by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
randolphp@umkc.edu

BANKRUPTCY; ASSIGNMENTS OF RENTS; USE OF RENTS POST-PETITION; "EQUITIES OF THE CASE: " It is not an abuse of discretion for the Bankruptcy Court to find that the debtor's progress toward developing its reorganization plan constitutes an adequate "equity of the case" to warrant expenditure of cash collateral rents on administrative expenses without adequate protection. In re River Village Associates, 181 B.R. 795 (E.D.Pa. 1995) While applicable state law (Delaware) was somewhat undeveloped in the area, the court ruled that it should be interpreted to grant to the duly-recorded secured creditor a "perfected" interest in rents during the pendency of the bankruptcy case. Nonetheless, the District Court upheld the Bankruptcy Court's determination that the debtor could withhold and use rents during the case for payment of administrative claims, based on the "equities of the case" exception found in Bankruptcy Code section 552(b)."

Reporter's Comment: This hapless single asset real estate case was kept alive for over a year due to the Bankruptcy Court's ruling on rents. The creditor finally confirmed its own creditor's "liquidating plan" in order to auction the collateral to itself. The debtor's staying power in a case such as this -- essentially a two-party dispute where the property was worth half the debt -- is almost always dependent on whether the rental collateral can be spent on the debtor's legal fees.

Editor's Comment: Although the law seems to be "tipping" in the creditor's direction generally, here comes a case that opens up a whole new loophole. The full meaning of the "equities of the case" exception has barely been explored, but most commentators seem to feel that the concept should address special equities concerning the nature of the parties and of the particular rents "Equities of the case" might exist, for instance, where the rents are generated largely as a consequence of post-petition activity of the debtor on this property or as a consequence of the existence of other assets of the debtor not subject to the rents interest.

But, at least according to most commentator, the drafters of the Act did not intend the courts to look to such general considerations as the chances of success reorganization. Certainly making a decision on this ground does not provide "adequate protection" to the creditor, and creates a new basis for argument in ever case. Such an interpretation of "equities of the case" is a "bootstrapping" rationale if there ever was one for using the Act to frustrate the creditor's legitimate security interest. If this decision represents a correct reading of the "equities of the case" exception, then millions have been squandered by parties needlessly litigating perfection issues.

For a similar unwelcome result for the creditor, see In re Citicorp Park Associates, 180 B.R. 15 (Bankr. D.Me 1995) ("Cash collateral" rents may be expended for administrative expenses even though creditor is undersecured so long as underlying real estate retains its value.)

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