499 B.R. 192
Bankr. D.P.R.2013Background
- Debtor filed Chapter 11 on May 15, 2012; FirstBank filed a claim later transferred to LSREF2 Island Holdings Ltd. (Island Holdings).
- Island Holdings moved to prohibit Debtor’s use of cash collateral, asserting a prepetition lien on lease rents via: (1) an Assignment of Leases and Rents (notarized Dec. 28, 2001) and (2) a Deed of First Mortgage recorded in the Property Registry.
- Court entered an interim Order prohibiting use of Island Holdings’ cash collateral and required Debtor to show cause; Debtor moved for reconsideration claiming Island Holdings failed to perfect a security interest under Puerto Rico’s Secured Commercial Transactions Act.
- Island Holdings argued the Secured Transactions Act excludes interests in real estate (including leases/rents), so Civil Code doctrines (date certaine via notarial affidavit) govern perfection; it also relied on the recorded mortgage’s rent-assignment clause.
- After briefing and hearings, the bankruptcy court held a two-step contested process: (1) whether a prepetition lien existed on rents; (2) if so, what adequate protection is required.
- The court found the Assignment (notarized affidavit with a date certaine) and the recorded mortgage properly constituted and perfected a prepetition lien on rent proceeds, denying Debtor’s motion.
Issues
| Issue | Plaintiff's Argument (Debtor) | Defendant's Argument (Island Holdings) | Held |
|---|---|---|---|
| Validity of prepetition lien on rents | Assignment/unperfected; rents are personal property; no enforceable lien absent UCC financing statement | Assignment notarized (date certaine) and mortgage grant rental rights; Civil Code doctrine permits effectiveness vs. third parties | Lien valid: notarized Assignment with date certaine effective against third parties |
| Perfection method under Puerto Rico law | Rents are personal property covered by Puerto Rico’s Secured Commercial Transactions Act; required financing statement under UCC-derived statute | Secured Transactions Act excludes interests in real estate (including leases/rents); Civil Code and Mortgage Law govern; notarial affidavit suffices | Secured via Civil Code article 1416 doctrine and by recording mortgage; perfection satisfied |
| Application of 11 U.S.C. § 552 to postpetition rents | Section 552 may allow avoidance under § 544 if security unperfected | § 552(b)(2) preserves lender’s prepetition assignment-of-rents interest in postpetition rents when agreement so provides and was perfected | § 552(b) applies: security agreements explicitly extend to rents; prepetition perfection shown, so postpetition rents are subject to lien |
| Use of cash collateral / Adequate protection | If rents remain steady and not declining, adequate protection unnecessary; also Debtor had not been given opportunity to respond before interim order | Creditor withheld consent to use; enforcement of lien and protection required before any use | Debtor did not properly move for use of cash collateral under Rule 4001; court cannot determine adequacy of protection now; interim prohibition and turnover/accounting ordered |
Key Cases Cited
- Travelers Casualty & Surety Co. of America v. Pacific Gas & Elec. Co., 549 U.S. 443 (U.S. 2007) (state law defines property interests for bankruptcy)
- Butner v. United States, 440 U.S. 48 (U.S. 1979) (property rights governed by state law)
- Cadle Co. v. Schlichtmann, 267 F.3d 14 (1st Cir. 2001) (discussing § 552(a) and (b) interplay)
- In re South Side House LLC, 474 B.R. 391 (Bankr. E.D.N.Y. 2012) (creditor has separate § 552(b) interest in rents and is entitled to protection)
- Financial Center Associates of E. Meadow, L.P. v. TNE Funding Corp., 140 B.R. 829 (Bankr. E.D.N.Y. 1992) (distinguishing lien-for-security vs. absolute assignment and addressing lender’s rights to rents)