In re National Real Estate Ltd. Partnership-II
| Decision Date | 23 August 1989 |
| Docket Number | Adv. No. 88-0390.,Bankruptcy No. 87-05232 |
| Parties | In re NATIONAL REAL ESTATE LIMITED PARTNERSHIP-II, Debtor. NATIONAL REAL ESTATE LIMITED PARTNERSHIP-II, Plaintiff, v. CONSOLIDATED CAPITAL PROPERTIES, Defendant. |
| Court | United States Bankruptcy Courts. Seventh Circuit. U.S. Bankruptcy Court — Eastern District of Wisconsin |
Patrick B. Howell, Milwaukee, Wis., for plaintiff-debtor.
Paul S. Medved, Milwaukee, Wis., for defendant.
DECISION
This adversary proceeding evolves from this court's decision in In re National Real Estate Limited Partnership-II, 87 B.R. 986 (Bankr.E.D.Wis.1988). That decision, rendered on June 16, 1988, granted the motion of Consolidated Capital Properties ("ConCap") for relief from the automatic stay. It enabled ConCap, as beneficiary under a deed of trust, to complete foreclosure on the Round Tree Apartments, a 228-unit apartment complex owned by the debtor and located in San Antonio, Texas. Certain "loose ends" were left in its wake.
On May 26, 1988, subsequent to the filing of this chapter 11 case1 and while the earlier decision was under advisement, ConCap served the debtor with a "Notice Of Claim To Rents, Profits And Similar Items As Cash Collateral Pursuant To § 546(b)."2 The debtor segregated all rents obtained after receipt of this notice, totalling $61,765.33 ("segregated funds").
On August 2, 1988, a sheriff's auction was conducted. ConCap bid $3,500,000 and acquired legal title to the property. Because ConCap filed a proof of claim for $3,739,358.99 in this chapter 11 case, it maintains it has the right to assert a deficiency claim against the debtor's estate for the resulting shortfall.
In December of 1986, nearly a year before this chapter 11 case was filed, the debtor commenced a state action in Waukesha County Circuit Court against ConCap for injunctive relief, rescission and damages, alleging fraud, misrepresentation and mutual mistake of fact. The debtor asserted that when ConCap sold the apartment complex to the debtor in the Fall of 1981, it agreed to sell and deliver a "legal lot" but failed to do so. On June 22, 1987, the Honorable Robert T. McGraw, presiding judge in the state court action, granted to the debtor a temporary injunction enjoining ConCap from proceeding with its foreclosure suit. Judge McGraw required the debtor, as a condition of the temporary injunction, to deposit $41,800, in lieu of a bond, with the Waukesha County Clerk of Court "to be disbursed by the Clerk of Court pursuant to the further order of this Court." On August 31, 1987, Judge McGraw dissolved the temporary restraining order, concluding that there were adequate legal remedies available to the debtor. The remainder of the debtor's suit is still pending, and no order has as yet been made by Judge McGraw as to disbursement of the $41,800 deposit.
The following issues remain unresolved:
ConCap and the debtor have stipulated that the segregated funds are entirely attributable to rents from the Round Tree Apartments. ConCap is not seeking recovery for any rents received by the debtor from this apartment complex before May 26, 1988. However, ConCap claims it holds a perfected security interest in the segregated funds, that all the segregated funds received on and after May 26, 1988 constitute its cash collateral by virtue of its § 546(b) notice and that the debtor's claim for recovery from the segregated funds is limited to "legitimate, properly documented property management expenses incurred between May 26, 1988 and August 2, 1988." ConCap specifically objects to any recovery by the debtor for child care expenses4 and partnership expenses.
The debtor maintains that ConCap has no right to any portion of the segregated funds. Alternatively, if it is found that ConCap has a perfected security interest, the debtor argues that it is entitled to a substantial portion of these funds as reasonable and necessary expenses incurred for the preservation of the property. As part of its claim, the debtor seeks recovery for child care expenses and for its partnership expenses.
Property interests are created and defined by state law. Butner v. U.S., 440 U.S. 48, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979). In Texas, where the apartment complex is located, a transfer of an interest in real property, including rental property, is perfected when the appropriate documents are timely filed in the deed records of the county where the real property is situated. Averch, "Revisitation of the Fifth Circuit Opinions of Village Properties and Casbeer: Is Post-Petition `Perfection' of an Assignment of Rents Necessary to Characterize Rental Income as Cash Collateral?," 93 Com.L.J. 516, 527 (1988). On September 15, 1981, ConCap executed and filed in the official public records of real property of Bexar County, Texas, a deed of trust, assignment of rents and security agreement and a separate conditional assignment of rents and leases covering the Round Tree Apartments. Although ConCap's lien was validly perfected, under Texas law, its right to collect the rents became operative only upon ConCap obtaining possession of the property, impounding the rents, securing the appointment of a receiver or "taking some other similar action." Taylor v. Brennan, 621 S.W.2d 592, 594 (Tex.1981). That "other similar action" occurred when ConCap's § 546(b) notice was received by the debtor on May 26, 1988. Until then, ConCap was not entitled to recover any rents, and the debtor was free to use them. In re Village Properties, Ltd., 723 F.2d 441, 443 (5th Cir.1984), cert. denied, 466 U.S. 974, 104 S.Ct. 2350, 80 L.Ed.2d 823; In re Casbeer, 793 F.2d 1436, 1442 (5th Cir. 1986); In re Tripplet, 84 B.R. 84, 89 (Bankr.W.D.Tex.1988).
It is the debtor's position that ConCap has no perfected interest in the segregated funds and that the § 546(b) notice utilized by ConCap was not an effective method of perfecting its interest in rents. That argument was rejected in In re Casbeer, which held that the perfection "relates back to a time before bankruptcy for the purpose of § 546(b); perfection does not relate back to a time before bankruptcy for the purpose of entitlement to rents;" 793 F.2d at 1443.
A conditional assignment of rents in Texas, such as that presented to this court in the case at bar, serves only as a form of collateral, and the assignee is not entitled to the rents until it properly asserts its right to receive them. Taylor v. Brennan, 621 S.W.2d 592 at 593-94. ConCap properly perfected its security interest in the rents upon service of its § 546(b) notice on the debtor. This is an acceptable method of affirmative action for recovery of rents in Texas within the meaning of Taylor v. Brennan. In re Casbeer, In re Village Properties Ltd., In re Tripplet, 84 B.R. 84, 89 (Bankr.W.D.Tex.1988).
There is authority to the contrary. In re Prichard Plaza Associates Limited Partnership, 84 B.R. 289 (Bankr.D.Mass.1988); In re Kearney Hotel Partners, 92 B.R. 95 (Bankr.S.D.N.Y.1988); In re Gotta, 47 B.R. 198 (Bankr.W.D.Wis.1985).5 However, the majority of cases agree with Casbeer and Village Properties Ltd. In re Gelwicks, 81 B.R. 445, 448 (Bankr.N.D.Ill.1987); In re Morning Star Ranch Resorts, 64 B.R. 818 (Bankr.D.Colo.1986); In re Sampson, 57 B.R. 304 (Bankr.E.D.Tenn.1986); Consolidated Capital Income Trust v. Colter, Inc., 47 B.R. 1008 (D.Colo.1985); In re Fluge, 57 B.R. 451 (Bankr.D.N.D.1985).
Under Butner, what is most crucial to a determination of this issue is the applicable state law. This court must therefore analyze this matter in light of the controlling Texas authority as embodied in Casbeer, Village Properties, Ltd., Tripplet and Taylor v. Brennan. See also In re Oliver, 66 B.R. 426 (Bankr.N.D.Tex.1986). Consequently, it concludes that ConCap properly perfected its interest in post-petition rents accruing after service of its § 546(b) notice upon the debtor on May 26, 1988.
From that time forward, all such rents, comprised of the segregated funds, became ConCap's cash collateral by virtue of §§ 363(a) and 552(b) of the Bankruptcy Code.6
This leads to the next issue of whether any portion of the debtor's expenses are recoverable against the segregated funds. 11 U.S.C. § 506(c) of the Bankruptcy Code provides that the debtor "may recover from property securing an allowed secured claim the reasonable, necessary costs and expenses of preserving, or disposing of, such property to the extent of any benefit to the holder of such claim." This provision was intended by Congress to codify case law expressing the equitable principle that a lienholder may be charged with the reasonable costs and expenses incurred by the debtor in order to preserve the property subject to the lien to the extent the lienholder derives a benefit therefrom. 3 Collier on Bankruptcy § 506.06 (15th Ed.1987).
§ 506(c) has been interpreted by the Seventh Circuit in In re Trim-X Inc., 695 F.2d 296 (7th Cir.1982), to mean that a party seeking recovery must demonstrate that the sought after expenses were: (1) reasonable, (2) necessary and (3) beneficial to the secured creditor. In re Trim-X Inc. also declares that a bankruptcy court must carefully explain its rationale in arriving at "reasonable" expenses. The burden is upon the party seeking to recover these expenses to demonstrate the existence of such benefits. 3 Collier on Bankruptcy § 506.06 (15th Ed.1987).
The expenses sought by the debtor shall now be analyzed in the light of these principles.
(Amount Claimed: $9,687.15)
The testimony failed to establish that two maintenance personnel (Abram...
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