Matter of Gotta
| Decision Date | 01 March 1985 |
| Docket Number | Adv. No. 84-0306-11. |
| Citation | 47 BR 198 |
| Parties | In the Matter of John D. GOTTA, Debtor. The EXCHANGE NATIONAL BANK OF CHICAGO, Plaintiff, v. John D. GOTTA, Defendant. |
| Court | U.S. Bankruptcy Court — Western District of Wisconsin |
C. Scott Pryor, Howard, Peterman, Eisenberg, Solochek & Nachban, S.C., Milwaukee, Wis., for plaintiff.
Virginia M. Bartelt, Stafford, Rosenbaum, Rieser & Hansen, Madison, Wis., for defendant.
On September 1, 1982, John D. Gotta ("Gotta") signed a note to Exchange National Bank of Chicago ("Exchange") in the principal sum of $720,000 plus interest at the rate of 2% over prime. The note was secured by a second mortgage on property located in Beloit ("Northgate Plaza"). An assignment of rents (the "assignment") was executed in conjunction with the mortgage, which itself included an assignment of rents. The assignment was by its terms to become effective only upon Exchange taking possession of the premises. The mortgage assignment of rents was not specific as to the time of its operation other than the "election of the mortgagee and the terms of this mortgage." Gotta failed to pay the note when it became due on June 30, 1983, and is in default. Prior to November 21, 1984, Exchange had not attempted to enforce either assignment of rents.
On November 21, 1984, Gotta filed a petition in bankruptcy under chapter 11. An order for relief was entered, and Gotta has since been a debtor in possession.
On December 4, 1984, Exchange filed a complaint alleging a right to receive the rents collected from Northgate Plaza and seeking an injunction prohibiting Gotta from "using, selling, or leasing the cash collateral the rents in which the plaintiff has an interest without the permission of the plaintiff and the authorization of the Court. . . ." In conjunction with the complaint, Exchange filed a motion for a temporary restraining order and a preliminary injunction. Following a hearing on December 5, 1984, this court determined that a temporary restraining order should not be issued pending determination of the motion for preliminary injunction, on the grounds that Exchange had not proved that it had an interest in the rents which caused them to be cash collateral.
On December 18, 1984, Exchange filed motions requesting the appointment of a trustee "in the form and nature of a statecourt receiver" to collect the rents and profits collected from Northgate Plaza and apply them to the outstanding balance on the Note. Exchange also sought to require Gotta to account for and turn over all rents and profits collected from Northgate Plaza from the date of filing. For the reasons stated below, this court denies both motions.
Exchange has not shown sufficient cause under 11 U.S.C. § 1104 to have a trustee appointed. Pursuant to section 1104(a)(1) a trustee may be appointed on a showing of cause, "including fraud, dishonesty, incompetence, or gross mismanagement of the affairs of the debtor . . . or similar cause. . . ." Exchange has not alleged any of the statutorily listed grounds as cause for appointment of a trustee. Rather, Exchange seeks the appointment of a trustee solely as a means of perfecting its interest in the rents from Northgate Plaza, which was unperfected on the date this bankruptcy case was filed. This is not "cause" under section 1104, but is rather an attempt to avoid the automatic stay provision of 11 U.S.C. § 362(a)(4) and (5).
Exchange cites Butner v. United States, 440 U.S. 48, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979), in support of the proposition that this court should "take whatever steps are necessary to ensure that the mortgagee is afforded in federal bankruptcy court the same protection he would have under state law if no bankruptcy had ensued." 440 U.S. at 56, 99 S.Ct. at 918. In Butner the Supreme Court rejected the Seventh and Third Circuits' approaches to dealing with a mortgagee's interest in a bankrupt's rents. Both circuits had granted rent assignees immediate rights to receive rents upon a mortgagor's bankruptcy as a matter of federal law holding that "since the bankruptcy court has the power to deprive the mortgagee of his state-law remedy, equity requires that the right to rents not be dependent on state-court action that may be precluded by federal law." 440 U.S. at 53, 99 S.Ct. at 917. The Supreme Court reversed that result, holding instead that federal bankruptcy courts must look to state law to determine whether an enforceable interest in rents exists; "it does not follow, however, that `equitable administration' requires that all mortgagees be afforded an automatic security interest in rents and profits when state law would deny such an automatic benefit and require the mortgagee to take some affirmative action before his rights are recognized." 440 U.S. at 56, 99 S.Ct. at 918.
Despite language in Butner to the effect that a bankruptcy court must permit whatever steps are necessary to insure that a mortgagee is able to perfect its interest in rents after a bankruptcy is filed, the holding was much narrower. The Supreme Court held only that a bankruptcy court must look to state law to determine a mortgagee's interest. If that interest is perfected under state law, the bankruptcy court must insure that the mortgagee is afforded the same protection in bankruptcy that it would have been under state law if no bankruptcy had ensued.
For while it is argued that bankruptcy may impair or delay the mortgagee\'s exercise of his right to foreclose, and thus his right to acquisition of a security interest in rents according to the law of many States, a bankruptcy judge familiar with local practice should be able to avoid this potential loss by sequestering rents or authorizing immediate state-law foreclosures. Even though a federal judge may temporarily delay entry of such an order, the loss of rents to the mortgagee normally should be no greater than if he had been proceeding in a state court: for if there is a reason that persuades a federal judge to delay, presumably the same reason would also persuade a state judge to withhold foreclosure temporarily. The essential point is that a properly administered scheme in which the basic federal rule is that state law governs, the primary reason why any holder of a mortgage may fail to collect rent immediately after default must stem from state law.
440 U.S. at 56-57, 99 S.Ct. at 918-919 (emphasis added).
The Supreme Court did not address nor did it appear to consider the automatic stay provisions of the Bankruptcy Act of 1898. Under then Bankruptcy Rule 11-44 relief from stay was set in general equitable provisions; "the court may, for cause shown, terminate, annul, modify or condition such stay." To the extent it was considered, the Supreme Court appeared to presume the operation of a court with general administrative obligations in bankruptcy cases and wide latitude in the exercise of its discretion to lift the automatic stay. But the 1978 Bankruptcy Code, which recast the bankruptcy court as a more purely judicial forum restrained from general administration of reorganizations,1 stays the perfection of liens.
Section 362(a)(4) and (5) provide that the filing of a bankruptcy petition operates as a stay of any act to "create, perfect, or enforce" any lien against property of the estate or the debtor. Any post-petition attempt to perfect a security interest violates the automatic stay and is void and of no effect. In Re Oxford Royal Mushroom Products, Inc., 39 B.R. 948, 949 (Bankr.E.D.Pa.1984); see also In Re Munsey Corporation, 10 B.R. 864, 866, 7 B.C.D. 674 (Bankr.E.D.Penn.1981); In Re Bailey, 20 B.R. 906, 913 (Bankr.W.D.Wis. 1982). The 1978 Code also specifically addresses conditions which must be met in order to grant relief from that automatic stay.2 When properly sought by a mortgagee with an unperfected security interest in rents, a bankruptcy judge may authorize immediate foreclosure by lifting the automatic stay if the specific requirements of section 362(d)(1) or (2) are met.
In addition, an exception from the automatic stay is specified for the perfection of certain liens under 11 U.S.C. § 362(b)(3) and 11 U.S.C. § 546(b) or 11 U.S.C. § 547(e). Those sections permit perfection of interests which are effective against an entity acquiring rights in the property prior to perfection, such as mechanics' liens, and provide exceptions to the general rule stated in 11 U.S.C. § 362(a)(4) that the filing of a petition operates as a stay of "any act to create, perfect, or enforce any lien against property of the estate." If perfection of a lien has no retroactive effect it does not fall within the section 546(b) exception. In Re Electric City, Inc., 43 B.R. 336, 11 C.B.C. 895 (Bankr.W.D.Wa.1984).
Perfection of a security interest in an assignment of rents has no retroactive effect. Unless the assignee perfects his/her interest in rents and profits, a prior right in the rents may be acquired by a third person, Woodworth v. Blair, 112 U.S. 8, 5 S.Ct. 6, 28 L.Ed. 615 (1884); Emerson v. European and N.A.R. Co., 67 Me. 387, 24 At. 39 (1877), such as a junior assignee who first takes action to reduce the rents and profits to his/her possession, or a creditor who obtains a lien thereon by judicial process, American Bridge Co. v. Heidelbach, 94 U.S. 798, 4 Otto 798, 24 L.Ed. 144 (1876), Gilman v. Ill. & Miss. Tel. Co., 91 U.S. 603, 1 Otto 603, 23 L.Ed. 405 (1875).3 This is true whether the interest in rents constitutes an assignment or a pledge.4 In Re Pine Lake Village Apt. Co., 17 B.R. 829 (Bankr.S.D.N.Y.1982). Although there are no Wisconsin cases specifically addressing the issue, the cases in states having otherwise similar mortgage and assignment laws support the conclusion that the assignments in question have no retroactive effect and are not within the exemption from section 362(a) afforded to liens which relate back.
To interpret Butner as Exchange asks would be to carve out an...
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