In re South Side House, LLC
474 B.R. 391
| Bankr. E.D.N.Y. | 2012Background
- Debtor South Side House LLC owns a 74-unit residential and 2 commercial building in Brooklyn; lender holds a $29M mortgage with an Assignment of Rents.
- Post-petition rents have funded the debtor’s plan and ordinary course obligations, totaling over $4.6M through December 31, 2011.
- Dispute centers on whether rents post-petition are property of the estate and cash collateral, and how payments from rents should be applied to the lender’s claim.
- The debtor argues rents are estate property and cash collateral, to be used for plan funding and administrative expenses, with payments applied first to unsecured, then to post-petition interest and finally principal.
- The lender contends rents are not property of the estate (or not subject to the estate) and that post-petition rents should be applied to interest first, preserving the debt; the case includes extensive valuation, plan feasibility, and stay-relief considerations.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Are the post-petition rents property of the estate and cash collateral? | Debtor: rents are estate property and cash collateral under New York law and the Cash Collateral Order. | Lender: rents are not property of the estate (absolute assignment or effective control) and thus not cash collateral. | Rents are property of the estate and cash collateral. |
| How should post-petition rents paid to the lender be applied to the claim? | Payments reduce unsecured claim first, then post-petition interest and 506(b) charges, then principal. | Payments first cover post-petition interest or a portion of secured claim, potentially preserving unsecured balance. | Payments apply first to unsecured portion, then to post-petition interest, fees, costs, charges under 506(b), and finally to principal. |
| Is the Assignment of Rents an absolute assignment or a security-for-security pledge? | Assignment allows the debtor to collect rents subject to lender’s rights; not an automatic transfer of title. | The language suggests absolute assignment to the lender. | Assignment is a pledge for additional security, not an absolute assignment. |
| How does Section 362(d)(3) interact with rent payments in a single-asset real estate case? | Payments under 362(d)(3) should be treated like adequate protection; apply to unsecured then to other portions as appropriate. | Sixty-five percent or more of the claim structure may permit post-petition interest; 362(d)(3) expedites plan but may permit continued payments. | Payments under 362(d)(3) are applied like adequate protection; follow the same priority as above (unsecured first, then 506(b) post-petition, then principal). |
Key Cases Cited
- United States v. Whiting Pools, 462 U.S. 198 (U.S. Supreme Court 1983) (defines property of the estate under §541 and the reach of post-petition property interests)
- In re Jason Realty, L.P., 59 F.3d 423 (3d Cir. 1995) (rent assignments governed by state law; lien theory vs. title theory)
- In re Brown, 734 F.2d 119 (2d Cir. 1984) (broad interpretation of ‘property of the estate’ in §541(a))