In re Thymewood Apartments, Ltd.

• Decision Date: 31 January 1991
• Docket Number: No. C-2-90-0810 to C-2-90-0816.,C-2-90-0810 to C-2-90-0816.
• Citation: In re Thymewood Apartments, Ltd., 123 B.R. 969 (S.D. Ohio 1991)
• Parties: In re THYMEWOOD APARTMENTS, LTD. Jointly Administered With Blossom Corners Apartments II, Ltd., Bel Aire Apartments II, Ltd., Bel Aire Apartments, Ltd., Centre Lakes Apartments, Ltd., Centre Lakes Apartments II, Ltd., Centre Lakes Apartments III, Ltd.
• Court: U.S. District Court — Southern District of Ohio

123 B.R. 969 (1991)

In re THYMEWOOD APARTMENTS, LTD. Jointly Administered With Blossom Corners Apartments II, Ltd., Bel Aire Apartments II, Ltd., Bel Aire Apartments, Ltd., Centre Lakes Apartments, Ltd., Centre Lakes Apartments II, Ltd., Centre Lakes Apartments III, Ltd.

Nos. C-2-90-0810 to C-2-90-0816.

United States District Court, S.D. Ohio, E.D.

January 31, 1991.

Todd Marti, Schottenstein, Zox & Dunn, Columbus, Ohio, for appellant.

Carol Stebins, David Korn, Jones, Day, Reavis & Pogue, J. Andrew Merkle, Denmead, Blackburn & Willard, Columbus, Ohio, for appellee.

OPINION AND ORDER

KINNEARY, Senior District Judge

This matter comes before the Court to consider the consolidated appeal from the ruling of the bankruptcy court below by the appellants, Amerifirst Federal Savings Bank ("Amerifirst"). This Court has jurisdiction to hear appeals from final judgments, orders, and decrees of bankruptcy judges. 28 U.S.C. § 158(a) (1988); Bankr.R. 8001.

The appellees in this case are Thymewood Apartments, Ltd., Blossom Corners Apartments II, Ltd., Bel Aire Apartments, Ltd., Bel Aire Apartments II, Ltd., Centre Lake Apartments, Ltd., Centre Lake Apartments II, Ltd., and Centre Lake Apartments III, Ltd. Because the issues presented by these cases are identical,¹ for the sake of expediency the Court will enumerate briefly the facts for one representative case.

The first case, which involves the mortgagor Thymewood ("Debtor"), began on December 5, 1984, when the Debtor executed and delivered to Cardinal Industries Mortgage Company ("CIMC") a promissory note in the principal amount of $2,500,000.00, which was secured by a mortgage on real property upon which the Debtor intended to build an apartment complex. After recordation, the note was assigned to the mortgagee in this dispute, Amerifirst. Subsequent to the assignment, the mortgagor went into default on the note, and, on May 5, 1989, Amerifirst sent notice of default and a demand for immediate payment of all rents pursuant to an assignment of rents clause² contained in the mortgage agreement, and a Florida statute which purports to allow for an absolute and unconditional assignment of rents generated from mortgaged property to the holder of the mortgage upon default by the mortgagor and notice by the mortgagee. Fla.Stat. § 697.07 (1989). The Debtor responded by paying to Amerifirst the rents collected from its tenants for approximately one year, which included several months of payment immediately following its petition for reorganization. As of August 1, 1990, a total of $2,726,563.11 was due Amerifirst from the Debtor, exclusive of default interest and attorney fees.

In the court below, In re Cardinal Industries, Inc., 118 B.R. 971 (Bankr.S.D. Ohio 1990), the central issue was the nature and extent of each lenders' interest in the rents generated from the property against which it held an assignment of rents for which the statutory notice under Florida law had been given. Id. at 976. The court concluded that section 697.07 was not meant to provide for an absolute transfer of ownership rights in rents upon default by a debtor. Rather, the statute "merely eliminates the mortgagee's need to obtain an order sequestering the rents or to take possession of the property prior to a right to receive the rents after the mortgagor's default." Id. at 979.

Specifically, the court found that the statute was meant only to determine how a mortgagee could enforce its security interest in rents; it does not provide for an absolute transfer of ownership in these rents. Id. at 979; see also Matter of Growers Properties, 117 B.R. 1015, 1015 n. 1 (Bankr.M.D.Fla.1990); In re One Fourth Street North, Ltd., 103 B.R. 320, 321-22 (Bankr.M.D.Fla.1989); In re Aloma Square, 85 B.R. 623, 625 (Bankr.M.D.Fla. 1988). As a result, the court was constrained to hold that since the statute would not allow for an absolute transfer of rents, the mortgagee's rights were possessory only, and not in the nature of complete ownership. As possessory rights, they were in the nature of a lien, and therefore became property of the debtor's estate pursuant to section 541³ of the bankruptcy code. Id.

As property of the estate, the lender's right to the rents was thus limited by both the terms of the lending agreement and section 552(b)⁴ of the bankruptcy code. Because section 552(b) carries forward the pre-petition security interest of the mortgagee, and because the court found that the parties intended the lending agreement to reach only net rents (that portion of rents remaining after payment of operating costs), the court found that the debtors' obligation of repayment was limited to these residual monies. Id. at 980-81. Therefore, the pivotal issue in this case was the court's decision to characterize the mortgagee's interest as possessory, for only then could it be considered a security interest and thus become part of the debtor's estate, subject to the jurisdiction of the bankruptcy court and the restrictions of section 552(b). Conversely, had the court found the mortgagee to have had an ownership right, the rents, to the extent provided in the Mortgage Agreement, apparently would have passed directly to Amerifirst and not been subject to the Chapter 11 Plan. The conclusion that the interest was a possessory one turned, of course, on the court's construction of the Florida statute.

On appeal, Amerifirst contends that the plain language of the statute compels the Court to find that upon default and notice the mortgagee, under Florida law, received an ownership right in the rents since the Florida statute purported to allow absolute assignments of rental proceeds. The Debtors dismiss the reading of the statute for which Amerifirst contends, arguing instead that the statute was meant to change only the procedure by which a mortgagee could enforce its right to collect rents pursuant to an assignment clause. The statute did not, they assert, confer any substantive right to ownership of the proceeds.

I. STANDARD OF REVIEW

In a bankruptcy proceeding, the bankruptcy court is the finder of fact. In re Caldwell, 851 F.2d 852, 857 (6th Cir. 1988). Bankruptcy rule 8013 provides that "findings of fact, whether based on oral or documentary evidence, shall not be set aside unless clearly erroneous." Id. It is, therefore, the settled practice in this circuit that a district court is not to disturb the factual findings of a bankruptcy court unless there is "most cogent evidence of mistake or miscarriage of justice." Sladov v. United States, 552 F.2d 159, 162 (6th Cir. 1977) (quoting McDowell v. John Deere Indus. Equip. Co., 461 F.2d 48, 50 (6th Cir.1972), rev'd on other grounds, 436 U.S. 238, 98 S.Ct. 1778, 56 L.Ed.2d 251 (1978)). Conclusions of law, on the other hand, are subject to de novo review. In re Caldwell, 851 F.2d at 857.

With respect to the substantive law to be applied, Butner v. United States, 440 U.S. 48, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979), is controlling. In that case, the Supreme Court held that the right to rents and profits derived from mortgaged property is to be determined by reference to the laws of the state in which the property is located rather than by federal law.⁵ Accordingly, the Court will apply Florida law to the dispute at hand.

II. THE FLORIDA STATUTE

A. Textual Analysis

The starting point for analysis of a statute is the statutory language itself. Consumer Prod. Safety Comm'n v. GTE Sylvania, Inc., 447 U.S. 102, 108, 100 S.Ct. 2051, 2056, 64 L.Ed.2d 766 (1980). "In this case it is also where the inquiry should end, for where, as here, the statute's language is plain, `the sole function of the courts is to enforce it according to its terms.'" United States v. Ron Pair Enters., Inc., 489 U.S. 235, 241, 109 S.Ct. 1026, 1030, 103 L.Ed.2d 290 (1989). At issue in this case is the construction and effect of a Florida statute which provides:

A mortgage may provide for an assignment of rents. If such assignment is made, such assignment shall be absolute upon the mortgagor\'s default, becoming operative upon written demand made by the mortgagee. Upon application by the mortgagee, a court of competent jurisdiction may require the mortgagor to deposit such rents in the registry of the court pending adjudication of the mortgagee\'s right to the rents, any payments therefrom to be made solely to protect the mortgaged property and meet the mortgagor\'s lawful obligations in connection with the property. Any undisbursed portion of said rents shall be disbursed in accordance with the court\'s final judgment or decree.

Fla.Stat. § 697.07 (1989) (emphasis added).

It is at once clear that section 697.07, on its face, authorizes inclusion of an assignment of rents provision in a lending agreement between a mortgagee and a mortgagor. Once the parties have agreed to such a provision, the assignment, whatever its terms, vests automatically in the mortgagee upon satisfaction of the statutory requisites of default and notice. The word "absolute," which is at the core of the present controversy, modifies the word "assignment," thus indicating that it is the rights conferred by the assignment itself that are transferred to the mortgagee under the statute. Nowhere, however, does the statute purport to define the scope of the substantive rights involved. Rather, the word "absolute" signifies that an assignment, whatever its terms, is to be effected free of any qualification or condition by which it might defeated or otherwise changed. Moreover, because the interest is absolute, it passes as an operation of law, conferring upon the mortgagee an ownership interest in the rents to the extent provided for in the agreement. Thus an assignment of rents provision may provide for an absolute transfer of the revenues generated by the subject property, creating an ownership interest in a mortgagee, which is effective upon default by the mortgagor and notice given to the mortgagor by the mortgagee.

The second...