Shurlow v. Bonthuis

576 N.W.2d 159 (1998) 456 Mich. 730

William D. SHURLOW and Shurhoff Development Company, a Michigan general partnership, Plaintiffs-Appellants,
v.
Thomas BONTHUIS, Defendant-Appellee.

Docket No. 107140, Calendar No. 14.

Supreme Court of Michigan.

Argued December 11, 1997. Decided April 1, 1998.

Marvin & Associates by Richard A. Marvin and Jon V. Coretti, Grand Rapids, for plaintiffs-appellants.

Law, Weathers & Richardson, P.C. by Douglas W. Van Essen and Ingrid A. Jensen, Grand Rapids, for Defendant-Appellee.

Opinion

BOYLE, Justice.

As a result of plaintiffs' failure to perfect their security interest in the lessee's personal property, defendant guarantor contends that he was discharged from any liability under two personal guaranty agreements. The circuit court granted defendant's motion for summary disposition and the Court of Appeals affirmed. We granted leave to appeal to determine whether a security interest in personal property given as collateral to secure payment under a lease agreement for which defendant executed a personal guaranty was subject to UCC filing requirements and, if so, whether the failure on the part of the plaintiffs to perfect their security interest in the personal property under state law constitutes impairment of the collateral so as to discharge the obligation of the guarantor and release him from further liability upon default of the lessee. We hold that the lien granted in the underlying lease agreement falls within the coverage of article 9 of the UCC and that § 9207 does not discharge the defendant's obligation under the guaranty agreements. We affirm in part and reverse in part the decision of the Court of Appeals and remand the case to the trial court for further proceedings consistent with this opinion.

I

The relevant facts of this case as set forth by the Court of Appeals^[1] are:

In 1991, plaintiffs and the predecessors of Market Place Media, Inc's (MPM), entered into a series of commercial leases for office space. In these leases, the predecessors granted plaintiffs a landlord's lien covering personal property located on the leased premises. As an inducement for these leases, Bonthuis, an officer for the predecessors, executed two personal guaranty agreements promising to secure the predecessors' performance under the leases. However, plaintiffs failed to do anything to perfect their lien on the personal property in question. Additionally, MPM terminated Bonthuis' employment soon after its purchase of the business.

In 1993, MPM failed to pay rent due under the leases. As a result, plaintiffs filed suit in the district court against MPM and Bonthuis, and they received a judgment of possession and a money judgment for $9,354.32 against MPM and Bonthuis. Subsequently, plaintiffs filed this case against MPM and Bonthuis for additional damages. However, MPM and Bonthuis filed bankruptcy petitions seeking protection from their creditors under Chapter 7 of the Bankruptcy Code. As a result, the trial court stayed this case pending the resolution of the bankruptcies.

The bankruptcy trustee sold MPM's personal property for $34,929.50. Plaintiffs filed a claim against the bankruptcy estate for $22,758.93, claiming secured status pursuant to the landlord's lien in the lease and the district court judgment. Notwithstanding this claim, the bankruptcy court subordinated plaintiffs' claim to the interest of MPM's bankruptcy trustee. Because of this subordination, plaintiffs received no proceeds from the sale of MPM's personal property by the bankruptcy trustee. After the rejection of plaintiffs' claim in the bankruptcy court, Bonthuis withdrew his bankruptcy petition, and the trial court lifted the stay that had suspended the proceedings in this case.

Subsequently, Bonthuis moved for summary disposition under MCR 2.116(C)(8) and (10), claiming that plaintiffs' failure to file a financing statement in accordance with Article 9 of the Uniform Commercial Code, which would have perfected their landlord's lien, impaired the collateral consisting of MPM's personal property, and freed Bonthuis from any obligation under his personal guaranties. Plaintiffs argued that their landlord's lien was exempted from the coverage of Article 9 by M.C.L. § 440.9104(b); M.S.A. § 19.9104(b), so Bonthuis was not protected under Article 9 from plaintiffs' claims. Alternatively, plaintiffs argued that even if their landlord's lien fell within the coverage of Article 9, M.C.L. § 440.9207; M.S.A. § 19.9207 did not free Bonthuis from his obligations under the guaranty agreements. The trial court rejected plaintiffs' arguments and granted summary disposition in Bonthuis' favor.

It is from the Court of Appeals affirmance of the trial court's grant of defendant's motion for summary disposition that the plaintiffs now appeal.

II

We address first plaintiffs' claim that the lien granted in the underlying lease agreement was a landlord's lien and thus not subject to the provisions of the UCC under M.C.L. § 440.9104(b); M.S.A. § 19.9104(b). A landlord's lien is the right of a landlord to levy upon the goods of a tenant in satisfaction of unpaid rents or property damage.^[2] Although landlords' liens may arise by statute, common law, or contract,^[3] commonly these liens take the form of statutory liens that give the lessor the status of a preferred creditor with regard to the lessee's property.^[4] It is without dispute that subsection 9104(b) excludes landlords' liens from article 9 coverage.^[5] What is at issue in this appeal is whether subsection 9104(b) contemplates consensual security interests embodied in a contract, or whether it excludes only those landlords' liens that arise by operation of law or by common law. Arguing that Michigan recognizes neither statutory nor common-law landlords' liens, plaintiffs claim that the clear intent of the Legislature was to apply the exclusion of subsection 9104(b) to contractual landlord's liens such as the one at issue.^[6] The standard of review is de novo with regard to questions of law. People v. Carpentier, 446 Mich. 19, 521 N.W.2d 195 (1994).

A

Article 9 of the UCC provides a comprehensive scheme by which security interests in personal property and fixtures are regulated. All transactions intended to create a security interest in personal property and fixtures are contemplated under this article.^[7] Generally, security interests that are not consensual but that arise by operation of law are excluded under this article.^[8] Substance predominates over form in determining article 9 applicability.^[9] Thus, the determinative factor is not the form of the transaction as much as it is the intent of the parties in entering into the transaction.^[10]

This article does not apply:

* * * * * *

(b) To a landlord's lien....

B

The scope of article 9 of the UCC as embodied in § 9102 provides in part:

(1) Except as otherwise provided in section 9104 on excluded transactions, this article applies;

(a) To any transaction (regardless of its form) which is intended to create a security interest in personal property or fixtures including goods, documents, instruments, general intangibles, chattel paper or accounts; and also

(b) To any sale of accounts or chattel paper.

(2) This article applies to security interests created by contract including pledge, assignment, chattel mortgage, chattel trust, trust deed, factor's lien, equipment trust, conditional sale, trust receipt, other lien or title retention contract, and lease or consignment intended as security. This article does not apply to statutory liens except as provided in section 9310.

Despite the broad scope of § 9102, plaintiffs argue that article 9 is inapplicable to the lien in question because of an express provision in subsection 9104(b) excluding landlord's liens from article 9 coverage.^[11]

While a literal reading of subsection 9104(b) supports plaintiffs' argument, we cannot ignore the clear intent of article 9, which is to bring all consensual transactions within the scope of UCC coverage. Paragraph 12 of the underlying lease agreement between plaintiffs and the lessee's provided:

Lessor's Lien. In the event Lessee shall fail to pay the rent provided for herein or other wise default in the performance of Lessee's obligations hereunder, Lessor shall have a lien on the property of Lessee located on the Premises to secure the payment or performance due Lessor.

The UCC "is to be liberally construed and applied to promote its underlying purposes and policies." M.C.L. § 440.1102; M.S.A. § 19.1102.^[12] In construing the act in accordance with its purposes, the text of each section should be read in the light of the purpose and policy of the rule or principle in question.^[13] There is no dispute that the lien in question was a consensual contractual lien. To effectuate the intent of § 9102 to bring all consensual security interests in personal property and fixtures under article 9 coverage, it follows that article 9 applies to the lien in question. Indeed, comment 1 to § 9102 provides further support for this position by stating: "Section 9-104 excludes certain transactions where the security interest ... arises under statute or common law by reason of status and not by consent of the parties."

Courts in other jurisdictions addressing this same question have reached similar results.^[14] See, e.g., In re King Furniture City, Inc., 240 F. Supp. 453 (E.D.Ark., 1965); In re Leckie Freeburn Coal Co., 405 F.2d 1043 (C.A.6, 1969); Dunham's Music House, Inc. v. Asheville Theatres, Inc., 10 N.C.App. 242, 245, 178 S.E.2d 124 (1970); United States v. Globe Corp., 113 Ariz. 44, 50, 546 P.2d 11 (1976); Todsen v. Runge, 211 Neb. 226, 232-233, 318 N.W.2d 88 (1982). Plaintiffs argue that most of, if not all, these cases are distinguishable insofar as they involve states that enacted statutory landlords' liens or recognize common-law landlords' liens. However, plaintiffs' argument does not alter our view that article 9 encompasses the lien in question, nor does it persuade us that the act should not be construed in accordance with its underlying purposes and policies.^[15] Accordingly, we hold that the UCC applies to the lien in question.^[16]

III

Having concluded that plaintiffs' consensual lien in personal property falls within the scope of article 9 of the UCC, it follows that plaintiffs held a security interest in the personal property of the lessees that they had not perfected.^[17] As guarantor of that secured interest, defendant contends that the plaintiffs' negligence in failing to perfect their secured interest released him from obligation under the guaranty agreements pursuant to § 9207. We disagree.

A

Defendant asserts that as a guarantor of the secured interest in the commercial lease agreement between plaintiffs and lessees, he is a "debtor" for purposes of § 9105.^[18] As such, defendant claims he is entitled to all the protections afforded a debtor under the UCC, including the duty of a creditor to protect and preserve the collateral securing the underlying debt. In effect, as guarantor, defendant contends that he steps into the debtor's shoes and gains the right to assert article 9 defenses. Defendant relies on § 9207 and on the Court of Appeals decision in Nat'l Bank of Detroit v. Alford, 65 Mich.App. 634, 237 N.W.2d 592 (1975), to support his position that his liability under the personal guaranty agreements was discharged as a result of plaintiffs' negligence in failing to perfect their secured interest.

B

The UCC recognizes a secured party's duty to preserve and protect collateral pursuant to § 9207. Section 9207 provides in part:

(1) A secured party must use reasonable care in the custody and preservation of collateral in his possession. In the case of an instrument or chattel paper reasonable care includes taking steps to preserve rights against prior parties unless otherwise agreed.

* * * * * *

(3) A secured party is liable for any loss caused by his failure to meet any obligation imposed by the preceding subsections but does not lose his security interest. [M.C.L. § 440.9207(1),(3); M.S.A. § 19.9207(1),(3).]

In Nat'l Bank of Detroit, supra, the defendant guarantors were relieved of any obligation under a guaranty agreement because of the plaintiff's failure to promptly record a chattel mortgage on an airplane. Rejecting plaintiff's claim under M.C.L. § 440.3606; M.S.A. § 19.3606, the Court concluded that § 9207 provided an additional, independent duty on the part of the creditor to promptly record the chattel mortgage. Failure on the part of the creditor to perfect its interest resulted in the unjustifiable impairment of the collateral on which the guarantors had a right to rely and spoiled the guarantors' right of subrogation. Accordingly, defendant guarantors were discharged from any liability under the guaranty agreement.^[19]

A determination whether § 9207 discharges defendant's guaranty here requires careful consideration of the scope and definitions of article 9. Subsection 9207(1) provides that when the collateral is an instrument or chattel paper, "reasonable care includes taking necessary steps to preserve rights against prior parties unless otherwise agreed." M.C.L. § 440.9207(1); M.S.A. § 19.9207(1). Reasonable care in this context might mean that the secured party in possession of instruments or chattel paper may be required to "file a financing statement, provide notice of default, and inform accommodation parties of a failure on the part of the maker of a note to make payment."^[20]

Chattel paper, as defined by subsection 9105(1)(b), is "a writing or writings which evidence both a monetary obligation and a security interest in or a lease of specific goods...." However, chattel paper as defined under subsection 9105(1)(b) must not be confused with chattel paper that is itself collateral.^[21] Collateral is "the property subject to a security interest, and includes ... chattel paper which [has] been sold." M.C.L. § 440.9105(1)(c); M.S.A. § 19.9105(1)(c). A security interest in chattel paper is an interest in the paper itself, not the goods represented by the paper.^[22]

The Court of Appeals erroneously assumed that any document that fits within the definition of "chattel paper" triggers article 9's provisions regarding chattel paper. However, article 9 by its terms applies only when documents that otherwise fall within the definition of chattel paper are used by the creditor as security for further financing or are otherwise sold or transferred. M.C.L. § 440.9102; M.S.A. § 19.9102.^[23] Here, no assertions were made that indicate that the lease and guaranty agreements were sold, pledged, or otherwise assigned as security in any transaction. Thus, while these documents may fit within § 9105's definition of "chattel paper," they are not subject to article 9's provisions regarding security interests in chattel paper until they are used by the creditor as collateral or are otherwise transferred. M.C.L. § 440.9102; M.S.A. § 19.9102. That is, it is a condition precedent for application of article 9 to chattel paper that the chattel paper be used as collateral or otherwise transferred. This condition precedent was not met here.

Contrary to the defendant's contention, the lease agreement, coupled with defendant's guaranties, did not constitute the collateral subject to a security interest. M.C.L. § 440.9105(c); M.S.A. § 19.9105(c). Rather, the collateral was at all times the personal property of the lessee, and there has been no assertion by the parties or evidence offered that warrants a conclusion that plaintiffs had possession of that property.^[24] The Court of Appeals erred in holding that § 9207 could be invoked here to provide a remedy for defendant. Accordingly, we do not believe that summary disposition was properly granted in favor of the defendant under § 9207 of the act.^[25]

IV

For the reasons stated, we hold that the lien granted in the underlying lease agreement falls within the coverage of article 9 of the UCC and that § 9207 does not discharge the defendant's obligation under the guaranty agreements. Accordingly, the decision of the Court of Appeals is affirmed in part and reversed in part, and the case is remanded for further proceedings.

MALLETT, C.J., and BRICKLEY, MICHAEL F. CAVANAGH, WEAVER, MARILYN J. KELLY, and TAYLOR, JJ., concur with BOYLE, J.

NOTES

[1] 218 Mich.App. 142, 553 N.W.2d 366 (1996).

[2] Barron's Law Dictionary (3d ed.), p. 278.

[3] 218 Mich.App 143, n. 1.

[4] Barron's, n. 2 supra.

[5] Subsection 9104(b) provides in part:

This article does not apply:

(b) To a landlord's lien....

[6] Defendant argues that Michigan has recognized a commonlaw landlord's lien in S.S. Kresge Co. v. Twelve Seventy-Five Woodward Ave. Corp., 270 Mich. 218, 221, 258 N.W. 252 (1935). While that case did recognize a form of such a lien, journeying back to Treackle v. Coke, 1 Vern. 165; 23 Eng. Rep. 389 (1683) to answer what was a new question in our state, our decision in this case does not require us to determine whether the antiquated remedy provided in Kresge remained viable before the Legislature's adoption of subsection 9104(b), or, for that matter, whether it remains viable today.

[7] Brown v. Yousif, 445 Mich. 222, 231, 517 N.W.2d 727 (1994) (the Legislature intended article 9 to be of general applicability, covering all forms of security interests in personal property, regardless of its form). See also M.C.L. § 440.9101; M.S.A. § 19.9101, comment; M.C.L. § 440.9102; M.S.A. § 19.9102, comment; White & Summers, Uniform Commercial Code (3d ed.), § 21-2, p. 926.

Although lacking the force of law, the official comments appended to each section of the UCC are useful aids to interpretation and construction. Szabo v. Vinton Motors, Inc., 630 F.2d 1, 4 (C.A.1, 1980); White & Summers, supra, § 4, p. 12.

[8] M.C.L. § 440.9104; M.S.A. § 19.9104. See also White & Summers, n. 7 supra, § 21-2, p. 926.

[9] M.C.L. § 440.9102; M.S.A. § 19.9102; M.C.L. § 440.9104; M.S.A. § 19.9104, comment. "If Article Nine otherwise applies, the parties cannot render it inapplicable merely by casting their arrangement in the language of some particular pre-Code security device (or in the language of some other type of transaction such as a lease)." White & Summers, n. 7 supra, § 21-1, pp. 925-926.

[10] "[T]he principal test whether a transaction comes under this Article is: is the transaction intended to have effect as security?" M.C.L. § 440.9102; M.S.A. § 19.9102, comment 1.

[11] See n. 5.

[12] Subsection 1102(2) provides that the underlying purposes of the act are:

(a) to simplify, clarify and modernize the law governing commercial transactions;

(b) to permit the continued expansion of commercial practices through custom, usage and agreement of the parties;

(c) to make uniform the law among the various jurisdictions.

The UCC should be construed narrowly or broadly, as the case may be, in conformity with the purposes and policies involved. M.C.L. § 440.1102; M.S.A. § 19.1102, comment 1.

[13] M.C.L. § 440.1102; M.S.A. § 19.1102, comment 1.

[14] See White & Summers, n. 7 supra, § 21-7, p. 951. "Article Nine does not apply to landlord's liens arising under the statute or case law. However, several cases have arisen in which the parties have, in effect, sought to create landlord liens by contract. Here, the courts hold that Article Nine applies, and properly so." Id.

[15] Moreover, plaintiffs have failed to cite, and we have not found, even one case that expressly or impliedly supports plaintiffs' interpretation of subsection 9104(b).

[16] We note that plaintiffs filed a proof of claim with the United States Bankruptcy Court, seeking secured status in the amount of $22,758.93 on the basis of their lien in the lease agreement and their district court judgment of possession and money judgment. Plaintiffs represented to the bankruptcy court that their interest was a secured interest in part because of the lien in the lease and, after receiving an unfavorable result in that court, took the position that the interest did not fall under the UCC.

[17] It is undisputed that plaintiffs did not perfect their security interest in the personal property in question.

[18] Defendant contends that the definition of debtor in M.C.L. § 440.9105(1)(d); M.S.A. § 19.9105(1)(d) encompasses guarantors for the reason that a guarantor owes payment on the debt. M.C.L. § 440.9105(1)(d); M.S.A. § 19.9105(1)(d) provides in part:

"Debtor" means the person who owes payment or other performance of the obligation secured, whether or not he or she owns or has rights in the collateral.... Where the debtor and the owner of the collateral are not the same person, the term "debtor" means the owner of the collateral in any provision of the article dealing with the collateral, the obligor in any provision dealing with the obligation, and may include both where the context so requires.

[19] There is ample support for the proposition that an unjustifiable impairment of collateral includes a failure to perfect a security interest if such failure results in the loss of a surety's or guarantor's right of subrogation. See First Bank & Trust Co. v. Post, 10 Ill.App.3d 127, 293 N.E.2d 907 (1973); Executive Bank of Fort Lauderdale v. Tighe, 66 A.D.2d 70, 411 N.Y.S.2d 939 (1978), modified on other grounds 54 N.Y.2d 330, 445 N.Y.S.2d 425, 429 N.E.2d 1054 (1981); Van Balen v. Peoples Bank & Trust, 3 Ark.App. 243, 626 S.W.2d 205 (1981); North Bank v. Circle Investment Co., 104 Ill.App.3d 363, 60 Ill. Dec. 105, 432 N.E.2d 1004 (1982); Rempa v. LaPorte Production Credit Ass'n, 444 N.E.2d 308 (Ind.App., 1983); Port Distributing Corp. v. Pflaumer, 880 F. Supp. 204 (S.D.N.Y., 1995), aff'd. 70 F.3d 8 (C.A.2, 1995). Each of these cases, however, relies not on § 9-207, but on § 3-606. Section 3-606 acts to discharge a surety when, without the creditor's consent, the creditor "unjustifiably impairs any collateral for the instrument...." In 1993, M.C.L. § 440.3606; M.S.A. § 19.3606 was repealed by the Legislature.

[20] Hawkland, Lord, & Lewis, Uniform Commercial Code, § 9-207:01, p. 1.

[21] See Reiley, Guidebook to Security Interests in Personal Property (2d ed.), § 2.05, p. 2-8(chattel paper in the abstract must not be confused with chattel paper that is itself the collateral).

[22] M.C.L. § 440.9105; M.S.A. § 19.9105, comment states:

To secure his own financing a secured party may wish to borrow against or sell the security agreement itself along with his interest in the collateral which he has received from his debtor. Since the refinancing of paper secured by specific goods presents some problems of its own, the term "chattel paper" is used to describe this kind of collateral.

A typical chattel paper transaction may be described as follows:

A dealer sells a tractor to a farmer on conditional sales contract. The conditional sales contract is a "security agreement," the farmer is the "debtor," the dealer is the "secured party" and the tractor is the type of "collateral" defined in Section 9-109 as "equipment." But now the dealer transfers the contract to his bank, either by outright sale or to secure a loan. Since the conditional sales contract is a security agreement relating to specific equipment, the conditional sales contract is now the type of collateral called "chattel paper." [M.C.L. § 440.9105; M.S.A. § 19.9105, comment].

[23] See also Jackson, Embodiment of rights in goods and the concept of chattel paper, 50 U. Chi. L.R. 1051, 1053 (1983) (chattel paper is not relevant for any article 9 purpose until it is used as collateral in a secured transaction).

[24] Had plaintiffs had possession of the personal property of the lessee they would have held a perfected security interest in the property, M.C.L. § 440.9302(1)(a); M.S.A. § 19.9302(1)(a); M.C.L.§ 440.9305; M.S.A. § 19.9305, and defendant's argument that his liability under the personal guaranty agreements was discharged as a result of plaintiffs' failure to perfect their secured interest would necessarily fail.

[25] We do not foreclose defendant's ability to claim on remand that, under the common law, impairment of collateral discharges a guaranty. Because this issue was not addressed by either the trial court or the Court of Appeals, we refrain from reaching this issue.