Jason Realty, L.P., In re
| Decision Date | 04 August 1995 |
| Docket Number | 95-5133,Nos. 94-5691,s. 94-5691 |
| Citation | 59 F.3d 423 |
| Parties | , Bankr. L. Rep. P 76,558 In re JASON REALTY, L.P., Debtor. FIRST FIDELITY BANK, N.A. v. JASON REALTY, L.P., Appellant. JASON REALTY, L.P., Appellant, v. FIRST FIDELITY BANK, N.A. |
| Court | U.S. Court of Appeals — Third Circuit |
Jonathan I. Rabinowitz (argued), Bernard Schenkler, Paul Rosenblatt, Ravin, Sarasohn, Cook, Baumgarten, Fisch & Baime, Roseland, NJ, for appellant.
Joseph Lubertazzi, Jr. (argued), Sheila E. Calello, McCarter & English, Newark, NJ, for appellee.
Before: GREENBERG, ROTH and ALDISERT, Circuit Judges.
These consolidated appeals arise out of the bankruptcy of Jason Realty, L.P., a single-asset, New Jersey limited partnership that owns and operates a two-story retail and office building. On this property, First Fidelity Bank, N.A., holds a note, a mortgage, and an assignment of rents. At issue here is the assignment agreement, which assigned the rents, income and profits from the property to the bank, but granted Jason Realty the privilege to collect the rents until the event of default. Jason Realty defaulted prior to filing its Chapter 11 petition. The parties now dispute title to the rents.
The major question for decision is whether the assignment was an absolute assignment, as interpreted by the district court, or a collateral pledge, as construed by the bankruptcy court. We agree with the district court that the assignment vested First Fidelity with title to the rents and granted Jason Realty a license to collect the rents until default. Upon default, Jason Realty had no interest in the rents. Accordingly, the rents are not property of the estate and are not available as cash collateral nor as a funding source for the debtor's reorganization plan. Therefore, we will affirm the orders of the district court.
The orders of the bankruptcy judge and the district court are final and appealable. Commerce Bank v. Mountain View Village, Inc., 5 F.3d 34, 36-37 (3d Cir.1993). We have jurisdiction under 28 U.S.C. Sec. 158(d). Because there is no dispute as to the facts presented below, the interpretation and application of the assignment contract and the Bankruptcy Code raise only questions
of law subject to plenary review. See In re DeSeno, 17 F.3d 642, 643 (3d Cir.1994); FRG, Inc. v. Manley, 919 F.2d 850, 854 (3d Cir.1990).
The contest here is between Jason Realty, L.P., the debtor, and First Fidelity Bank, N.A., a creditor. Jason Realty is the owner of commercial real estate in Aberdeen, New Jersey. On September 14, 1989, Jason Realty executed a promissory note in favor of Howard Savings Bank for the repayment of approximately $750,000.00. On this date, it also executed two additional agreements: a mortgage and an assignment of leases. The assignment provided:
THAT the Assignor for good and valuable consideration, receipt whereof is hereby acknowledged, hereby grants, transfers and assigns to the Assignee the entire lessor's interest in and to those certain leases ... TOGETHER with all rents, income and profits arising from said leases.
App. at 78. The assignment included the following "terms, covenants and conditions":
So long as there shall exist no default by the Assignor in the payment of the principal sum, interest and indebtedness secured hereby and by said Note and Mortgage, ... the Assignor shall have the privilege to collect ... all rents, income and profits arising under said leases or from the premises described therein and to retain, use and enjoy the same. * * *
Upon payment in full of the principal sum, interest and indebtedness secured hereby and by said Note and Mortgage, this Assignment shall become and be void and of no effect.
App. at 80 and 82. On October 2, 1992, First Fidelity purchased the note, mortgage and assignment from Howard Savings Bank.
Jason Realty defaulted on the note by failing to make the principal and interest payments due on November 1, 1993, and each month thereafter. On January 28, 1994, First Fidelity sent notices to the tenants of the mortgaged property demanding that they pay their rent directly to First Fidelity. On March 3, 1994, First Fidelity instituted a foreclosure action in a New Jersey state court, and on March 18 filed an application for appointment of a receiver. One week thereafter, Jason Realty filed a voluntary Chapter 11 petition. Accordingly, the foreclosure action was stayed.
On April 4, 1994, the bankruptcy court authorized Jason Realty's preliminary use of the rents to pay expenses in accordance with the budget submitted to the court and set a final hearing date for April 25, 1994. At the final hearing, the bankruptcy court held that the rents, amounting to approximately $12,500 per month, constituted cash collateral and granted Jason Realty's motion for continued use of cash collateral. The court also directed Jason Realty to pay First Federal $6,041.00 per month as adequate protection. The court entered a final order authorizing the debtor's continued use of cash collateral. First Fidelity filed an appeal to the district court which reversed the bankruptcy court's order and held that the rents were not property of the estate and could not be used as cash collateral. The appeal at No. 94-5691 challenges this order.
On November 8, 1994, First Fidelity moved for relief from the automatic stay. Jason Realty filed a cross-motion seeking to compel First Fidelity to pay operating expenses for the real property under 11 U.S.C. Sec. 506(c). On December 5, 1994, the bankruptcy court issued an order granting relief from the automatic stay and denying the cross-motion. Jason appealed to the district court, which affirmed. The appeal at No. 95-5133 challenges this order.
The issue before us is whether the assigned rents should have been classified as property of the estate under 11 U.S.C. Sec. 541(a)(1). Property of the estate consists of all property in which the debtor holds an interest upon the commencement of bankruptcy. See 11 U.S.C. Sec. 541(a)(6). Generally, a debtor-in-possession, as trustee, see 11 U.S.C. Sec. 1107(a), is free to use, sell or lease property of the bankruptcy estate in the operation of the debtor's business. See 11 U.S.C. Sec. 363(c)(1). Thus, classification of the instant rents is significant because the rents could become part of the bankruptcy estate and fund the debtor's reorganization.
The district court concluded that Jason Realty had no interest in the rents at the commencement of bankruptcy on March 25, 1994, because it had assigned the rents on September 14, 1989. Although Jason Realty had a license to collect the rents, the license was revoked when Jason Realty defaulted on the note on November 1, 1993, prior to the commencement of bankruptcy.
Jason Realty argues (and the bankruptcy court held 1) that the estate held an interest in the rents, because the assignment merely pledged the rents as security. Jason Realty contends that it retained title to the rents and that the rents are now "cash collateral." Cash collateral takes many forms and includes "the ... rents ... of property subject to security interest as provided in section 552(b) of this title." 11 U.S.C. Sec. 363(a). Subject to certain conditions, a bankruptcy court may authorize the use of cash collateral by a debtor. Id.
We must determine whether the assignment conveyed title to First Fidelity or, instead, pledged the rents as security. Assignments of rents are interests in real property and, as such, are created and defined in accordance with the law of the situs of the real property. Butner v. United States, 440 U.S. 48, 55, 99 S.Ct. 914, 918, 59 L.Ed.2d 136 (1979); Commerce Bank, 5 F.3d at 37. A federal court in bankruptcy is not allowed to upend the property law of the state in which it sits, for to do so would encourage forum shopping and allow a party to receive "a windfall merely by reason of the happenstance of bankruptcy." Butner, 440 U.S. at 55, 99 S.Ct. at 918. Thus, in determining whether the parties' assignment of rents transferred title or, instead, created a "security interest," our goal must be to ensure that First Fidelity "is afforded in federal bankruptcy court the same protection [it] would have under state law if no bankruptcy had ensued." Id. at 56, 99 S.Ct. at 918. We thus turn to New Jersey law to classify the parties' interests in the rents.
It is settled in New Jersey that an assignment of rents passes title to the assignee. Paramount Bldg. & Loan Ass'n of City of Newark v. Sacks, 107 N.J.Eq. 328, 152 A. 457 (N.J. Ch. 1930). An assignment of a right is a manifestation of the assignor's intention to transfer it by virtue of which the assignor's right to performance by the obligor is extinguished in whole or in part and the assignee acquires right to such performance. Restatement (Second) of Contracts Sec. 317; see generally Aronsohn v. Mandara, 98 N.J. 92, 484 A.2d 675, 678-79 (N.J.1984). The precise wording determines the effect of the assignment. See In re Winslow Center Assocs., 50 B.R. 679, 681 (Bankr.E.D.Pa.1985); In re Pine Lake Village Apartment Co., 17 B.R. 829, 834 (Bankr.S.D.N.Y.1982); Matter of Glen Properties 168 B.R. 537 (D.N.J.1993).
An absolute assignment transfers title to the assignee upon its execution. New Jersey Nat'l Bank & Trust Co. v. Wolf, 108 N.J.Eq. 412, 155 A. 372 (N.J. Ch. 1931). An assignment is absolute if its language demonstrates an intent to transfer immediately the assignor's rights and title to the rents. In re Winslow Center Assocs., 50 B.R. at 681-82 (applying New Jersey law). The instant assignment was quintessentially absolute, because it was a total assignment in per verba de praesenti: Jason Realty "hereby grants, transfers and assigns to the assignee the entire lessor's interest in and to those certain leases ... Together with all rents." These parties...
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