In re Constable Plaza Associates, LP

• Court: U.S. Bankruptcy Court — Southern District of New York
• Writing for the Court: HOWARD SCHWARTZBERG
• Citation: In re Constable Plaza Associates, LP, 125 BR 98 (Bankr. S.D.N.Y. 1991)
• Decision Date: 14 March 1991
• Docket Number: Bankruptcy No. 91 B 20249.
• Parties: In re CONSTABLE PLAZA ASSOCIATES, L.P., Debtor.

125 B.R. 98 (1991)

In re CONSTABLE PLAZA ASSOCIATES, L.P., Debtor.

Bankruptcy No. 91 B 20249.

United States Bankruptcy Court, S.D. New York.

March 14, 1991.

COPYRIGHT MATERIAL OMITTED

Angel & Frankel, P.C., New York City, for debtor; John H. Drucker, of counsel.

McNamee, Lochner, Titus & Williams, P.C., Albany, N.Y., for Connecticut Mut. Life Ins. Co.; Peter A. Pastore, of counsel.

Ralph Nobile, Receiver, Bronxville, N.Y.

Wilkie Farr & Gallagher, Blueberry Harbor Corp., New York City, Donna H. Lieberman, of counsel.

DECISION ON MOTION FOR AN ORDER AUTHORIZING DEBTOR'S USE OF ASSETS IN WHICH CONNECTICUT MUTUAL LIFE INSURANCE COMPANY MAY ASSERT AN INTEREST

HOWARD SCHWARTZBERG, Bankruptcy Judge.

Connecticut Mutual Life Insurance Company ("Mutual") has moved for an order directing the Chapter 11 debtor, Constable Plaza Associates, L.P., to turnover all rents from the debtor's office building in New Rochelle, New York received after the appointment of a state court receiver. Alternatively, Mutual seeks to continue the receiver in possession as custodian of the rents pursuant to 11 U.S.C. § 543(d)(1). The debtor, in turn, has moved for an order under 11 U.S.C. § 363(c)(2)(B), authorizing its use of the rents as cash collateral solely for the maintenance, management, repairs and charges incurred with respect to the office building which generates the rents in question. The hearing was held on March 12, 1991.

BACKGROUND FACTS

On February 20, 1991, the debtor filed with this court its voluntary petition for reorganizational relief under Chapter 11 of the Bankruptcy Code and continued in possession and management of its property as a debtor in possession in accordance with 11 U.S.C. §§ 1107 and 1108.

The debtor is a limited partnership formed for the purpose of purchasing and operating an office building in New Rochelle, New York and a parcel of undeveloped land across the street from the office building. The debtor purchased its interest in the real property in question in December of 1988 from Blueberry Harbor Corporation ("Blueberry"), subject to a preexisting mortgage held by Mutual in the face amount of $3,500,000.00. Additionally, a purchase money mortgage in the face amount of $700,000.00 was given by the debtor to Blueberry. The debtor also gave Blueberry a $100,000.00 mortgage on the vacant parcel of real estate across the street from the office building against which Mutual holds a first mortgage.

The Mutual first mortgage provides for a balloon payment of $3,500,000.00 principal on December 22, 1991. Interest is to be paid in monthly installments at the rate of 10 percent, amounting to approximately $29,166.00 per month. The first mortgage also contains a provision in Section 13.07 that in the event of a mortgage default, the mortgagor assigns to the mortgagee "as additional security for the indebtedness . . . the rents, issues and profits, and any and all deposits held as security under said leases."

The debtor defaulted under the mortgage note and mortgage. On January 7, 1991, Mutual commenced a mortgage foreclosure action against the debtor in the New York Supreme Court, Westchester County. By order dated January 25, 1991, the state court judge appointed a receiver in the mortgage foreclosure action. Thereafter, the tenants at the office building were notified to pay rent to the receiver.

On February 25, 1991, the parties appeared in this court in connection with the debtor's motion for contempt against Mutual for wilfully violating the automatic stay by urging the state court receiver to collect rents from the office building tenants. The debtor also sought a preliminary injunction. The motions were resolved by the parties whereby the debtor would collect rents and place them in a segregated account pending a determination of the motions made by the debtor and Mutual which were returnable thereafter and which are now the subject of the instant proceeding.

DISCUSSION

Mutual argues that by obtaining the appointment of a receiver of rents and profits prior to the filing of the Chapter 11 petition, it perfected a valid recorded security interest entitling it to possession of the rents. Mutual reasons that the debtor's interest in the rents was cut off before the debtor filed its Chapter 11 petition with the result that as to the rents, the debtor has absolutely no interest in the rents which could be regarded as property of the estate within the context of 11 U.S.C. § 541.

There is no question that Mutual's right to the rents under the prepetition assignment of rents clause in the mortgage and the subsequent appointment of a state court receiver must be determined under New York law. See Butner v. United States, 440 U.S. 48, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979) (the determination of property rights in the assets of a debtor's estate is made according to state law). It is settled law in New York that an assignee of future rents who has done nothing to perfect its rights will not prevail over an execution creditor or a trustee in bankruptcy. Sullivan v. Rosson, 223 N.Y. 217, 119 N.E. 405 (1918). The Second Circuit in In re Brose, 254 Fed. 664 (2d Cir.1918) early held that as a result of the Sullivan case an assignment of rents clause in a mortgage operates merely as a pledge of the rents, to which the pledgee does not become entitled until it asserts its rights. The court also quoted, with approval, the following language of the United States Supreme Court:

The general rule is that the mortgagee is not entitled to the rents and profits of the mortgaged premises until he takes actual possession, or until possession is taken, in his behalf, by a receiver. . . . (Emphasis added)

Freedman's Savings Co. v. Shepherd, 127 U.S. 494, 502, 8 S.Ct. 1250, 1254, 32 L.Ed. 163 (1888).

In the instant case, a receiver was appointed on Mutual's behalf in the state court foreclosure action before the debtor filed its Chapter 11 petition. Accordingly, Mutual has a prima facie basis for asserting that the state court's prepetition appointment of a receiver pursuant to the assignment of rents clause in the mortgage transferred all title and interest in the rents prior to the commencement of the debtor's Chapter 11 case. However, the assignment of rents clause in the mortgage specifically states that such assignment was "as additional security for the indebtedness."

In accordance with United States v. Whiting Pools, Inc., 462 U.S. 198, 103 S.Ct. 2309, 76 L.Ed.2d 515 (1983), the concept of property of the estate is to be given a broad application. Manifestly, Mutual did not cut off all of the debtor's property rights with respect to the rents; Mutual received an assignment of the rents as security for the mortgage debt, so that when the mortgage debt was satisfied, the debtor's right to receive the rents resumed. Obviously, Mutual does not claim an absolute right to collect rents indefinitely, even after such time as the debtor might have satisfied the mortgage debt.

The issue as to whether or not an assignment of rents clause in a mortgage creates an absolute assignment of the rents upon a mortgage default, or merely an assignment for security purposes, is important in determining if the mortgagee has perfected its interest. Thus, the issue is not whether or not the mortgagee has an absolute right forever to collect rents regardless of a possible future satisfaction of the mortgage, but instead, whether the mortgagee's default, without more, gives rise to the mortgagee's right to collect the rents during the mortgage default phase. Hence, the distinction is significant in resolving the issue of perfection for the purpose of determining the mortgagee's right to collect the rents, and is not dispositive of the question as to whether the mortgagee has an absolute right to collect rents indefinitely, regardless of a satisfaction of the mortgage by the mortgagor.

As the Ninth Circuit Court of Appeals observed in Equitable Mortgage Co. v. Fishman (In re Charles D. Stapp of Nevada, Inc.):

Under California law, if an assignment is absolute, the beneficiary of the deed of trust is entitled without further action to all rents accruing from the date of notice of the default. If the assignment-of-rents provision is construed as a pledge of the rents as additional security, the rents inure to the bankruptcy trustee until the trust deed beneficiary perfects his claim to them.

Equitable Mortgage Co. v. Fishman (In re Charles D. Stapp of Nevada, Inc.), 641 F.2d 737 (1981), Great West Life Assurance Co. v. Rothman (In re Ventura-Louise Properties), 490 F.2d 1141, 1143-44 (9th Cir.1974). In the Stapp case, the court referred to the deed of trust, which is equivalent to a mortgage in New York, and concluded that the phrase "as additional security" did not appear in the assignment language. Therefore, the court concluded that the assignment was absolute. The term "absolute" did not mean that the mortgagee was forever entitled to the rents regardless of a possible satisfaction of the mortgage or deed of trust. Instead, the court said:

The assignment is "absolute" in the sense that it was effective upon default without further action by the creditor.

* * * * * *

"Absolute" does not mean, however, that the assignee is relieved of all obligation to account or that the right to the rents is independent of the underlying debt. Upon foreclosure, the creditor of course, must account for any excess derived from the sale and rents collected between the date of the default and the date of foreclosure sale over and above the amount of the obligation owed. (Emphasis added)

Id. at 740.

In the instant case, Mutual was required to obtain the appointment of a receiver, which it did, in order to establish its right to collect the rents under the assignment of rents clause in the mortgage. See Casbeer v. State Federal Savings & Loan Assoc. (In re Casbeer), 793 F.2d 1436, 1442 (5th Cir.1986). Mutual was not entitled, without further action,...