Daily Development for
Monday, May 6, 1996

by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law

BANKRUPTCY; RENTS; ABSOLUTE ASSIGNMENT: Third Circuit cases continue their wandering ways, a creditor holding an "absolute assignment" of rents is deemed under the law of New Jersey to hold title to rents, such that the debtor could not use the rents for any purpose. MacArthur Executive Associates v. State Farm Life, 190 B.R. 189 (D.N.J. 1995).

Because the debtor therefore had no means of offering adequate protection (p. 196), relief from stay was compelled in this single asset real estate case.

Both parties had raised arguments under In re Jason Realty, L.P., 59 F.3d 423 (3d Cir. 1995), reported in the Spring 1995 Quarterly Report. The debtor showed that the lender's loan documents described the rental assignment "as security" in some places, and as an "absolute transfer" in other places. The District Court held that there was no reason for a creditor to "be forced to elect between taking a security interest and an absolute assignment of rents" (p. 195); a creditor could effectively provide for both remedies, in case "one of the two remedies is later deemed defective." (Id.)

Reporter's Comment: Jason Realty's concept of "rental title" neither explains nor predicts the result well in most foreclosure cases. The Third Circuit belongs to a small minority of jurisdictions which continue to describe the rights of secured parties in terms of "title to" collateral. See, e.g., Unif. Comm. Code, 9-202 (title to collateral immaterial).

Editor's Comment: We are seeing a fascinating "full circle" in this little corner of bankruptcy law. The original flap over assignments of rents arose in part over the reluctance of some courts to find anything other than an "absolute" assignment of rents to be "perfected," so as to have any post-petition effect. These decisions were clearly "anti-creditor" in tone and result Many of the decisions in this line were quite harsh on creditor attempts to create "absolute assignments" - holding that any mention of the security purposes of the arrangement would destroy the "absolute" nature of the assignment. For a summary of this history, see P. Randolph, "Recognizing Lenders' Rents Interests in Bankruptcy," 27 ABA Real Prop. Prob. & Tr. Law Journ. 281, 295-299(1992.)

Now the Third Circuit courts, apparently, have concluded that the creditor really ought to win these disputes, perhaps because of dissatisfaction with debtor abuses of rents in single asset real estate bankruptcies.

As the editor has stated in the above cited article, the issue was a false issue to begin with and remains a false issue. Of course, if a landlord actually had sold the right to collect rents to a third party prior to bankruptcy, then the rents would not be part of the estate. Such sale would be a true "absolute assignment." But simply calling an assignment to a creditor an "absolute assignment" does not make it one in fact. Where the agreement of the parties is that the creditor's rights in the rents exist only to extent of the unpaid debt, then the assignment is for security, regardless of how the parties denominate it. Since this latter situation is virtually universally the case, it makes no sense for bankruptcy courts to craw distinctions among rent assignments arrangements for security on the basis of whether or not they are "absolute."

Probably a majority of the bankruptcy circuits have now embraced this position (generally arrived at without recourse to the editor's writings). But the Third Circuit and a few Seventh Circuit cases follow the bizarre approach detailed here.

Items in the Daily Development section generally are extracted from the Quarterly Report on Developments in Real Estate Law, published by the ABA Section on Real Property, Probate & Trust Law. Subscriptions to the Quarterly Report are available to Section members only. The cost is nominal. For the last five years, these Reports annually have been collated, updated, indexed and bound into the Annual Survey of Developments in Real Estate Law, volumes 1-5, published by the ABA Press. The Annual Survey volumes are available for sale to the public. For the Report or the Survey, contact Laprica Mims at the ABA. (312) 988 6233.

Items reported here and in the ABA publications are for general information purposes only and should not be relied upon in the course of representation or in the forming of decisions in legal matters. Accuracy of data and opinions expressed are the sole responsibility of the DIRT editor and are in no sense the publication of the ABA.