Opinion ID: 1295300
Heading Depth: 1
Heading Rank: 6

Heading: mortgagee's failure to collect rent

Text: In its petition, 24th & Dodge alleged that Delaware Acceptance and Nebraska Acceptance wrongfully foreclosed the mortgage because Delaware Acceptance and Nebraska Acceptance failed to recover sums owed to 24th & Dodge by the tenant ... which such sums Delaware Acceptance and Nebraska Acceptance were obligated to recover by virtue of their acting upon an assignment of rents. In Nebraska, a mortgagee's status is that of a lien holder. See Neb.Rev.Stat. § 76-276 (Reissue 2003). Under this theory, the mortgagee is regarded as owning a security interest in real estate only and the mortgagor retains both the legal title and right of possession. Id. See, also, Restatement (Third) of Property: Mortgages § 4.1 (1997). Although title and possession remain in the mortgagor, mortgagees may create a security interest in rents arising from real estate. § 76-276. The security interest may be enforced by the recovery of rents as part of the enforcement of an assignment of rents instrument. Neb.Rev.Stat. § 52-1705 (Reissue 2004). There is little Nebraska case law regarding the collection of rents under an assignment of rents agreement. We have, however, made it clear that a mortgagee in possession before foreclosure must not only account for rents and profits received, but also for rents which the mortgagee could have received with reasonable diligence. Hays v. Christiansen, 105 Neb. 586, 181 N.W. 379 (1921). See, also, Kemp v. Small, 32 Neb. 318, 49 N.W. 169 1891); Comstock v. Michael, 17 Neb. 288, 22 N.W. 549 (1885) (superseded by statute on other grounds). In the present case, 24th & Dodge has not alleged that Delaware Acceptance and Nebraska Acceptance were in possession of the mortgaged property. Rather, 24th & Dodge alleges that they were obligated to recover [the rents] by virtue of their acting upon an assignment of rents for the subject property. Brief for appellant at 9. Thus, the issue presented is whether a mortgagee who acts upon the assignment of rents without taking actual possession of the mortgaged property must account for rents which could have been collected from the tenant. There is no case law cited by 24th & Dodge which supports its position that a mortgagee becomes obligated to account for rents merely by acting upon an assignment of rents. In In re Olick, 221 B.R. 146 (Bankr.E.D.Pa.1998), the U.S. Bankruptcy Court for the Eastern District of Pennsylvania addressed a claim that debtors were entitled to certain credits and offsets based upon the mortgagee's failure to collect rents and otherwise manage the mortgaged property pursuant to its alleged responsibilities under an assignment of rents agreement. The In re Olick court concluded that the mortgagee was not obligated to collect rents. The relevant portion of the In re Olick opinion is set forth below: Our research reveals that the cases most supportive of the Debtors' theory concern the duties of mortgagees-in-possession. Mortgagees-in-possession are held to be quasi trustees, with a duty to collect and account for rents.... The mortgagee in possession has a duty to collect the rents and profits which accrue during his occupancy and apply them to the mortgage debt.... Moreover, the mortgagor is entitled to an accounting from his mortgagee who has taken possession....... ... In the present case, however, the Debtors have not met their burden of showing that [the creditor, National Penn Bank (NPB),] should be held to this high standard since they failed to establish that NPB was a mortgagee-in-possession. To explain, a creditor becomes a mortgagee-in-possession when it takes actual possession and control over a debtor's property.... In the present case, however, the record is devoid of evidence that NPB took actual possession of the Commercial Property. NPB exercised its rights under the assignment of rents by sending the tenant a letter demanding the payment thereof, and, upon the tenant's noncompliance, NPB garnished the rent. By sending the demand letter to the tenant, NPB was deemed to have taken constructive possession of the property ... thus permitting NPB to collect the rents, but the applicable case law appears to require a creditor to take actual possession to achieve the status of mortgagee-in-possession. (Citations omitted.) (Emphasis omitted.) 221 B.R. at 156-57. We agree with the In re Olick court that in order for a mortgagee to become accountable for rents under an assignment of rents, the mortgagee must be in actual possession of the mortgaged property, as opposed to merely collecting rents under an assignment of rents. This view is not only consistent with our holding in Hays v. Christiansen, 105 Neb. 586, 181 N.W. 379 (1921), it is also consistent with case law from other jurisdictions and secondary sources. See, U.S. Fid. & Guar. v. Old Orchard Plaza, 284 Ill.App.3d 765, 773, 220 Ill.Dec. 59, 672 N.E.2d 876, 882 (1996) ([p]ossession means `physical possession of the mortgaged real estate to the same extent to which the mortgagor, absent the foreclosure, would have been entitled to physical possession'); Prince v. Brown, 856 P.2d 589 (Okla.App.1993) (explaining mortgagee who receives rents does not become mortgagee in possession unless he has also entered into continued physical possession and exercises exclusive operating control of property); 54A Am.Jur.2d Mortgages § 213 (1996) (defining possession as exclusive actual control over property to exclusion of mortgagor); 55 Am.Jur.2d, supra, § 1319 (stating general rule that one who takes possession of property as mortgagee must account for rents). There is no allegation in the present case that Delaware Acceptance and Nebraska Acceptance were in actual possession of the physical property to the exclusion of 24th & Dodge. Consequently, we conclude that Delaware Acceptance and Nebraska Acceptance had no duty to collect rents after exercising their rights under the assignment of rents. Therefore, 24th & Dodge's allegation that Delaware Acceptance and Nebraska Acceptance were negligent in their failure to collect rents under the assignment of rents did not state a cause of action.