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Nature of Suit Code: 422
Nature of Suit: Bankruptcy Appeals Rule 28 USC 158
Cause of Action: 

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l' l 1~ 1]: b 

PUBLISH U\iirr:J Sc~ !::'..>IJte of Ar?f'Cral.s 

Temh Cir:uit 

UNITED STATES COURT OF APPEALS aPR 18 1ggo ' 

TENTH CIRCUIT !\OBERT L. I"IOECKER 

VIRGINIA BEACH FEDERAL SAVINGS ) 

AND LOAN ASSOCIATION, .) 

) 

Plaintiff-Appellee, ) 

) 

v. ) 

) 

FRANKE. WOOD; BEVERLY J. WOOD, doing ) 

business as Franklin Investments, ) 

Franklin Development Co., and Franklin ) 

Woodworks; FRANKE. WOOD; BEVERLY J. ) 

WOOD, and the Unsecured Creditors ) 

Committee (UCC), ) 

) 

) 

Defendants-Appellants. ) 

No. 88-1308 

APPEAL FROM THE UNITED STATES DISTRICT COURT 

FOR THE NORTHERN DISTRICT OF OKLAHOMA 

(D.C. No. 87-C-364-E) 

Submitted on the briefs: 

Clerk 

James A. Hogue, Sr., Hogue and Turkel, Inc., Tulsa, Oklahoma, for 

Defendants-Appellants. 

Andrew. R. Turner, Conner & Winters, Tulsa, Oklahoma, for 

Plaintiff-Appellee. 

Before TACHA, BALDOCK, and BRORBY, Circuit Judges. 

PER CURIAM. 

Appellate Case: 88-1308 Document: 01019626905 Date Filed: 04/18/1990 Page: 1 
-After-examining the briefs and appellate record, this panel 

has determined unanimously that oral argument would not materially 

assist the determination of this appeal. See Fed. R. App. P. 

34(a); 10th Cir. R. 34.1.9. The case is therefore ordered 

submitted without oral argument. 

During March of 1983, appellants Frank and Beverly Wood 

(hereinafter debtors) 1 executed an installment note in the 

principal amount of $1,500,000.00 in favor of First City Mortgage 

Company. This note was almost immediately assigned to appellee 

Virginia Beach Federal Savings and Loan Association (hereinafter 

VBF). The note was secured by a mortgage and security agreement 

as well as an assignment Of interest in leases, all executed by 

debtors in favor of First City and then assigned to VBF. 

Debtors defaulted on the note leaving an unpaid balance of 

approximately $1, 500, 000. 00 including interest.. VBF commenced a 

foreclosure action in state court in an.effort to obtain the 

premises that were mortgaged to secure the debt. The state court 

entered a journal entry of judgment in favor of VBF which included 

an order of foreclosure authorizing a sheriff's sale. VBF did not 

seek the appointment of a receiver pending the sale. 

The sale was stayed by debtors' filing of a petition for 

relief under Chapter 11 of the Bankruptcy Code. In the bankruptcy 

court, VBF filed a notice of its claim under 11 u.s.c. § 546(b) to 

cash collateral in the form of rental income from the mortgaged 

1 For the purposes of this opinion, we subsume within the term 

"debtors" appellant unsecured creditors committee -- a party of 

like interest to the Woods. 

2 

Appellate Case: 88-1308 Document: 01019626905 Date Filed: 04/18/1990 Page: 2 
property. The-bankruptcy court denied VBF's claim. VBF appealed 

to the district court. The district court reversed and held that 

VBF was entitled to the rental income since the filing of the 

§ 546(b} notice. 

On appeal, debtors essentially make two assignments of 

district court error. First, debtors contend that the district 

court erred in its legal conclusion that VBF was entitled to the 

rental income. Second, debtors argue that the district court 

erred procedurally by permitting a magistrate to conduct an 

advisory hearing .and that the bankruptcy appeal was actually 

decided by a magistrate and not by an Article III judge. For the 

reasons set forth below, we affirm. 

In reviewing the decision of a bankruptcy court, the district 

court and the court of appeals apply the ,same standards of 

review -- de novo for legal determinations and clearly erroneous 

for factual findings -- that govern the appellate review in other 

cases. See, ~, Bartmann v. Maverick Tube Corp., 853 F.2d 1540, 

1543 (10th Cir. 1988). 

Initially, we determine that debtors' second appellate 

argument is without merit. We agree with debtors that magistrates 

are not permitted to enter final decisions in bankruptcy appeals. 

However, there is no evidence that that was done in this case. 

The final order which we now review was signed by the district 

judge. 

Turning to debtors' first appellate argument, we must begin 

by determining whether the subject rental income can be considered 

3 

Appellate Case: 88-1308 Document: 01019626905 Date Filed: 04/18/1990 Page: 3 
cash collateral -- under . the Bankruptcy Code. Cash collateral is 

defined by 11 U.S.C. § 363(a)2. Rental income from property 

subject to a security interest as provided for in 11 u.s.c. 

§ 552(b) 3 comes within the definition of cash collateral. We look 

to state law to determine whether VBF had the requisite security 

interest in the subject rental income. See Butner v. United 

States, 440 U.S. 48, 55-57 (1979). 

VBF does not ground its security interest on the assignment 

of interest in leases. It concedes that such an assignment of 

rental income made conditional upon the future default of the 

mortgagor was void and unenforceable during the time period 

relevant to this case. 4 See Hart v. Bin9man, 43 P.2d 447, 449 

2 Cash collateral is defined in 11 u.s.c. § 363(a) as follows: 

In thi~ section, "cash collateral" means cash, negotiable 

instruments, documents of title, securities, deposit accounts, or 

other cash equivalents whenever acquired in which the estate and 

an entity other than the estate have an interest and includes the 

proceeds, products, offspring, rents, or profits of property 

subject to a security interest as provided in section 552(b) of 

this title, whether existing before or after the commencement of a 

case under this title. 

3 11 U.S.C. § 552(b) reads as follows: 

Except as provided in sections 363, 506(c), 522, 544, 545, 

547, and 548 of this title, if the debtor and an entity entered 

into a security agreement before the commencement of the case and 

if the security interest created by such security agreement 

extends to property of the debtor acquired before the commencement 

of the case and to proceeds, product, offspring, rents, or prof its 

of such property, then such security interest extends to such 

proceeds, product, offspring, rents, or profits acquired by the 

estate after the commencement of the case to the extent provided 

by such security agreement and by applicable nonbankruptcy law, 

except to any extent that the court, after notice and a hearing 

and based on the equities of the case, orders otherwise. 

4 Oklahoma law presently permits the enforceability of such 

assignments of rental income. See Okla. Stat. tit. 46 § 4 

(continued on next page) 

4 

Appellate Case: 88-1308 Document: 01019626905 Date Filed: 04/18/1990 Page: 4 
(Okla.· 193S)(holding mortgage clauses which attempt to pledge 

rents . to be void and unenforceable because they are contrary to 

public policy). 

VBF's claim to the rental income stems from the existence of 

the mortgage itself. This court, in reliance upon the language of 

the state statute governing the appointment of a receiver, Okla. 

Stat. § 518(2)(192l)(predecessor provision to identical Okla. 

Stat. tit. 12, § 1551(2)(1981) (since amended, effective Nov. 1, 

1989), stated "[t]he statute recognizes the mortgage as creating 

an equitable lien on the rents pending foreclosure~'' Little v. 

Keaton, 38 F.2d 457, 461 (10th Cir.), cert. denied, 282 U.S. 847 

(1930). This equitable lieri arising from the mo~tgage and 

security agreement constitutes the security interest under 

§ 552(b) that causes the rental income to be categorized as cash 

collateral under§ 363(a). 

Section 552(b) qualifies the continuing (postpetition) force 

of a prepetition security interest by noting the overarching 

control of other code sections, including 11 5 u.s.c. § 544. 

(continued from previous page) 

(effective Nov. 1, 1986). This new law is not retroactive and has 

no effect on the outcome of this case. 

5 11 u.s.c. § 544(a) reads as follows: 

The trustee shall have, as of the commencement of the case, 

and without regard to any knowledge of the trustee or of any 

creditor, the rights and powers of, or may avoid any transfer of 

property of the debtor or any obligation incurred by the debtor 

that is voidable by --

(1) a creditor that extends credit to the debtor at the 

time of the commencement of the case, and that obtains, 

at such time and with respect to such credit, a judicial 

lien on all property on which a creditor on a simple 

(continued on next page) 

5 

Appellate Case: 88-1308 Document: 01019626905 Date Filed: 04/18/1990 Page: 5 
Section 544(a)· provides that, upon the commencement of a 

bankruptcy case, a trustee (or, as in the instant case, a 

debtor-in-possession, see 11 u.s.c. § 1107(a)) has the rights and 

powers of both a hypothetical judicial lien creditor and a bona 

fide purchaser to avoid any transfer of the debtor's property if 

the conveyed interest was not perfected pr.epetition. 

State law controls the issue of whether a property interest 

has been perfected. See Butner, 440 U.S. at 55. Oklahoma is a 

lien theory state. See Hart, 43 P.2d at 449. Thus, the mortgagor 

remains the legal owner of the mortgaged property. See Coursey v. 

Fairchild, 436 P.2d 35, 38 (1967). The right of possession to the 

property (and, incidentally, to the rental income derived 

therefrom) "is dependent wholly upon the termination of a 

foreclosure action, except as to the _statutory and equitable 

powers relating to the appointment o~ a receiver." Hart, 43 P.2d 

at 449. Although the Oklahoma courts have not written in terms of 

"perfection'' of the interest of a mortgagee in the rental income 

(continued from previous page) 

contract could have obtained such a judicial lien, 

whether or not such a creditor exists; 

(2) a creditor that extends credit to the debtor at the 

time of the commencement of the case, and obtains, at 

such time and with respect to such credit, an execution 

against the debtor that is returned unsatisfied at such 

time, whether or not such a creditor exists; or 

(3) a bona fide purchaser of real property, other than 

fixtures, from the debtor, against whom applicable law 

permits such transfer to be perfected, that obtains the 

status of a bona fide purchaser and has perfected such 

transfer at the time of the commencement of the case, 

whether or not such a purchaser exists. 

6 

Appellate Case: 88-1308 Document: 01019626905 Date Filed: 04/18/1990 Page: 6 
.. drawn from the mortgaged.premises, it is clear that, for purposes 

of this case, perfection is equivalent to the present right to 

receive the rental income. Therefore, a mortgagee perfects its 

interest when it either properly obtains possession of the 

property or obtains the appointment of a receiver. 

VBF neither obtained possession of the property nor the 

appointment of a receiver prior to debtors filing their bankruptcy 

petition. Although it would appear, without more, that § 544(a) 

would permit debtors to retain the subject rental income, the 

Fifth Circuit has correctly stated the following: 

The starting point to determine whether 11 u.s.c. 

§ 544(a)(l) or (3) prevents the postpetitio~ perfection 

of a security interest in rents is 11 u.s.c. 

§ 362(a)(4). Under§ 362(a)(4), any act to perfect any 

lien against property of the estate is stayed by the 

filing of a bankruptcy petition under ~l U.S.C. 

§§ 301-303. An exception to§ 362(a)(4) exists, though, 

for acts taken "to perfect an interest in property to 

the extent that the trustee's rights and powers are 

subject to such perfection under" 11 u.s.c. § 546(b). 

11 U.S.C. § 362(b)(3). Section 546(b) limits ·a 

trustee's § 544 avoiding powers if generally applicable 

law "permits perfection of an interest in property to be 

effective against an entity that acquires rights" in the 

property before the date of perfection. If that law 

requires that the.property be seized or that an action 

be commenced to perfect the security interest and that 

action was not taken before the bankruptcy petition was 

filed, the interest is perfected by postpetition notice. 

11 u.s.c. § 546(b). 

For [the mortgagee] to escape having its [security 

interest in the rental income] voided under § 544(a), 

[state] law must permit a creditor such as [the 

mortgagee] to enforce a security interest in rents 

against an entity that acquired rights to the rents 

before the creditor perfected. That is, [state] law 

must authorize the creditor's perfection to relate back 

to a time before [the debtor] filed his bankruptcy 

petition and, as a debtor-in-possession, assumed the 

status of a lien creditor or bona fide purchaser. 

7 

Appellate Case: 88-1308 Document: 01019626905 Date Filed: 04/18/1990 Page: 7 
In re Casbeer, 793 F.2d 1436, 1442-43 (5th Cir. 1986)(footnotes 

omitted). 

At the time of the commencement of the bankruptcy case, VBF 

was entitled, under Oklahoma law, to have a receiver appointed, 

and to obtain the rental income that accrued from that point 

forward. VBF did not move to have a receiver appointed because of 

the relatively quick setting of the sheriff's sale by which it 

anticipated acquiring of property outright. Okla. Stat. tit. 12, 

§ 1551(2) requires the mortgagee to demonstrate that the mortgaged 

property is in danger of being lost, removed, or materially 

injured or that the condition of the mortgage has not been 

performed and that the property is probably insufficient to 

discharge the mortgage debt. There is no dispute in this case 

that the installment notice is in default and that the value of 

the mortgaged property (approximately $1,250,000.00) was 

significantly below the amount of the outstanding indebtedness at 

the time the district court order was entered (approximately 

$1,700,000.00). Had VBF sought the prepetition appointment of a 

receiver under§ 1551(2), VBF would have perfected its interest in 

the rental income. 

VBF contends that its § 546(b) notice of claim to cash 

collateral is tantamount to a motion for the appointment of a 

receiver under Okla. Stat. tit. 12, § 1551(2) to which VBF would, 

absent the bankruptcy proceedings, be entitled to file. VBF 

asserts that this notice perfected its interest in the rental 

income and that th i's perfection related back to a prepetition 

time. This assertion is correct. 

8 

Appellate Case: 88-1308 Document: 01019626905 Date Filed: 04/18/1990 Page: 8 
l' 

By its nature, the equitable lien on the rental income 

possessed by VBF relates back to a prepetition time, specifically, 

the time that the mortgage was executed. 

An equitable lien is a mere floating equity until a 

judgment or decree subjecting the property to the 

payment of a debt or claim is rendered, but even though 

not judicially recognized until a judgment declaring its 

existence, it relates back to the time it was created by 

the conduct of the parties. 

51 Am. Jur. 2d Liens§ 22 (1970). See also In re Stratton, 106 

Bankr. 188, 193 (Bankr. E.D. Cal. 1989); Matter of Adametz, 53 

Bankr. 299, 307 (Bankr. W.D. Wis. 1985); United States ex rel. 

Farmers Home Admin. v. Redland, 695 P.~d 1031, 1040 (Wyo. 1985) . 

. Accord Leyden v. Citicorp Indus. Bank, 782 P.2d 6, 11 n.10 (Colo. 

1989). 

Although the perfection of VBF's interest in the rents 

relates back to the time of the exe~·ution of ttie mortgage for the 

purpose of§ 546(b), the entitlement to the rental income does not 

relate back. Under Oklahoma law, a mortgagee is not entitled to 

recover the rental income prior to the appointment or recognition 

of a receiver. See Hart, 43 P.2d at 451. VBF's § 546(b) notice 

serves as the federal bankruptcy equivalent of the appointment or 

recognition of a receiver under Oklahoma law. VBF is entitled to 

the rental income from the subject property from that time 

forward. Furthermore, as the Fifth Circuit observed in Casbeer, 

793 F.2d at 1443, this result comports with the direction in 

Butner that state law should be applied in determining the exact 

extent of a mortgagee's interest in rental income. This uniform 

application of state and federal law in this regard prevents ''a 

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Appellate Case: 88-1308 Document: 01019626905 Date Filed: 04/18/1990 Page: 9 
I' 

party from receiving 'a windfall merely by reason of the 

happenstance of bankruptcy.'" Butner, 440 U.S. at 55 quoting 

Lewis v. Manufacturers Nat'l Bank, 364 U.S. 603, 609 (1961). 

The judgment of the United States District Court for the 

Northern District of Oklahoma entered on February 19, 1988, is 

AFFIRMED. 

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