Absolute Assignment of Rents Precludes Turnover

Posted by NCBRC - November 6, 2013

This case centered on whether rent collected by the debtors becomes part of the bankruptcy estate even though the right to collect the rents had been absolutely assigned to their lender PHH Mortgage (“PHH” or “assignee”). Relying on In re Jason Realty, 59 F.3d 423 (3d Cir. 1995), the bankruptcy court found that PHH, as assignee, was the owner of the right to collect rents and, therefore, the debtor had no ownership interest to augment the bankruptcy estate. The district court affirmed. In re Cordova, No. 13-810 (D. N.J. Oct. 22, 2013).

At the time the debtors filed for bankruptcy, PHH had taken no steps to collect the rent pursuant to the assignment, and the debtors were still collecting and using it for personal living expenses. Upon the bankruptcy filing, however, PHH moved for relief from stay. The trustee, meanwhile, moved for turnover arguing that rather than benefiting the debtors, the rents should be turned over to the estate for the benefit of creditors.

The bankruptcy court found that under New Jersey law, there was an “absolute” assignment of rent in this case because the contract “language demonstrates an intent to transfer immediately the assignors right and title to the rent.” The bankruptcy court found that although the debtor continued to collect rents for their own benefit, any harm was to the lender rather than the bankruptcy estate.

On appeal the district court agreed that the issue boiled down to whether the rents were “absolutely” assigned to the assignee in 2007 when the assignment document was executed. If so, under Jason Realty, the rents were not property of the estate notwithstanding the debtors’ continued collection and personal use of them. Under New Jersey law, an assignment is “absolute” if it immediately transfers ownership of property to the assignee. Finding that the underlying assignment should be interpreted as “absolute,” the court found that the rents were property of PHH rather than the debtors. Compare In re 5877 Poplar, L.P., 268 B.R. 140 (Bankr. W.D. Tenn. 2001) (applying Tennessee contract law, and taking into consideration the fact that once underlying debt paid, assignee’s right to rents ceases, court found assignment security interest rather than absolute assignment); In re Cavros, 262 B.R. 206 (Bankr. D. Conn. 2001) (under Connecticut law, assignment of rents though “absolute” on its face, is taken as “cash collateral” under section 363(a) and “constitutes in equity a mortgage.”); In re RV Centennial Partnership, 202 B.R. 774 (Bankr. D. Colo. 1996) (Under Colorado law assignment of rents, even if absolute, does not transfer title to the assignee).

The trustee attempted to distinguish Jason Realty as involving a dispute between the lender and the debtor, whereas here, the assignee had not entered the fray as of the time of the trustee’s turnover motion. Thus, the trustee argued that where the lender had not asserted its rights to the rents, the bankruptcy creditors should benefit from them rather than the debtors. Acknowledging the superficial appeal of the argument, the court nonetheless rejected it. The issue was not one of who should benefit from the collection of rents, but rather, whether the rents were part of the bankruptcy estate.

Citing Matter of Glen Properties, 168 B.R. 537 (D.N.J. 1993), the trustee next argued that the debtor retained an ownership interest in the license to collect rents until such time as the assignee affirmatively revoked that license by asserting its own rights to collect. This license was property that should be included in the bankruptcy estate.

The district court cited three bases for disagreement with the trustee’s position. 1) Assuming that license to collect rents was a property interest under state law, that interest was different from the typical patent, liquor, or trademark license which had independent value that could be sold, 2) a debtor’s right to collect rent is offset by his obligation to make mortgage payments, and, as such the right to collect rent is more of a collection obligation for the benefit of the lender, and 3) as a factual matter, when the assignee in this case moved for relief from stay, it affirmatively sought to enforce its rights to the rents.

Ultimately, the district court found that the holding in Jason Realty prevented a bankruptcy court from using its equitable power to include those rents in the property of the estate where they had been absolutely assigned to a third party. This is true even where the assignee has sat on its rights and allowed the debtor to continue to benefit from the collection of rents.

Cordova opinion

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