

8. House Legislative Analysis, Home Seller Disclosures, 40.House Bill 4375 (3-25-93) (hereinafter ~House Legis-lative Analysis"). 41.

9. Id. 42.

10. Id. 43.

11. MCLA 565.957. 44.

12. MCLA 565.954(1) and (2). 45.

13. MCLA 565.954(3). 46.14. ld. 47.

15. MCLA 565.957. 48.16. MCLA 565.962.

17. MCLA 565.954(4). 49.

18. MCLA 565.956; 565.960. 50.

19. MCLA 565.956. 51.

20. MCLA 565.957, 52.

21. Id. 53.

22. MCLA 565.959. 54.

23. MCLA 565.952. 55.

24. Id. 56.

25. MCLA 565.953.

26. MCLA 565.955(1).

27. ld.

28. MCLA 565,955(2) and (3).

29. ld.

30. House Legislative Anal~is.

31. MCLA 565.965.

32. MCLA 565.957.

33. National Association of REALTORS°, Public AffairsDivision, Talking Points, "Disclosure" (November,1990).

House Legislative Analysis.

MCLA 339,101; 339.2501 et. seq.

MCLA 339.2518.

MCLA 339.2517(1).

ld.

MCLA 565,954(3) and (4).

MCLA 565.964.

House Legislative History.

MCLA 565.961.

House Legislative History.

MCLA 565.957.

MCLA 565.954(3).

MCLA 565.956.

MCLA 565.955(1).

1993 Illinois Laws Public Act 88-111, Section 35(effective October 1, 1994).

ld.

ld.

MCLA 565.954(I).

MCLA 565.957.

Id.

Id.

MCLA 565.963.

MCLA 565.954(3).


SELLER’S DISCLOSURE STATEMENT

Property Address:Street

, MichiganCity, Village, or Township

Purpose of Statement: This statement is a disclosure of the condition of the property in compliance with the sellerdisclosure act. This statement is a disclosure of the condition and information concerning the property, knownby the seller. Unless otherwise advised, the seller does not possess any expertise in construction, architecture,engineering, or any other specific area related to the construction or condition of the improvements on the propertyor the land. Also, unless otherwise advised, the seller has not conducted any inspection of generally inaccessibleareas such as the foundation or roof. This statement is not a warranty of any kind by the seller or by any agentrepresenting the seller in this transaction, and is not a substitute for any inspections or warranties the buyer maywish to obtain.

Seller’s Disclosure: The seller discloses the following information with the knowledge that even though this is nota warranty, the seller specifically makes the following representations based on the seller’s knowledge at thesigning of this document. Upon receiving this statement from the seller, the seller’s agent is required to providea copy to the buyer or the agent of the buyer. The seller authorizes its agent(s) to provide a copy of this statementto any prospective buyer in connection with any actual or anticipated sale of the property. The following arerepresentations made solely by the seller and are not the representations of the seller’s agent(s), if any. Thisinformation is a disclosure only and is not intended to be a part of any contract between buyer and seller.

Instructions to the Seller: (1) Answer ALL questions. (2) Report known conditions affecting the property.(3) Attach additional pages with your signature if additional space is required. (4) Complete this form yourself.(5) If some items do not apply to your property, check N/A (nonapplicable). If you do not know the facts, checkUNKNOWN. FAILURE TO PROVIDE A PURCHASER WITH A SIGNED DISCLOSURE STATEMENT WILL ENABLEA PURCHASER TO TERMINATE AN OTHERWISE BINDING PURCHASE AGREEMENT.

ApplianceslSystems/Services: The items below are in working order:

Ye_._~s N~o Unknown N/._.~A

Range/OvenDishwasherRefrigeratorHood/fanDisposalTV antenna, TV rotor & remote controlsElectrical systemGarage door opener & remote controlAlarm systemIntercomCentral vacuumAttic fanPool heater, wall liner & equipmentMicrowaveTrash compactorCeiling fanSauna/hot tubLawn sprinkler systemWater heaterPlumbing systemWater softener/conditionerWell & pumpSeptic tank & drain field


Ye.._~s N~o Unknown N/.__~A

Sump pumpCity Water SystemCity Sewer SystemCentral air conditioningCentral heating systemFurnaceHumidifierElectronic air filterSolar heating systemFireplace and chimneyWood burning system

Explanations (attach additional sheets if necessary)

UNLESSNOTED, WITHOUT WARRANTY BEYOND DATE OF CLOSING.Property conditions, improvements & additional information:1. Basement: Has there been evidence of water?

If yes, please explain:2. Insulation: Describe, if known

Urea Formaldehyde Foam Insulation (UFFI) is installed?

3. Roof: Leaks?Approximate age if known

OTHERWISE AGREED, ALL HOUSEHOLD APPLIANCES ARE SOLD IN WORKING ORDER EXCEPT AS

yes ~ no ~

unknown ~ yes ~ no ~yes ~ no ~

4o Well: Type of well (depth/diameter, age and repair history, if known}:

Has the water been tested?If yes, date of last report/results:

Septic tanks/drain fields: Condition, if known:

yes~ no~

6o

8o

9o

Heating System: Type/approximate age:Plumbing System: Type: copper~ galvanized~Any known problems?Electrical system: Any known problems?

other~

History of infestation, if any: (termites, carpenter ants, etc.)

Environmental Problems: Substances, materials or products thatmay be an environmental hazard

such as, but not limited to, asbestos, radon gas, formaldehyde, lead-based paint, fuel or chemicalstorage tanks and contaminated soil on the property, unknown __ yes __

If yes, please explain:no~


Other items: Are you aware of any of the following:I. Features of the property shared in common with the adjoining landowners, such as walls, fences, roads

and driveways, or other features whose use or responsibility for maintenance may have an effect on theproperty? unknown ~ yes~ no~

2. Any encroachments, easements, zoning violations, or nonconforming uses?unknown ~ yes ~ no ~

3. Any "common areas" (facilities like pools, tennis courts, walkways, or other areas co-owned with others)or a homeowners’ association that has any authority over the property?

unknown~ yes~ no~4. Structural modifications, alterations, or repairs made without necessary permits or licensed contractors?

unknown ~ yes~ no~5. Settling, flooding, drainage, structural or grading problems? unknown ~ yes ~ no ~6. Major damage to the property from fire, wind, floods, or landslides? unknown ~yes ~ no ~7. Any underground storage tanks? unknown ~ yes ~ no ~8. Any area environmental concerns (i.e., proximity to a landfill, airport, shooting ranges, etc.)?

unknown ~ yes ~ no ~If the answer to any of these questions is yes, please explain. Attach additional sheets, if necessary:

The most recent state equalized valuation of the property provided by the local taxing unit to the seller was$ as of (date). The seller has lived in the residence on the property from

(date) to (date). The seller has owned the property since (date) and makesrepresentations only since that date. The seller has indicated above the history and condition of all the items basedon that information known to the seller. If any changes occur in the structural/mechanical/appliance systems ofthis property from the date of this form to the date of closing, seller will immediately disclose the changes to buyer.In no event shall the parties hold the broker liable for any representations not directly made by the broker orbroker’s agent.

Seller certifies that the information in this statement is true and correct to the best of seller’s knowledge as of thedate of seller’s signature.

BUYER SHOULD OBTAIN PROFESSIONAL ADVICE AND INSPECTIONSOF THE PROPERTY TOMORE FULLY DETERMINE THE CONDITION OF THE PROPERTY.

Seller Date

Seller Date

Buyer has read and acknowledges receipt of this statement.

Buyer Date Time:

Buyer Date Time:


ALCAN AND BELL PETROLEUM: THE FEDERALCOURTS RECONSIDER JOINT AND SEVERAL

LIABILITY IN SUPERFUND CASES

by Jack D. Shurnate*

For nearly ten years, federal courts have beenroutinely imposing strict joint and several liability onresponsible parties, including property owners, inSuperfund cases. This has had a chilling effect on manyreal estate transactions. Owners of industrial andcommercial property may be afraid to lease theirproperty for a use which could generate pollutionsubjecting the owner to enormous cleanup costs.Potential buyers have been reluctant to acquireproperty if there was a possibility of historiccontamination. Even if the owner could ultimatelyrecover the cleanup cost from previous owners andoperators or polluting tenants, this sometimes meantincurring large costs and facing years of expensivecontribution litigation.

Now, there is hope that the federal courts may bestarting to reconsider the imposition of joint andseveral liability in all Superfund cases. Recentdecisions by the Courts of Appeals for the Second,

Third, and Fifth Circuits, after taking a fresh lookat the Comprehensive Environmental Response,Compensation and Liability Act (CERCLA or Super-fund),1 its legislative history, and some of the earlyCERCLA decisions, have decided that imposition ofjoint and several liability is not always appropriate.

The question of whether there should be joint andseveral liability in CERCLA cases is one that hastroubled Congress and the courts from the time the Actwas drafted. CERCLA resulted from parallel bills whichmoved, more or less simultaneously, through the Houseand Senate in 1980. The House passed a bill whichcalled for "strict joint and several" liability, but alsoadopted an amendment to the bill proposed by then- Representative Albert Gore, Jr.

The Gore Amendment softened the concept ofjoint and several liability by authorizing the courts toundertake an equitable allocation of liability based uponsix specific factors, the oft-cited "Gore" factors.

*Jack Shumate is a shareholder in the Detroit office of Butzel Long specializing in environmental law andenvironmental aspects of real estate and corporate matters. He is a member of the Section Council and formerchairperson of the Environmental and Energy Law Committee. He has been a contributor to the Reuiew onseveral previous occasions and a Homeward Bound speaker.


The Senate Bill, as introduced, also would haveimposed joint and several liability but the Senatedeleted the term "joint and several," feeling that it wastoo harsh. The Conference Committee used theHouse Bill as a vehicle for compromise, but struckeverything except the title and, for the most part,substituted the Senate Bill.2 Consequently, the liabilitysection imposed "strict" liability but deleted both theterms "joint" and "several" and the reference to theGore factors.

In early CERCLA cases, defendant potentiallyresponsible parties (PRPs) argued that the deletiorl ofthe term "joint and several" from CERCLA evidencedCongressional intent that liability should be several,rather than joint. The courts uniformly rejected thiscontention. Concluding that the imprecision andambiguity in the drafting of CERCLA evidenced aCongressional intent for the courts to develop a federalcommon law for implementation of CERCLA, the earlycases concluded that the propriety of joint and severalliability was one of the areas in which federal commonlaw should be developed. The first case which reachedthis conclusion was U.S. v Chem-Dyne Corp., 572F. Supp. 802 (S.D. Ohio 1983). ChemoDyne hasbeen consistently cited, and to some extent followed,by virtually every other court which has addressed theissue of joint and several liability.

In ChemoDyne, the court disposed of an earlymotion by a group of PRPs for a determination thatthey were not jointly and severally liable. In denying thismotion, the court analyzed the legislative history ofCERCLA and analogized the Act to Section 311 ofthe Federal Water Pollution Control Act.a The courtconcluded:

A reading of the entire legislative history andcontext reveals that the scope of liability andterm joint and several liability were deleted toavoid a mandatory legislative standardapplicable in all situations which mightproduce inequitable results in some cases.(Citations omitted.) The deletion was not in-tended as a rejection of joint and several liabil-ity. (Citations omitted.) Rather, the term wasomitted in order to have the scope of liabilitydetermined under common law principles,where a court performing a case by caseevaluation of the complex factual sce-narios associated with multiple-generator wastesites will assess the propriety of applyingjoint and several liability on an individualbasis. (Emphasis added.)4

After concluding that the development of a federalcommon law, rather than application of the law of theforum state, was appropriate, the court turned to theRestatement (2d) of Torts for guidance andconcluded:5

An examination of the common law revealsthat when two or more persons actingindependently caused a distinct or single harmfor which there is a reasonable basis fordivision according to the contribution of each,each is subject to liability only for the portionof the total harm that he has himself caused.Restatement (2d) of Torts, ,~433A, 881(1976) Prosser, Law of Tort~ (4th ed. 1971),pp. 313-314; (case citations omitted).

Furthermore, where the conduct of two ormore persons liable under §9607 has com-bined to violate the statute, and one or moreof the defendants seeks to limit his liability onthe ground that the entire harm is capable ofapportionment, the burden of proof as toapportionment is upon each defendant, ld. at§433B; ld. These rules clearly enumerate theanalysis to be undertaken when applying 42U.S.C. §9607 and are most likely to advancethe legislative policies and objectives ofthe Act.

Finally, the court noted that "The question ofwhether the defendants are jointly and severally liablefor the cleanup costs turns on a fairly complex factualdetermination" and found that "There is an insufficientevidentiary basis, with unresolved factual questions,which precludes the resolution of this case in the formof a summary judgment motion."6

Chem-Dyne thus clearly stands for the proposi-tions that (i) whether imposition of joint and severalliability is proper must be made on the basis of the factsof each case and involves a "fairly complex factualanalysis" and (ii) the burden of proof in making thiscomplex factual analysis is on the party seeking toescape joint and several liability. There is nothing in thecourt’s language to suggest that it favored a uniformrule of joint and several liability for all CERCLA cases.

The next significant case to consider the issue wasU.$. v A & F Materials Co., Inc., 578 F. Supp.1249 (S.D. I11. 1984). After reviewing the legislativehistory of the Act and the relevant principles of theRestatement, the court agreed with the conclusion ofthe Chem-Dyne court that the decision whether to

MICHIGAN REAL PROPERTY REVIEW Summer, 1994- Page 83

impose joint and several liability should be made basedupon the facts of each case. The A & F Materialscourt, however, concluded that some relaxation of theapproach of the Restatement, permitting an equitableallocation of liability, was appropriate for CERCLAcases:

After reviewing the legislative history, the Courtconcludes a rigid application of theRestatement approach to joint and severalliability is inappropriate. Under theRestatement approach, any defendant whocould not prove its contribution would bejointly and severally liable. This result must beavoided because both Houses of Congresswere concerned about the issue of fairness,and joint and several liability is extremely harshand unfair if it is imposed on a defendant whocontributed only a small amount of waste to asite. The Senate expressed its sensitivity to thefairness issue by rejecting a mandatorylegislative standard in lieu of allowing the courtsto impose joint and several liability on a caseby case basis.

Moreover, the House expressed its sensitivityto the fairness issue by passing a bill whichcontained a moderate approach to joint andseveral liability. ° ° * [T]he House passed theGore Amendment which softened the moderncommon law approach to joint and severalliability. ° ° ° Under the Gore Amendment, acourt had the power (emphasis by court) toimpose joint and several liability whenever adefendant could not prove his contribution toan injury, however, a court could still apportiondamages in this situation. ° ° o7

The Court finds that the moderate approachto joint and several liability * ° ° is bothpersuasive and consistent with the intent ofCongress. " " "

From the beginning, therefore, the federal courtsrecognized that there were situations where divisibilityor equitable apportionment of liability was appropriateand that the most stringent standard was that of theRestatement.

Congress has expressly approved the Chem-Dynerule. The House Committee on Energy and CommerceReport on the bill which became the SuperfundAmendments and Reauthorization Act (SARA), 1986U.S. Code Cong. and Adm. News 2835 states:8

No change has been made in the standard ofliability that applies under CERCLA. ° ° *

Where appropriate, liability under CERCLAis also joint and several, as a matter offederal common law.

Explicit mention of joint and several liabilitywas deleted from CERCLA in 1980 to allowcourts to establish the scope of liability througha case-by-case application of ’traditional andevolving principles of common law’ andpre-existing statutory law. (Citations omitted).The courts have made substantial progress indoing so. The Committee fully subscribes tothe reasoning of the court in the seminalcase of United States v Chem-DyneCorporation, (citation omitted) whichestablished a uniform federal rule allowing forjoint and several liability in appropriateCERCLA cases.

The Committee believes that this uniformfederal rule on joint and several liability iscorrect and should be followed. * * ° Thus,nothing in this bill is intended to change theapplication of the uniform federal rule of jointand several liability enunciated by theChem-Dyne court. (Emphasis added.)

It is not dear whether Congress was endorsingonly the Chem-Dyne analysis of when imposition ofjoint and several liability is appropriate or was alsoaddressing the court’s ruling on burden of proof.

Many federal courts, however, seem to have readChem-Dyne as establishing merely that imposition ofjoint and several liability is acceptable under CERCLA.Consequently, by the mid-1980’s, courts wereroutinely imposing joint and several liability, citingChem-Oyne, but failing to make the necessary factualinquiry. It appears that in many instances, this wasdone as a matter of policy because the court felt thatthe imposition of joint and several liability was the bestway to promote the legislative goals of CERCLA.

]n State of Colorado v Asarco, Inc., 608 F.Supp. 1484 (D. Co., 1985), the court observed:9

CERCLA’s primary goal is the expeditiouscleanup of hazardous waste sites. Joint andseveral liability is a powerful tool to achievethat goal. It enables a plaintiff to select oneprimarily responsible party as the defendant,determine liability as to that defendant, andcollect the total amount of damages from thatone defendant. [f a plaintiff were required tosue all potentially responsible parties


(hundreds in this case) in order to ensure acomprehensive cleanup, delays inherent in suchmassive lawsuits would surely delay cleanup ofthe site. Once cleanup is assured,however, no goal of CERCLA would bepromoted by requiring one of the responsibleparties to continue to bear the full costs ofinjuries caused in part by others. I conclude,therefore, that the majority rule allowingcontribution among responsible parties isconsistent with CERCLA’s statutory purposeand scheme. (Emphasis added).

The district courts increasingly adopted this viewthat liability should be joint and several and thatconsideration of equitable apportionment should bedeferred to a contribution action after the site wasBeaned up. Thus, in U.S. v Stringfeliow, 661 F.Supp. 1053 (C.D. Cal. 1987) the court said:1°

Imposing joint and several liability carries outthe legislative intent by insuring thatresponsible parties will fulfill their obligation toclean up the hazardous waste facility. TheCourt has discretion to use equitable factors inapportioning damages in order to mitigate thehardships of imposing joint and severalliability upon defendants who have onlycontributed a small amount to a potentiallylarge indivisible harm. However, the Court’sdiscretion in apportioning damagesamong the defendants during thecontribution phase does not affect thedefendants’ liability. (Emphasis added.)

In U.$. v Western Processing Co., Inc., 734 F.Supp. 930 (W.D. Wash. 1990) at 938, the court statedthat only one case, A & F Materials, supported theuse of equitable apportionment and described that caseas an "aberration."

In Allied Corp. v Acme Solvents Reclaiming,Inc., 691 F. Supp. 1100 (N.D. Ill. 1988), the courtcited the A & F Materials decision with approval andapplied the Gore factors. Reviewing the legislativehistory of SARA, the court concluded that there isnothing in the statements of Congress rejecting themultiple factor analysis of the moderate approach andelected to apply that approach. This was a contributionaction, however, and the court noted in a footnote, atpage 1118, "In employing the moderate approach inthe present case, this court makes no ruling as to thepropriety of the approach in cost recovery claimsinvolving the government as plaintiff."

The Court of Appeals for the Sixth Circuit alsoseemed to favor deferring considerations of equitable

allocation to the contribution stage. U.S. v R.W.Meyer, Inc., 889 F.2d 1497 (6th Cir. 1989). In thatcase, the government obtained a judgment of joint andseveral liability against Meyer (who was the propertyowner), the company which operated a polluting busi-ness on the leased property, and the president and soleshareholder of that business. The cou~t declined todisturb the finding of the district court because it feltthat it was "not clearly erroneous," since Meyer hadstrict liability as the owner of the property during theperiod when the pollution occurred. The court con-cluded:11

To the extent that Meyer can demonstrate thedivisibility of the harm and that it paid morethan its fair share, it will be entitled to relief inits action for contribution currently pend-ing against the other defendants. Accordingly,we conclude that the district court did not errin finding the defendants jointly and severallyliable. (Emphasis added.)

Thus, the Federal courts had reached the point ofroutinely imposing joint and several liability and defer-ring consideration of equitable apportionment to alater contribution action between PRPs. This consid-eration frequently did not occur, however, because thethreat of joint and several liability - the "powerful tool"as the Asarco court described it - forced PRPs to settlewith the government. Having once settled, they ob-tained contribution protection, i.e., statutory immunityfrom contribution actions by other PRPs against whomthe govemment brought enforcement actions. This hassignificantly reduced the number of cases in whichjudicial allocation has occurred. Recently, however, theCourts of Appeals for three different circuits haverejected this approach. They have returned to therationale of Chem-Dyne and the principles of theRestatement.

U.S. v Alcan Aluminum Corp., 964 F.2d 252(3rd Cir. 1992) (Alcan I), involved a situation where thegovernment sued 20 defendants, including Alcan, torecover cleanup costs at a Superfund site. The other19 settled, leaving more than $473,000 in unrecoveredgovernment response costs.

Alcan argued that its waste contained such lowconcentrations of hazardous constituents that it couldnot have caused or contributed to the harm because theconcentration of hazardous constituents in its wastewas less than background. Nevertheless, the districtcourt granted judgment to the government.

The Court of Appeals, after reviewing a number ofprior decisions on joint and several liability and §433(A)

MICHIGAN REAL PROPERTY REVIEW Summer, 1994 o Page 85

of the Restatement, rejected the government’s argu-ment for strict joint and several liability. The courtvacated the judgment and remanded the case to thedistrict court for a factual hearing, concluding:12

These provisions underscore the intensely fac-tual nature of the ~divisibility" issue and thushighlight the district court’s error in grantingsummary judgment for the full claim in favor ofEPA without conducting a hearing. For thisreason, we will remand this case for the courtto determine whether there is a reasonablebasis for limiting Alcan’s liability based on itspersonal contribution to the harm to theSusquehanna river.

We observe ° ° " that Alcan’s burden in at-tempting to prove the divisibility is substantial,and the analysis will be factually complex as itwill require an assessment of the relative tox-icity, migratory potential and synergistic ca-pacity of the hazardous waste issue. (Citationomitted.) But Alcan should be permitted thisopportunity to limit or avoid liability. If Alcansucceeds in this endeavor, it should only beliable for that portion of the harm fairly attrib-utable to it.

Thus, the court adopted the rationale and result of theChem-Dyne decision. Where Chem-Dyne haddenied summary judgment to the defendants on thejoint and several liability issue without a hearing, Alcan! denied summary judgment to the government withouta factual hearing. The Alcan ! court, likeChem-Dyne, also strictly adhered to the Restatementprinciple of placing the burden of proof on the PRPseeking divisibility.

U.S. v Alcan Alumintu~ Corp., 990 F.2d 711(2nd Cir. 1993) (Alcan I0 involved essentially the samefacts.as Alcan !. Once again, Alcan was the onlynon-settlor, facing liability for $3.2 million of unrecoveredresponse costs. Again, Alcan argued that its wastecould not have caused or significantly contributed tothe harm because of the minimal concentrations ofhazardous substances in the emulsion. The districtcourt granted summary judgment to EPA and the Stateof New York.

The Court of Appeals addressed the issue ofcausation at length and concluded that the governmentdid not have to prove that Alcan’s waste caused theharm in order to recover. Then, it turned to

Chem-Dyne, a handful of other Federal Court ofAppeals decisions, and §433(A) of the Restatementand concluded that it might be appropriate for thedamages to be apportioned. It also placed the burdenof proof on Alcan to establish that divisibility orapportionment was appropriate. The court confusedthe issues, however, by obseraing:Is

In so ruling, we candidly admit that causationis being brought back into the case - throughthe back door, after being denied entry at thefront door - at the apportionment stage. Wehasten to add nonetheless that causation - withthe burden on defendant - is reintroduced onlyto permit a defendant to escape payment whereits pollutants did not contribute more thanbackground contamination and also cannotconcentrate. To state this standard in otherwords, we adopt a special exception to theusual absence of a causation requirement, butthe exception is applicable only to claims, likeAlcan’s, where background levels are notexceeded. " ° °

Alcan il confuses the issue by mixing the question ofcausation with divisibility and equitable apportionment.The language limiting the effect of the court’s rulingleaves it unclear what the court was actually saying,except that it felt that imposition of $3.2 million inliability on Alcan for disposal of a substance withminimal hazardous content was simply unacceptable.The court did remand the case, however, to give Alcana chance to make an evidentiary record supportingapportionment of liability.

The final case in the recent trilogy is In the Matterof Bell Petroleum Services, Inc., 3 F.3d 889 (SthCir. 1993), decided September 28, ].993. It involveda situation where EPA was seeking recovery ofresponse costs against three former owners of achrome plating facility which had contaminated thegroundwater. Each company had operated the sameplant, with similar operations, but for differentnumbers of years. In this case, the district court had notgranted summary judgment. Joint and several liabilitywas imposed after an evidentiary hearing.

On appeal, the Fifth Circuit concluded that therewere three distinct approaches to the issue of joint andseveral liability. First is the Chem-Dyne approach,adopting the principles of the Restatement withrespect to apportionment of liability and burden ofproof. The second was the approach of the two Aicandecisions, which the court, through reasoning which isunclear, considered different because those cases heldthat the government is not required to prove causation


and that the defendant could escape liability altogetherwith an appropriate evidentiary showing. (Chem-Dynedealt with an early motion for summary judgment basedonly on legal issues. It did not address the government’sburden of proof or the extent to which a PRP couldreduce its liability, so it appears questionable whetherthe Alcan decisions, especially Alcan !, aredistinguishable from Chem-Dyne.) The third approachidentified by the court was the "moderate" approachof A & F Materials.

The court concluded that certain basic principleswere common to all these approaches, including "thefact that Congress intended the imposition of joint andseveral liability only in appropriate cases and then~ onthe basis of common law principles. The courtidentified the major differences between the threeapproaches as timing of the resolution of the divisibilityquestion, whether equitable factors should beconsidered, and whether a defendant can avoid liabilityfor all, or only some portion, of the damages. Finally,the court concluded that even where commingledwaste of unknown toxicity, migratory potential, andsynergistic effect are present, the defendant maybe able to demonstrate a reasonable basis forapportionment, noting, however, that such attemptsare rarely successful.

The court stated that the Chem-Dyne approachis preferable for resolving issues of joint and severalliability. It then seemed to back away fromChem-Dyne’s strict adherence to the Restatementprinciples on burden of proof, saying, "* * * we nev-ertheless recognize that the Restatement principlesmust be adapted, where necessary, to implement Con-gressional intent with respect to liability under theunique statutory scheme of CERCLA."

Applying all these conclusions, the court decidedthat there was a single, indivisible harm to thegroundwater, but that there was a reasonable basis forequitable apportionment. The court apportionedliability based on the basis of the number of years thateach defendant operated the facility.

There was a strongly worded dissent in BellPetroleum. The dissent agreed with the applicability~ Chem-Dyne and the Restatement principles, butwould have placed a heavy burden of proof on thedefendants and left it to the discretion of the districtcourt to determine whether this burden of proof wasmet. The dissent also accuses the majority of departingfrom the Restatement principles and adopting a "ruleof thumb" method of apportionment.

CONCLUSION

While the rationale of Alcan i, Alcan !i and BellPetroleum differ, they agree in rejecting the routineimposition of joint and several liability and deferringthe question of divisibility or equitable apportionmentto a later contribution action. Also, they all return tothe Chem-Dyne rationale, i.e., the principles of theRestatement (2d) of Torts should apply to the issueof joint and several liability. Finally, they all agree thatthe question of joint and several liability is factuallyintensive and complex, requiring an appropriateevidentiary record prior to decision in the district court.

Both Aican cases and Bell Petroleum addressedthe question of joint and several liability of generatorsof hazardous waste. These cases did not involve a partywhich merely had status liability as an owner, but itseems that the principles of apportionment of liabilityenunciated in the Restatement should apply even moreclearly to a property owner who did not contribute tothe contamination. The problems of applying theRestatement principle on burden of proof anddetermining proper bases for apportionment of liabilitywould certainly be more complicated in a matterinvolving both active polluters and a passive propertyowner, but they should not be insoluble.

If the federal courts follow the trend which seemsto have been established by the Alcan and BellPetroleum decisions, therefore, property owners maybegin to receive some relief in Superfund cases.

ENDNOTES

1. 42 USC 9601 et seq.

2. 126 Cong. Rec. Hl1787 (Dec. 3, 1980); (no Confer-ence Committee Report was published on CERCLA).

3. 33 USC 1251 et seq.

4. 572 F.Supp. at 808.

5. Ibid. at 810.

6. Ibid. at 811.

7. 578 F.Supp. at 1256-1257.

8. 1986 U.S. Code Cong. & Adm. News at 2856.

9. 608 F.Supp. at 1491.

10. 661 F.Supp. at 1060.

11. 889 F.2d at 1508.

12. 964 F.2d at 269.

13. 990 F.2d at 722.


APPELLATE COURT OVERTURNS EPA’SLENDER LIABILITY RULE

by Peter D. Holmes*

As discussed in my article in a previous issue of theReulew,1 the U.S. Environmental Protection Agency’s("EPA") 1992 rule (the "Rule") clarifying the securityinterest exemption under the federal ComprehensiveEnvironmental Response, Compensation and LiabilityAct ("CERCLA"), 42 U.S.C. {]9601 et seq., went along way towards protecting lenders from CERCLAliability for the cleanup of contaminated property.2Section 107 of CERCLA imposes strict liability onpersons responsible for a release or threatenedrelease of hazardous substances into the environment,including certain past or present owners or operatorsof the facility at which the release occurs or isthreatened.3 However, the security interest exemptionexcludes from the definition of "owner or operator" aperson who, without participating in management ofthe facility, holds indicia of ownership primarily toprotect a security interest in the facility.4 Among the

most significant provisions of the Rule were: (1) itsdefinition of "participation in management" to meanactual participation in the management or operationalaspects of the facility, as opposed to either a merecapacity to influence facility operations or actualparticipation in financial or administrative aspects ofthe enterprise; (2) its continuation of the exemption forlenders who purchase the property pursuant toforeclosure as long as the lender promptly seeks to sellor otherwise divest the foreclosed-on property; and(3) its guidance regarding permissible activities duringworkout or other stages of the lending relationship thatwill not cause the lender to lose the exemption.Unfortunately, the February 1994 decision by the D.C.Circuit in Kelley v EPAs invalidated the Rule (by a2-1 vote) on the grounds that it exceeded EPA’sstatutory authority.

*Peter D. Holmes, who has specialized in environmental law for the past 14 years, is a shareholder in the Detroitoffice of Butzel Long. He is a graduate of Duke University (B.S. in Chemistry 1970), the University of Michigan(M.S. in Chemistry in 1971), and the University of Michigan Law School (J.D., magna cure laude, 1975). Mr.Holmes’ experience includes three years as an attorney with the U.S. Environmental Protection Agency’s Officeof General Counsel in Washington, D.C., and five years as an Associate Professor teaching environmental andadministrative law at Western New England College School of Law.

Summer, 1.994 -- Page 88 MICHIGAN REAL PROPERTY REVIEW

The Court’s Decision.

The plaintiffs in Kelley were the State of Michiganand the Chemical Manufacturers Association. TheAmerican Bankers Association and four other tradeassociations intervened in support of the Rule. Thepetitioners argued: (1.) that EPA lacked statutoryauthority to define by regulation the scope of lenderliability under CERCLA; and (2) that the substance ofthe Rule was contrary to the plain meaning of CERCLA.Because the court majority agreed with the petitionersthat the Rule exceeded EPA’s statutory authority, it didnot address the Rule’s substantive validity. ¯

Although the court rejected the petitioners’ c!aimthat EPA lacked authority to promulgate anysubstantive regulations under CERCLA, it held thatwith respect to any specific regulation, EPA must showthat it has been explicitly or implicitly delegatedinterpretative authority. The court rejected EPA’scontention that its responsibility under Section 105 ofCERCLA to promulgate the National ContingencyPlan setting forth the actions and procedures to betaken in response to contamination, and in particularSection 1.05’s broad language authorizing EPA "toreflect and effectuate the responsibility and powerscreated by this chapter,"6 provided EPA with the powerto define the scope of liability under Section 107.

EPA also argued that CERCLA provisions grantingEPA authority to recover deanup costs financed throughthe Superfund by bringing a cost recovery actionagainst liable parties or, alternatively, to issueadministrative orders directing such parties to performthe cleanup themselves, require that EPA first decidewhether a party is actually liable before taking suchenforcement action. Thus, EPA contended that CERCLAimplicitly grants it the power to define the scope ofliability. The court rejected this argument on the groundsthat any government prosecutor must determine foritself whether a potential defendant violated the lawbefore deciding to bring a dvil action, but typically lacksauthority to issue substantive regulations to interpretthe scope of statutory liability.

The court also rejected what it described as EPA’sstrongest argument -- that EPA’s authorization underSection 1.06(b)(2)~ (to preliminarily determine, subjectto judicial review, whether a private party that hascleaned up a contaminated site pursuant to anadministrative order is entitled to reimbursement of itscosts) gives it implicit authority to define liability. Underthat provision, reimbursement is required if the party

is not liable under CERCLA or, even if liable, the partydemonstrates that the ordered cleanup was unlawful.The court concluded, however, that if EPA deniesreimbursement because it contends that the party isliable and the party challenges that decision in court,EPA’s contention is not entitled to judicial deference.Rather, the court viewed the private right of action asreflecting Congress’ deliberate intent to designate "thecourts and not EPA as the adjudicator of the scope ofCERCLA liability."s

Finally, the court also rejected EPA’s alternativeargument that the Rule is at least entitled to judicialdeference as an interpretative rule. The court held thatnot only does the Rule bear little resemblance to aninterpretative regulation that defines specific statutoryterms, but judicial deference to an interpretative rulewas improper for the same reason that EPA could notissue the Rule as a substantive regulation: "Congressmeant the judiciary, not F_.PA, to determine liabilityissues. -9

In dissent, Judge Mikva argued that Congressimplicitly delegated authority to EPA to define whichparties are liable under CERCLA. Judge Mikva thenaddressed the issue of the Rule’s substantive validity.He found that the term "owner or operator" and thesecured creditor exemption are ambiguous and thatEPA’s Rule construes the exemption in a reasonablemanner. Thus, Judge Mikva would defer to EPA’sinterpretation under the Chewon Doctrine and upholdthe Rule.1°

The lmnact of the Decision.

On April 11, 1994, EPA and the banking industryintervenors petitioned the D.C. Circuit for rehearingen bane. If the ruling stands, the lending community’savenue of recourse will be in Congress. Indeed, theKelley court recognized that its decision placedlenders in a precarious position and invited EPA to seekCongressional relief. The Clinton Administration’sCERCLA reauthorization bill11 provides EPA withgeneral rulemaking authority and with expressauthority to promulgate regulations to define statutoryterms as they apply to lenders and other financialservice providers, and trustees and other fiduciaries. IfCERCLA reauthorization stalls, lenders probably willpress for passage of a stand-alone bill to addresslender liability.

While lenders may view the invalidation of EPA’slender liability rule as placing them in the same


uncertain position that existed before EPApromulgated the Rule, that concern may be somewhatoverstated. Although the Rule is no longer entitled tojudicial deference and the precedential value of casesthat had applied the Rule is now questionable, EPA islikely to look to the Rule to guide its enforcementproceedings under CERCLA. Nevertheless, lenders areagain likely to become increasingly cautious withrespect to property that is known or suspected to beenvironmentally contaminated.

Ironically, despite the State of Michigan’ssuccessful challenge to the Rule, lenders in Michiganface less uncertainty under state law. Public Act 310of 1994, which was enacted on December 28, 1993,amended the Michigan Environmental Response Act("MERA’), M.C.L. §299.601 et seq., to define"participation in management" for purposes of thesecured creditor exemption to incorporate substantialaspects of the EPA Rule. Thus, MERA now expresslyprovides that the mere capacity to influence orunexercised right to control facility operations does notconstitute pa~cipation in management.12 MERA alsonow incorporates the Rule’s test for participation inmanagement: the lender must exercise decision-making control over the borrower’s environmentalcompliance, undertake responsibility for the borrower’shazardous substance handling or disposal practices, orexercise managerial control over operational aspects ofthe borrower’s enterprise.13 The new MERA provisionsfurther specify certain workout and other ivan activitiesthat do not constitute participation in management.

Finally, the Kelley decision also has significantimplications for EPA’s rulemaking authority in otherareas of CERCLA. For example, EPA proposed a rulein August 1992 to standardize EPA cost recoveryprocedures under Section 107 of CERCLA.14 Because

the proposed rule attempts to define the costs that willbe recoverable in a Section 107 action and to interpretthe governing statute of limitations, the Kelleyrationale may mean that EPA’s views on this issue aresubject to no more judicial deference than its views onwho is a liable party. Given such potentiallybroad-ranging implications of the D.C. Circuit’sdecision, EPA will continue to try to overturn it eitherin court or through legislative amendment.

ENDNOTES1. Peter D. Holmes, Navigating to CERCLA’s Safe

Harbor: F.PA’s Lender Liabilit~ Rule, 20 Mich.Real Prop. Review 161 (Winter 1993).

2. 57 Fed. Reg. 18344 (Apr. 29, 1992).

3. 42 U.S.C. §9607(a)(1) and (2).4. 42 U.S.C. §9601(20)(A).

5. Nos. 92-1312 and 92-1314, 1994 U.S. App LEXI$1715 (D.C. Cir. Feb. 4, 1994).

6. 42 U.S.C. §9605(a).

7. 42 U.$.C. §9606(b}(2).8. 1994 U.S. App LEXIS at "9.

9. Id. at °I0.1O. Chevron U.S.A. Inc. v Natural Resources Defense

Council, Inc., 467 U.S. 837 (1984) (if Congress did notaddress the issue in question, the reviewing court shoulddefer to the agency’s statuto~ interpretation as long asit is reasonable).

11. H.R. 3800 and S.1834.12. M.C.L. §299.603a(1).13. M.C.L. §299.603a(1)(A)-(C).14. 57 Fed. Reg. 34742 (Aug. 6, 1992).


LEGISLATIVE STATUS REPORTACTION ON LEGISLATION OVER THE LAST THREE MONTHS

by Gregory I_.. McClelland and Deborah A. Lee

lib 4284 -- Amends downtown developmentauthority act to provide for state reimbursement for’lostschool operating revenues -- introduced by Rep.Pltoniak on 2/17/93 and referred to Committee onTaxation; 3/11/93, second reading with substitute;5/31/94 substitute, placed on third reading, placed onimmediate passage, passed, given immediate effect.

lib 4285 -- Amends tax increment financeauthority act to provide for state reimbursement for lostschool operating revenues-- introduced by Rep. Bobieron 2/17/93 and referred to Committee on Taxation;3/11/93, second reading with substitute; 5/31/94,placed on third reading, placed on immediate passage,passed, given immediate effect.

lib 4286 -- Amends local development financeact to provide for state reimbursement for lost schooloperating revenues -- introduced by Rep. Sikkema on2/17/93 and referred to Committee on Taxation;3/11/93, second reading with substitute; 5/31/94,placed on third reading, placed on immediate passage,passed, given immediate effect.

lib 4789-4790 -- Establishes civil fines for thelittering of public and private property and provides forforfeiture of property under certain circumstances --introduced by Rep. Anthony on 5/18/93 and referredto Committee on Conservation, Environment & GreatLakes; 5/3/94, reported with recommendation withsubstitute; referred to second reading; 5/24/94,substitute; 5/26/94, substitute adopted; placed onthird reading, placed on immediate passage, passed;5/31/94, referred to Committee on Natural Resources& Environmental Affairs. (4790) referred to secondreading; 5/24/94, substitute adopted; 5/31/94,re-referred to Committee on Conservation,Environmental and Great lakes.

HB 4935 -- Amends the act concerned with thelevy and collection of taxes to change the date real andpersonal property taxes become a lien to December

of the prior year--introduced by Rep. Bullard, Jr. on7/13/93 and referred to Committee on Taxation;10/13/93, reported with recommendation;10/26/93, placed on third reading; 10/27/93,passed, given immediate effect; 10/28/93, referred tocommittee on finance; 3/10/94, reported favorablywithout amendment; 3/17/94, reported by committeeof the whole favorably without amendment, placed onorder of third reading; 3/23/94, passed, givenimmediate effect bill ordered enrolled; 4/12/94,presented to the Governor, approved by the Governor,filed with Secretary of State, assigned PA 80 withimmediate effect.

HB 4965 -- Amends the act creating the revenuedivision of the department of the treasury, to require,in instances where the department of treasury hasrecorded a lien in error, that the release contain anotice stating that lien was filed in error -- introducedby Rep. Martin on 7/21/93 and referred toCommittee on Taxation; 3/3/94, reported withrecommendation with substitute; 3/15/94, substituteadopted, placed on third reading; 3/17/94, passed,given immediate effect; 3/22/94, referred to SenateCommittee on Finance.

HB 5018 -- Repeals ~truth in taxation" and"truth in assessing" provisions of general property taxact -- introduced by Rep. Bullard on 8/31/93 andreferred to Committee on Taxation; 5/26/94,reported with recommendation with substitute,referred to second reading.

lib 5019 -- Amends property tax act to establishguidelines for granting property tax povertyexemptions -- introduced by Rep. Bullard on8/31/93 and referred to Committee on Taxation;3/10/94, reported with recommendation withsubstitute; 3/22/94, substitute adopted, placed onthird reading; 3/23/94, amended, passed, givenimmediate effect; 3/24/94, referred to SenateCommittee on Finance.


HB 5234 -- Amends the enterprise zone act toprovide for modification of the specific tax rate forcommercial, industrial or utility property located in anenterprise zone area-- introduced by Rep. Brackenridgeon 12/9/93 and referred to Committee on Taxation;5/11/94, reported with recommendation withsubstitute, referred to second reading; 5/18/94,substitute adopted, placed on third reading, placed onimmediate passage; 5/31/94, amended, passed, givenimmediate effect.

HB 5245 -- Amends the act permitting the StateConservation Commission to acquire land andundertake improvement programs at certain state parksto provide immunity from civil liability to departmentvolunteers -- introduced by Rep. Middaugh on12/17/93 and referred to Committee onConservation, Environment & Great Lakes; 2/22/94,reported with recommendation; 2/23/94, placed onthird reading, placed on immediate passage, passed,given immediate effect; 2/24/94, referred to SenateCommittee on Natural Resources & EnvironmentalAffairs; 3/15/94, reported favorably withoutamendment; 3/17/94, reported by Committee of theWhole favorably without amendment, placed on orderof third reading; 3/22/94, passed, given immediateeffect, billed ordered enrolled; 4/12/94, presented tothe Governor, approved by the Governor, filed withsecretary of state, assigned PA 78 with immediateeffect.

HB 5308 -- Provides amendments to the generalsales tax act to exempt the sale of electricity, naturalgas or home healing fuels for residential use from the2% sales tax increase -- introduced by Rep. Whymanon 2/2/94 and referred to Committee on Taxation;3/24/94, substitute adopted, substitute adopted, placedon third reading, placed on Immediate passage, passed,given immediate effect; 4/12/94, referred toCommittee on Finance; 4/26/94, motion todischarge committee, motion to discharge committeeapproved, referred to general orders, placed onimmediate passage, passed, given immediate effect, billordered enrolled; 4/27/94, presented to theGovernor; 5/3/94, approved by the Governor, filedwith secretary of state, assigned PA 111 withimmediate effect.

HB 5313 ~ Provides amendments to the taxtribunal act to revise the interest rate on excessproperty taxes paid under protest to one percentagepoint above the adjusted prime rate per annum afterMarch 31, 1994 -- introduced by Rep. Dombrosld on2/3/94 and referred to Committee on Taxation;2/23/94, reported with recommendation with

substitute; 3/10/94, substitute amended and adopted,placed on third reading, placed on immediate passage,passed, given immediate effect; 3/15/94, referred tocommittee on finance; 5/31/94, motion to dischargecommittee, motion to discharge committee approved,placed on immediate passage, placed on order ofthird reading.

HB 5341 -- Provides amendments to the statereal estate transfer tax act to impose a 1% tax of thetotal value of property being transferred beginningJanuary 1, 1995 -- introduced by Rep. Schroer on2/15/94 and referred to Committee on Taxation;4/20/94, reported with recommendation withsubstitute, referred to second reading; 4/26/94,substitute adopted, placed on third reading, placedon immediate passage; 4/27/94, passed, givenimmediate effect; 4/28/94, referred to Committee onFinance; 5/5/94, reported favorably withoutamendment.

HB 5345 -- Amends the general property tax actto provide for and prescribe a procedure for claiminga homestead exemption from property taxes used forschool purposes ~ introduced by Rep. Freeman on2/15/94 and referred to Committee on Taxation;2/16/94, reported with recommendation withsubstitute; 2/22/94, substitute defeated; 2/22/94,substitute amended and adopted; 2/22/94, passed,given immediate effect; 2/23/94, referred toCommittee on Finance; 5/24/94, reported favorablywith substitute, referred to General Orders.

HB 5369 ~ Provides amendments to theMichigan penal code to provide that an indM’dual whoplaces an object in a tree with intent to inhibit ordiscourage the removal of that tree or cause injury toa person attempting to remove the tree, is guilty of amisdemeanor and, should injury occur to a personattempting to remove the tree, guilty of a felony --introduced by Rep. Anthony on 2/23/94 and referredto Committee on Agriculture and Forestry; 4/26/94,reported with recommendation with amendment(s),referred to second reading; 5/18/94, substitute adopted,placed on third reading, placed on immediate passage,passed; 5/19/94, referred to Committee on Agricul-ture and Forestry.

HB 5374 -- Amends the charter and livery boatsafety act to provide for the assumption of risk of injuryfor canoers who rent, lease or operate canoes ownedby a boat livery -- introduced by Rep. Bodem on2/24/94 and referred to Committee on Tourism &Recreation; 5/26/94, reported with recommendationwith substitute, referred to second reading.


HB 5380 -- Amends the act concerned withhome solicitation sales to exclude from coverage salesmade at the buyer’s home pursuant to a contact withthe seller initiated by the buyer -- introduced by Rep.Jersevtc on 3/1/94 and referred to Committee onBusiness and Finance; 3/17/94, reported withrecommendation.

HB 5395 -- Amends the school code of 1976 topermit districts to differentiate taxes levied in 1993 forthe operation of a community swimming pool fromoperating millage and to permit school districts thatoperate a community swimming pool to levy a tax forthe maintenance and operation of the community poolwith the approval of the school electors m introducedby Rep. Dalman on 3/8/94 and referred’ toCommittee on Education; 5/19/94, reported withrecommendation with substitute, referred to secondreading; 5/26/94, substitute, placed on third reading,placed on immediate passage, passed, given immediateeffect; 5/31/94, referred to Committee on Finance.

HB 5403 -- Amends the electrical administrativeact to revise the expiration and renewal dates oflicenses -- introduced by Rep. Jacobetti on 3/1/94and referred to Committee on Labor.

HB 5405 -- Amends the Forbes mechanicalcontractors act to revise the expiration and renewaldates of licenses and address issuance and renewal oflicenses for persons who have an outstanding fee orfine resulting from non-payment of a check oroverdraft m introduced by Rep. Jacobetti on 3/10/94and referred to Committee on Labor.

HB 5407 ~ Creates an act requiring a statedepartment or agency purchasing real property onbehalf of the state to publish notice of the state’sintention to purchase the real property and hold apublic hearing on the matter -- introduced by RepVorva on 3/10/94 and referred to Committee onState Affairs.

HB 5409 -- Amends the state education tax actto define agricultural use and include in the definitionof homestead certain farms meeting specifiedrequirements ~ introduced by Rep. Gustafson on3/10/94 and referred to Committee on Taxation.

HB 5417 -- Amends the act concerned with¯ public hearings on budgets of local units of governmentto require local governmental units to hold a publichearing on their proposed budgets and include in theirnotice of hearing that the property tax millage rateproposed to be levied to support their proposed budgetwill be the subject of the hearing -- introduced by Rep.

Bullard Jr. on 3/17/94 and referred to Committee onTaxation.

HB 5420 -- Amends the general property tax actto specify the procedure for reviewing clerical errors ormutual mistakes of fact regarding correct assessmentfigures and provide for interest on refunds --introduced by Rep. Jaye on 3/17/94 and referred toCommittee on Taxation.

HB 5438 -- Creates the Michigan ginseng actconcerned with licensing and regulating the harvest,sale and distribution of american ginseng -- introducedby Rep. Randall on 3/23/94 and referred toCommittee on Agriculture and Forestry; 4/20/94,reported with recommendation with substitute,referred to second reading; 5/18/94, substitute adopted,placed on third reading, placed on immediate passage,passed; 5/19/94, referred to Committee onAgriculture and Forestry; 5/31/94, reported favorablywithout amendment.

HB 5445 -- Amends the school code of 1976 toprescribe limits on intermediate school districtvocational-technical millage rates -- introduced byRep. Walberg on 3/24/94 and referred to Committeeon Education.

HB 5450 ~ Amends the general property tax actto provide procedures for claiming a homesteadexemption from tax under the school code of 1976including provisions for claiming an exemption by filingan affidavit before May 1 for summer property taxlevies or October 1 for December property tax levies~ introduced by Rep. Whyman on 3/24/94 andreferred to Committee on Taxation.

HB 5470 -- Amends the general property tax actto provide additional procedures for the filing ofhomestead exemption affidavit including the ability ofbuyers of an existing or newly constructed home to filean affidavit immediately after taking ownership andpossession of the property, for subsequent affidavits toautomatically rescind earlier affidavits and for anappeal process should the department of treasurydetermine that a particular property is not thehomestead of the owner-- introduced by Rep. Middletonon 4/19/94 and referred to Committee on Taxation.

HB 5485 -- Amends the general sales tax act toprovide for the refund of the additional 2% sales taxcollected by retailers from persons engaged in thebusiness of construction, repairing or improving realestate for others pursuant to an agreement madebefore May 1, 1994 -- introduced by Rep. Profit on4/20/94 and referred to Committee on Taxation.


HB 5486 -- Amends the act concerned with therights and duties of parties to home solicitation salesto add a provision granting buyers 75 years of age orolder additional time (15 business days) to terminate anagreement or offer to purchase made pursuant toa home solicitation -- introduced by Rep. LeTarteon 4/20/94 and referred to Committee on SeniorCitizens.

HB 5499 -- Provides general amendments to thesubdivision control act of 1967 -- introduced by Rep.Stille on 4/26/94 and referred to Committee on LocalGovernment.

HB 5500 -- Creates an act to prohibit certain realestate development unless unreasonable impacts onservices and facilities arising from the development areeliminated -- introduced by Rep. Stille on 4/26/94and referred to Committee on Local Government.

HB 5501 -- Amends the county rural zoningenabling act to authorize counties to establish landmanagement plans and adopt zoning ordinances pur-suant to the plan, provide for the classification ofdistricts on the basis of public facilities and services,permit the purchase and transfer of development rights,grant the power of eminent domain, among otherthings -- introduced by Rep. Stille on 4/26/94 andreferred to Committee on Local Government.

HB 5502 -- Amends the township rural zoningenabling act to authorize townships to establish landmanagement plans and adopt zoning ordinancespursuant to the plan, provide for the classification ofdistricts on the basis of public facilities and services,permit the purchase and transfer of developmentrights to grant the power of eminent domain, amongother things -- introduced by Rep. Stille on 4/26/94and referred to Committee on Local Government.

HB 5503 -- Creates an act permitting local unitsof government, by ordinance, to establish procedures,requirements and standards for considering andentering into development agreements with personshaving a vested interest in private real estate locatedwithin the governing bodies’ borders -- introduced byRep. Stille on 4/26/94 and referred to Committee onLocal Government.

HB 5504 ~ Creates an act which provides astandard for determining when property is speciallybenefited by an improvement financed by specialassessments ~ introduced by Rep. Stille on 4/26/94and referred to Committee on Local Government.

HB 5505 -- Creates an act to provide for mapsfor designating existing and proposed public facilities,

regulate or prohibit construction within the boundariesof existing or propcsed public facilities and provide forthe acquisition of property for certain public facilities-- introduced by Rep. Stille on 4/26/94 and referredto Committee on Local Government.

HB 5506 -- Creates an act to provide for andauthorize cities and villages to establish landmanagement plans and adopt zoning ordinancespursuant to the plan, provide for the classification ofdistricts on the basis of public facilities and services,permit the purchase and transfer of development rights,grant the power of eminent domain, among otherthings -- introduced by Rep. Stille on 4/26/94 andreferred to Committee on Local Gcvemment.

HB 5520 -- Amends the solid wastemanagement act to revise and add various planningrequirements ~ introduced by Rep. Middleton on5/3/94 and referred to Committee on Conservation,Environment and Great Lakes.

HB 5527 -- Amends the general property tax actto eliminate the property tax administration fee --introduced by Rep. Martin on 5/4/94 and referred toCommittee on Taxation.

HB 5528 -- Amends the act concerned withestablishing a state parks endowment fund toprovide for the implementation of a constitutionalamendment to create the Michigan state parksendowment fund within the state treasury --introduced by Rep. Alley on 5/4/94 and referred toCommittee on Appropriations; 5/24/94, reported withrecommendation, referred to second reading;5/25/94, placed on third reading, placed onimmediate passage, passed, given immediate effect;5/31/94, referred to Committee on Natural Resources& Environmental Affairs.

HB 5534 -- Amends the condominium act torequire bylaws to provide for co-owner attendance atall board of directors meetings and provide writtennotice of any such meeting -- introduced by Rep.Bullard, Jr. on 5/5/94 and referred to Committee onHousing and Urban Affairs.

HB 5535 ~ Amends the act concerned, in part,with prohibiting the holding of incompatible publicoffices, to permit, village and township officers oremployees to serve as a member of various taxincrement financing boards ~ introduced by Rep.Lowe on 5/5/94 and referred to Committee onLocal Government; 5/24/94, reported withrecommendation, referred to second reading.


HB 5536 -- Amends the city income tax act tocreate and provide incentives to participate in an"adopt-a-lot" program -- introduced by Rep. Young,Jr. on 5/10/94 and referred to Committee onTaxation.

HB 5540 ~ Amends the act which provides forcity and village zoning and land use to require city orvillage zoning ordinances to authorize family day carehomes and group day care homes in all residentialzones, subject to certain conditions and limitations --introduced by Rep. Dolan on 5/10/94 and referred toCommittee on Local Government. ¯

liB 5541 m Amends the school code of 1976 toallow a summer tax collection for 1994 if a resolutionof the school board is adopted before June 1, 1994m introduced by Rep. Porreca on 5/10/94 andreferred to Committee on Taxation.

liB 5551 ~ Amends the school code of 1976 toallow electors to establish or increase a permanentcharter millage rate for taxes levied for the operationof a community college-- introduced by Rep. Dobronskion 5/12/94 and referred to Committee on LocalGovernment.

lib 5553 ~ Amends the general property tax actto provide reimbursement to local tax collectingunits for all expenses incurred in administratinghomestead exemption affidavits -- introduced by Rep.Whyman on 5/12/94 and referred to Committee onAppropriations.

lib 5554 -- Amends the fire prevention code torequire a fire suppression system be installed in newconstruction and renovation of any public lodging --introduced by Rep. Curtis on 5/12/94 and referred toCommittee on State Affairs.

HB 5556 -- Amends the solid wastemanagement act to. exempt methane gas recoveryfacilities from the ban on yard waste disposal --introduced by Rep. Palamara on 5/12/94 and referredto Committee on Conservation, Environment andGreat Lakes.

lib 5557 -- Amends the scrap tire regulatory actto address abandoned scrap tires and allow funding forcleanup of scrap tires on certain private property --introduced by Rep. Leland on 5/12/94 and referredto Committee on Conversation, Environment &Great Lakes.

HB 5593 -- Amends the uniform partnership actto establish and regulate limited liability partnerships

introduced by Rep. Profit on 5/31/94 and referred toCommittee on Business and Finance.

HB 5594 ~ Creates an act concerned withestablishing a manufactured housing recovery fund --introduced by Rep. Olshove on 5/31/94 and referredto Committee on Transportation.

SB 144 -- Provides general amendments toeconomic and industrial development act ~ introducedby Sen. Cisky on 1/26/93 and referred to Committeeon Local Government & Urban Development;5/3/94, reported favorably with substitute; 5/4/94,referred to Committee on Local Governments andUrban Development; 5/18/94, reported favorably withsubstitute; 5/31/94, amended, substitute andamendment(s) adopted, reported by Committee of theWhole favorably with substitute and amendment(s),substitute and amendment(s) concurred in, placed onorder of third reading with substitute and amendment(s),amendment(s) defeated, passed.

SB 155 -- Amends the occupational code toexempt certain real estate brokers and associatebrokers providing market analyses for a fee fromappraiser licensure requirements -- introduced by Sen.Dunaskiss on 1/26/93 and referred to Committee onState Affairs & Military/Veteran Affairs; 6/15/93,general orders; 6/17/93, third reading; 6/23/93,passed; 6/23/93, Committee on State Affairs;2/22/94, reported with recommendation withsubstitute; 3/2/94, substitute adopted, placed on thirdreading; 4/13/94, passed, given immediate effect,returned to senate; 4/26/94, house substituteconcurred in, given immediate effect, ordered enrolled;5/4/94, presented to the Governor; 5/18/94,approved by the Governor, filed with secretary of state,assigned PA 125 with immediate effect.

SB 288 -- Amends general property tax act torequire assessor to use the amount determined byboard of review for following year’s assessment --introduced by Sen. Bouchard on 1/26/93 and referredto Committee on Finance; 1/27/94, reportedfavorably without amendment; 2/1/94, reported byCommittee of the whole favorably without amend-ment; 5/26/94, reported with recommendation withamendment(s), referred to second reading.

SB 688 -- Amends fertilizer act of 1975 toprovide for the protection of groundwater and torequire compliance with the groundwater and fresh-water protection act -- introduced by Sen. McManuson 6/8/93 and referred to Committee on Agriculture& Forestry; 3/1/94, reported favorably withsubstitute; 3/9/94, reported by Committee of the


whole favorably with substitute, substitute concurredin, placed on order of third reading with substitute;3/10/94, passed, referred to Committee onAgriculture and Forestry; 5/25/94, reported withrecommendation, referred to second reading.

SB 882 -- Amends the general property tax actto eliminate the State Tax Con’uT~ission and StateBoard of Equalization and reassign their duties toentities such as the Department of Treasury and CountyBoard of Commissioners and eliminates certainproperty tax appeal procedures -- introduced by Sen.Bouchard on 10/13/93 and referred to Committee onSchool Finance Reform; 1/27/94, referred tocommittee on finance; 5/24/94, reported favorablywith substitute, placed on immediate passage, placedon order of third reading, amended, amendment(s)defeated, substitute and amendment(s) adopted,passed, vote reconsidered, amended, substitute andamendment(s) adopted, passed, referred toCommittee on Taxation; 5/26/94, reported withrecommendation with substitute, referred tosecond reading.

SB 936 -- Amends the act providing for thelevying and collection of taxes by cities, to require a citywith a population of more than one million to provide,by ordinance, a procedure to finance snow removalfrom streets, mosquito abatement, and securityservices by special assessments and authorize the useof petitions to initiate the establishment of a specialassessment district -- introduced by Sen. O’Brien on12/1/93 and referred to Committee on Finance;3/10/94, reported favorably with recommendationfor referral to Committee on Natural Resources &Environmental Affairs, recommendation concurred in,referred to Committee on Natural Resources &Environmental Affairs; 3/22/94, reported favorablywithout amendment; 3/22/94, amended, reported byCommittee of the Whole favorably with amendment(s),amendment(sl concurred in, placed on order of thirdreading with amendment(s); 3/24/94, passed, referredto Committee on Conservation, Environment and GreatLakes; 4/26/94, substitute adopted, reported byCommittee of the Whole favorably with substitute,substitute concurred in, placed on order of thirdreading with substitute; 4/27/94, passed, referred toCommittee on Local Govemment.

SB 952 -- Creates the Michigan state parksfoundation act which creates a Michigan state parksfoundation whose purpose is to support the overallenhancement of the Michigan state parks system ~introduced by Sen. Ehlers on 12/8/93 and referred toCommittee on Finance; 4/12/94, reported withrecommendation, referred to second reading;

5/4/94, given immediate effect, ordered enrolled;5/12/94, presented to the Governor; 5/25/94,approved by the Governor; filed with Secretary ofState, assigned PA 130 with immediate effect.

SB 970 ~ Amends the act concerned with stateconservation and state park improvement programs toprovide general amendments including renaming theact the Michigan state parks systems act ~ introducedby Sen. Hoffman on 1/18/94 and referred toCommittee on Natural Resources & EnvironmentalAffairs; 3/15/94, reported favorably with amendment(s);3/17/94, reported by Committee of the Wholefavorably with amendment(s), amendment(s) concurredin, placed on order of third reading with amendment(s);3/22/94, passed, referred to Committee onConservation, Environment and Great Lakes;4/12/94, reported with recommendation, referred tosecond reading; 4/19/94, amended, placed on thirdreading; 4/27/94, passed, given immediate effect,returned to Senate; 5/4/94, house amendment(s)concurred in, given immediate effect, ordered enrolled;5/12/94, presented to the Governor; 5/18/94,approved by the Governor, filed with secretary ofstate, assigned PA 120 with immediate effect.

SB 971 -- Amends the act concerned withconservation and the improvement of certain stateparks to establish an "adopt-a-park" program that willallow volunteer groups to assist state park staff inmaintaining and enhancing state parks -- introducedby Sen. Hoffman on 1/18/94 and referred toCommittee on Natural Resources & EnvironmentalAffairs; 3/15/94, reported favorably withoutamendment; 3/17/94, reported by Committee of theWhole favorably without amendment, placed on orderof third reading; 3/22/94, passed, referred toCommittee on Conservation, Environment and GreatLakes; 4/12/94, reported with recommendation,referred to second reading; 5/4/94, given immediateeffect, ordered enrolled; 5/12/94, presented to theGovernor; 5/18/94, approved by the Governor, filedwith secretary of state, assigned PA 121 withimmediate effect.

SB 1007 -- Provides amendments to theenvironmental response act to bring about the citizensreview board established by the act and, in addition, to.provide that one member of the review board beappointed by a republican leader and one by ademocratic leader of the House of Representa~ves --introduced by Sen. Hoffman on 2/8/94 and referredto Committee on Natural Resources & EnvironmentalAffairs; 4/12/94, reported favorably withoutamendment, reported by Committee of the Whole


favorably without amendment; 4/14/94, placed onorder of third reading; 4/26/94, amendment(s)defeated, passed, referred to Committee onConversation, Environment and Great Lakes.

SB 1008 -- Provides amendments to the actconcerned with prohibiting obstructions andencroachments on public highways to permit certainutility lines to be constructed within limited accesshighway right of ways and otherwise allow utilitycompanies to enter upon, construct and maintaincertain facilities and require standards -- introduced byRep. Hoffman on 2/8/94 and referred to Committeeon Technology & Energy; 4/12/94, reportedfavorably without amendment; 4/14/94, reported~ byCommittee of the Whole favorably withoutamendment, placed on order of third reading;4/26/94, passed, referred to Committee onTransportation.

SB 1029 ~ Provides amendments to the schoolcode of 1976 to provide that in the event a 6% salestax is implemented, 18 mills be levied on homesteadproperty before mills are levied uniformly on allproperty and provide an exemption from thisrequirement for certain school districts ~ introducedby Sen. Bouchard on 2/22/94 and referred toCommittee on Education; 3/1/94, reported favorablywith substitute.

SB 1036 -- Amends the revised judicature act of1961 to permit licensed real estate brokers and salespersons to represent landlords in small claims court onsecurity deposit disputes under certain circumstances-- introduced by Senator Hoffman on 3/02/94 andreferred to Committee on Judicature; 5/12/94,reported favorably without amendment; 5/19/94,reported by committee of the whole favorably withoutamendment, placed on order of third reading;5/24/94, passed, referred to committee on judiciary.

SB 1038 -- Amends the mortgage brokers, lend-ers, and servicers licensing act to include in its list ofexempted entities nonprofit corporations establishedpursuant to the neighborhood reinvestmentcorporation act -- introduced by Senator Schwarz on3/2/94 and referred to Committee on Corporationsand Economic Development; 3/17/94, reportedfavorably without amendment; 3/22/94, reportedby Committee of the Whole favorably withoutamendment, placed on order of third reading;3/23/94 passed, referred to Committee onBusiness and Finance; 5/12/94, reported withrecommendation, referred to second reading.

SB 1039 -- Amends the act concemed withsecondary mortgages and other unsecured loans toexempt from application nonprofit corporationsestablished pursuant to the neighborhoodretnvestment corporation act -- introduced bySenator Schwarz on 3/2/94 and referred toCommittee on Corporations and EconomicDevelopment; 3/17/94, reported favorably withoutamendment; 3/22/94, reported by Committee of theWhole favorably without amendment, placed on orderof third reading; 3/23/94 passed, referred toCommittee on Business and Finance; 5/12/94,reported with recommendation, referred to secondreading.

SB 1096 -- Amends the condominium act toprovide for the rights of co-owners to attend meetingsof the Board of Directors of the Assodation andprovide for notice of meetings of the Board ofDirectors -- introduced by Sen. Honigman on4/14/94 and referred to Committee on LocalGovernment and Urban Development.

SB 1100 -- Creates a bill to authorize the transferor conveyance of certain real estate owned by thestate in Kalamazoo county and for the department ofmanagement and budget’s demolition or disposal ofcertain surplus buildings -- introduced by Sen. Welbornon 4/19/94 and referred to Committee on StateAffairs & Military/Veteran Affairs; 5/24/94, reportedfavorably without amendment, referred to general orders;5/25/94, placed on immediate passage, placed onorder of third reading, passed, referred to Committeeon State Affairs.

SB 1104 -- Creates the Michigan statepreservation, empowerment, and economicdevelopment authority act to promote historicpreservation and economic growth withineconomically distressed local governmental areas-- introduced by Rep. Kelly on 4/20/94 and referredto Committee on Corporations and EconomicDevelopment.

SB 1106 -- Amends the occupational code todelete references to "commissions" -- introduced byRep. Wartner on 4/20/94 and referred to Committeeon Commerce; 5/12/94, reported favorably withoutamendment; 5/19/94, amended, reported by commit-tee of the whole favorably with amendment(s),amendment(s) concurred in, placed on order of thirdreading with amendment(s); 5/24/94, amendment(s)defeated, passed, referred to Committee on Businessand Rnance.


SB 1108 --Amends the occupational code torepeal the article regulating community planners anddelete references to community planners from theoccupational code -- introduced by Sen. Wartner on4/20/94 and referred to Committee on Commerce;5/12/94, reported favorably with substitute;5/19/94, reported by committee of the wholefavorably with substitute, substitute concurred in, placedon order of third reading with substitute; 5/24/94,passed, referred to Committee on State Affairs.

SB 1111 -- Amends the school code of 1976to make technical revisions and provide forimplementation of the homestead property taxexemption -- introduced by Sen. Emmons on4/20/94 and referred to Committee on Finance;5/24/94, reported favorably with substitute, placed onimmediate passage, placed on order of third reading,amendment(s) defeated, amended, amended;5/25/94, amended, substitute and amendment(s)adopted, substitute defeated, passed by 3/4 vote,referred to Committee on Taxation.

SB 1117 -- Amends the farm land and openspace preservation act to provide for annual reductionsin liens provided for under the act under certainconditions -- introduced by Rep. Berryman on4/27/94 and referred to Committee on Finance.

SB 1123 m Amends the state education tax actto delete certain definitions and provide for statetreasurer certification of the levy of tax under the act-- introduced by Sen. Emmons on 4/27/94 andreferred to Committee on Finance; 4/28/94, reportedfavorably with amendment(s); 5/4/94, reported byCommittee of the Whole favorably with amendment(s),amendment(s) concurred in, placed on order of thirdreading with amendment(s); 5/5/94, passed, referredto Committee on Taxation; 5/26/94, reported withrecommendation with amendment(s), referred tosecond reading.

SB 1135 (Same as House Bill 5520). -- Amendsthe solid waste management act to revise and addvarious planning requirements -- (HB 5520)introduced by Rep. Middleton on 5/3/94 and referredto Committee on Conservation, Environment and GreatLakes -- (SB 1135) introduced by Sen. Dunaskisson 5/3/94 and referred to Committee on NaturalResources & Environmental Affairs; 5/5/94 reportedfavorably with substitute; 5/10/94, reported bycommittee of the whole favorably with substitute,

substitute concurred in, placed on order of thirdreading with substitute; 5/12/94, passed, referred toCommittee on Conservation, Environment & GreatLakes; 5/24/94, reported with recommendation withamendment(s), referred to second reading; 5/25/94,amended, placed on third reading, placed onimmediate passage, amended, passed, givenimmediate effect, returned to senate.

SB 1139 --Amends the environmental responseact to provide general amendments ~ introduced bySen. Kelly on 5/4/94 and referred to Committee onNatural Resources & Environmental Affairs..

SB 1142 --~ Amends the state real estate transfertax act to include land contracts and certain othertransfers ~ introduced by Sen. Carl on 5/5/94 andreferred to Committee on Finance; 5/24/94, reportedfavorably with substitute, referred to general orders;5/31/94, reported by committee of the whole favor-ably with substitute, substitute concurred in, placed onorder of third reading with substitute, placed onimmediate passage, amendment(s) defeated, passed.

$B 1153 -- Amends the property tax limitationact to provide general and technical amendments ~introduced by Sen. Smith, Jr. on 05/12/94 andreferred to Committee on Finance; 5/1.9/94, reportedfavorably without amendment; 5/24/94, placed onimmediate passage, placed on order of third reading,substitute adopted, passed, referred to Committee onTaxation; 5/26/94, reported with recommendation,referred to second reading.

SB 1164 -- Amends the uniform transboundarypollution reciprocal access act to include Canadianprovinces within reciprocating jurisdictions --introduced by Sen. Kelly on 5/24/94 and referred toCommittee on Natural Resources & EnvironmentalAffairs.

SB 1176 w Amends the housing law of Michiganto revise housing inspection procedures ~ introducedby Sen. Bouchard on 5/25/94 and referred toCommittee on Corporations and EconomicDevelopment.

SB 1177 w Amends the tax tribunal act toprovide for general amendments -- introduced by Sen.Emmons on 5/25/94 and referred to Committee onFinance.


RECENT DECISIONS

by Joseph LloydChard & Lloyd

201 E. WashingtonAnn Arbor, Michigan 48104

G&A Incorporated v Nahra, 204 Mich App 323;__ NW2d __ (1994) ’Landlord/Tenant - Payment of Taxes, SpecialAssessmentsPlaintiff and Defendant were tenant and landlord ofcommercial property. The lease charged the tenantwith "paying all of the real property taxes" on theproperty during the lease term. The question beforethe court was whether a special assessment forimprovement of adjacent off-street parking was withinthe scope of this provision. The trial court ruled onmotion for summary disposition that the special assess-ment was not included in "real property taxes." TheCourt of Appeals, hearing the case de novo, ruled thatthe special assessment was for the purpose ofproviding a lasting benefit to the property and, follow-ing the reasoning of Kadzban v City of Grandville, 442Mlch 495; 502 NW2d 299 (1993), affirmed thetrial court.

City of Ann Arbor v National Center forManufacturing Sciences, lnc, 204 Mich App 303;__ NW~x~ __ (1994)

Tax Exemption - Michigan Strategic Fund

The Michigan Strategic Fund Act, MCL 125.2001;MSA 3.541(201) grants exemption from ad valoremproperty taxes to certain research facilities funded bythe State of Michigan. Plaintiff municipality brought anaction for declaratory judgment seeking to have thatact held unconstitutional. Plaintiff argued that the taxviolated the Uniformity of Taxation Clause in theMichigan Constitution, Article 9, Section 3, and thatit unconstitutionally delegated legislative power to theadministrators of the fund. The trial court grantedsummary disposition in favor of the defendant and theCourt of Appeals affirmed, finding that there wassufficient rational purpose and that there weresufficient standards and definitions in the act to passconstitutional muster.

Giannetti v Cornlillie, 204 Mich App 234;NW2d __ (1994)

Offer and Acceptance - Mirror Image Rule

The Plaintiffs offered to purchase the Defendants’home, submitting a standard real estate purchase offer.The defendant Sellers made a counteroffer, and thePlaintiffs purportedly accepted, but they changed theamount of the mortgage in the financing contingencyfrom $124,000 to $128,000. The real estate agent didnot submit this modified offer back to the defendants,but rather told them that the plaintiffs had accepted thecounteroffer. Defendants sought to rescind the offerimmediately prior to the closing.

The trial court found that there was a contractnotwithstanding the change in the terms of thecounteroffer, the Court of Appeals disagreed andreversed. The Plaintiffs argued that the modificationof the mortgage amount did not vitiate theirpurported acceptance because the mortgage amountwas not a material term of the contract. The Court ofAppeals held that any change, even one apparentlyminor, was sufficient to require reacceptance by theopposite party.

English v Augusta Township, 204 Mich App 33;~ NW2d ~ (1994)

Mobile Home Parks - Exclusionary Zoning

The Plaintiffs own 49 acres in Augusta Township.They sought a change in their zoning classificationfrom agricultural to mobile-home park zoning.Defendant denied the rezoning, and Plaintiff filed suit.At trial, the evidence showed that the Township haddesignated 96 acres for mobile homes, but thatparticular land was chosen for mobile home usebecause the Township believed that it would never bedeveloped. The Township zoning official testified thathe had been pressured to keep manufactured housingout of the Township. The trial court found that theTownship had unconstitutionally excluded mobile home


parks by relegating them to an undevelopable area, andordered the Township to rezone the subject parcel toa Mobile Home classification.

The Court of Appeals partially affirmed. It found thata zoning ordinance which totally excludes an otherwiselegitimate use carries with it a strong taint of unlawfuldiscrimination. The Court disagreed with the trial court,however, as to the form (if not the substance) of theremedy. The Court of Appeals ordered that the trialcourt not order the land rezoned, but it did order it toissue an injunction prohibiting the Defendant frominterfering with the Plaintiff’s reasonable use of theirproperty as a mobile home park.Duggan v Clare County Board of Commis-sioners, 203 Mich App 570; m NW2d __ (1994)

Municipal Land Sales - Scope of ReferendumRe Landfill

The question before the court was whether a resolutionof the County Board of Commissioners authorizingsale of certain property, and development of that landfor a solid waste landfill pursuant to the Solid WasteManagement Act, was subject to public referendum.

After the sale in question, the plaintiffs initiated apetition drive and collected the signatures necessary toplace the matter on the ballot. The Board refused toplace the matter on the ballot and Plaintiff broughtsuit. The trial court granted defendants partialsummary disposition, holding that the resolution wasnot legislation subject to referendum. The Court ofAppeals affirmed.

Cheff v Edwards, 203 Mich App 548; m NW2d ~(1994)Foreclosure by Advertisement - Junior Liens

The Plaintiff held a junior lien on certain property. Thefirst mortgage was foreclosed by advertisement and thesecond mortgage holder thereafter brought suit,seeking to declare that his mortgage remained as anencumbrance based on a theory that he was entitledto actual notice of the foreclosure proceedings. Thetrial court granted summary disposition for thedefendant and the Court of Appeals affirmed. It washeld that, however harsh, the statute authorizingforeclosure by advertisement was constitutional.

Summer, ].994 -- Page ].00 MICHIGAN REAL PROPERTY REVIEW

CONTINUING LEGAL EDUCATION

Jack D. Shurnate, Chairpersonand

Arlene R. Rubinstein, Administrative Assistant

NINETEENTH ANNUAL SUMMER CONFERENCETreetops Sylvan Resort

Gaylord, MichiganJuly 20-23, 1994

SUMMER CONFERENCELimited Accommodations Still Available!

Treetops Sylvan Resort, the location of this year’s summer conference, offers something for every interest.Magnificent, championship golf courses plus many other recreation and leisure activities are available. Mix businesswith pleasure with these affordable rates!

Single Double

Standard Room $69 $80

Queen Room $79 $90

Queen Deluxe $92 $].03

King Deluxe $1].0 $].2].

Presidential $ ]. ].5 $ ]. 26

Rooms have been reserved at Treetops Sylveu~ Resort at the above daily rates. Per room per night. Please add8% state and local taxes. Children ].7 years and under sleep free when in room with parents.

Stephen E. Dawson of Dickinson, Wright, Moon, Van Dusen and Freeman has chosen a distinguished group ofspeakers to discuss the following timely and informative topics of interest to all real estate attorneys. Thursdaymorning, Mark L. McAlpine of Clark, Klein & Beaumont will speak on the basics of Alternative Dispute Resolutions.William B. Dunn of Clark, Klein and Beaumont and Russell A. McNair of Dickinson, Wright, Moon, Van Dusen& Freeman will follow with a discussion on drafting, focusing on practical concems involved in utilizing provisionsfor dispute resolution alternatives in commercial real estate transactions.

Friday morning will begin with Gail A. Anderson of Dickinson, Wright, Moon, Van Dusen & Freeman speakingon new real estate laws. Next, Alan S. Levine of Butzel Long will discuss Michigan Real Estate Tax Sales. LawrenceD. McLaughlin of Honigman, Miller, Schwartz and Cohn will conclude Friday morning’s lectures with State ofthe LaW.


The popular "Hot Tips~ portion of the conference will begin Saturday morning at 8:30 a.m. with the followingtopics and speakers:

Section 1031 - Tax Free ExchangesMichael R. Atldns - Miller, Canfield, Paddock & Stone

Waterfront Access RightsJames Y. Stewart - Butzel Long

Bankruptcy Code §365(h) and Tenant Assignments and Subleases: Tenant BewareStephen E. Dawson - Dickinson, Wright, Moon, Van Dusen & Freeman

Residential Construction Contracts - Highlighting Your Worst NightmareRonald P. Strote - May, Simpson & Strote

Tips on Negotiating the Office Lease from the Tenant’s PerspectiveCameron H. Piggott - Dykema Gossett

Tips on Negotiating the Retail Space Lease from the Tenant’s PerspectiveJohn G. Cameron, Jr. - Warner, Norcross & Judd

Single Asset Chapter 11 Real Estate Cases - Bad Faith, New Debtor Syndrome and other PitfallsLisa Sommers Gretchko - Pepper, Hamilton & Scheetz

Please look elsewhere in this issue for a Summer Conference Registration form.

HOMEWARD BOUND

The 1994-95 Homeward Bound Series will begin, Thursday, October 27, 1994 in Troy at the ManagementEducation Center, 811 W. Square Lake Road. Due to low registrations, we will no longer present the HomewardBound Series in Grand Rapids. We are sorry for any inconvenience this may cause members of the Section.

This year’s program director is William B. Acker of Kemp, Klein, Humphrey and Endelman. Mr. Acker is in theprocess of finalizing this informative program. Topics to be discussed include: Update on Environmental CleanUp Requirements, RTC, Pre-Workout Agreements, Tax Free Exchanges, Bankruptcy, Residential Real EstateTransactions, Understanding Surveys and Boundary Disputes and Litigation, and Real Estate Malpractice Trapsof the 90’s. Information regarding the Series will be available later this summer.

For more information on any Section activity please call Arlene Rubinstein, Administrative Assistant at810-644-7378.

COURSE CALENDARSet forth is a schedule of continuing legal education courses sponsored or co-sponsored by the Real Property LawSection through September 1994.

Key: HB = Homeward

ICLE = Courses cosponsored by the Institute of Continuing Legal Education

DATE LOCATION PROGRAM TOPIC

July 20-23 Treetops Sylvan ResortGaylord

Summer Conference Current Developments andPractice Tips 1994

Sept. 21 Cobo HallHotel PontchartrainDetroit

Annual StateBar Meeting

Hot Tips on What’s Newin Real Estate Law

Summer, 1994 m Page 102 MICHIGAN REAL PROPERTY REVIEW

STATE BAR OF MICHIGANREAL PROPERTY LAW SECTION

NINETEENTH ANNUAL SUMMER CONFERENCECURRENT DEVELOPMENTS AND PRACTICE TIPS 1994

TREETOPS SYLVAN RESORTGAYLORD, MICHIGAN

General Information:

THURSDAY, JULY 21, 19949:00 A.M. - Noon

Stephen E. Dawson, Esq.Program CoordinatorDickinson, Wright, MoonVan Dusen 8= Freeman

Alternative Dispute Resolution Mark L. McAIpine, Esq.Clark, Klein & Beaumont

Real Estate Documentation and ADR:The Pitfalls and Pratfalls;Document Drafting Tips

William B. Dunn, Esq.Clark Klein & BeaumontandRussell A. McNair, Jr., Esq.Dickinson, Wright, Moon,Van Dusen & Freeman

FRIDAY, JULY 22, 19949:00 A.M. - Noon

New Real Estate Broker Laws

Tax Sales in Michigan: How theyWork; Purchasing Tax Titles

Gail A. Anderson, Esq.Dickinson, Wright, Moon,Van Dusen & Freeman

Alan S. Levine, Esq.Butzel Long

State of the Law Lawrence D. McLaughlin, Esq.Honigman Miller Schwartzand Cohn

MICHIGAN REAL PROPERTY REVIEW Summer, 1994 m Page 103

SATURDAY, JULY 23, 19948:30 A.M. - 11:30 A.M.

"HOT TIPS"

Section 1031 - Tax Free ExchangesMichael R. Atldns, Esq. - Miller, Canfield, Paddock & Stone

Waterfront Access RightsJames Y. Stewart, Esq. - Butzel Long

Bankruptcy Code §365 (h) and Tenant Assignments and Subleases: Tenant BewareStephen E. Dawson, Esq. - Dickinson, Wright, Moon, Van Dusen & Freeman

Residential Construction Contracts - Highlighting Your Worst NightmareRonald P. Strote, Esq. - May, Simpson & Strote

Tips on Negotiating the Office Lease from the Tenant’s StandpointCameron H. Plggott, Esq. - Dykema Gossett

Tips on Negotiating the Retail Space Lease from the Tenant’s StandpointJohn G. Cameron, Jr., Esq. - Warner, Norcross & Judd

Single Asset Chapter 11 Real Estate Cases: Bad Faith, New Debtor Syndrome and Other PitfallsLisa Sommers Gretchko, Esq. - Pepper, Hamilton & Scheetz

Name

Firm Name

Address

city

Telephone

Spouse/Guest’s Name

(tear and mail)

NINETEENTH ANNUAL SUMMER CONFERENCETREETOPS SYLVAN RESORT

GAYLORD, MICHIGANJULY 20-23, 1994

State

Registration Fees: Section Members $200 Non-Section Members $225

Mail to: P.O. Box 473, Birmingham, MI 48012

For further information, please call Arlene Rubinstein at 810-644-7378.

NEW

NMICHIGAN ENVIRONMENTAL ESTATUTES AND REGULATIONS

(2nd Edition) W

PREPARED BY THE ENVIRONMENTAL LAW AND REAL PROPERTY SECTIONS OFTHE STATE BAR OF MICHIGAN

TWO VOLUME HANDBOOK (APPROX. 2,500 PAGES)COVERS ALL MICHIGAN ENVIRONMENTAL STATUTES AND REGULATIONSFIRST RELEASED IN SEPTEMBER 1990ALL NEW TEXT PUBLISHED IN 1992

WITHOUT BINDER WITH BINDER

$120.00 $150.004.80 4% MI TAX 6.00

18.00 SHIPPING & HANDLING 20.00$142.80 $176.00

4% MI TAXSHIPPING & HANDLING

MAKE CHECKS PAYABLE TO:AND SEND TO:

THE STATE BAR OF MICHIGAN306 TOWNSEND STREET, LANSING, MI 48933-2083ATTENTION: TWILA WILLARD

DEBRA L. SMITH

MICHIGAN REAL PROPERTY REVIEW - Honigman · 2014. 4. 30. · 2. While the right to collect rents is...

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