In re Financial Ctr. Assoc. of East Meadow, LP

• Decision Date: 14 May 1992
• Docket Number: Bankruptcy No. 191-16391-352,Adv. No. 191-1595.
• Parties: In re FINANCIAL CENTER ASSOCIATES OF EAST MEADOW, L.P., Debtor. FINANCIAL CENTER ASSOCIATES OF EAST MEADOW, L.P., Plaintiff, v. TNE FUNDING CORPORATION, Defendant.
• Court: U.S. Bankruptcy Court — Eastern District of New York

140 B.R. 829 (1992)

In re FINANCIAL CENTER ASSOCIATES OF EAST MEADOW, L.P., Debtor.

FINANCIAL CENTER ASSOCIATES OF EAST MEADOW, L.P., Plaintiff, v. TNE FUNDING CORPORATION, Defendant.

Bankruptcy No. 191-16391-352, Adv. No. 191-1595.

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

May 14, 1992.

Sachs & Kamhi, P.C., Carle Place, N.Y., for debtor.

Windels, Marx, Davies & Ives, New York City, for TNE Funding Corp.

DECISION ON MOTION TO DISMISS THE CASE AND THE ADVERSARY COMPLAINT, TO LIFT THE AUTOMATIC STAY AND FOR ADEQUATE PROTECTION

MARVIN A. HOLLAND, Bankruptcy Judge:

This opinion deals only with three of the issues raised by the parties: (i) Under New York law is the appointment of a receiver of rents and profits considered perfection of an assignment of rents as additional security contained in a mortgage of real property; (ii) Can the appointment of a receiver of rents and profits in a mortgage foreclosure within the statutory period be avoided as preferential; and (iii) To what extent, if any, is a pre-payment charge binding and enforceable pursuant to 11 U.S.C. § 506(b) and New York law.

We hold that the appointment of a receiver to collect rents is not considered "perfection" of the assignment of rents, that no avoidable preferential transfer ensues from the appointment of a receiver, and that the pre-payment charge herein is not avoidable.

These proceedings are subject to bankruptcy court jurisdiction pursuant to 28 U.S.C. §§ 1334(b), 157(a) and the Order of Referral of Matters to Bankruptcy Judges for this District, 69 B.R. 186. These are core proceedings pursuant to 28 U.S.C. § 157(b)(2)(E), (F), (G) and (H).

Background

1. On December 8, 1989 TNE Funding Corporation (hereinafter "TNE") commenced an action to foreclose its mortgage on the Debtor's only substantial asset, its leasehold estate in the property known as 90 Merrick Avenue, East Meadow, New York (hereinafter "the Real Property").

2. On September 11, 1991 an order appointing a receiver to collect rents and other income from the Real Property was entered in New York State Supreme Court, Nassau County. The receiver did not take possession of the property.

3. On October 1, 1991 the Debtor filed a voluntary petition under Chapter 11 of the Bankruptcy Code (11 U.S.C. § 101 et seq.).

4. By a notice of motion dated November 8, 1991 and an amended notice of motion dated November 22, 1991, TNE moved for the following relief: (i) dismissal of the case for bad faith filing; (ii) in the alternative, vacatur of the automatic stay to permit the receiver to collect the rents issuing from the Real Property and to permit TNE to proceed with its foreclosure action; and (iii) granting TNE adequate protection for its interest in the Real Property and in the rents which constitutes cash collateral.

5. The Debtor filed papers in opposition to TNE's motion as well as an adversary proceeding. The Debtor argued: (i) the petition was filed in good faith; (ii) acceleration of the Debtor's debt upon default triggers an unconscionable payment charge which if voided would leave the creditor oversecured; (iii) the Debtor has equity in the Real Property and the Real Property is essential for effective reorganization; (iv) the appointment of a receiver in the state court proceeding is a perfection of the rent assignment which should be avoided as preferential.

Although TNE did not file a formal motion to dismiss the adversary complaint, it was agreed at the December 18, 1991 hearing that TNE's reply memorandum would be treated as a motion to dismiss.

6. On February 6, 1992 the court ruled from the bench in favor of TNE by refusing to invalidate the pre-payment clause, holding that the appointment of a receiver not be considered as perfection of the assignment of rents and cannot be avoided as preferential transfer. The court did not rule on the good faith argument as no evidence was taken and since the other pending issues may turn the good faith issue moot.

7. This opinion is written at the request of the parties to amplify portions of the court's bench ruling.

8. The court would like to commend both attorneys upon the quality of their presentations and for their professionalism throughout this proceeding.

DISCUSSION

I. Appointment of a Receiver is not Perfection of the Assignment of Rents

For a long period of time courts have failed to distinguish between "perfection" of an assignment of rent and the "triggering event" prerequisite to its enforcement. The cases, many of which are cited in the Debtor's papers, speak of the appointment of a receiver of rents and profits as a perfection of the assignment. However under New York law, rents are considered interests in real property¹ and as such a security interest in rents is perfected upon recordation. See, N.Y.R.P.L. §§ 291, 294-a (McKinney 1989 & 1991 Supp.); 74 N.Y.Jur.2d, Landlord and Tenant, §§ 334, 335 (1988 & 1991 Supp.).

Sections 547(e)(1) and (e)(2) of the Bankruptcy Code are interrelated. Section 547(e)(2) provides that a transfer is made at the time it takes effect between the parties if it is perfected within ten days, or at the time of perfection²; while § 547(e)(1) defines what is considered perfection. Pursuant to § 547(e)(1) a "transfer of real property other than fixtures ... is perfected when a bona fide purchaser ... cannot acquire an interest that is superior to the interests of the transferee." 11 U.S.C. § 547(e)(1)(A). In the absence of a Bankruptcy Code test to determine the rights of a bona fide purchaser, state law controls. See Butner v. United States, 440 U.S. 48, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979); Barnhill v. Johnson, ___ U.S. ___, 112 S.Ct. 1386, 1389, 118 L.Ed.2d 39 (1992).

In New York recordation protects the assignee under an assignment of rents against an intervening bona fide purchaser. N.Y.R.P.L. § 294-a. Since TNE recorded its assignment of rents on September 24, 1985, the transfer of the security interest is considered to have occurred on that date, at the latest. 11 U.S.C. § 547(e)(2)(B). As TNE's security interest in the rents was perfected some six years prior to the filing of the petition in bankruptcy it cannot now be avoided pursuant to § 547.

The debtor cites cases that characterize the appointment of a receiver as perfection of the security interest in rents. Those cases miss the point and their position has been rejected in numerous decisions. See, In re Vienna Park Properties, 136 B.R. 43 (S.D.N.Y.1992); In re Northport Marina Associates, 136 B.R. 911 (Bankr.E.D.N.Y. 1992); In re White Plains Development Corp., 136 B.R. 93 (Bankr.S.D.N.Y.1992); In re White Plains Development Corp., 137 B.R. 139 (Bankr.S.D.N.Y.1992); In re Rancourt, 123 B.R. 143 (Bankr.D.N.H. 1991); In re Park at Dash Point, L.P., 121 B.R. 850 (Bankr.W.D.Wash.1990).

II. Appointment of a Receiver does not Result in a Preferential Transfer

The appointment of a receiver to collect rents cannot be avoided as preferential transfer pursuant to the exception to 11 U.S.C. § 547(c)(5) since this section requires the existence of a transfer which "creates or perfects security interest." Assuming, arguendo, that an appointment of receiver were to result in a "transfer" under New York law, and further assuming that the conditions which entitle a trustee to avoid the transfer under § 547(c)(5) were met, TNE's security interest had been created and perfected years prior to the Debtor's filing for bankruptcy. Furthermore, we are doubtful whether § 547(c)(5), which specifically refers to "inventory or a receivable", applies to rents. "Receivables" usually connote choses in action and as such are classified as an intangible personal property while in New York rents are classified as real property interests.

The Debtor next argues that the appointment of a receiver of rents results in an avoidable preference pursuant to 11 U.S.C. § 547(b). There is no real dispute that the conditions set in § 547(b)(1) through (4) were met. Two issues remain however: 1) whether or not a transfer occurs as a result of the receiver's appointment, and 2) if it does, does this enable the creditor to receive more than it would have received if the case were a Chapter 7 case and the transfer had not been made. 11 U.S.C. § 547(b)(5).

(i) Transfer is defined as "every mode, direct or indirect, absolute or conditional voluntary or involuntary, of disposing of or parting with property or with an interest in property ..." 11 U.S.C. § 101(54)(58). The Debtor appears to argue that even if TNE's security interest in the rents were perfected prior to the preference period pursuant to §§ 547(e)(1)(A), 547(e)(2)(A) or (B), the appointment of a receiver resulted in a transfer of the Debtor's property right to collect the rents.

In order to fully understand this argument, the treatment given to assignments of rents under New York law must be discussed.

As was already seen, rents are considered real property interests in New York State. Creation of a security interest in real property in New York does not transfer ownership of the real property to the mortgagee but rather creates a chose in action secured by a lien upon the land. A mortgage does not create an estate in the mortgagee. "The mortgagor remains the owner of the legal estate, and the mortgagee has only a special or personal interest therein as a security for the debt or obligation." N.Y.Jur.2d, Mortgages, § 147 (1989 and 1991 Supp.) (citations omitted). Furthermore, "the right of a mortgagee to retain possession lawfully obtained is an incident of the debt and not an attribute of title." Id., § 149.

The issue becomes more complicated when dealing with rents instead of land. It is not disputed that in this case the assignment of rents was not an absolute one but rather as an additional security. The case law distinguishes between these two different types of assignment. See, In re Vienna Park Properties, L.P., 136 B.R. 43, 52 (S.D.N.Y.1992); Federal Home Loan Mortgage...