Federal Home Loan Mortg. Corp. v. Nazar

• Court: U.S. District Court — District of Kansas
• Writing for the Court: CROW
• Citation: Federal Home Loan Mortg. Corp. v. Nazar, 100 B.R. 555 (D. Kan. 1989)
• Decision Date: 17 July 1989
• Docket Number: No. 89-1189-C.,89-1189-C.
• Parties: FEDERAL HOME LOAN MORTGAGE CORPORATION, Plaintiff, v. Edward J. NAZAR, Trustee in Bankruptcy, et al., Defendants.

100 B.R. 555 (1989)

FEDERAL HOME LOAN MORTGAGE CORPORATION, Plaintiff, v. Edward J. NAZAR, Trustee in Bankruptcy, et al., Defendants.

No. 89-1189-C.

United States District Court, D. Kansas.

May 30, 1989.

Order on Motion to Alter or Amend July 17, 1989.

Robert E. Nugent, Morris, Lain, Evans, Brock & Kennedy, Wichita, Kan., for plaintiff.

W. Thomas Gilman, Redmond, Redmond, O'Brien & Nazar, Wichita, Kan., for defendants.

MEMORANDUM AND ORDER

CROW, District Judge.

The case comes before the court on the motion of plaintiff, Federal Home Loan Mortgage Corporation (Freddie Mac), to appoint a receiver to assume custody and control of and to collect rents from the Heather Ridge Apartments in Salina, Kansas. Plaintiff holds a mortgage note and mortgage in the amount of $900,000 on the apartments. The note requires the debtors, Wallace G. McKinney and Joan S. McKinney, to pay monthly installments of $8,912.62 and to make escrow payments for insurance and taxes.

On June 6, 1988, the McKinneys filed a voluntary petition for relief under Chapter 7 of the United States Bankruptcy Code in the United States Bankruptcy Court for the District of Kansas. Edward J. Nazar was appointed trustee in the bankruptcy case. Before the debtors' filing of the bankruptcy petition, Freddie Mac apparently took no steps to have a receiver appointed or to obtain possession of the rents pursuant to the assignment of rents provision within the mortgage. The McKinneys have been discharged in bankruptcy and have disclaimed any interest in the Heather Ridge Apartments. The trustee maintains possession of the Apartments and collects the rent.

On January 25, 1989, Freddie Mac filed a motion in bankruptcy court for relief from the automatic stay. In its motion, Freddie Mac expressly requested relief from the stay "to enforce its rights under the mortgage and rent assignment." Over the trustee's objection, the bankruptcy court entered an order on March 24, 1989, allowing the trustee thirty days to indicate its interest in having the Apartments sold through the bankruptcy estate and if none was made, Freddie Mac was relieved "from stay to initiate a foreclosure proceeding."

The mortgage note is presently in default as the trustee has not made monthly installment payments and has not made payments into the tax escrow. Plaintiff represents the escrow account to be depleted and taxes in the approximate amount of $13,000 to be due on June 20, 1989. The amount owing on the mortgage note is $969,917.01 with interest at the annual rate of 11.5% from June 17, 1988. In its original memorandum plaintiff estimates the value of the Apartments at $940,000 with an estimated annual gross income of $216,000. In its reply brief, plaintiff submits an appraisal that the value of the Apartments was $980,000 as of January 6, 1989. The trustee has submitted an appraisal that the value of the Apartments was $1,014,000 as of December 31, 1988.

Plaintiff asserts several grounds for its motion to appoint a receiver. First, plaintiff relies on the terms of the mortgage, in particular, paragraph 26 which provides in relevant part:

As part of the consideration for the indebtedness evidenced by the Note, Borrower hereby absolutely and unconditionally assigns and transfers to Lender all the rents and revenues of the Property, including those now due, past due, or to become due by virtue of any lease or other agreement for the occupancy or use of all or any part of the Property, regardless of to whom the rents and revenues of the Property are payable. Borrower hereby authorizes Lender or Lender\'s agents to collect the aforesaid rents and revenues and hereby directs each tenant of the Property to pay such rents to Lender or Lender\'s agents; provided, however, that prior to written notice given by Lender to Borrower of the breach by Borrower of any covenant or agreement of Borrower in this instrument, Borrower shall collect and receive all rents and revenues of the Property as trustee for the benefit of Lender and Borrower, to apply the rents and revenues so collected to the sums secured by this instrument in the order provided in paragraph 3 hereof with the balance, so long as no such breach has occurred, to the account of Borrower, it being intended by Borrower and lender that this assignment of rents constitutes an absolute assignment and not an assignment for additional security only. Upon delivery of written notice by Lender to Borrower of the breach by Borrower of any covenant or agreement of Borrower in this instrument, and without the necessity of Lender entering upon and taking and maintaining full control of the Property in person by agent or by a court-appointed receiver, Lender shall immediately be entitled to possession of all rents and revenues of the Property as specified in this paragraph 26 as the same become due and payable, including but not limited to rents then due and unpaid, and all such rents shall immediately upon delivers of such notice be held by Borrower as trustee for the benefit of Lender only; provided, however, that the written notice by Lender or Borrower of the breach by Borrower shall contain a statement that Lender exercises its rights to such rents.

....

Upon Borrower\'s breach of any covenant or agreement of Borrower in this instrument, Lender may in person, by agent or by a court-appointed receiver, regardless of the adequacy of Lender\'s security, enter upon and take and maintain full control of the Property in order to perform all acts necessary and appropriate for the operation and maintenance thereof including, but not limited to, the execution, cancellation or modification of leases, the collection of all rents and revenues of the Property, the making of repairs to the Property and the execution or termination of contracts providing for the management or maintenance of the Property, all on such terms as are deemed best to protect the security of this instrument. In the event Lender elects to seek the appointment of a receiver for the Property upon Borrower\'s breach of any covenant or agreement of Borrower in this Instrument. Borrower hereby expressly consents to the appointment of such receiver. Lender or the receiver shall be entitled to receive a reasonable fee for so managing the Property.

Second, plaintiff asserts the trustee has failed to make payments on the note and to pay the real estate taxes. Lastly, plaintiff contends that property needs to be preserved pending final judgment and that plaintiff needs to be protected from loss of rental income and continued accrual of real estate taxes, penalties and interest. The trustee opposes the appointment of a receiver as being contrary to state law, the bankruptcy court's order, the Bankruptcy Code and the United States Constitution.

Federal Law

In their initial briefs, the parties agreed Kansas law would govern the determination of a mortgagee's security interest in rents and property deriving from mortgaged property. See Butner v. United States, 440 U.S. 48, 54, 99 S.Ct. 914, 917, 59 L.Ed.2d 136 (1979) "Property interests are created and defined by state law. Unless some federal interest requires a different result, there is no reason why such interests should be analyzed differently simply because an interested party is involved in a bankruptcy proceeding." Id. at 55, 99 S.Ct. at 918. In its reply brief, Freddie Mac raises for the first time that it is entitled to have federal law govern its rights because it is a federal instrumentality disbursing federal funds. See United States v. Kimbell Foods, Inc., 440 U.S. 715, 726-27, 99 S.Ct. 1448, 1457-58, 59 L.Ed.2d 711 (1979). While a reply brief is not the appropriate pleading to be raising substantive arguments in the first instance, the court will consider the issue since the Trustee has had an opportunity to respond.

When federal agencies lend funds pursuant to authority conferred by federal statute, the agencies' rights also derive from and are protected by federal law. Kimbell Foods, 440 U.S. at 726-727, 99 S.Ct. at 1457-58; United States v. Landmark Park & Associates, 795 F.2d 683, 685 (8th Cir.1986). The courts have consistently looked to federal law to govern the rights and remedies available to federal lenders such as the Department of Housing and Urban Development, (HUD), the Farmers Home Administration, the Federal Housing Administration, and the Small Business Administration. Landmark Park, 795 F.2d at 686 (and cases cited therein); In re Vincent Gaines Implement Co., Inc., 71 B.R. 14 (Bankr.E.D.Ark.1986). The trustee does not dispute that Freddie Mac, like HUD and the others, is a nationwide federal mortgage lender. Accordingly, there exists a federal interest in uniform laws to be applied to Freddie Mac's mortgage rights and remedies.

The Eighth Circuit has considered whether the federal rule of decision as to the perfection of a mortgagee's interest in rents should be governed by state law or some applicable federal law. Landmark Park, 795 F.2d at 686. This court agrees with the Eighth Circuit's observation that there exists a variance in state laws and a heterogeneous body of case law on the issues of when and how an interest in rents may be perfected. Concluding a uniform federal rule on a federal lender's right to enforce an assignment of rents was justified, Eighth Circuit looked to two federal district court decisions which had held that the assignment provisions entitled the mortgagee to the rents and that this right was activated and perfected upon the debtor's default. Id. at 687 (citing United States v. Floral Park Development Co., 619 F.Supp. 144 (S.D.Ohio 1985); United States v. American Nat. Bank & Trust Co., 573 F.Supp. 1319 (N.D.Ill.1983)). Enforcing the assignment of rents clause as written, the circuit court found that the mortgagor's right to rents terminated upon default and that the mortgagee's right to rights was not conditioned upon appointment of a receiver even though the deed of...