Saline State Bank v. Mahloch

• Decision Date: 23 November 1987
• Docket Number: No. 86-2458,86-2458
• Citation: 834 F.2d 690
• Parties: Bankr. L. Rep. P 72,101 SALINE STATE BANK, Appellant, v. Richard MAHLOCH, Eunice Mahloch, Dennis Mahloch and First National Bank of Chicago, Illinois, Appellees.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 690

834 F.2d 690

Bankr. L. Rep. P 72,101

SALINE STATE BANK, Appellant, v. Richard MAHLOCH, Eunice Mahloch, Dennis Mahloch and First National Bank of Chicago, Illinois, Appellees.

No. 86-2458.

United States Court of Appeals Eighth Circuit.

Submitted June 12, 1987.

Decided Nov. 23, 1987.

Jerrold L. Strasheim, Omaha, Neb., for appellant.

Joseph M. Russell, Chicago, Ill., for appellees.

Before LAY, Chief Judge, HEANEY, Circuit Judge, and LARSON, ^* Senior District Judge.

LAY, Chief Judge.

Saline State Bank entered into a mortgage agreement with the debtors, Richard, Dennis, and Eunice Mahloch, on January 12, 1982. After meeting their obligations under the mortgage agreement for eleven months, the Mahlochs filed a petition in bankruptcy under chapter 11 of the Bankruptcy Code on November 30, 1982. Even though the Mahlochs had declared bankruptcy however, they continued to meet their obligations under the mortgage agreement with Saline State Bank ("Saline") for several months.

On September 28, 1983, Saline, as mortgagee, filed an application with the bankruptcy court to sequester rents and profits from the property. This claim to rents and profits was based on the language of the loan agreement, which expressly provided:

[U]pon such default the Mortgagee, or a receiver appointed by a court, may at its option and without regard to the adequacy of the security, enter upon and take possession of the Property and collect the rents, issues and profits therefrom and apply them first to the cost of collection and operation of the Property and then upon the indebtedness secured by this Mortgage; said rents, issues and profits being hereby assigned to the Mortgagee as further security for the payment of the indebtedness secured hereby.

On November 10, 1983, a hearing was held before bankruptcy Judge Crawford. ¹ Judge Crawford ruled that Saline's interest would not be recognized in Nebraska, and that the automatic stay provision of 11 U.S.C. Sec. 362(a) (1982) would prevent Saline from perfecting its interest after the Mahlochs filed in bankruptcy. Accordingly, the bankruptcy court denied Saline's applications to sequester rents and profits and ruled in favor of the Mahlochs and the First National Bank of Chicago ("FNB"), an unsecured creditor.

On appeal to the district court, Judge Beam ² reversed the bankruptcy court's decision and remanded for further proceedings to determine if the value of the property was insufficient to secure Saline's interest. Saline was opposed on remand, once again, by FNB and the Mahlochs. After considering additional documentary evidence and stipulations of fact, Bankruptcy Judge Mahoney ³ entered an order denying Saline's applications. ⁴

On appeal to the district court for the second time, Judge Strom ⁵ affirmed the bankruptcy court's decision even though the Mahlochs did not enter an appearance. First National Bank of Chicago, representing the unsecured creditors, asserted that it could avoid the interest claimed by Saline because Nebraska law did not recognize interests in rents and profits as perfected until the mortgagee actively pursues its interest. In ruling in favor of FNB, Judge Strom relied on 11 U.S.C. Sec. 544, which allows the trustee or debtor in possession to avoid perfection of liens arising subsequent to the filing of the bankruptcy petition.

On appeal from Judge Strom's ruling, Saline asserts that the district court committed reversible error in relying on section 544. ⁶ Saline also argues that the express provision relating to rents and profits is a self-executing lien, effective henceforth at the time of the agreement. This latter argument, in effect, adopts the rationale that under Nebraska law, which both parties agree controls the question of the validity of the lien interest, no further act of perfection is necessary by Saline, and they are entitled to claim the rents and profits as cash collateral under 11 U.S.C. Sec. 363(a).

According to FNB's argument under section 544, however, the security agreement affecting rents and profits is not a lien under Nebraska law until Saline perfects that interest in state court by appointing a receiver and foreclosing on the property. FNB argues that Saline could not do this until after the Mahlochs filed their bankruptcy petition because there was no default pre-petition. FNB also finds that the district court did not err in invoking section 544 which precludes Saline from perfecting its lien.

The overall effect of the district court's ruling, then, is that Saline has no further security interest in the rents and profits and the fund must be applied to satisfy the general creditors (one of whom would now be Saline). Alternatively, FNB asserts that if Saline is able to perfect its lien, it cannot do so retroactively and any enforcement of the lien must be as of September 28, 1983, when Saline moved in bankruptcy court to have the funds sequestered.

After Butner v. United States, 440 U.S. 48, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979), the rights of a secured creditor must be determined according to the applicable non-bankruptcy law of the state wherein the debt arises. Once bankruptcy intervenes, the bankruptcy trustee can avoid only those security interests which could not have been perfected under state law. At least in the case of a pre-petition default, Butner states emphatically that: "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 57, 99 S.Ct. at 919.

The Pre-Petition Security Interest Under Nebraska Law

Saline argues that its interest was perfected pre-petition, and, therefore, it is entitled to collect subsequent rents and profits. In support of its argument, Saline refers to established Nebraska law which recognizes the validity of assignment of rents clauses. Central Sav. Bank v. First Cadco Corp., 186 Neb. 112, 114, 181 N.W.2d 261, 264 (1970); Penn. Mut. Life Ins. Co. v. Katz, 139 Neb. 501, 504, 297 N.W. 899, 901 (1941).

Notwithstanding Saline's persuasive argument, we find that Nebraska law requires us to hold that Saline did not have a lien until their interest was fully perfected, i.e., by filing a petition to sequester rents and profits. Neb.Rev.Stat. Sec. 25-1081 (Reissue 1985) and Neb.Rev.Stat. Sec. 25-1082 (foreclosure proceeding). Only by this method could the mortgagee exercise ownership over the rents and profits. See Prudential Ins. Co. of Am. v. Farm Inv. Co., 123 Neb. 578, 586, 243 N.W. 842, 846 (1932); Huston v. Canfield, 57 Neb. 345, 348-49, 77 N.W. 763, 764 (1899). Furthermore, under the express terms of the mortgage agreement, this procedure to perfect the lien can be invoked only upon default of the mortgagor. Nebraska law makes clear that perfection of this type of interest may happen only when the mortgaged property is insufficient to discharge the mortgage debt. Federal Farm Mortgage Corp. v. Ganser, 146 Neb. 635, 639, 20 N.W.2d 689, 692 (1945); Prudential Ins. Co. of Am. v. Farm Inv. Co., 123 Neb. at 586, 243 N.W. at 846; Huston v. Canfield, 57 Neb. at 348-49, 77 N.W. at 764; Jacobs v. Gibson, 9 Neb. 380, 387-88, 2 N.W. 893, 894 (1879). In the present case, it was stipulated that Saline was undersecured.

Saline argues that the agreement's assignment of rents clause creates a self-executing lien and, therefore the appointment of a receiver is a mere procedural step. This position is contrary to established Nebraska law. ⁷ As stated by the Nebraska Supreme Court:

The general rule is that a junior mortgagee who obtains a receiver of the rents and profits in aid of a bill to foreclose his mortgage is entitled to the rents and profits at the hands of such receiver up to the time of appointing a receiver upon a bill of a prior mortgagee not a party to the original suit. High on Receivers, Sec. 688. And the prior mortgagee is only entitled to have of the receiver such rents and profits as accrue after the appointment in aid of such prior mortgage, although one and the same person is appointed in both cases. The rule is based upon the consideration that, until the elder mortgagee sees fit to assert his right to the rents and income, a junior encumbrancer has a right to do so; and the first mortgagee not being a party to the former suit and having no lien on the rents and profits, and no right to recover the back rents, he can only assert his right thereto as against the receiver from the date of the appointment in his own suit.

Goddard v. Clarke, 81 Neb. 373, 376, 116 N.W. 41, 42 (1908) (emphasis added).

Subsequent cases have enforced the same requirements. See Penn. Mut. Life Ins. v. Katz, 139 Neb. at 504, 297 N.W. at 901 (widow executed mortgage on property which, upon thirty days default, assigned to plaintiff mortgagee the rents due and delivered to plaintiff a written assignment of the mortgaged property). In Penn. Mut. Life Ins. v. Katz, the court observed that:

Defendant contends, relying upon Huston v. Canfield, 57 Neb. 345, 77 N.W. 763, that in a foreclosure action the court cannot divert the rents of the mortgaged premises from the tenant in possession claiming title under the mortgagor, except by the appointment of a receiver pursuant to statutory provisions. Of course, this contention is true unless the stipulation inter partes makes the rule otherwise.

Recently, the United States Bankruptcy Court for the District of Nebraska observed that, outside of the bankruptcy context, it remains the rule in Nebraska today that a receiver must be appointed:

In Nebraska, the proper procedures to enforce such a lien outside the context of bankruptcy includes the commencement of foreclosure proceedings and requesting the appointment of a receiver to collect the rents and profits.

In re Anderson, 50 B.R. 728, 732 (D.Neb.1985) (citing Prudential Ins. Co. v. Farm Inv. Co., 123 Neb. 578, 243 N.W. 842 (1932) and Huston v. Canfield, 57 Neb. 345, 77 N.W. 763 (1899)).

An analysis of Nebraska cases...