In re Delta Plaza Partners

• Decision Date: 02 May 1991
• Docket Number: Bankruptcy No. 90-21312,Adv. No. 90-2123.
• Parties: In re DELTA PLAZA PARTNERS, a Florida General Partnership. DELTA PLAZA PARTNERS, a Florida General Partnership, Plaintiff, v. MINNESOTA MUTUAL LIFE INSURANCE CO., a Foreign Corporation, and the United States of America, Internal Revenue Service, Defendants.
• Court: United States Bankruptcy Courts. Fifth Circuit. U.S. Bankruptcy Court — Northern District of Mississippi

133 B.R. 355 (1991)

In re DELTA PLAZA PARTNERS, a Florida General Partnership.

DELTA PLAZA PARTNERS, a Florida General Partnership, Plaintiff, v. MINNESOTA MUTUAL LIFE INSURANCE CO., a Foreign Corporation, and the United States of America, Internal Revenue Service, Defendants.

Bankruptcy No. 90-21312, Adv. No. 90-2123.

United States Bankruptcy Court, N.D. Mississippi.

May 2, 1991.

William R. Armstrong, Jr., Henderson, Duke, Dantone and Hines, P.A., Greenville, Miss., for Delta Plaza Partners.

Paul J. Stephens, Watkins and Eager, Jackson, Miss., for Minnesota Mut. Life Ins. Co.

Assistant U.S. Atty. Jim M. Greenlee, Oxford, Miss., for I.R.S.

OPINION

DAVID W. HOUSTON, III, Bankruptcy Judge.

On consideration before the court is a motion for summary judgment filed by the defendant, Minnesota Mutual Life Insurance Co.; response to said motion having been filed by the debtor, Delta Plaza Partners; and the court having considered same hereby finds as follows, to-wit:

I.

The court has jurisdiction of the subject matter of and the parties to this proceeding pursuant to 28 U.S.C. § 1334 and 28 U.S.C. § 157. This is a core proceeding as defined in 28 U.S.C. § 157(b)(2)(A)(K) and (O).

II.

The debtor, Delta Plaza Partners, is a Florida general partnership and the current owner of a shopping center located in Greenville, Mississippi, known as the Delta Plaza Shopping Center. On or about August 31, 1978, Mainstream, Inc., the former owner of the shopping center, executed and delivered to the defendant, Minnesota Mutual, a promissory note in the original principal sum of $3,950,000.00, which was secured by a deed of trust encumbering the shopping center. On or about April 2, 1980, Mainstream, Inc., executed and delivered to Minnesota Mutual a second promissory note in the original principal sum of $275,000.00. The payment of both promissory notes, totaling $4,225,000.00, was secured by an amended and restated deed of trust, also encumbering the shopping center. Both deeds of trust were duly recorded in the official land records of Washington County, Mississippi. The debtor admits that it was in default under the terms of the promissory notes at the time that it filed its bankruptcy petition.

Minnesota Mutual takes the position that by virtue of the language set forth in the aforementioned deeds of trust that it has a security interest and perfected lien in the rents generated by the shopping center. The pertinent language in the deeds of trust is set forth as follows:

NOW, THEREFORE, in consideration of the aforesaid indebtedness in the sum of Ten Dollars in hand paid, receipt of which is hereby acknowledged, Grantor hereby conveys, sells and warrants unto Trustee the following described real property situated in Washington County, Mississippi . . . together with all rights, ways, privileges, servitudes, interest, easements, improvements, tenements, hereditaments, appurtenances, advantages and all rents, issues, and profits belonging or pertaining to real property. As further security for payment of indebtedness and performance of the obligations, covenants and agreements secured hereby, Grantor hereby transfers, sets over and assigns:

* * * * * *

(b) To trustee, all other rents, issues, and profits of the premises from time to time accruing, whether under leases or tenancies now existing or hereafter created, reserving to Grantor, however, so long as Grantor is not in default hereunder, the right to receive and retain such rents, issues, and profits of the premises.

(Underlining added)

As an equitable argument, the debtor alleges that Minnesota Mutual is an oversecured creditor and, as such, is not entitled to terminate the debtor's use of post-petition rents. According to the pleadings and the memoranda of law, the parties generally agree that the debtor owes Minnesota Mutual the sum of $3,516,041.86, together with accrued interest in the sum of $71,739.33, plus related costs and attorneys fees. Interest allegedly continues to accrue on this indebtedness at the rate of $448.37 per diem. In support of its position, the debtor contends that the shopping center has a value of $6,250,000.00, and that this value more than adequately protects Minnesota Mutual's claim.

III.

Pursuant to 11 U.S.C. § 544(a)(3) and § 552(b), Delta Plaza Partners filed a complaint against Minnesota Mutual and the Internal Revenue Service, seeking to avoid the lien encumbering the rents generated by the shopping center. The debtor contends that the lien of Minnesota Mutual has not been perfected as to the rents solely by the recordation of the deeds of trust. The debtor, since it is a Chapter 11 debtor-in-possession, alleges that it enjoys a trustee's hypothetical status as a bona fide purchaser of real property for value with a recorded deed as set forth in 11 U.S.C. § 544(a)(3). As such, the debtor states that Minnesota Mutual's lien on the rents cannot now be perfected because of the debtor's intervening hypothetical status.

The debtor also alleges that mere recordation of a mortgage or deed of trust does not perfect a lien on rents, and that prior to the bankruptcy case being filed, Minnesota Mutual should have taken additional action to achieve perfection. In the alternative, the debtor contends that the "equities of the case" language appearing in 11 U.S.C. § 552(b) should compel the court to disallow Minnesota Mutual's pre-petition lien from extending to the rents generated post-petition.

Minnesota Mutual has filed its answer and counter-claim stating essentially that it has a perfected lien encumbering the rents as a result of the clauses appearing in its deeds of trust. Minnesota Mutual argues that it is entitled to segregation of all the rents, as well as, an administrative priority claim as to all rents or cash collateral used by the debtor since it filed its bankruptcy petition. In the alternative, Minnesota Mutual contends that should it be required to take some additional action to perfect its lien on the rents, that through its counter-claim, it has now done so.

The Internal Revenue Service filed its answer generally denying the allegations of the complaint. The court is of the opinion that the Internal Revenue Service was improperly joined as a defendant and will dismiss the complaint, without prejudice, as to the Internal Revenue Service.

IV.

For purposes of this opinion, the court does not consider that the language in the deeds of trust, creating the security interest in the rents, conveyed an absolute assignment of the rents to Minnesota Mutual upon default. Concerning this issue, the Fifth Circuit in Matter of Village Properties, Ltd., 723 F.2d 441 (5th Cir.1984), commented as follows:

An absolute assignment of rentals, on the other hand, automatically transfers the right to rentals when a specified condition occurs (e.g. default). An absolute assignment passes title to the rents instead of creating a security interest. In Re Ventura-Louise Properties, 490 F.2d 1141 (9th Cir.1974). Courts have been reluctant to construe assignment of rents as absolute assignments. Taylor v. Brennan, 621 S.W.2d 592 at 594 (Tex.1981). Moreover, some courts and commentators have suggested that there is a presumption that clauses assigning rents create a security interest. E.g., Childs v. Shelburne Realty Co., 23 Cal.2d 263, 268, 143 P.2d 697, 700 (1943); Note, Assignment of Rents Clauses Under California Law and in Bankruptcy; Strategy for the Secured Creditor, 31 Hast. L.J. 1433, 1452 (1980).

723 F.2d 441 at 443.

V.

11 U.S.C. § 544(a)(3) provides as follows:

(a) The trustee shall have, as of the commencement of the case, and without regard to any knowledge of the trustee or of any creditor, the rights and powers of, or may avoid any transfer of property of the debtor or any obligation incurred by the debtor that is voidable by —

(3) a bona fide purchaser of real property, other than fixtures, from the debtor, against whom applicable law permits such transfer to be perfected, that obtains the status of a bona fide purchaser at the time of the commencement of the case, whether or not such a purchaser exists and has perfected such transfer..

The debtor contends that the recording of the aforementioned deeds of trust only creates a security interest in the shopping center rents but that it does not, standing alone, perfect the security interest. Relying on Matter of Village Properties, Ltd., supra, and Myers v. Hobbs, 100 F.2d 822 (5th Cir.1939), the debtor states that Minnesota Mutual must take an additional step to perfect its lien in the rents such as by foreclosing its mortgage, by obtaining a court order sequestering the rents, by having a receiver appointed for the purpose of collecting the rents, or some other similar action. Having reviewed the opinions in the aforementioned two cases, this court concurs with the debtor. The following quote from Matter of Village Properties, Ltd. is insightful:

Before reaching the main issue in this case we pause to discuss Texas law concerning a mortgagee\'s interest in rents collected by a bankrupt estate. Texas adheres to the lien theory of mortgages. Under this theory the mortgagee is not the owner of the property and is not entitled to its possession, rentals or profits. Consequently, as occurred in the case at bar, mortgagees usually assign to themselves (through the deed of trust, or other instrument) the mortgagor\'s interest in all rents falling due after the date of the mortgage as additional security for the mortgage debt. Texas courts have followed the common law rule that an assignment of rentals is not effective "until the mortgagee obtains possession of the property, or impounds the rents, or secures the appointment of a receiver, or takes some other similar action." Taylor v. Brennan, 621 S.W.2d 592, 594 (Tex.1981) (citing Simon v. State Mutual Life Assur. Co., 126 S.W.2d 682 (Tex.Civ. App.—Dallas 1939, writ ref\'d); McGeorge v. Henrie, 94 S.W.2d 761 (Tex. Civ.App.—Tex

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