531 B.R. 176
Bankr. E.D. Mich.2015Background
- Debtor owns Town Center Flats (residential townhouse/apartment complex) and granted a mortgage and assignment of rents to ECP to secure a loan (KeyBank originally; rights assigned to ECP).
- Debtor defaulted on December 31, 2013; ECP filed a recorded notice of default and served tenants, then attempted to collect rents prepetition.
- ECP filed a state-court foreclosure/receiver complaint on January 23, 2015; Debtor filed Chapter 11 on January 31, 2015.
- ECP moved for an order declaring no automatic stay applied to the rents or, alternatively, to prohibit Debtor’s use of rents/cash collateral, arguing the assignment (and MCL § 554.231) vested rents in ECP.
- Debtor argued the assignment was security only (citing In re Newberry Square), so Debtor retained an interest in rents and they are estate property/cash collateral.
- The bankruptcy court held the rents are property of the estate and constitute cash collateral; ECP’s motion was denied.
Issues
| Issue | Plaintiff's Argument (ECP) | Defendant's Argument (Debtor) | Held |
|---|---|---|---|
| Are prepetition-assigned rents property of the bankruptcy estate or owned by the mortgagee? | Assignment + MCL § 554.231 transferred rents to ECP; thus rents are not estate property and not subject to the stay. | Assignment was additional security only; debtor retained an interest in rents, so rents are estate property under § 541. | Rents are property of the estate; assignment treated as security interest, not absolute transfer. |
| If rents are estate property, do they constitute cash collateral under § 363(a)? | N/A (ECP argued rents were not estate property; alternatively contended they were ECP’s cash collateral and should be segregated). | Debtor argued rents are estate property usable in Chapter 11 reorganization. | Court held rents are cash collateral under § 363(a). |
| What is the proper interpretive law source for determining property status? | State statute and recorded assignment control; MCL §§ 554.231-.232 establish assignment rights. | Bankruptcy Code and federal precedent govern what is “property of the estate” despite state-law assignment. | Applied state law (Butner) but gave controlling effect to federal bankruptcy principles in defining estate property. |
| Does recorded prepetition notice to tenants preclude use of rents in Chapter 11? | Prepetition notice and recording perfected ECP’s rights to collect rents directly. | Even if perfected, prepetition procedural steps do not extinguish debtor’s interest for reorganization purposes. | Recording/notice did not eliminate debtor’s estate interest; rents remain estate property available in Chapter 11. |
Key Cases Cited
- In re Newberry Square, Inc., 175 B.R. 910 (Bankr. E.D. Mich. 1994) (assignment of rents is security; rents remain estate property)
- Butner v. United States, 440 U.S. 48 (1979) (state law governs property interests in bankruptcy)
- Otis Elevator Co. v. Mid-America Realty Investors, 206 Mich. App. 710 (1994) (state court discussion that default may extinguish mortgagor’s interest for priority among creditors)
- In re Madison Heights Group, LLC, 506 B.R. 734 (Bankr. E.D. Mich. 2013) (contrary view treating recorded assignments as divesting debtor of rents)
- United States v. Whiting Pools, Inc., 462 U.S. 198 (1983) (property seized prepetition may nevertheless be estate property)