In re Camelot Associates Ltd. Partnership

• Decision Date: 27 March 1989
• Docket Number: Bankruptcy No. 3-87-2131 to 3-87-2133.
• Parties: In re CAMELOT ASSOCIATES LIMITED PARTNERSHIP, Floresta Associates Limited Partnership, Southbridge Associates Limited Partnership, Debtors.
• Court: United States Bankruptcy Courts. Eighth Circuit. U.S. Bankruptcy Court — District of Minnesota

102 B.R. 161 (1989)

In re CAMELOT ASSOCIATES LIMITED PARTNERSHIP, Floresta Associates Limited Partnership, Southbridge Associates Limited Partnership, Debtors.

Bankruptcy Nos. 3-87-2131 to 3-87-2133.

United States Bankruptcy Court, D. Minnesota, Third Division.

March 27, 1989.

Randall L. Seaver, Minneapolis, Minn., for debtors.

Raymond J. Ostler, Gomberg and Sharfman, Ltd., Chicago, Ill., Steven H. Berndt, Minneapolis, Minn., for Pathway Financial.

ORDER DENYING MOTIONS OF PATHWAY FINANCIAL FOR ADEQUATE PROTECTION

GREGORY F. KISHEL, Bankruptcy Judge.

These Chapter 11 cases come on before the Court in chambers upon the motions of Pathway Financial ("Pathway") for adequate protection. Pathway originally presented this motion in conjunction with its motion for relief from stay. In a February 24, 1988 order, this Court deferred ruling on Pathway's motions for relief from stay pending final adjudication of Pathway's secured status in related litigation involving Pathway, the debtors in these cases, and other parties, presently venued in the United States District Court for this District. The Court later ordered briefing on the adequate protection issues joined by Pathway's motions, and took them under advisement after the final brief was filed in May, 1988. Pathway appears by its attorneys, Raymond J. Ostler and Steven H. Berndt. Debtors (individually "Camelot," "Floresta," and "Southbridge"; collectively "Debtors") appear by Randall L. Seaver. MetroBank Minneapolis ("MetroBank"), a scheduled creditor of Southbridge, appears by its attorney, Rosanne H. Wirth. Upon the moving and responsive documents, briefs, and other relevant pleadings and proceedings in these three cases, the Court makes the following Findings of Fact, Conclusions of Law and Order.

FINDINGS OF FACT

Camelot, Floresta, and Southbridge are Minnesota limited partnerships which filed voluntary petitions for reorganization under Chapter 11 in this Court on July 16, 1987. Walter C. Kocemba and Steve R. Klaers are general partners in all of them. In 1983-84, Kocemba and Klaers formed the three debtors to acquire blocks of condominiums in three separate developments in Broward County, Florida. No debtor purchased all of the units in its respective development.

In connection with its purchase of each condominium unit,¹ each debtor executed a promissory note in favor of Capital Mortgage Financial Corporation ("Capital"), and granted Capital a mortgage against the unit to secure the debt evidenced by the note. Each debtor also executed an instrument titled "Collateral Assignment of Rental and Voting Rights" for each unit in favor of Capital. The parties to the Camelot transactions executed the notes, mortgages, and assignments of rents on January 1, 1984. The parties to the Floresta and Southbridge transactions executed them on April 1, 1984. In December 1984, Capital assigned its interests under the notes, mortgages, and assignments of rents to Pathway.

For each mortgage instrument, the parties used the Florida version of the "FNMA-FHLMC Uniform Instrument." For the Southbridge transactions, the parties used the "Single Family" version, which does not contain an assignment-of-rents clause. For the Camelot transactions, the parties used the "1 to 4 Family" version, which contains the following relevant language at paragraph 20:

20. Assignment of Rents: Appointment of Receiver. As additional security hereunder, Borrower hereby assigns to Lender the rents of the Property, provided that Borrower shall prior to acceleration upon any default by Borrower . . . or abandonment of the Property, have the right to collect and retain such rents as they become due and payable.

Under acceleration . . . or abandonment of the Property, Lender shall be entitled to have a receiver appointed by a court to enter upon, take possession of and manage the Property and to collect the rents of the Property, including those past due. All rents collected by the receiver shall be applied first to payment of the costs of management of the Property and collection of rents, including but not limited to receiver\'s fees, premiums on receiver\'s bonds and reasonable attorney\'s fees, and then to the sums secured by this Mortgage. The receiver shall be liable to account only for those rents actually received.

(The parties did not place specimen copies of the Floresta mortgages into the record, so it is unknown which version of the FNMA-FHLMC instrument they used in those transactions.)

The parties used an identical form for the "Collateral Assignment of Rentals and Voting Rights" executed in the transactions for all three debtors. That instrument provides, at p. 1:

. . . In order to further secure the payment of the indebtedness of the Assignor to the Assignee, . . . the Assignor does hereby sell, assign, transfer, and set over onto the Assignee all of the rents, issues, and profits of the aforesaid premises, this Assignment to become effective immediately but the Assignee hereby grants to the Assignor a license to collect said rents until a default shall occur under any of the terms and conditions of the aforesaid Note and Mortgage and upon the occurrance sic of any such default the license herein granted shall automatically terminate. . . .

. . . . .

1. The Assignor hereby authorizes the Assignee by its officers, employees, or agents, at its option, after the occurrance sic of a default . . ., to enter upon the premises and to collect, in the name of the Assignor or in its own name as Assignee, the rents accrued but unpaid and in arrears at the date of such default as well as the rents thereafter accruing and becoming payable during the period of the continuance of the default or any other default . . .

At some point after they purchased the units, Debtors hired Blue Harbor Realty, Inc. ("Blue Harbor") as agent to manage, maintain, and rent the units. Debtors all defaulted on their payment obligations to Pathway under the mortgage notes at some point in the spring of 1987. On or after May 26, 1987, Pathway served Blue Harbor a notice of that default, directing Blue Harbor to thenceforth remit all rental collections to Pathway pursuant to the terms of the assignments of rents. On or before July 10, 1988, Pathway served a notice on Blue Harbor, as Debtors' agent, demanding a cure of the mortgage defaults. Debtors failed to cure the defaults; Pathway then commenced actions in the Florida state courts for judicial foreclosure of the mortgages. Shortly after that, Debtors filed for relief under Chapter 11. Prior to Debtors' bankruptcy filings, Pathway neither sought nor obtained the judicial appointment of a receiver, whether in the mortgage foreclosure actions or otherwise. It had not taken possession of the units, constructively or otherwise, by judicial process or otherwise; nor had it taken any action to collect rents directly from tenants.

Since their bankruptcy filings, Debtors have remained in possession of the units. They have continued to collect rents from them, and to pay ordinary post-petition expenses of management as incurred.² They have retained all net rental collections above current expenses in their debtor-in-possession accounts, pending the outcome of the present motion. The total of funds now on deposit for all three cases exceeds $300,000.00.

CONCLUSIONS OF LAW

In these motions, Pathway asserts that it has an absolute and unconditional interest in the post-petition rents³ generated by Debtors from the condominium units subject to Pathway's mortgages.⁴ The following language of 11 U.S.C. § 552(b) preserves any perfected and enforceable prepetition security interest which Pathway held in ongoing income generated from the units under the assignments of rents, and makes that interest enforceable against rental income generated post-petition:

Except as provided in sections 363, 506(c), 522, 544, 545, 547, and 548 of this title, if the debtor and an entity entered into a security agreement before the commencement of the case and if the security interest created by such security agreement extends to property of the debtor acquired before the commencement of the case and to . . . rents . . . of such property, then such security interest extends to such . . . rents . . . acquired by the estate after the commencement of the case to the extent provided by such security agreement and by applicable nonbankruptcy law . . .

The assignments of rents executed by each debtor in favor of Capital and its assignees (and the underlying mortgage instruments, at least in the case of Camelot) purport to grant Capital and its assignees a security interest⁵ in the rents generated from the mortgaged condominium units.⁶ However, unperfected liens or security interests are subject to avoidance by a trustee or Chapter 11 debtor in possession under 11 U.S.C. § 544(a). Thus, the ultimate question is whether Pathway held a valid, perfected, and enforceable security interest in the rents as of the commencement of these cases. In re Metro Square, 93 B.R. 990, 995 (Bankr.D.Minn.1988). If it did, the post-petition rents are cash collateral, 11 U.S.C. § 363(a), and Debtors may not use them absent Pathway's consent, 11 U.S.C. § 363(c)(2)(A), or absent a court order granting adequate protection to Pathway, 11 U.S.C. §§ 363(b)(2)(B) and 363(e). Id. The validity and perfection of Pathway's security interest in rents is governed by state law. Butner v. United States, 440 U.S. 48, 57, 99 S.Ct. 914, 919, 59 L.Ed.2d 136 (1979); Saline State Bank v. Mahloch, 834 F.2d 690, 692 (8th Cir.1987); In re Metro Square, 93 B.R. at 995. In this case, Florida state law provides the rule of decision.

Historically, under Florida law, a mortgagee holding an assignment of rents from its mortgagor

becomes entitled to receive rents . . . from the time he takes possession of the property either by consent of the owner or through the appointment of a Receiver in foreclosure proceedings . . . Only through a Receiver

...