In re Wynnewood House Associates
| Citation | 121 BR 716 |
| Decision Date | 06 December 1990 |
| Docket Number | Bankruptcy No. 90-13023F. |
| Parties | In re WYNNEWOOD HOUSE ASSOCIATES, Debtor. |
| Court | United States Bankruptcy Courts. Third Circuit. U.S. Bankruptcy Court — Eastern District of Pennsylvania |
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Diane J. Sigmund, Blank, Rome, Comisky & McCauley, Philadelphia, Pa., for the movant, Heller Financial, Inc.
Charles M. Golden, Beth Golden Frieder, Obermayer, Rebmann, Maxwell & Hippel, Philadelphia, Pa., for the debtor, Wynnewood House Associates.
Before me is a motion brought by Heller Financial, Inc. ("Heller"), which seeks an order for "Sequestration of Rents" currently collected by Wynnewood House Associates ("debtor") and that are allegedly the cash collateral of Heller. The facts may be summarized as follows and were stipulated to by the parties.
The debtor filed a petition under chapter 11 of the Bankruptcy Code on July 26, 1990. The debtor owns, operates, and manages a residential apartment complex and office building located at 300 E. Lancaster Avenue, Wynnewood, Pennsylvania (the "Premises"). The debtor continues to operate and manage this property as debtor in possession.
On July 17, 1989 Heller made a loan in the principal amount of $9,720,000.00 (the "loan") to the debtor. The following documents were executed contemporaneously: a promissory note; a "mortgage security agreement and assignment of leases and rents;" and, an "assignment of leases and rents." Ex. H-1, H-2 and H-5. It is undisputed by the parties that along with receiving collateral in the real estate itself, Heller also received a security interest in the rents generated by the realty.
Heller's mortgage, Ex. H-2, securing the loan contains clauses assigning rents and leases in these terms:
Similarly, the assignment, H-3, "assigns to Heller all of the right, title, and interest of the debtor in and to all existing and future leases . . . together with all rent, income, and profit therefrom. . . ." The assignment also, at ¶ B 1, grants the debtor the right to receive and use all rents until a default occurs.
Heller recorded both the mortgage and the assignment with the Pennsylvania Montgomery County Recorder of Deeds on July 20, 1989. (Exs. H-2 and H-5). On May 1, 1990, the debtor failed to make the monthly payment of interest and escrow due and, thus, defaulted on its obligations to Heller. On May 22, 1990, Heller sent the debtor a Notice of Default by certified mail. (Defendant's Answer to motion, ¶ 7; Ex. H-3 (Attachment)). On July 23, 1990 Heller sent a letter demanding repayment of $9,519,230.42 plus per diem interest. (Ex. H-3.)
The debtor failed to cure the default, and failed to tender any of the interest, late charges and escrow payments due thereafter. On July 20, 1990, the debtor submitted a proposed repayment plan to Heller to bring the loan current. (Ex. H-3). Heller rejected debtor's proposal in a letter dated July 23, 1990, made a counterproposal for the debtor's consideration, and noted it would forbear from taking action against the debtor until August 3, 1990 while its proposal was being reviewed. (Ex. H-3). This letter also stated that if the parties did not enter into an acceptable modification of the loan, or if Heller did not receive full payment of its loan by August 3, 1990, Heller would "vigorously pursue its legal remedies". (Ex. H-3).
On July 25, 1990, the debtor notified Heller that it was considering Heller's counterproposal and would respond to Heller after certain individuals had reviewed the terms of the new plan. (Ex. H-4). The following day, July 26, 1990, the debtor filed its chapter 11 petition.
On or about August 13, 1990, the parties discussed but did not resolve Heller's interest in the rents and debtor's use of the cash collateral. Heller then filed this motion to "sequester rents." Specifically, Heller requests that all rents not utilized by the debtor "as ordinary operating expenses" be sequestered and deposited in a special account which may only be used upon further order of this court. The debtor has filed an answer denying Heller's right to the relief it sought.
In support of its request, Heller contends that it holds a perfected prepetition security interest in rents of the debtor's realty which, by virtue of 11 U.S.C. § 363(a), makes these rents "cash collateral." Heller then argues that this prepetition security interest in rents is preserved postpetition by 11 U.S.C. § 552(b). As Heller does not consent to the use of its "cash collateral" beyond the payment of ordinary operating expenses, and as the debtor has never sought court approval for the use of cash collateral, 11 U.S.C. § 363(c)(2), Heller, at bottom, is requesting that the debtor be enjoined from using its cash collateral without its consent. See Matter of L.G. Edwards Farm, Inc., 30 B.R. 842, 844 (Bankr.E.D.Mo.1983). The debtor counters that the rents from its realty are not cash collateral. Both parties correctly assert that the resolution of this dispute requires consideration of nonbankruptcy law, specifically Pennsylvania law, concerning the right of a mortgagee to receive the rents from realty.
The applicability of Pennsylvania law to a discussion of Heller's rights in postpetition rents stems both from 11 U.S.C. § 552(b)1 and Butner v. United States, 440 U.S. 48, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979). In Butner, the Court expressly held that the right of a mortgagee to receive rents postpetition under the former Bankruptcy Act of 1898 would be determined solely by nonbankruptcy law.
As was noted by the Butner Court, there were two divergent approaches concerning a mortgagee's postpetition right to receive rents. One approach looked to nonbankruptcy law, generally state law; the other looked to bankruptcy law. Before the Supreme Court overruled the latter approach, the Third Circuit Court of Appeals had developed a "federal rule of equity that afforded the mortgagee a secured interest in postpetition rents even if state law would not recognize any such interest until after foreclosure." Butner, 440 U.S. at 53, 99 S.Ct. at 917 (citing Bindseil v. Liberty Trust Co., 248 F. 112 (3d Cir.1917); In re Pittsburgh-Duquesne Development Co., 482 F.2d 243 (3d Cir.1973)). Under this uniform, federal construction of bankruptcy law, a mortgagee would be entitled to recover postpetition rents whether a security interest had been taken on rents, and whether the mortgagee had taken steps prepetition to obtain possession of the property, simply by virtue of the mortgagor's bankruptcy filing. See Central Hanover B. & T. Co. v. Philadelphia & R.C. & I, Co., 99 F.2d 642, 645 (3d Cir.1938). See also Randolph, The Mortgagee's Interest in Rents: Some Policy Considerations and Proposals, 29 Kansas L.Rev. 1, 44 (1980).
In support of its holding which overruled the Third Circuit's position, the Butner Court reasoned that Congress has generally left the determination of property interests which comprised a debtor's estate to state law: "Property interests are created and defined by state law." Butner, 440 U.S. at 55, 99 S.Ct. at 918. Furthermore, "the justifications for application of state law are not limited to ownership interests; they apply with equal force to security interests, including the interest of a mortgagee in rents earned by mortgaged property." Id. at 55, 99 S.Ct. at 918 (footnote omitted). Thus, the Supreme Court determined that the interest of a mortgagee in postpetition rents from real estate would be defined by state law under the former Bankruptcy Act.
The validity of Butner was not disturbed by the enactment of the Bankruptcy Code of 1978. See e.g., Matter of 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 (1984); In re Jones, 77 B.R. 981, 983 (Bankr.M.D.Ga. 1987). See also Matter of Roach, 824 F.2d 1370, 1374 (3d Cir.1987); In re Farmers Markets, Inc., 792 F.2d 1400, 1402 (9th Cir.1986). Indeed, the reference in section 552(b) to the underlying security instrument and applicable nonbankruptcy law appears to codify the Butner holding insofar as postpetition rents are concerned. Accord In re TM Carlton House Partners, Ltd., 91 B.R. 349, 352-53 (Bankr.E.D.Pa. 1988). Therefore, to determine Heller's interest in the debtor's postpetition rents, I must begin with an analysis of Pennsylvania law on the right of a mortgagee to receive rents from real estate.
Pennsylvania law regarding the interests of a mortgagee in rents stems from its common law.2 Simplified slightly, as a "title" jurisdiction,3 Pennsylvania decisions generally proclaim that a mortgagee, (whether its security agreement has a rents assignment4 provision or not), has the right to seek possession of the realty in certain circumstances (i.e. default) and in prescribed ways. See Bulger v. Wilderman and Pleet, 101...
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