In re 1301 Connecticut Ave. Associates, Bankruptcy No. 88-00446.

• Decision Date: 10 September 1990
• Docket Number: Bankruptcy No. 88-00446.
• Citation: 117 BR 2
• Parties: In re 1301 CONNECTICUT AVENUE ASSOCIATES, Debtor.
• Court: United States Bankruptcy Courts – District of Columbia Circuit

117 B.R. 2 (1990)

In re 1301 CONNECTICUT AVENUE ASSOCIATES, Debtor.

Bankruptcy No. 88-00446.

United States Bankruptcy Court, District of Columbia.

August 10, 1990.

As Amended September 10, 1990.

David R. Kuney, Washington, D.C., for debtor.

AMENDED DECISION DENYING MOTIONS FOR RELIEF FROM THE AUTOMATIC STAY

S. MARTIN TEEL, Jr., Bankruptcy Judge.

The debtor in this Chapter 11 case, 1301 Connecticut Avenue Associates, operates office building property at 1301-1317 Connecticut Avenue, N.W., in this district. Baltimore Federal Financial, F.S.A. ("BFF"), the debtor's secured lender, has filed two motions.¹ By the first motion (Docket Entry ("DE") 326) ("the rent motion") BFF seeks relief from the stay to allow it to collect rents from the debtor's tenants or, in the alternative, BFF seeks an order prohibiting the debtor from using the rents as alleged cash collateral and requiring the debtor to replenish rents allegedly wrongly used. By the second motion ("the ground lease motion") BFF seeks relief from the automatic stay to recover the rent payable by the debtor under a ground lease between the debtor, as lessee, and Washington Properties Limited Partnership ("Washington Properties" or "the lessor"), the ground lessor, and seeks an order either directing the debtor to pay the rent due under the ground lease to BFF or, at a minimum, restraining the debtor from paying the rent to the lessor. In the alternative, BFF requests an order authorizing it to recover the ground rent directly from Washington Properties.

The Court, having considered the pleadings and the evidence and arguments of counsel presented at hearings on April 11, 1990, and May 11, 1990, concludes that both motions should be denied, based upon the following findings of fact and conclusions of law.

FINDINGS OF FACT

The debtor was formed for the purpose of acquiring, rehabilitating and operating 1301-1317 Connecticut Avenue, N.W., Washington, D.C. ("the Property"). The debtor's interest in the Property is held pursuant to an Amended and Restated Indenture of Lease, dated May 2, 1985, as amended, ("the Ground Lease"), under which it leases the Property from Washington Properties.

About eight months after entering into the Ground Lease, the debtor entered into a construction loan agreement with BFF in order to finance renovation work at the Property. Under that construction loan agreement, BFF agreed to lend up to $12.5 million to the debtor ("the construction loan"), as evidenced by the Deed of Trust Note ("the Note") in that amount executed by the debtor in favor of BFF on December 24, 1985.

The day before the Note was executed, as security for the loan, the debtor and Washington Properties executed a Deed of Trust in favor of BFF. The Deed of Trust, recorded in the land records of the District of Columbia on December 24, 1985, grants to the trustees thereunder all of the fee simple interest of the debtor and Washington Properties in and to the Property. Deed of Trust, p. 2, paras. A, B, and C. In addition, in regard to rents and profits, the Deed of Trust provides:

To secure the prompt payment of the indebtedness under the Note . . . Grantor debtor and Landlord Washington Properties . . . do hereby grant and convey in fee simple unto the Trustees all of their right, title, and interest in and to the following property:

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D. All leases, rents, issues, and profits of the Property, it being agreed that, so long as no default shall exist hereunder, Grantor or Landlord, as the case may be, shall have the right to collect and retain said rents, issues and profits. Upon request of Holder BFF, Grantor and Landlord will execute and record, at Grantor\'s expense, such further assignments of rents, issues and profits and of Grantor\'s and Landlord\'s rights with respect to any leases or tenancies of the Land and Improvements, or any part thereof, as Holder may require. Holder shall have the right to notify any tenant or occupant of the Land or Improvements as to its rights hereunder and/or under such assignment. Neither Trustee nor Holder shall be obligated to perform any of Grantor\'s and/or Landlord\'s obligations in connection with any tenancy of the Land or Improvements.

Deed of Trust, pp. 2 and 3. In other words, under the Deed of Trust, Washington Properties and the Debtor retained the right to collect the profits of the Property ("the Rent") as long as no default occurred under the Deed of Trust. Article IV of the instrument sets BFF's remedies upon default, including a provision that —

the Holder BFF, . . . without notice, may enter upon and take possession of the Property or any part thereof, and perform any acts, including the right to rent any part or all of the Property, which Holder deems necessary or proper to conserve the Property, and may collect and receive all rents, issues and profits thereof, including those past due, as well as those accruing thereafter. The Holder shall be entitled to also have a receiver appointed to enter and take possession of the Property, collect the rents and profits therefrom, and apply the same as the court may direct. * * * The right to enter and take possession of the Property, to manage and operate the same, to collect the rents, issues and profits thereof, whether by a receiver or otherwise, shall be in addition to . . . any other right to remedy hereunder. . . .

Deed of Trust, p. 18, para. 4.1C. Stated differently, under the Deed of Trust, BFF was granted the right to enter and take possession of the Property or to have a receiver appointed to do so, if BFF wanted to be able (or wanted a receiver to be able) to collect the Rents. BFF had not taken either step prior to the debtor's filing its bankruptcy petition.

Also as security for the construction loan and to secure the repayment of the Note, the debtor executed an Assignment of Leases ("the Assignment") on December 11, 1985, which, like the Deed of Trust, granted BFF an interest in the debtor's leases and rent. Assignment, p. 1, paras. A and B. The Assignment further states:

This Assignment is an absolute present transfer and assignment to BFF of the Collateral i.e., all rights and interest in the lease and/or subleases, agreements, licenses or other agreements for occupancy and all Rents.

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5. The intention of the parties is that this Assignment of Leases, Rents and Profits shall be a present assignment. Provided: (a) no default shall exist on the part of the Assignor under the Note or under any of the other Loan Documents, (b) Assignor has not breached any warranty, representation or agreement contained herein or therein, and (c) there exists no material misrepresentation by Assignor in the Note or any of the other Loan Documents, then Assignor shall be entitled to collect all rents, rentals, fees, profits, payments, and other sums of money that become due and payable under the Leases. . . . In the event of any such default, breach or misrepresentation by Assignor and the expiration of the applicable grace period, if any, Assignee BFF shall have the right, power and privilege (but shall be under no duty) to take possession of the premises described in the Leases, or any part thereof, including any documents, books, records, plans and specifications and accounts of Assignor related thereto, and to have, hold, manage, lease, insure, and operate (including the making of repairs, alterations, additions and betterments) the same on such terms and for such period of time as Assignee may deem proper, and either with or without taking possession of said premises, Assignee shall have the right, power and privilege (but shall be under no duty), and is hereby appointed by Assignor to act as its true and lawful attorney-in-fact, with power of substitution, immediately to collect and sue for, in its own name, or in the name of Assignor, such rents, rentals, fees, payments and/or other sums of money as they become due. A written demand by Assignee to any lessee for the payment of rent, rentals, fees, profits, payments and other sums of money that become due under the Leases, after the occurrence of any such default, breach or misrepresentation by Assignor claimed by Assignee, shall be sufficient to require such lessee to make all future payments of such rents, rentals, fees, payments and other sums of money directly to Assignee without the necessity for further notice to such lessee or consent by Assignor.

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Assignment of Leases, pp. 2 and 5. The language of the Deeds of Trust and of the Assignment, the circumstances surrounding those documents and the testimony of the one witness who testified concerning the negotiations leading to the documents persuade the Court that both the Deed of Trust and the Assignment were intended only to pledge rents as a security interest protecting against default and were not intended as absolute assignments.

Renovation of the Property began in March of 1986, and the Property entered its lease-up phase in 1987. At the time the debtor executed the Deed of Trust and the Assignment, the Property had no tenants and the debtor had executed no leases.

By letter dated April 21, 1987, BFF, by its attorney, notified the debtor that it was in default under the Note and Deed of Trust, giving the debtor, in accordance with the parties' agreement, 40 days to cure the purported defaults as listed in the letter. The letter also stated:

In addition, this letter shall constitute written notice that Lender BFF has determined that the Loan proceeds remaining to be disbursed are not sufficient to pay the cost of completing the renovation of the improvements, interest on the loan and operating expenses, and that Lender is requiring Borrower debtor to furnish additional funds in the amount of $610,000.00 to cover the resulting deficit before advancing any additional Loan proceeds.

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The Lender hereby reserves all of its rights and remedies with respect to the foregoing defaults and the request for

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