MORTGAGES; ASSIGNMENT OF RENTS: Where mortgagee has received absolute assignment of rents, mortgagee is entitled to post default net, even if obligation is nonrecourse. Homecorp v. Secor Bank, 659 So.2d 15 (Ala. 1994). The assignment of rents was the now-standard form absolute assignment coupled with a license in the mortgagor to collect. The license terminated upon an "uncured" event of default, and the instruments required no notice of "activation." The mortgagee did have an obligation to give ten days notice of default prior to acceleration, however.

The rents in this case were collected in a rents fund by the manager, and the lender sent notice to the borrower and the manager "freezing" the distribution of the rents a few months prior to foreclosure.

The court held that the assignment operated absolutely upon the occurrence of an "uncured" event of default. In this case, the notice asserting control over the rents coincided with the first formal notice of default. The court therefore concluded that the assignment was not "activated" until ten days following the notice of default.

As the manager in fact (foolishly!!) distributed the rents fund to the borrower, the court upheld a judgment against the manager as well as against the borrower.

The borrower cited the "non recourse" clause, in which it was stated that the lender could look only to the property and the income from it. It argued that the obvious intent of the reference to "income" here to establish that the mortgagee had the right to income from the property following foreclosure. Without expressly interpreting the language of the "non-recourse" clause, the court concluded that the assignment of rents in the mortgage authorized application of the pre-foreclosure rents in the event of a deficiency.

The mortgagee only sought the "net rents" and the court limited its ruling to rights on the net rents.

Comment: As most lawyers now acknowledge, the language of the typical "absolute assignment" is bogus. It is an attempt to create a fictional non-security assignment when the real purpose is to provide security for a loan. The unusual phrasing is the consequence of a series of unfortunate bankruptcy court decisions that now are largely moot following amendments to the bankruptcy laws. Nevertheless, a few courts persist in their attempts to read the clauses as transfers of greater interests than the parties demonstrate by their actions to be the intent of the arrangement.

By its language, the court in its opinion purports to give sweeping effect to the absolute assignment in this case. By its acts, however, the court obviously is giving only limited rights, more consistent with the security purposes of the arrangement. For instance, the court makes no effort to give a right to accumulated rents in the rents fund that accrued prior to the "uncured default," even though there is nothing in the assignment language that would limit the scope of the lender's claim (and the lender asserted rights as of an earlier date than the date of the uncured default).

Further, the parties, without explanation, address only the net rents. Again, were this an absolute assignment, there is no reason to interpret it to be an assignment of anything less than the gross rents. The assignor had contractual responsibilities to maintain the apartments and pay expenses, but there is no reason to believe that the assignment of rents and profits imposed such responsibilities on the assignee.

The court does give the lender the access to accumulated rents in other discrete funds, but this is for reasons unrelated to the assignment of rents.

MORTGAGES; FORECLOSURE; LEASES; SECURITY DEPOSITS: Following foreclosure, Mortgagee may have access to tenants' security deposits in hands of mortgagor/landlord because lender may have liability for return of such deposits. Homecorp v. Secor Bank, 659 So.2d 15 (Ala. 1994). As this was an apartment complex, it is almost a certainty that the mortgagee's recorded mortgage predated any of the lease agreements. There is no indication of any language in the mortgage or lease documents that would give the tenants any recourse against a foreclosing mortgagee for return of security deposits. Nevertheless, the Alabama Supreme court, comments, without authority, as follows:

"The trial court concluded that, following the foreclosure of the mortgage, [lender] necessarily assumed the obligations of the landlord under the leases with the tenants . . ., including the obligation to repay nay security deposits . . . The trial court also concluded that even if [lender] was not legally obligated to refund the security deposits to those tenants . . . [lender] had an interest to protect by doing so and could not be regarded as a volunteer. The trial court correctly held that [lender] is entitled to recover the total amount of security deposits paid to [mortgagor]." 659 So. 2d at 20-21.

Note also that this was a non-recourse mortgage. The transfer of the security deposits was not pursuant to a debt claim or even pursuant to the assignment of rents.

One of the defendants was the apartment management company, which was held liable to the mortgagee for the amount of the deposits after it turned them over to the landlord/borrower.

Comment: Perhaps the court is saying nothing more that when the lender, following foreclosure, continued collecting the rents from the tenants, it implicitly was assuming liability under the terms of the leases. Its language could also be interpreted as a holding that the lender became obligated under the tenant leases solely by acquiring the leased property at the (apparently private) foreclosure. This latter interpretation would appear to be bad law.

More interesting is the second aspect of the holding - that the foreclosing mortgagee would have the right to seize the rents simply because it was liable or "threatened" with liability to the tenants. Presumably the foreclosing mortgagee had the right to refuse to continue the leases of the tenants. If it did so, it was acting on its own volition, and not because it had been "trapped" by something that the manager or the prior owner had done. Although, clearly, the tenants themselves might have had some complaint against their prior landlord, on what basis does the mortgagee have such rights?

MORTGAGES; MORTGAGEE'S REMEDIES; SPECIAL FUNDS: Mortgagee in a non-recourse mortgage has the right to special funds set aside out of rents to pay taxes where borrower does not pay taxes and mortgagee is required to redeem property following tax foreclosure. Homecorp v. Secor Bank, 659 So.2d 15 (Ala. 1994). In this instance, the borrower, pursuant to the mortgage, had set aside out of rental income in a separate account some monies for purposes of paying property taxes. It appears that the monies in these accounts were less than the amount actually paid by lender to redeem.

Comment: Obviously lender had a waste claim for the non-payment of the rents, and it is probable that it had the right to recover for waste over and above the non-recourse restriction (the full non-recourse language is not in the opinion). The court, however, seems to view the mortgagee's entitlement as based upon the facts that the funds had been set aside for the payment of taxes and the mortgagee had been forced to redeem from tax foreclosure. This is a kind of "constructive trust" theory that gave the mortgagee rights not only against the borrower but also against the constructive trustee - the managing agent.

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