474 B.R. 391
Bankr. E.D.N.Y.2012Background
- This is a Chapter 11 bankruptcy case of South Side House, LLC, a single-asset real estate debtor in the Eastern District of New York.
- The debtor owns a 74-unit residential plus two commercial building in Williamsburg, Brooklyn, with a secured loan of about $29 million held by U.S. Bank National Association, as Trustee.
- The debtor has been paying post-petition rents generated by the property to the lender as adequate protection and cash collateral since mid-2009, with total payments exceeding several million dollars by late 2011.
- The central issues are whether post-petition rents are property of the bankruptcy estate and cash collateral, and how such rents should be applied to the lender’s claim.
- The court must determine the nature of the Assignment of Rents under New York law and the interplay with sections 541, 552, 363, and 506 of the Bankruptcy Code.
- The plan contemplates funding and payment from rents, while the lender opposes treatment of rents as estate property and argues for a different application of post-petition payments.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Are post-petition rents property of the estate and cash collateral? | South Side argues rents are estate property and cash collateral. | U.S. Bank contends rents are not estate property and remain defendant’s rights. | Rents are property of the estate and the lender’s cash collateral. |
| How should post-petition rents be applied to the lender’s claim? | Rents should first reduce unsecured claims, then post-petition interest, costs, and finally principal. | Rents should be applied to post-petition interest before reducing unsecured claims. | Payments are to be applied first to the unsecured portion, then to post-petition interest/costs, and finally to principal. |
| Is the Assignment of Rents absolute or security for the loan? | Assignment may revest rents to debtor if loan is paid; not absolute. | Assignment is absolute or sufficiently effective to deprive debtor of rents. | Assignment is a pledge for additional security, not an absolute transfer of rents. |
| Does Section 362(d)(3) affect how rents are treated for stay relief and payments? | Payments under 362(d)(3) should mirror adequate protection and apply to principal first. | Section 362(d)(3) requires payments equal to nondefault interest, with potential post-petition interest. | Section 362(d)(3) payments are treated like adequate protection payments; apply to unsecured first, then post-petition interest and costs, then principal. |
Key Cases Cited
- United States v. Whiting Pools, 462 U.S. 198 (U.S. 1983) (property of the estate can include post-petition property acquired from prepetition property)
- First Fid. Bank v. Jason Reality, L.P., 59 F.3d 423 (3d Cir. 1995) (state-law definition of property interests under rent assignments; assignment may be for security)
- Brown v. Dellinger (In re Brown), 734 F.2d 119 (2d Cir. 1984) (broad interpretation of ‘all legal and equitable interests in property’ in the estate)