In re Stanley Station Associates, LP
| Decision Date | 24 April 1992 |
| Docket Number | Bankruptcy No. 90-40324. |
| Citation | 139 BR 990 |
| Parties | In re STANLEY STATION ASSOCIATES, L.P., Debtor. |
| Court | U.S. Bankruptcy Court — District of Kansas |
Cynthia F. Grimes and Daniel D. Phillips, Lewis, Rice & Fingersh, Kansas City, Mo., for debtor.
Stephen B. Sutton and Stephen A. Murphy, Gage and Tucker, Kansas City, Mo., for Mut. Benefit Life Ins. Co.
James E. Foulston, Wichita, Kan., trustee.
Two contested matters raise the same principal issue for decision. Debtor-in-possession, Stanley Station Associates, L.P. ("Stanley" or "debtor"), moves for turnover of rents generated by a shopping center it owns. Mutual Benefit Life Insurance Company ("MBL") moves for adequate protection of its alleged lien against the rents. MBL holds some of the rents through its agent Kessinger/Hunter & Co. ("K/H") by authority of a Johnson County, Kansas, District Court rent impoundment order that MBL obtained before the debtor filed this voluntary Chapter 11 case. The Court has denied MBL's earlier motion for relief from stay which sought leave to apply the rents to its claim.
Stanley Station Associates, L.P., appears by its attorneys, Cynthia F. Grimes and Daniel D. Phillips of Lewis, Rice & Fingersh, Kansas City, Missouri. Mutual Benefit Life Insurance Company appears by its attorneys, Stephen B. Sutton and Stephen A. Murphy of Gage & Tucker, Kansas City, Missouri.
The Court has jurisdiction under 28 U.S.C. § 1334 and the general reference order of the District Court effective July 10, 1984. This proceeding is core under 28 U.S.C. § 157.
The general question is whether a Kansas mortgagee is entitled to "cash collateral" treatment of the rents generated by mortgaged property when it obtained an ex parte state court order for possession of those rents before the mortgagor filed its Chapter 11 reorganization petition. The Court answers in the negative.
The facts as gleaned from the motions and affidavits are stipulated and undisputed. Stanley Station Associates, L.P., is a Kansas limited partnership with its principal place of business in Stanley, Kansas. Stanley filed for relief under Chapter 11 of the Bankruptcy Code on February 16, 1990. Its principal asset is a shopping center located in Stanley, Kansas. The Court has previously appraised the shopping center at a fair market value of $1,800,000.00 as of February 16, 1990.
A Mortgage, Security Agreement and Assignment of Rents and Leases, all dated December 19, 1985, encumber the shopping center and its accoutrements (except for a pad site). Debtor executed these documents in favor of MBL, which caused them to be recorded with the Johnson County, Kansas, Register of Deeds on December 19, 1985. The instruments assign to MBL all rents and profits from the shopping center.
The Mortgage accompanies a Promissory Note dated December 19, 1985, in the principal amount of $2,250,000.00, payable to MBL in 60 monthly installments of $19,218.75 with the entire balance due on January 1, 1991. Debtor has made no installment payment due under the Promissory Note and Mortgage since August of 1989 and is in default. On the petition date, February 16, 1990, the debtor owed MBL $2,412,450.81 on the Note.
The loan documents contain various provisions relating to MBL's remedies against rents upon default, typical of which is the provision giving MBL the right to "all . . . rents, issue and profits less operation and maintenance expenses, derived from the security." The same clause purports to gives MBL the right to a receiver upon default. See paragraph 2 of Mortgage and Security Agreement dated September 19, 1985, attached to the MBL Proof of Claim filed July 27, 1990.
The significant state court filing events all took place on February 1, 1990. At 1:14 p.m. on that date, MBL filed a "Petition for Mortgage Foreclosure" in the District Court of Johnson County, Kansas. The Petition named Stanley and 32 tenants of the shopping center as party defendants. It prayed for (1) judgment for foreclosure against Stanley; (2) an order directing the tenants and others in possession to make all present and future rent payments to plaintiff MBL or its designated depository; (3) an order declaring its mortgage a first lien on the property; (4) sale of the property; (5) application of the sale proceeds to MBL's claim, after payment of costs and taxes; (6) an order foreclosing all defendants from any right, title or interest in the property; and (7) an order for a writ of assistance to put plaintiff MBL in possession of the property.
The foreclosure petition did not pray for the appointment of a receiver, nor did it state the probable value of the property or the estimated annual income therefrom as is required in a petition or application for appointment of a receiver under K.S.A. 60-1304. No provision for a receiver's bond was addressed. The petition was not verified. The record does not contain an application for appointment of a receiver, but as will be discussed later, a hearing for appointment of a receiver was scheduled.
At 2:03 p.m. that same day, MBL filed a "Motion for Order to Pay Rents Pursuant to Assignment of Rents and Leases." MBL supported this pleading with a "Memorandum in Support of Motion for Order to Pay Rents Pursuant to Assignment of Rents and Leases." These pleadings urged the court to order the tenants to make their rental payments to plaintiff or its designee.
At the same time, 2:03 p.m., MBL filed an "Order to Pay Rents Pursuant to Assignment of Rents and Leases." This order was signed by The Honorable Marion W. Chipman, Judge of the District Court of Johnson County, Kansas. The order was obtained without prior notice to the debtor. Judging from the simultaneous filing times of the pleadings, MBL obtained the judge's signature on the order before it filed the motion. The record does not reflect that Judge Chipman heard evidence or made findings before signing the order which reads:
ORDERED, ADJUDGED AND DECREED that, until further order of the Court, all defendant tenants and lessees shall make all rent payments directly to The Mutual Benefit Life Insurance Company and mailed to Kessinger/Hunter & Co., Inc. at 15377 West 95th Street, Lenexa, Kansas 66219, c/o Mr. Kenneth M. Nicolay.
Two minutes later, at 2:05 p.m., MBL filed a "Motion to Appoint Special Process Server" and an "Order for Appointment of Special Process Server" signed by Judge Chipman. The order directed "that Michelle D. Campbell, or other qualified personnel of Gage & Tucker, be appointed as special process server to serve the defendants in the State of Kansas." Although the record does not show that MBL filed a pleading asking for the appointment of a receiver, the state court then scheduled a hearing for appointment of a receiver for February 16, 1990, at 4:30 p.m.1
Before the hearing for appointment of a receiver on February 16, 1990, debtor filed its voluntary petition for Chapter 11 relief, triggering the automatic stay against further proceedings in state court. In the interim between the foreclosure filing on February 1, 1990, and the Chapter 11 filing on February 16, 1990, a number of the tenants heeded the state court order and paid their rent to MBL's agent, K/H, rather than to the debtor.
On March 22, 1990, debtor moved in this Court for an order of turnover under 11 U.S.C. § 543 seeking to compel Kessinger/Hunter as an agent of MBL to turn over collected rents.
MBL and K/H objected to debtor's Motion for Turnover, and MBL then filed a Motion for Relief from Stay. On June 8, 1990, MBL filed a notice of perfection of rents under 11 U.S.C. § 546(b).
At the hearing on November 19, 1990, this Court denied MBL's Motion for Relief from Stay.
At no time in this proceeding has MBL moved to prohibit debtor from using rents as cash collateral. Kessinger/Hunter has continued to collect rents from some, but not all, tenants, while other tenants have continued to pay the debtor. Debtor has also received Court authority to employ a rents collection attorney pending resolution of these issues. The rents collected by this attorney are being held in an account by debtor's counsel.
MBL contends that the February 1, 1990, ex parte order of the District Court of Johnson County, Kansas, ordering the rents paid to its agent K/H, is a valid order which has the effect of "perfecting" its lien on the rents, thereby making them "cash collateral" under §§ 363(a) and 552(b) of the Bankruptcy Code. In the alternative, MBL contends its motion under § 546(b) dictates the same result. Finally, MBL claims not to be adequately protected in the rents and entitled to relief from the § 362 stay so that it may apply the rents to its claim.
Debtor contends that the state court ex parte order to pay rents to MBL's agent violates due process of law and is therefore void. In debtor's view, neither the pre-petition rent impoundment order nor the post-petition sequestration motion under § 546(b) have perfected a lien against the rents which would entitle MBL to cash collateral treatment of the rents under the Bankruptcy Code.
Unless some federal interest requires a different result, property interests created and defined by state law are controlling in bankruptcy. Butner v. United States, 440 U.S. 48, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979); In re Matter of Jeffers, 3 B.R. 49 (Bankr.N.D.Ind.1980); In re Jenkins, 13 B.R. 721 (Bankr.D.Colo.1981), rev'd on other grounds, 19 B.R. 105 (1982); In re Oak Glen R-Vee, 8 B.R. 213 (Bankr.C.D.Calif.1981); In re Gaslight Village, Inc., 6 B.R. 871 (Bankr.D.Conn.1980); In re Hellenschmidt, 5 B.R. 758 (Bankr. D.Colo.1980); In re Kuhn Construction Co., Inc., 11 B.R. 746 (Bankr.S.D.W.Va. 1981).
Bankruptcy courts applying other states' adopted versions of the Uniform Commercial Code generally agree that rent assignment clauses in real estate mortgages do not...
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