Daily Development for
Monday, April 7, 1997

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

The continuing saga of the assignment of rents in bankruptcy has been off our pages for a number of months now. That doesn't mean that the issue is dead. Our intrepid bankruptcy reporter - Jim Stillman of Murphy, Weir & Butler in San Francisco, weighs in with this "off beat" reminder that there is still life in this debate. If the reported case, which does not expressly involve rent assignments, were to be applied to rent assignments in the Ninth Circuit, and the Jason Realty doctrine applied there, this would indeed be news.

MORTGAGES; ASSIGNMENT OF RENTS; "ABSOLUTE ASSIGNMENT"; THE IN RE JASON REALTY DOCTRINE: An unperfected, outright assignment of royalties by the debtor to a creditor, which was "irrevocable" until the creditor/assignee's debt was satisfied in full, left the debtor/assignor without a current vested interest in the property, such that a subsequent I.R.S. lien did not achieve priority.

Broadcast Music, Inc. v. Hirsch, _____ F.3d. _____ (9th Cir. 1997) [Nos. 95-56144, 95-56185, January 15th].

The wording of the standard form assignment was ambiguous, sometimes referring to itself as a "security interest" (which would have been unperfected under applicable law, and thus subject to the I.R.S. lien) and elsewhere as an absolute or irrevocable assignment. To defeat the I.R.S., both "assignor" and "assignee" testified that they "meant" to create an absolute transfer of the royalties in question. They meant "absolute," however, only insofar as necessary to satisfy the creditor/assignee's debt. The Court of Appeals found that, "look[ing] to the substance, not the form of the transaction, [the debtor[ made complete assignments of the monies specified in the assignment documents, leaving him without a current vested interest."

Reporter's Comment: The above case, having to do with copyright royalties, is another pedagogical illustration of the great elasticity in the word "assignment," which is often a subject of argument where pre-foreclosure rents are at stake. The best statement of the rule on assignments would be: An assignment will be deemed an outright transfer, when the court decides that the "assignee" should prevail, as against a subsequent transferee or the debtor; and an assignment will be deemed a security interest, when the court is satisfied that the subsequent transferee, or debtor, will not enjoy what the court perceives as an unfair advantage that might accrue under the law of security.

In the reported case, the subsequent I.R.S. lien was, itself, unperfected; in the words of the Court of Appeals, "the I.R.S. was excused from having to record its liens" under Section 6323(f)(5) of the I.R.C.; clearly, the Court of Appeals could muster no sufficient reason for preferring a later, involuntary secret lien over a prior voluntary one. (Recall that by statute, subsequent judgment lien creditors fail against prior voluntary transferees, whether or not recorded, under the laws of many states.) The analysis in this case, that the "assignment" was an outright transfer, should be understood only with a firm comprehension of the result the court wished to reach.

So, too, in In re Jason Realty, 59 F.3d 423 (3d Cir. 1995), often reported in these pages, in which the Third Circuit Court of Appeals held that an assignment of rents constituted an absolute, outright "transfer of property," for the purpose of denying a single-asset chapter 11 debtor the right to use rents. Now, the assignment in Jason Realty was no more "irrevocable" than the assignment in Broadcast Music, Inc., supra; in other words, both assignments were "irrevocable" only until the debt was repaid, and for that and other reasons, both assignments were patent security instruments under the law of mortgages; and if there were nothing else at stake, then the appellate courts' analyses in both cases would receive a Failing grade in any second-year Mortgages class.

Editor's Comment: Note that the issue of whether a conditional assignment in rents is perfected has been resolved (we hope) by 1995 amendments to the Bankruptcy statutes. But the Jason Realty issue goes beyond the question of perfection - the courts in the Third Circuit are holding that an "absolute" assignment, albeit indisputably given in the context of a security arrangement for a loan, confers "ownership" of the assignment proceeds free and clear of a subsequent debtor's bankruptcy trustee's claims.

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