In re Prichard Plaza Associates Ltd. Partnership

• Decision Date: 28 March 1988
• Docket Number: Bankruptcy No. 87-40637 (JFQ).
• Parties: In re PRICHARD PLAZA ASSOCIATES LIMITED PARTNERSHIP, Debtor.
• Court: United States Bankruptcy Courts. First Circuit. U.S. Bankruptcy Court — District of Massachusetts

84 B.R. 289 (1988)

In re PRICHARD PLAZA ASSOCIATES LIMITED PARTNERSHIP, Debtor.

Bankruptcy No. 87-40637 (JFQ).

United States Bankruptcy Court, D. Massachusetts.

March 28, 1988.

David Nickless, Nickless & Phillips, Fitchburg, Mass., for debtor.

William Macauley, Craig and Macauley, Boston, Mass., for First Safety Fund Nat. Bank.

Victor G. Milione, Widett, Glazier & McCarthy, Boston, Mass., for Mut. Bank.

OPINION

JAMES F. QUEENAN, Jr., Bankruptcy Judge.

A bank holding a mortgage and assignments of rents and leases claims the rents or adequate protection for not receiving and retaining them. The Court holds that the Bank is entitled to neither because it was not in possession of the real estate at the time this Chapter 11 case began. Involved is the resolution of an important question of state mortgage law undecided by the Supreme Judicial Court of Massachusetts.

I FACTS

The facts are undisputed. Prichard Plaza Associates Limited Partnership (the "Debtor") is the beneficial owner of three contiguous parcels (Lots 1, 2A and 2B) forming an integrated complex of offices and retail stores located on Main Street in Fitchburg, Massachusetts. It purchased the property from David C. Donahue ("Donahue") in April of 1986, taking title in the name of Marvin P. Smith ("Smith"), as Trustee of Prichard Plaza Realty Trust (the "Trust").

At the time of the purchase, Donahue executed a promissory note in the principal sum of $1,030,000 payable to First Safety Fund National Bank (the "Bank"). This note is secured by a mortgage and security agreement covering the property (the "Mortgage") and another document entitled "Assignment of Landlord's Interest in Leases and Assignment of Rents" (the "Lease Assignment"). Both the Mortgage and Lease Assignment were recorded with the real estate records pursuant to a Massachusetts statute which provides that a conveyance not so recorded, including a mortgage and an assignment of rents or profits, "shall not be valid as against any person, except the grantor . . ., his heirs and devisees and persons having actual notice of it. . . ." Mass.Gen.L. ch. 183, § 4. Upon taking title, Smith executed an assumption agreement whereby on behalf of the Trust he assumed Donahue's obligations to the Bank under the $1,030,000 note and Mortgage, on a nonrecourse basis. Smith also assumed on a nonrecourse basis pre-existing indebtedness owed to the Bank as trustee under certain 1979, 1980 and 1981 mortgage bonds of the Massachusetts Industrial Finance Agency. The Bank is now the holder of all these bonds. Smith obtained $800,000 of purchase money financing from Mutual Fund Bank ("Mutual"), executing a recourse note and mortgage in Mutual's favor. Mutual's mortgage is a first mortgage which covers only Lot 2B. Payments on Mutual's mortgage are current. The Bank's mortgage securing its $1,030,000 note is a second mortgage on Lot 2A and a third mortgage on Lots 1 and 2B. The Bank also has mortgages securing the bonds of the Massachusetts Industrial Finance Agency; one of these is a first mortgage on Lot 2A, another is a first mortgage on Lot 1, and others are second mortgages on Lots 1 and 2B.

The Bank's Mortgage securing the $1,030,000 note contains clauses assigning rents and leases in these terms:

Mortgagor covenants and agrees:

. . . .

2. Assignment of Rents. As additional security for this mortgage and for the Obligations referred to above, the Mortgagor hereby assigns and transfers to the Holder any and all sums of money now due or to become due from the leasing, letting or other use of the mortgaged premises. Said sums are to be collected by the Mortgagor so long as there is no uncured default under the terms of this mortgage or the Obligations referred to above. In the event of any such default, the Holder may, by written notice to the tenant or occupant of the premises, require that said tenant or occupant pay all rents and other sums due or thereafter to become due directly to the Holder, until further notice by the Holder.

3. Assignment of Leases. At any time upon notice from the Holder to submit for examination all leases then in force affecting the Premises; the Mortgagor hereby irrevocably assigns to the Holder any or all of such leases now existing or hereafter entered into and hereby grants to Holder full authority as Mortgagor\'s true and lawful attorney-in-fact, coupled with an interest, with full power of substitution, to make, execute, acknowledge and deliver any further written assignments of said leases.

The Lease Assignment, which secures the same $1,030,000 note, assigns to the Bank "all of Assignor's interest as Landlord in and to all leases of building areas and space in buildings . . . whether such Leases are now in effect or are hereafter entered into, together with all the rents, income and profits. . . ." The Lease Assignment also states:

So long as there shall exist no default by Assignor in the performance of any obligations, the performance of which is secured hereby, or in the performance of any obligation, covenant or agreement herein or in said Leases contained, Assignor shall have the right to collect, upon but not prior to accrual, all rents, income and profits from the property and to retain, use and enjoy the same.

Upon or at any time after default in the performance of any obligation secured hereby or in the performance of any obligation, covenant or agreement herein or in said Leases contained, Assignee, without in any way waiving such default, may at its option, without notice and without regard to the adequacy of any other remedies available to Assignee, either in person or by agent, with or without bringing any proceedings, take possession of the property and have, hold, manage, lease and operate the same, on such terms and for such period of time as Assignee may deem proper, and may demand, collect, sue for and receive all rents and income, including those past due and unpaid, of the Property, with full power to make from time to time all alterations, renovations, repairs or replacements thereto as may deem proper to Assignee, and to apply such rents and income to the payment of (a) the cost of all such alterations, renovations, repairs and replacements, and expenses incident to taking and retaining possession of the Property, and the management and operation thereof, and keeping the same properly insured; (b) all taxes, charges, claims, assessments, and any other liens which may affect the Property, and premiums for said insurance, with interest on all such items; (c) the cost of performance of the obligations secured hereby, together with all costs and attorneys\' fees; and (d) any sums due from Assignor to Assignee, in such order of priority as to any of such items as Assignee in its sole discretion may determine, any statute, law, custom or use to the contrary notwithstanding.

On June 26, 1987, the Bank filed a complaint to foreclose the Mortgage with the Massachusetts Land Court, having made previous demand upon Smith for payment in full of the $1,030,000 note by reason of default in several months' payments. On July 2, 1987, the Bank wrote to Smith advising him that an event of default had occurred and telling him that as assignee of the rents the Bank was notifying tenants to pay rent directly to it. By letters dated July 1, 1987, the Bank made demand upon the tenants for payment of all rent then due or to become due thereafter, including the July rent. Since then, a number of the tenants have been paying the Bank. Others have continued to pay the Debtor, and still others have withheld rent or placed it in escrow pending adjudication or agreement concerning which party is entitled to be paid.

On September 9, 1987, judgment was entered in the Massachusetts Land Court empowering the Bank "to make an entry and to sell the property. . . ." The Bank has not made entry on the property under Mass.Gen.L. ch. 244, §§ 1, 2. It did schedule an auction sale of the property for November 24, 1987. The Debtor filed its Chapter 11 petition with this Court on November 23, 1987. That filing automatically stayed the auction sale pursuant to 11 U.S.C. § 362.

The muddled situation on rent payments has remained the same since the Chapter 11 filing. Some tenants are still paying the Bank, some are paying the Debtor and some are withholding payment or placing their payments in escrow. The Bank has placed all rents which it has received into a separate account, without applying them against its indebtedness. The Debtor has continued to manage the property and pay whatever operating expenses that are being incurred, except taxes.

On November 23, 1987, the day the Debtor filed its Chapter 11 petition, the Bank also filed a motion seeking either to dismiss the Chapter 11 case or to terminate the automatic stay, and requesting adequate protection if the other relief it sought was not granted. The Court heard and denied the motion on that same day. In its findings of fact and rulings of law, which were dictated into the record, the Court found that the property was not depreciating in value. The Court ruled that the Bank had adequate protection under § 362, relying upon the Fifth Circuit's decision in United Savings Association of Texas v. Timbers of Inwood Forest, Ltd. (In re Timbers of Inwood Forest, Ltd.), 808 F.2d 363 (5th Cir.1987) (en banc) (reinstating and supplementing panel opinion at 793 F.2d 1380). That decision has since been affirmed by the Supreme Court. ___ U.S. ___, 108 S.Ct. 626, 98 L.Ed.2d 740 (1988).

The Bank now files the present motion entitled "Motion for Adequate Protection and Sequestration of Rents" in which it requests that it be permitted to continue to receive rents and to apply them to its debt, and asks the Court either to prohibit the Debtor from using rent monies or to condition that use upon the Debtor providing the Bank adequate protection for loss of the rents. In addition to opposing the motion, the Debtor requests the Court to...