504 B.R. 770
Bankr. D.N.J.2014Background
- Debtor Jacob P. Surma owns a three-unit Asbury Park property encumbered by SunTrust first and second mortgages; Debtor lives in one unit and collects $2,500/month rent from the other units.
- At mortgage execution, Debtor signed a 1-4 Family Rider with an absolute assignment of rents in favor of SunTrust; Debtor defaulted in 2008 and arrears exceeded $124,000 by 2010.
- SunTrust pursued foreclosure; Debtor filed two Chapter 13 cases (2010, 2011) to stop sheriff’s sales, then converted the second case to Chapter 11 after dismissal and filed a modified Chapter 11 Plan and Disclosure Statement.
- The Plan proposes to bifurcate SunTrust’s claim (cram down to property FMV) and apply the assigned rents to the secured portion, treating any remaining SunTrust claim as unsecured.
- SunTrust objected, arguing the absolute assignment transferred title to rents (making them nonestate property) and that the Debtor may not force allocation of rents away from SunTrust’s secured/unsecured deficiency interests.
- The bankruptcy court held the Plan unconfirmable because it would require SunTrust to allocate rents in a way inconsistent with New Jersey law and Third Circuit precedent (In re Jason Realty), and denied approval of the Disclosure Statement.
Issues
| Issue | Surma's Argument | SunTrust's Argument | Held |
|---|---|---|---|
| Whether rents assigned prepetition by an "absolute assignment" are property of the bankruptcy estate and may be used in a plan | Rents can be used to pay the secured portion post-cramdown; Debtor relies on Parks reasoning that §506(d) requires rents to be applied to the cramdown amount | Assignment was absolute under NJ law; assignment transferred title to assignee so rents are not estate property and are unavailable for use in any plan | Rents are not estate property and cannot be used, allocated, or forced to be applied under the Plan (Plan is patently unconfirmable) |
| Whether §506(d) permits reallocating assigned rents to the cramdown secured amount | §506(d) requires avoidance of liens to the extent unsecured and thus rents (net proceeds) must be applied to cramdown amount | §506(d) is inapplicable because SunTrust’s claim is allowed and not disallowed; Dewsnup distinguishes §506(a) valuation from §506(d) lien avoidance | §506(d) does not override state-law assignment here; it does not authorize reallocating rents when claim is not disallowed |
| Whether a confirmed plan can alter third-party/assignee rights in collateral proceeds (e.g., rents or insurance proceeds) | Plan confirmation can bind creditors and structure payment | Assignment/beneficiary rights are contractual and not altered by plan confirmation (citing McAteer) | Plan cannot strip or reallocate assignee’s independent contractual rights to rents |
| Whether the Disclosure Statement should be approved when the Plan depends on unavailable rents | Plan is workable if rents are applied to secured claim; approval should follow | Plan is facially unconfirmable because it depends on rents unavailable under Jason Realty; disclosure should be denied | Disclosure Statement denied because accompanying Plan is patently unconfirmable due to misuse of assigned rents |
Key Cases Cited
- In re Jason Realty, L.P., 59 F.3d 423 (3d Cir. 1995) (absolute assignment of rents transfers title to assignee; assigned rents are not estate property and are unavailable for use in any plan)
- Dewsnup v. Timm, 502 U.S. 410 (1992) (distinguishes valuation under §506(a) from lien avoidance under §506(d))
- United Sav. Ass’n v. Timbers of Inwood Forest Assocs., 484 U.S. 365 (1988) (limits bankruptcy valuation doctrines and discusses liens and cramdown context)
- First Fidelity Bank v. McAteer, 985 F.2d 114 (3d Cir. 1993) (confirmation of a plan does not alter a creditor’s independent contractual rights to proceeds held by third parties)
- Butner v. United States, 440 U.S. 48 (1979) (property interests in bankruptcy are defined by state law)