VIRGINIA BEACH FEDERAL SAV. AND LOAN ASS'N v. Wood, Bankruptcy No. 87-C-364-E
| Decision Date | 18 February 1988 |
| Docket Number | 87-C-514-E.,Bankruptcy No. 87-C-364-E |
| Parties | VIRGINIA BEACH FEDERAL SAVINGS AND LOAN ASSOCIATION, Appellant, v. Frank E. WOOD and Beverly J. Wood d/b/a Franklin Investments, Franklin Development Co., and Franklin Woodworks, Appellees. VIRGINIA BEACH FEDERAL SAVINGS AND LOAN ASSOCIATION, Appellant, v. Frank E. WOOD, Beverly J. Wood, and the Unsecured Creditors Committee ("UCC"), Appellees. |
| Court | U.S. District Court — Northern District of Ohio |
Thomas E. English, Douglas S. Tripp, English, Jones & Faulkner, Tulsa, Okl., for debtors.
Jonathan H. Alden, Hall, Estill, Hardwick, Gable, Collingsworth & Nelson, Tulsa, Okl., for the Creditors Committee.
Andrew R. Turner, Tony M. Davis, Deirdre O. Dexter (Conner & Winters, of counsel), Tulsa, Okl., for Virginia Beach Federal Sav. & Loan Ass'n.
Now before the Court is the appeal of Creditor Virginia Beach Federal Savings & Loan Association ("VBF") of the Order of the United States Bankruptcy Court for the Northern District of Oklahoma dated March 11, 1987, which found that VBF had no interest in the rents from its collateral after the filing of its Notice Under 11 U.S.C. § 546 of Claim to Cash Collateral on December 2, 1986.
The facts as stipulated to by the parties are briefly as follows. On March 9, 1983, debtors executed in favor of First City Mortgage Company an installment note in the principal amount of $1,500,000.00, secured by a mortgage and security agreement in certain properties, which was assigned to VBF. Both mortgage and assignment were duly filed. Debtors also executed in favor of First City Mortgage Company an assignment of their interest in leases covering the subject property, and this was assigned to VBF. Debtors defaulted on the loan, leaving an unpaid balance of approximately $1,500,000.00 including interest. VBF commenced a mortgage foreclosure action in Tulsa County and obtained a Journal Entry of Judgment and an order of foreclosure authorizing a Sheriff's Sale. No appointment of receiver was requested. The sale was set for September 2, 1986, but was stayed by the filing of the Petition in Bankruptcy Case No. 86-02242 in the Northern District of Oklahoma on September 2, 1986. VBF filed a proof of claim under 11 U.S.C. § 546(b) for over $1,700,000.00 on December 24, 1986, claiming rentals from the subject property.
Debtors and the Unsecured Creditors Committee objected to the Notice filed by VBF on the ground that Oklahoma law has held assignment of rent clauses void and unenforceable, and VBF does not have the present interest in the rents which is required to make a claim to "cash collateral" in the bankrupt estate.
At a hearing on February 10, 1987, United States Bankruptcy Judge James Ryan denied VBF's notice and claim, saying the assignment of rent clause was void, and thus VBF did not have a vested interest in the rents. He also determined the VBF would not have had that vested interest even if a receiver had been appointed until after it issued execution against that receiver following confirmation of the Sheriff's Sale which was stayed. VBF now appeals that ruling.
Having reviewed carefully the pleadings in this case, the transcript of the February 10, 1987 hearing, and the applicable law, the Court makes the following findings.
In Butner v. United States, 440 U.S. 48, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979), the Supreme Court held that a mortgagee's rights to rents collected is to be determined by reference to state law. The Court also stated:
The federal bankruptcy 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. For while it is argued that bankruptcy may impair or delay the mortgagee\'s exercise of his right to foreclosure, and thus his 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.
Id. at 56-57, 99 S.Ct. at 918-19, 59 L.Ed.2d at 142-43.
Under Butner this Court must look at Oklahoma State law to determine VBF's right to the rents referred to in this appeal. It is clear that Oklahoma law has held assignment of rent clauses void and unenforceable as being contrary to public policy. Tiger v. Sellers, 145 F.2d 920, 923 (10th Cir.1944), citing Hart v. Bingham, 171 Okl. 429, 43 P.2d 447, 449 (1935). This Court finds that the Bankruptcy Judge was correct in ruling that VBF did not have a vested interest in the rents based on the assignment of rents clause involved here.
Oklahoma law has also recognized that upon appointment of a receiver or upon taking possession of real property, a mortgagee can recover rents accruing on that property and apply them to the mortgage debt. Bingham, supra, 43 P.2d at 451. Pursuant to 12 O.S. § 1551 (1981) a receiver may be appointed:
in an action by a mortgagee for the foreclosure of his mortgage and sale of the mortgaged property, where it appears that the mortgaged property is in danger of being lost, removed or materially injured, or that the condition of the mortgage has not been performed, and that the property is probably insufficient to discharge the mortgage debt.
See also Little v. Keaton, 38 F.2d 457, 461 (10th Cir.1930).
Oklahoma is a lien theory...
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