In re Wiston XXIV Ltd. Partnership

• Citation: 147 BR 575
• Decision Date: 12 November 1992
• Docket Number: Civ. A. No. 92-CV-4096-DES,Bankruptcy No. 91-40410-11.
• Parties: In re WISTON XXIV LIMITED PARTNERSHIP. BALCOR PENSION INVESTORS V, Plaintiff/Appellant, v. WISTON XXIV LIMITED PARTNERSHIP, Defendant/Appellee.
• Court: U.S. District Court — District of Kansas

147 B.R. 575 (1992)

In re WISTON XXIV LIMITED PARTNERSHIP.

BALCOR PENSION INVESTORS V, Plaintiff/Appellant, v. WISTON XXIV LIMITED PARTNERSHIP, Defendant/Appellee.

Civ. A. No. 92-CV-4096-DES, Bankruptcy No. 91-40410-11.

United States District Court, D. Kansas.

November 12, 1992.

COPYRIGHT MATERIAL OMITTED

William H. Zimmerman, Jr., Royce E. Wallace, Wallace & Zimmerman, Wichita, Kan., for Wiston XXIV Ltd. Partnership.

Jonathan A. Margolies, McDowell, Rice & Smith, P.C., Kansas City, Mo., Steven R. Rebein, McDowell, Rice & Smith, P.C., Kansas City, Kan., James C. Murray, Katten, Muchin & Zavis, Chicago, Ill., for Balcor Pension Investors V.

MEMORANDUM AND ORDER

SAFFELS, District Judge.

This matter is before the court on the appeal taken by Balcor Pension Investors V ("Balcor") from an order of the Bankruptcy Court for the District of Kansas. The bankruptcy court denied Balcor's claim that post-petition rents accruing to the debtor, Wiston XXIV Limited Partnership ("Wiston") constitute cash collateral pursuant to 11 U.S.C. § 363(a) and that Balcor's interest in the rents withstands the bankruptcy trustee's avoiding powers.¹

Facts

Wiston is a Kansas limited partnership. Its primary asset is an apartment complex located in Overland Park, Kansas, known as Villa Medici Apartments. Balcor, an Illinois limited partnership, loaned Wiston $10,850,000 on November 23, 1987, in exchange for Wiston's Secured Promissory Note, Mortgage and Security Agreement, and Assignment of Leases and Rents. Both the mortgage and the assignment were recorded with the Johnson County Register of Deeds on November 30, 1987.²

Three years later, in December 1990, Wiston defaulted on the note. On February 19, 1991, Balcor accelerated the outstanding balance on the note, terminated Wiston's contractual right to use the rents generated by the apartment complex, declared that all rents were to be held in trust for Balcor, and demanded payment to Balcor of all rents then in Wiston's possession or thereafter received by Wiston.

On March 1, 1991, Wiston filed a voluntary petition under Chapter 11 of the Bankruptcy Code. Wiston remained in possession of the apartment complex and other assets of the bankruptcy estate, subject to the bankruptcy court's approval of its operating budgets. On the same day the petition was filed, Wiston also filed a Motion for Order Authorizing Use of Cash Collateral, seeking authority to use rental income from the apartment complex for its ongoing operating expenses. Balcor immediately filed a motion to segregate and sequester rents pursuant to 11 U.S.C. § 363(c)(4) and § 546(b), claiming a perfected senior lien in the rents and giving notice of its claim that the rents constituted its cash collateral. On April 2, 1991, the bankruptcy court ordered Wiston to make a monthly accounting of all operating expenditures to Balcor, and ordered segregation of all rents generated by the property in excess of the court-approved operating budget, prohibiting the debtor from using such funds except by order of the court. Wiston subsequently submitted proposed operating budgets to the bankruptcy court for approval, to which Balcor filed objections.

On November 8, 1991, Balcor filed a motion for relief from the automatic stay imposed by 11 U.S.C. § 362. Balcor also claimed it held a perfected security interest in the post-petition rent income from the apartment complex notwithstanding the filing of the bankruptcy petition. A hearing on Balcor's motion for relief from stay was held on January 23, 1992.³

In an order dated April 21, 1992, the bankruptcy court held that the security interest in rents was not perfected as of March 1, 1991, the date the bankruptcy petition was filed, and hence Balcor's security interest in the post-petition rents was subject to the avoiding powers of the bankruptcy trustee under 11 U.S.C. § 544(a)(2). The court also concluded that the rents were not Balcor's cash collateral. See In re Wiston XXIV Limited Partnership, 141 B.R. 429, 432 (Bankr.D.Kan.1992). Balcor appeals from this interlocutory order.

Jurisdiction

Wiston argues that this appeal is premature since the order of the bankruptcy court was not stayed pursuant to Bankruptcy Rule 8005, and the bankruptcy proceeding has not terminated. However, a Rule 8005 stay is discretionary, and is not a prerequisite to an appeal. Further, 28 U.S.C. § 158(a) grants the district court jurisdiction to hear appeals from interlocutory orders of bankruptcy judges with leave of the court.

Apparently on the assumption that the order appealed was a final order,⁴ Balcor filed a timely notice of appeal pursuant to Bankruptcy Rule 8001(a) and 8002(a), without an accompanying motion for leave to appeal as required by Rule 8001(b) for interlocutory orders. Because the bankruptcy court's order from which Balcor appeals did not resolve all of Balcor's adversary claims to the bankruptcy estate, particularly the primary contested issue of whether Balcor was entitled to relief from the automatic stay, this court finds that it is not a final order appealable as of right. See, e.g., In re Durability, Inc., 893 F.2d 264, 266 (10th Cir.1990) (appropriate "judicial unit" for finality purposes in bankruptcy is the particular adversary proceeding or discrete controversy); In re Louisiana World Exposition, Inc., 832 F.2d 1391, 1396 (5th Cir.1987) (each adversary proceeding and contested matter should be considered a separate judicial unit for purposes of determining finality) (quoting 1 Collier on Bankruptcy 3.03, at 3-157 (L. King 15th ed. 1987)).

Although D.Kan.Rule 710(a)(2) provides that leave to appeal interlocutory orders is to be sought by filing an application for leave to appeal, subsection (a)(4) provides that the timely filing of a notice of appeal shall be deemed a timely and proper application for leave to appeal. See also Bankruptcy Rule 8003(c). The record on appeal includes each of the items required by Rule 710(a)(2) for an application for leave to appeal. The court also finds that the issue presented in this appeal is a significant question of law in the bankruptcy context, which has not been considered at the appellate level on the basis of property rights under Kansas law. The court therefore deems the timely notice of appeal a proper application for leave to appeal, and by this order the court grants Balcor leave to appeal.

Scope of Appellate Review

Since the order of the bankruptcy court determined an issue of law on undisputed facts, review by this court is de novo. See, e.g., Virginia Beach Federal Savings and Loan Ass'n v. Wood, 901 F.2d 849, 851 (10th Cir.1990).

Analysis

In a bankruptcy proceeding, property interests are determined on the basis of state law. Butner v. United States, 440 U.S. 48, 55, 99 S.Ct. 914, 918, 59 L.Ed.2d 136 (1979). State law varies considerably with regard to the perfection of a mortgagee's interest in rents and the permissible methods by which such an interest may be perfected while the automatic stay of bankruptcy is in effect. See, e.g., United States v. Landmark Park & Associates, 795 F.2d 683, 686 (8th Cir.1986), and cases cited therein. Because the real property at issue in this case is located in Kansas, the law of Kansas applies to determine the property rights of Balcor to the rents generated by the mortgaged property. Butner, 440 U.S. at 54, 99 S.Ct. at 918.

In Kansas, a mortgage is not a conveyance; a mortgagee acquires only a lien securing the mortgagor's indebtedness. See Mid-Continent Supply Co. v. Hauser, 176 Kan. 9, 269 P.2d 453, 457 (1954); Hall v. Goldsworthy, 136 Kan. 247, 14 P.2d 659, 660 (1932); Missouri Valley Investment Co. v. Curtis, 12 Kan.App.2d 386, 745 P.2d 683, 685 (1987); K.S.A. 58-2301. A mortgagor is entitled to use and possession of the premises, together with income generated from the property, until his right is divested by appropriate judicial proceedings, or at least until a receiver is appointed to take possession after foreclosure proceedings begin. Caldwell v. Alsop, 48 Kan. 571, 573, 29 P. 1150, 1151 (1892), quoted in Hall v. Goldsworthy, 14 P.2d at 661; see Mid-Continent Supply Co., 269 P.2d at 458 (where mortgages contained no assignment of rents and profits, mortgagor remained entitled to rents and profits so long as he retains possession; but if receiver appointed following foreclosure, receiver takes possession of rents and profits to be held for benefit of parties in interest). The "lien theory" of the mortgage relationship, followed in Kansas, is the majority rule in the United States. Randolph, The Mortgagee's Interest in Rents: Some Policy Considerations and Proposals, 29 Kan. L.Rev. 1, 14 (1980) hereinafter "Randolph".

Under Kansas law, an assignment of rents to secure payment of a mortgage debt is deemed part of the mortgage, and is enforceable only in accordance with the law relating to the foreclosure of mortgages. Hall v. Goldsworthy, 14 P.2d at 661; cf. First Federal Savings and Loan Ass'n v. Moulds, 202 Kan. 557, 451 P.2d 215, 219 (1969) (right to possession and to rents and profits of property being foreclosed is in defendant owner and except for waste, is absolute); Capitol Building and Loan Ass'n v. Ross, 134 Kan. 441, 7 P.2d 86, 87 (1932) (mortgagor's right to possession of property during redemption period includes right to rents and profits, which cannot be waived by any provision of the mortgage); Mid Kansas Federal Savings and Loan Ass'n v. Zimmer, 12 Kan.App.2d 735, 755 P.2d 1352, 1355 (1988) (separate assignment of rents, executed at same time as note and mortgage, is subject to statute prohibiting waiver of redemption in any mortgage instrument).

Although the assignment creates a lien or security interest in favor of the assignee just as a mortgage creates a lien on behalf of the mortgagee, under Kansas caselaw the assignee is "entitled to the benefit of the contract" only after he takes action in court to reduce the rents to his possession or...