In re Galvin

• Decision Date: 05 November 1990
• Docket Number: Bankruptcy No. 90-00237.
• Citation: 120 BR 767
• Court: U.S. Bankruptcy Court — District of Vermont
• Parties: In re Thomas GALVIN and Beverly Galvin, Debtors.

120 B.R. 767 (1990)

In re Thomas GALVIN and Beverly Galvin, Debtors.

Bankruptcy No. 90-00237.

United States Bankruptcy Court, D. Vermont.

November 5, 1990.

D. Conard of Miller, Eggleston & Rosenberg, Ltd., Burlington, Vt., for Vermont Federal Bank, FSB.

T. Maikoff, Rutland, Vt., trustee, pro se.

M. Palmer, Glinka & Palmer, Middlebury, Vt., for Thomas Galvin and Beverly Galvin.

11 USC § 541 DETERMINATION¹

FRANCIS G. CONRAD, Bankruptcy Judge.

Bank seeks a determination whether post-petition rent paid to it from Debtors' tenant under a lease assigned to Bank prepetition and after a default on a commercial mortgage is not property of Debtors' Chapter 13 bankruptcy estate under 11 U.S.C. § 541(a).² An issue of first impression in this District, we hold Vermont's Supreme Court would find an absolute assignment of rent under the operative documents and facts. Thus, we conclude the post-petition rent is not part of Debtors' bankruptcy estate.

FACTS

On October 21, 1986, Debtors signed a purchase money first mortgage on a commercial building and land as security for a $60,000 promissory note to Bank. Pertinent terms of the mortgage include:

9. Remedies Cumulative. All remedies provided in this Mortgage are distinct and cumulative to any other right or remedy under this Mortgage or afford (sic) by law or equity and may be exercised concurrently, independently or successively.

. . . . .

15. Receiver. Upon acceleration . . . Mortgagee . . . shall be entitled to enter upon, take possession of and manage the Premises . . . or any part thereof, on whatever terms they, in their sole discretion, deem advisable, and to collect said rents and profits of the Premises including those past due. All rents and profits collected by Mortgagee . . . shall be applied first to payment of the costs of management of the Premises and collection of rents and profits, including . . . reasonable attorneys\' fees. Mortgagee and the receiver shall be liable to account only for those rents and profits actually received. In connection herewith and as additional security hereunder, Mortgagor hereby assigns to Mortgagee the rents of the Premises and all profits derived from any and all uses of the Premises subject to the rights of any holder of a mortgage having priority over this Mortgage, if any.

Debtors also granted Bank a "Collateral Assignment of Lease," on October 21, 1986, in the premises subject to the mortgage. The Collateral Assignment of Lease assigned Debtors' lease with the United States Postal Service (Tenant) to Bank. Pertinent terms of the Collateral Assignment of Lease include:

Bank is the holder of the Mortgage Deed secured thereby, now, therefore, further to secure said indebtedness, Debtors, hereby sell, assign, transfer, let, demise and set over unto Bank the possession of all the rents, issues and profits now due and which may hereafter become due under or by virtue of any lease, whether written or verbal . . . for the use or occupancy of any part of the premises . . . it being the intention hereby to establish an absolute transfer and assignment of all such leases and agreements and all the avails thereunder unto the assignee herein. . . .

This assignment shall be operative in the event of a default in the payment of the principal or interest secured by the Mortgage Deed, or in the event of a breach of any of covenants in the Mortgage Deed contained.

On January 17, 1990, Bank notified Debtors that they were in default of the mortgage. Bank sent a notice of acceleration to Debtors on February 1, 1990. On February 5, 1990, Bank notified Tenant of Debtors' default and directed Tenant to pay rent under the lease to Bank. Tenant has since paid rent to Bank.

On May 4, 1990, Debtors filed their Chapter 13 petition under 11 U.S.C. §§ 101, et seq. On July 20, 1990, Bank filed an objection to Debtors' Chapter 13 plan on the basis that Debtors' plan did not provide the full amount of Bank's claim.

We heard Bank's objection during a continued confirmation hearing on Debtors' Chapter 13 plan. At the hearing, Debtors agreed inter alia, to amend their Chapter 13 plan to provide for the full amount due Bank; however, Debtors' amended Chapter 13 plan deducts from the monthly payment to Bank the amount of rent Bank receives from Tenant. Bank objected to this treatment under the Chapter 13 plan. We directed briefs on the issue of whether post-petition rents belonged to Debtors' estate or to Bank. The matter was taken under advisement.

DISCUSSION

The substantive nature of a creditor's and debtor's property interest is defined by state law.

Property interests are created and defined by state law. Unless some federal interest requires a different result, there is no reason why such interest should be analyzed differently simply because an interested party is involved in a bankruptcy proceeding. Uniform treatment of property interests by both State and federal courts within a state serves to reduce uncertainty, to discourage forum shopping, and to prevent a party from receiving `a windfall merely by reason of the happenstance of bankruptcy.\'

Butner v. United States, 440 U.S. 48, 54-55, 99 S.Ct 914, 917-18, 59 L.Ed.2d 136, 141-42 (1979) (citing, Lewis v. Manufacturers National Bank, 364 U.S. 603, 609, 81 S.Ct 347, 350, 5 L.Ed.2d 323, 327 (1961)). Accord, Kors, Inc. v. Howard Bank, 819 F.2d 19, 22, 16 B.C.D. 162, 164 (2d Cir. 1987); Robinson v. U.S. Small Business Administration (In re Catamount Dyers, Inc.), 50 B.R. 788, 789 (Bkrtcy.D.Vt.1985); Purcell v. STN Enterprises, Inc. (In re STN Enterprises, Inc.), 47 B.R. 315, 318 (Bkrtcy.D.Vt.1985).

As Butner noted,³ a majority of States follow the general rule that the mortgagee is not entitled to rents and profits of the mortgaged premises until possession is taken. See, e.g., Freedman's Saving Co. v. Shepherd, 127 U.S. 494, 502, 8 S.Ct 1250, 1254, 32 L.Ed. 163 (1888); In re Brose, 254 F. 664, 666 (2d Cir.1918) (New York law); Hardee v. American Security & Trust Co., 77 F.2d 382 (D.C.Cir.1935) cert. denied, 296 U.S. 595, 56 S.Ct 110, 80 L.Ed. 421 (1935) (District of Columbia law); In re Clark Realty Co., 234 F. 576, 582 (7th Cir.1916); In re 1301 Connecticut Ave. Associates, 117 B.R. 2, 7 (Bkrtcy.D.D.C. 1990) (District of Columbia law); In re Ledgemere Land Corp., 116 B.R. 338, 341 (Bkrtcy.D.Mass.1990) (Massachusetts law, citing, In re Prichard Plaza Associates Limited Partnership, 84 B.R. 289, 297 (Bkrtcy.D.Mass.1988)).

In a minority of States, the mortgagee's right to rents and profits may be exercised immediately upon default either because the mortgagee is automatically entitled to possession of the property and to a security interest in the rents or because a provision in the mortgage deed or if a collateral document permits a mortgagee to take the rent upon notice of default and demand upon tenant. See e.g., Equitable Mortgage Co. v. Fishman (In the Matter of Charles D. Stapp of Nevada, Inc.), 641 F.2d 737, 739 (9th Cir.1981) (the term assignment without the qualifying language of "as additional security" required a finding of an absolute assignment of rent that was effective upon default without possession); Golden Enterprises, Inc. v. United States (In Matter of Golden Enterprises, Inc.), 566 F.2d 1207, 1210 (4th Cir.1977) (North Carolina law permits a mortgagee to take rents prior to foreclosure absent possession if there is a special provision which permits this action in the mortgage deed or other document) aff'd on other grounds, Butner v. United States, 440 U.S. 48, 99 S.Ct 914, 59 L.Ed.2d 136 (1979); Great West Life Assurance Company v. Rothman (In the Matter of Ventura-Louise Properties), 490 F.2d 1141, 1143 (9th Cir.1974) (California law); Associated Co. v. Greenhut, 66 F.2d 428, 429 (3d Cir.1933) cert. denied, 290 U.S. 695, 54 S.Ct. 131, 78 L.Ed. 598 (1933); In re Bethesda Air Rights Limited Partnership, 117 B.R. 202, 209 (Bkrtcy.D.Md. 1990) (Under Maryland law, mortgagee's notice to lessee of mortgagor's default and directing payments to designee was sufficient to end mortgagor's right to rents).

The issue is whether Vermont⁴ follows the majority rule that the assignment of rent clauses contained in the mortgage and Collateral Assignment of Lease operate as a mere pledge of additional security and, upon mortgagor's default, the mortgagee is required to perfect its right to mortgagor's tenant's rent by taking physical possession of the premises; or, does Vermont follow the minority rule that the mortgagee is entitled to enforce its contractual clauses as an absolute assignment of rents upon notice of mortgagor's default and demand upon mortgagor's tenant.

We begin with an examination of the material terms from the operative documents. Upon Debtors' default, the mortgage requires Bank to enter and take possession of the premises before it may collect rent from Debtors' Tenant. "Upon acceleration herein . . . Mortgagee . . . shall be entitled to enter upon, take possession . . . and to collect said rents and profits of the Premises including those past due. . . ." Moreover, the mortgage speaks of the assignment of rent as additional security rather than an absolute assignment. "In connection herewith and as additional security hereunder, Mortgagor hereby assigns to Mortgagee the rents of the Premises. . . ." (Emphasis supplied). Thus, the mortgage expresses the assignment of rents as additional security and not as an absolute assignment of rents.

The Collateral Assignment of Lease expresses two conflicting intentions, i.e., namely, the assignment of rent is additional security and is absolute. "Further to secure said indebtedness, Debtors, hereby sell, assign, transfer, let, demise and set over unto Bank the possession of all the rents, issues and profits now due and which may hereafter become due under or by virtue of any lease, whether written or verbal . . . it being the intention hereby to establish an absolute transfer and assignment of all such leases and...