In re Fairview-Takoma Ltd. Partnership

• Decision Date: 05 March 1997
• Docket Number: Bankruptcy No. 96-1-7995-DK.
• Citation: 206 BR 792
• Parties: In re FAIRVIEW-TAKOMA LIMITED PARTNERSHIP, Debtor.
• Court: U.S. Bankruptcy Court — District of Maryland

206 B.R. 792 (1997)

In re FAIRVIEW-TAKOMA LIMITED PARTNERSHIP, Debtor.

Bankruptcy No. 96-1-7995-DK.

United States Bankruptcy Court, D. Maryland.

March 5, 1997.

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Joyce A. Kuhns, Baltimore, MD, for debtor.

Nancy Alquist, Baltimore, MD, for creditor (Condor One).

J. Joseph Curran, Jr., Attorney General, Annapolis, MD.

Robert A. Zarnoch, Kathryn M. Rowe, Annapolis, MD, Office of Counsel to the General Assembly.

MEMORANDUM OF DECISION

DUNCAN W. KEIR, Bankruptcy Judge.

Fairview-Takoma Limited Partnership ("Fairview") is the owner of an apartment complex located in Takoma Park, Maryland (the "Property"). Fairview is the obligor under certain promissory notes, including a Deed of Trust Note dated February 20, 1986, in the original principal amount of $6,500,000 (the "Original Note"), a Supplemental Deed of Trust Note dated October 22, 1986 in the original principal amount of $1,000,000 (the "Supplemental Note"), and a Modification and Consolidation of Deed of Trust Notes dated October 22, 1986 (the "Consolidated Note"). The Original Note and the Supplemental Note were merged and consolidated with the Consolidated Note. The Consolidated Note is secured by, inter alia, a Modification and Consolidation of Deeds of Trust and Substitution of Trustees (the "Deed of Trust") dated October 22, 1986 and recorded in the Land Records of Prince George's County, Maryland on or about October 29, 1986; and a Collateral Assignment of Leases and Rents (the "Assignment of Rents") dated October 22, 1986 and recorded in the Land Records of Prince George's County, Maryland on or about October 26, 1986 (collectively referred to herein as the "Loan Documents").

Subsequent to an auction of defaulted loans held in August of 1996, the Secretary of the Department of Housing and Urban Development ("HUD") assigned and transferred the Consolidated Note to Lennar Atlantic Partners Limited Partnership ("Lennar"). Lennar, in turn, by assignment dated September 12, 1996, assigned the Consolidated Note to Condor One, Inc. ("Condor"). Condor is the current holder and assignee of the Consolidated Note, Deed of Trust, and Assignment of Rents.

On September 26, 1996, Condor contacted Fairview via a hand-delivered letter in which Condor asserted that Fairview had defaulted under the Consolidated Note and Loan Documents, and that Fairview's entire indebtedness thereunder had been accelerated and was therefore immediately due and payable. On September 27, 1996, Condor commenced an action in the Circuit Court for Prince George's County for the immediate appointment of a receiver for the Property pending foreclosure. At 3:48 p.m. on September 27, 1996, Fairview filed a petition for relief under Chapter 11 of the Bankruptcy Code.¹ Pursuant to 11 U.S.C. § 362(a)(1), Condor's state law action to appoint a receiver for the Property was stayed by Fairview's bankruptcy petition.

The dispute presently before the Court concerns Fairview's right to use the rents and other income (the "Rents") generated by the Property. Condor contends that it holds, pursuant to the terms of the Loan Documents, a lien interest in the Rents, and that the Rents are therefore cash collateral within the meaning of 11 U.S.C. § 363(a). Fairview disputes that Condor has a "perfected" lien upon the Rents on the ground that Condor failed to give Fairview proper notice of default, in accordance with the terms of the Loan Documents, prior to the filing of Fairview's bankruptcy petition. Consequently, Fairview asserts that it has an unfettered right to use the Rents in its ordinary course of business. See 11 U.S.C. § 363(b). In the alternative Fairview avers that even if Condor has a lien upon the Rents, the Rents are Fairview's sole source of funds, and that Fairview requires the use of the Rents in order to pay the ongoing costs of maintaining and operating the Takoma Park apartment complex. Fairview alleges that the maintenance and operation of the complex provides adequate protection to Condor for the requested use of the funds. See 11 U.S.C. § 363(c).

Section 363(a) of the Bankruptcy Code defines cash collateral as

cash, negotiable instruments, documents of title, securities, deposit accounts, or other cash equivalents whenever acquired in which the estate and an entity other than the estate have an interest and includes the proceeds, products, offspring, rents, or profits of property . . . subject to a security interest as provided in section 552(b) of this title, whether existing before or after the commencement of a case under this title.

11 U.S.C. § 363(a) (emphasis supplied). Thus the Rents are cash collateral to the extent that both Condor and Fairview's bankruptcy estate hold an interest in the Rents, and to the extent that the Rents are subject to a security interest as provided in § 552(b) of the Bankruptcy Code.

The parties do not dispute that Fairview's bankruptcy estate has an interest in the Rents. Upon the filing of Fairview's bankruptcy petition, Fairview's equitable interest in the Takoma Park Property became property of the estate. 11 U.S.C. § 541(a)(1). Pursuant to § 541(a)(6), the "proceeds, product, offspring, rents, or profits of or from property of the estate" also constitute property of the estate. Therefore, the Fairview estate has an interest in the Rents.

Rather, the issue which is at the heart of the dispute between Fairview and Condor is whether Condor holds an "interest" in the Rents that is recognized by § 363(a) of the Bankruptcy Code. In order to decide this issue, the Court must consider Maryland State law, significant changes both to federal and Maryland state law which impact the vitality of a mortgagee's lien interest in rents in the context of a bankruptcy case, and the applicability of those changes in the law to the matter at hand.

An analysis of the validity or extent of Condor's interest in the Rents begins with the Loan Documents. The second covenant of the Deed of Trust provides:

that all rents, profits and income from the property covered by this Deed of Trust are hereby assigned to the Beneficiary for the purpose of discharging the debt hereby secured. Permission is hereby given to Grantor, so long as no default exists hereunder, to collect such rents, profits and income.

Covenant five of the Deed of Trust provides "that upon default hereunder Beneficiary shall be entitled to the appointment of a receiver . . . without notice, to take possession and protect the property described herein and operate same and collect the rents, profits and income therefrom."

The Assignment of Rents, meanwhile, provides that "the Assignment is made for the purpose of securing . . . the payment of the principal sum, interest and indebtedness evidenced by" the Deed of Trust. The Assignment of Rents further provides in the first covenant that:

so long as there shall exist no default by the Assignor in the payment of the principal sum, interest and indebtedness secured hereby and by the Note and Mortgage, or in the performance of any obligation, covenant or agreement herein or in the Note and Mortgage contained on the part of the Assignor to be performed, the Assignor shall have the right to collect . . . all rents arising from the Project, and to retain, use and enjoy the same.

The second covenant of the Assignment of Rents provides that in the event of a default by the Assignor (i.e. Fairview), the Assignee (i.e. Condor) "may, at its option, with notice and without regard to the adequacy of the security for the said principal sum . . . and, either with or without taking possession of the Project in its own name, demand, sue for or otherwise collect and receive all rents of the Project. . . ."

The Loan Documents clearly convey an interest in the Rents to Condor under state law. Pursuant to the terms of the Deed of Trust and Assignment of Rents, Condor holds a lien against the Rents which secures Fairview's indebtedness under the Consolidated Note. Condor's interest in the Rents is not an absolute assignment, but rather is in the nature of a security interest. See Prudential Ins. Co. v. Three Flint Hill Ltd. Partnership (In re Three Flint Hill Ltd. Partnership), 202 B.R. 706, 711 (Bankr. D.Md.1995); In re Bethesda Air Rights Ltd. Partnership, 117 B.R. 202, 206-08 (Bankr. D.Md.1990); In re 1301 Connecticut Avenue Assocs., 117 B.R. 2, 4-8 (Bankr.D.D.C.1990), aff'd, 126 B.R. 1 (D.D.C.1991). Fairview retains the right to collect and use the Rents generated by the Property as long as it has not defaulted under the terms of the Loan Documents. In the event of a default by Fairview, Condor may take appropriate measures to collect and receive the Rents.

For three alternative reasons, as explained in this Opinion, the Court concludes that Condor holds an interest for purposes of security in the Rents generated by the Property post-petition, and thus Fairview's right to use such Rents is conditioned upon providing adequate protection to Condor. The Court reaches this conclusion because the assignment interest in the Rents held by Condor is sufficient, without the requirement of any further act to enforce that security interest, to meet the requirements of 11 U.S.C. §§ 363(a) and 552(b)(2), and to escape the avoidance provisions of § 544(a), notwithstanding Fairview's argument that prior reported cases in this district have held to the contrary. Alternatively, the Court finds that § 3-204 of the Real Property Article of the Maryland Code, which is remedial legislation enacted by the State of Maryland for the express purpose of addressing the precise issue presently before the Court, clarifies the law which the Court applies to reach this result, and is properly applicable to the facts of this case. In the third alternative, the Court finds that the addition of subsection (b)(2) to 11 U.S.C. § 552 pursuant to the Bankruptcy Reform Act of 1994 mandates the same result, and that the federal statute as amended...