In re American Continental Corp.

• Court: U.S. Bankruptcy Court — District of Arizona
• Writing for the Court: SARAH SHARER CURLEY
• Citation: In re American Continental Corp., 105 B.R. 564 (Bankr. Ariz. 1989)
• Decision Date: 14 August 1989
• Docket Number: Bankruptcy No. B-89-3117-PHX-SSC.
• Parties: In re AMERICAN CONTINENTAL CORPORATION, an Ohio corporation, Debtor. FEDERAL HOME LIFE INSURANCE COMPANY, an Indiana insurance corporation, Movant, v. AMERICAN CONTINENTAL CORPORATION, an Ohio corporation, Debtor/Respondent.

105 B.R. 564 (1989)

In re AMERICAN CONTINENTAL CORPORATION, an Ohio corporation, Debtor FEDERAL HOME LIFE INSURANCE COMPANY, an Indiana insurance corporation, Movant, v. AMERICAN CONTINENTAL CORPORATION, an Ohio corporation, Debtor/Respondent.

Bankruptcy No. B-89-3117-PHX-SSC.

United States Bankruptcy Court, D. Arizona.

August 14, 1989.

Charles Sterbach, Gallagher & Kennedy, Local Counsel, Phoenix, Ariz., James Feder, Wyman, Bautzer, Kuchel & Silbert, Los Angeles, Cal., for debtor.

Jim Grogan, American Continental Corp., Local Counsel, Phoenix, Ariz., for American Continental Corp.

Tamalyn Lewis-Edwards, Ridenour, Swenson, Cleere, & Evans, Phoenix, Ariz., for Federal Home Life Ins. Co.

S. Cary Forrester, Kalish, Forrester & Torres, P.C., Phoenix, Ariz., for FDIC.

Jared G. Parker, Winston & Strawn, Phoenix, Ariz., for American Continental Corporation's Subsidiaries.

MEMORANDUM DECISION AND ORDER CONCERNING CASH COLLATERAL

SARAH SHARER CURLEY, Bankruptcy Judge.

PRELIMINARY STATEMENT

Federal Home Life Insurance Company ("FHLIC") filed a Motion to Vacate the Stay against American Continental Corporation ("ACC"), the Debtor herein.

On May 25, 1989, this Court entered specific findings of fact and conclusions of law concerning the interest of FHLIC in and to the rents generated from the McClintock Fountains Shopping Center, then owned by ACC. This Court has subsequently entered an Order authorizing the sale of the Shopping Center. The sale has not yet closed, although that is anticipated shortly. The parties sought a determination as to the interest of FHLIC in and to the rental payments, inasmuch as it was anticipated that the Debtor would continue to receive the rents generated from the Shopping Center up to the point of closing.

Although this Court rendered its decision on the record on May 25, 1989, it specifically reserved jurisdiction to reduce its findings of fact and conclusions of law to a written decision and order.

This Court has jurisdiction over this matter, and this is a "core" proceeding pursuant to 28 U.S.C. §§ 1334 and 157. This decision and order shall constitute the formalized and final findings of fact and conclusions of law of this Court pursuant to Bankruptcy Rule 7052.

On April 13, 1989, ACC filed its petition under Chapter 11 of the Bankruptcy Code, and continued with its operations in the ordinary course of its business pursuant to 11 U.S.C. § 1107.

On April 17, 1989, FHLIC filed its Motion to Modify the Automatic Stay, so that it could perfect its interest in the rental payments received from the McClintock Fountains Shopping Center, which was owned by ACC. This Motion was filed, according to FHLIC, out of an overabundance of caution, because of the divergent authority amongst the Bankruptcy Judges in the District of Arizona as to how a secured creditor should perfect an interest in rents generated by Arizona real property and whether rents generated by Arizona real property could ever constitute "cash collateral" within the parameters of 11 U.S.C. § 363(a).

On April 17, 1989, FHLIC also filed a Notice of Perfection in the Shopping Center rental payments.

On May 2, 1989, FHLIC filed a Motion to Prohibit the Use of Cash Collateral generated by ACC from its leasing of space to tenants at the McClintock Fountains Shopping Center, and requested that any sale proceeds received from the sale of the Shopping Center also be sequestered.

On May 16, 1989, ACC filed an Objection to FHLIC's Notice of Perfection.

The parties filed a Statement of Stipulated Facts on May 12, 1989, so that this Court might resolve the legal issues presented to it. The facts to which the parties were able to stipulate are set forth below.

FACTUAL BACKGROUND

On October 27, 1988, FHLIC, as lender, and ACC and Amcor Investments Corporation ("Amcor"), a California corporation and a subsidiary of Lincoln Savings and Loan Association, entered into a Loan Agreement, wherein FHLIC agreed to loan ACC and Amcor the aggregate sum of $25,000,000.00. Eight individual promissory notes (the "Notes") were executed in connection with the Loan Agreement. The Notes are secured by eight individual deeds of trust ("Deeds of Trust") recorded against certain real properties, seven of which are owned by ACC.

FHLIC is the owner and holder of the Notes,¹ which are secured by the Deeds of Trust and the Assignments of Rents.²

There is no dispute as to validity of the liens against the aforesaid real property.

Paragraph 11 of the McClintock Fountains Deed of Trust provides for an assignment of the rents, issues and profits generated by McClintock Fountains Shopping Center as further security for the payment of the indebtedness due and owing by ACC to FHLIC.³

This was consistent with the recital or preamble paragraphs to the McClintock Fountains Deed of Trust, which also provided that all "rents, issues, profits" were given as further security for the payment of the indebtedness due and owing by ACC to FHLIC.⁴

Therefore, there was no absolute assignment of the rents. For instance, if the indebtedness were repaid by ACC, the assignment of rents would be abrogated.⁵ Moreover, ACC was able to use the rents until an event of default had occurred pursuant to the terms and conditions of the Deed of Trust.⁶

Pursuant to the terms of the Notes, on May 1, 1989, quarterly interest installments aggregating $750,000.00 were due and owing by ACC to FHLIC. This due date was subsequent to the filing of ACC's Chapter 11 petition. The aggregate sum of $750,000.00 was due, and not paid by ACC on May 1, 1989, as follows:

ORIGINAL PRINCIPAL                   MAY 1, 1989
                      SUM:                           INSTALLMENT
                  (A) $4,170,000.00                  $125,100.00
                  (B) $3,750,000.00                  $112,500.00
                  (C) $9,564,000.00                  $286,920.00
                  (McClintock Fountains Note)
                  (D) $2,700,000.00                  $ 81,000.00
                  (E) $1,905,872.00                  $ 57,176.16
                  (F) $1,537,222.00                  $ 46,116.66
                  (G) $  622,906.00                  $ 18,687.18
                  (H) $  750,000.00                  $ 22,500.00
                

Paragraph 6 of the McClintock Fountains Note provides:

6. DEFAULT

If Maker fails to pay any Quarterly Installment on its due date or fails to pay any other amount due under any Loan Document on its due date, or if (subject to the restrictions in Section 8.3 of the Loan Agreement)⁷ any other Event of Default occurs under any of the Loan Documents which is not cured within the time required, or if Maker gives to the Holder notice of pre-payment as hereinafter set forth and fails to make the pre-payment in the manner and on the date specified, then and in any of such events, the full unpaid principal balance of this Note, in the Holder\'s sole discretion, shall at once become due and payable and the unpaid principal balance, together with all accrued and unpaid interest and any other amounts payable hereunder and under the Loan Documents, shall thereupon bear interest at the Default Interest Rate and the Holder may immediately pursue all remedies available at law or in equity under this Note and the Loan Documents. All amounts not paid when due, whether or not as a result of acceleration of the unpaid principal balance and whether or not the Holder has notified Maker of the occurrence of an Event of Default, shall bear interest at the Default Interest Rate and at such time as judgment is obtained for any amounts owing under this Note or under any of the Loan Documents, interest shall continue to accrue on the amount of the judgment, until it is paid, at the Default Interest Rate.

Paragraph 42 of the Deed of Trust provided that a default under one Deed of Trust or Loan Document (such as a Note) was a default under the other Notes and Deeds of Trust.⁸

Since no default had occurred prepetition, FHLIC took no action pursuant to enforcement of the default provisions of the Notes or Deeds of Trust, including the assignment of rents provision, until after the filing of ACC's bankruptcy petition.

Because of the postpetition defaults in interest payments by ACC as of May 1, 1989 under all of the Notes, FHLIC now wants all of the net sales proceeds to be received by ACC, as well as the rents, to be applied to the outstanding amounts under the Notes.

LEGAL ISSUES

I. WHETHER THE ASSIGNMENT OF RENTS CLAUSE IN THE DEED OF TRUST WAS ABSOLUTE OR GRANTED AS A SECURITY DEVICE.

II. WHETHER THE ATTACHMENT AND PERFECTION OF A SECURITY INTEREST IN RENTS GENERATED BY REAL PROPERTY IS GOVERNED BY THE UNIFORM COMMERCIAL CODE OR REAL PROPERTY LAW.

III. WHETHER THE LIEN CREATED IN RENTS AS A RESULT OF THE RECORDATION OF A DEED OF TRUST WITH AN ASSIGNMENT OF RENTS CLAUSE IS INCHOATE.

IV. WHETHER THE LIEN CREATED UNDER ARIZONA LAW IS WITHIN THE SCOPE OF SECTION 546(b) OF THE BANKRUPTCY CODE.

V. WHAT ACTION IS APPROPRIATE AFTER THE FILING OF THE BANKRUPTCY PETITION TO PERFECT A LIEN IN RENTAL PROCEEDS.

DISCUSSION

I

In determining the nature and extent of the Assignment of Rents Clause, this Court should note that generally when determining the rights of various parties in a debtor's assets, State law is applicable. Butner v. U.S., 440 U.S. 48, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979).

The particular Clause at issue is Paragraph 11 of the Deed of Trust. (See Footnote 3, supra, for the complete text of Paragraph 11).

Although an assignment of rents clause under State law may be absolute,⁹ the Clause in this matter is not. First, the Deed of Trust states that the rents are given as security for the repayment of the indebtedness. Second, the assignment only remains in effect until the indebtedness is paid in full. Third, an event of default must occur to trigger the right of FHLIC to collect rent or take other action.¹⁰

Therefore, this Court concludes that the Assignment of Rents Clause was not absolute. The rents were given as further security. As such, an event of default must have necessarily occurred before FHLIC could proceed with...