Dec.11.2012 In exchange for a loan secured by commercial property, a lender often receives an absolute assignment of the property's leases and rents.
But who owns those rents once the borrower files for bankruptcy protection?
Payments under an absolute assignment will ordinarily be paid to the borrower or owner of the property as long as the loan secured by the deed of trust is not in default.
In a collateral assignment, the borrower is generally considered to retain ownership of the rents until the lender takes action to enforce the assignment or gains possession of the property through foreclosure.
One concern for the lender in this instance is that, in a judgement, other creditors will take priority, causing the lender to lose its security interest in the rent.
Under an absolute assignment, if a borrower defaults on the deed of trust, the lender may request appointment of a receiver to collect the rents until foreclosure of the deed of trust or a determination of ownership of rents by a court of law.The answer depends not on bankruptcy law, but on the law of the governing jurisdiction – and then potentially on the measures that the lender undertakes following a default.Two cases out of New York illustrate the importance of a lender's diligence in enforcing its rights under a mortgage and assignment of rents.Under the "title theory" of mortgages, a mortgage is considered a conveyance of the borrower's interest in property to the lender, which is restored upon satisfaction of the debt.As real property law evolved, the majority of states, including New York, abandoned this notion in favor of "lien theory," which treats mortgage transactions as secured debtor-creditor relationships.Bankruptcy courts can eliminate or reduce the amount you own on second mortgages in some bankruptcies through a process called lien stripping, and void a first mortgage if it has particular types of legal defects.A creditor, who has lost patience with a debtor, may bring in a debt collector to assist him in collecting the money due.Debtors argue that the rents are property of the bankruptcy estate and constitute cash collateral available for their use during the case.Lenders, on the other hand, assert that the assignments convey ownership of the rents, and as such, the rents may be used only with their consent.This prevents the borrower’s disposing of rent money due the lender, pending foreclosure.Under a collateral interest, however, some bankruptcy courts have held that the rents belong to the borrower until title to the real estate merges with the right to collect rents.