442 B.R. 558
6th Cir. BAP2010Background
- Buttermilk Towne Center owned and operated a commercial real estate development in Kentucky; bonds financed via open-end mortgage and a ground lease to the City, with Bank of America holding the mortgage lien.
- An Assignment of Rents and Subleases granted Bank of America a right to rents and profits, but with a limited license back to Debtor to collect rents if not in default, terminating automatically upon default.
- Debtor filed a Chapter 11 petition on April 28, 2010 and sought interim use of cash collateral to escrow funds for professional fees.
- Bank of America argued the rents were not estate property due to the Assignment; the bankruptcy court held rents were property of the estate and cash collateral.
- A hearing on adequate protection led the bankruptcy court to conclude that a replacement lien would adequately protect Bank of America’s interest in the rents, allowing use of cash collateral for expenses, including fees.
- Bank of America appealed, asserting that Stearns Bldg. required an equity cushion and that replacement liens do not constitute adequate protection in a single-asset real estate case.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Are post-petition rents estate property and cash collateral? | Bank of America argues the Assignment of Rents transfers ownership to lender, removing rents from the estate. | Buttermilk Towne Center contends the assignment is security, leaving rents as estate property subject to the lien. | Rents are property of the estate and constitute cash collateral. |
| May the cash collateral be used for administrative expenses with a replacement lien as adequate protection? | Bank of America contends replacement lien provides adequate protection in lieu of an equity cushion. | Buttermilk Towne Center asserts Stearns Bldg. requires an equity cushion for adequate protection. | Replacement lien is not adequate protection; Stearns Bldg. controls, reverse the cash collateral orders. |
| Does pre-petition possession of rents by the lender divest the debtor's property in the rents? | Bank of America suggests pre-petition possession by notice divested the rents. | Debtor argues possession does not extinguish estate ownership where the assignment is security. | Pre-petition possession does not divest the estate; rents remain property of the estate. |
Key Cases Cited
- In re Jason Realty, L.P., 59 F.3d 423 (3d Cir. 1995) (assignment interpreted as absolute ownership in some jurisdictions, not controlling here)
- In re River Oaks Ltd. P'ship, 166 B.R. 94 (E.D. Mich. 1994) (adequacy of protection and use of rents discussed)
- In re Guardian Realty Group, LLC, 205 B.R. 1 (Bankr.D.D.C. 1997) (security interest in rents treated as security, not absolute ownership)
- In re Willows of Coventry, Ltd., 154 B.R. 959 (Bankr.N.D.Ind. 1993) (possession does not per se defeat estate ownership of rents)
- Green v. Vanston Bond-Holders Protective Comm. (In re American Fuel & Power Co.), 151 F.2d 470 (6th Cir. 1945) (rents pledged as secondary security; lien continues as inchoate right)