In re Glessner

• Decision Date: 04 February 1992
• Docket Number: Bankruptcy No. 91-40741-11,Adv. No. 91-7203.
• Citation: 140 BR 556
• Parties: In re Roland L. GLESSNER, Esta W. Glessner, Debtors. Roland L. GLESSNER, Esta W. Glessner, Plaintiffs, v. UNION NATIONAL BANK & TRUST COMPANY, Defendant.
• Court: U.S. Bankruptcy Court — District of Kansas

140 B.R. 556 (1992)

In re Roland L. GLESSNER, Esta W. Glessner, Debtors Roland L. GLESSNER, Esta W. Glessner, Plaintiffs, v. UNION NATIONAL BANK & TRUST COMPANY, Defendant.

Bankruptcy No. 91-40741-11, Adv. No. 91-7203.

United States Bankruptcy Court, D. Kansas.

February 4, 1992.

William E. Metcalf, Metcalf and Justus, Topeka, Kan., for plaintiffs-debtors.

John D. Conderman, Arthur, Green, Arthur, Conderman & Stutzman, Manhattan, Kan., for United Nat. Bank & Trust Co.

John Foulston, Wichita, Kan., U.S. Trustee.

MEMORANDUM OF DECISION

JAMES A. PUSATERI, Bankruptcy Judge.

This proceeding has been submitted to the Court on stipulated facts and briefs. The plaintiff-debtors appear by counsel William E. Metcalf. Union National Bank & Trust Company (Bank) appears by counsel John D. Conderman. The Court has reviewed the relevant pleadings and is ready to rule.

The issue presented is whether the notice of claim to rents as cash collateral which the Bank filed after the debtors filed for bankruptcy was effective under 11 U.S.C.A. § 546(b) to "perfect" the Bank's interest in the rents, so that the post-petition rents produced by the debtors' properties are the Bank's cash collateral.

FACTS

The parties have stipulated to the following facts. The debtors borrowed money from the Bank at least as early as 1985, and gave the Bank a mortgage on nine pieces of real estate in December of that year. The mortgage, filed with the county register of deeds, contained the following paragraph:

"If any action be brought to foreclose this mortgage, the Court may on motion of the mortgagee, with respect to the condition or value of the mortgage property, appoint a receiver to take immediate possession of the mortgage property, to maintain and lease the same, and to collect the rents and profits arising therefrom during the pendency of such foreclosure. All rent and profit due and owing upon the initiation of foreclosure or thereafter becoming due and owing is hereby assigned by the mortgagor to the mortgagee. All rents and profits collected by the receiver shall be applied first to payment of the costs of management of the mortgage property and collection of rents and profits, including but not limited to, receiver\'s fees and premiums of receiver\'s bonds, and then to the sums secured by this mortgage."

In September of 1989, the debtors executed an "Assignment of Rents" which assigned the rents from the properties to the Bank upon their default as defined in the mortgage or a note. This document was filed with the county register of deeds.

In June of 1990, the debtors executed a promissory note in favor of the Bank, pledging the mortgage and assignment of rents as security for the note. They defaulted, and filed for bankruptcy on April 12, 1991. As of that date, they had not paid the 1988, 1989, and 1990 taxes on the real estate. The Bank had commenced no legal action before the debtors filed for bankruptcy, nor, so far as the record reflects, had it taken steps to collect the rents itself directly from the debtors' tenants. After the filing, the Bank filed a notice of claim to rents as cash collateral under 11 U.S.C.A. § 546(b), and a motion to sequester rents and to determine the rents are cash collateral. The debtors then filed this proceeding, seeking to have the Court determine the extent and validity of the Bank's claimed lien on the post-petition rents.

CONCLUSIONS OF LAW

This case involves the interaction of a number of sections of the Bankruptcy Code, and the peculiarities of Kansas law concerning mortgages and assignments of rents.¹ The Court must consider both federal and state court decisions as well as the Code in reaching its decision.

The Bankruptcy Code

The Bankruptcy Code restricts the debtors' use of "cash collateral," which is defined to be:

"cash . . . or . . . 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.A. § 363(a). Under this provision, the Bank had an interest in the rents from the mortgaged properties, either under the mortgage itself or under the subsequent assignment of rents. However, the debtors-in-possession are empowered to avoid the Bank's lien on the rents if, as of the date they filed for bankruptcy, Kansas law would have allowed a then-existing judicial lien creditor, executing judgment creditor, or bona fide purchaser of the real property to have priority over the Bank's lien. § 544(a). This power is tempered, however, to allow the Bank to "perfect" its lien postpetition if Kansas has "any generally applicable law that permits perfection of an interest in property to be effective against an entity that acquires rights in such property before the date of such perfection." § 546(b); see also § 362(b)(3) (acts to perfect are not stayed by the automatic stay to the extent avoidance powers are subject to such perfection under § 546(b)). If the debtors cannot avoid it under § 544(a), the Bank's lien on the rents extends to the post-petition rents "to the extent provided by the Bank's mortgage or assignment of rents and by applicable nonbankruptcy law, except to any extent that the court, . . . based on the equities of case, orders otherwise." § 552(b). Section 546(b) further provides that if seizure of the property or commencement of an action is required to perfect the interest, a notice to the debtor-in-possession shall be required instead. However, this Court believes such notice is not adequate where something more than mere commencement of a lawsuit is required, for example, where the petition must be followed by a motion with notice and a hearing, and a court ruling. Instead, the commencement of the action must automatically perfect the lien without any order of the court.

As explained below, under Kansas law, the Bank's interest in the debtors' current and past-due rents could be defeated by an executing judgment creditor as of the day the debtors filed for bankruptcy. Therefore, at least in this Court's view, the question under § 546(b) becomes whether any Kansas law would allow the Bank to take some action after that time and retroactively obtain a claim on the rents with priority over such a creditor.

Tenth Circuit Case

The Bank relies completely on the decision in Virginia Beach Federal Savings & Loan Association v. Wood, 901 F.2d 849 (10th Cir.1990) (per curiam), to support its claim to the debtors' rents. Applying Oklahoma law, the Circuit ruled that a mortgagee's § 546(b) notice of its claim to rents perfected its claim to the rents and the perfection related back to the time of the execution of the mortgage for purposes of § 546(b), but did not relate back for purposes of actual entitlement to recover the rents before the notice. 901 F.2d at 853. This Court has some difficulty understanding how "perfection" can relate back for purposes of § 546(b) when the creditor's entitlement to the rents does not. The legislative history of the section does not seem to contemplate such a result:

"The rights granted to a creditor under this subsection prevail over the trustee only if the transferee has perfected the transfer in accordance with applicable law, and that perfection relates back to a date that is before the commencement of the case.

". . . For example, many State laws, under the Uniform Commercial Code, permit perfection of a purchase-money security interest to relate back to defeat an earlier perfected non-purchase-money security interest if the former was perfected within ten days. UCC § 9-301(2). Such perfection would then be able to defeat a hypothetical judicial lien creditor on the date of the filing of the petition. The purpose of the subsection is to protect, in spite of the surprise intervention of bankruptcy petition, those whom State law protects by allowing them to perfect their liens or interests as of an effective date that is earlier than the date of perfection."

H.R.Rep. No. 595, 95th Cong., 1st Sess. 371 (1977); S.Rep. No. 989, 95th Cong., 2d Sess. 86 (1978) U.S. Code Cong. & Admin. News 1978, pp. 5787, 5872, 6327 (reprinted in Norton Bankruptcy Law and Practice: Bankruptcy Code and Related Legislation, Legislative History, Editorial Commentary at 507 (Clark, Boardman, Callaghan 1991-1992 Ed.)). In this Court's view, this history indicates Congress intended to permit perfection under § 546(b) only when state law allows perfection to relate back and defeat previous claims to all the property, not just defeat previous claims to future, unaccrued property. Kansas law, for example, expressly allows such relation-back for purchase money security interests, K.S.A.1990 Supp. 84-9-301(2) (perfection relates back if accomplished within 20 days after debtor receives possession of collateral), for mechanics' and materialmen's liens, K.S.A. 60-1101, -1102, -1105 and 1990 Supp. 60-1103 (perfection relates back to date services or materials first provided if lien statement filed within 3 or 4 months after last provided, depending on relationship to property owner, and action to foreclose filed within one year of statement's filing); In re Birdview Satellite Communications, Inc., 90 B.R. 465 (Bankr.D.Kan.1988), and for judgment liens, K.S.A.1990 Supp. 60-2202 (judgment lien relates back to date petition filed but not more than four months from date judgment entered). However, while the Court questions this facet of the Circuit's ruling, Virginia Beach is not controlling here in any event because the factual situation was different and relevant Kansas law is different than the Oklahoma law applied by the Circuit.

The pertinent facts and law in Virginia Beach were these. The mortgagee had filed a foreclosure action and obtained a judgment and order authorizing a...