Is an Absolute Assignment of Rent really Absolute? - Jim Moore - Knoxville Bankruptcy Lawyer

1/23/2011

This 21 page opinion of Chattanooga Bankruptcy Judge Cook deals with a fight between a Senior Housing facility and it’s secured creditor over whether “rent” is “cash collateral” as defined by § 363(a). The fight stems from the fact that the financing agreements state that there is an “absolute assignment” of rents that the debtor is given a license to collect and use. Such documentation has been found by Knoxville Bankruptcy Judge Stair to result in “rents” not being “property of the estate” and thus not Cash Collateral. As set forth by Judge Cook in footnote 7:

The court is aware that its conclusion differs from that reached in In re Kingsport Ventures, L.P., 251 B.R. 841 (Bankr. E.D. Tenn. 2000), and more recently in In re Lingham Rawlings, LLC, No. 10-32769, 2010 WL 3490204 (Bankr. E.D. Tenn. Sept. 1, 2010), which dealt with assignments very similar to the one in this case. There the court held that an assignment is absolute where (1) the language of the assignment is clear and unambiguous that it was intended to be an absolute assignment, (2) the assignment provides that the debtor retains nothing more than a revocable license to operate the property and collect the rents, (3) the assignment does not require the assignee to take any action in order to collect the rents after default, and (4) the assignment gives the assignee total discretion regarding the application of rents collected by it after default to reduce the debtor’s outstanding obligation. However, neither Kingsport Ventures nor Lingham Rawlings addressed either the debtor’s right to obtain a reconveyance of the rents upon payment of the debt or Whiting Pools. Having identified the existence of an equitable interest in the future income stream under state law, the court feels bound by the dictates of Whiting Pools, § 541(a), and § 363(a) to recognize the postpetition rents as cash collateral.”

Judge Cook reviews the law and holds:

“In sum, because the debtor at the commencement of this bankruptcy case held an equitable interest in the future income stream generated by the debtor’s business, that interest is property of the debtor’s bankruptcy estate and the postposition income constitutes cash collateral within the meaning of § 363(a) of the Bankruptcy Code.”

In re Senior Housing Alternatives, Inc., No. 10-15930 (Bankr. E.D. Tenn. Jan. 19, 2011).

Blog Archives