Opinion ID: 181681
Heading Depth: 4
Heading Rank: 1

Heading: Assignment of Rents

Text: The parties agree that under Kentucky law the courts must interpret the Assignment of Rents as a contract and give effect to the parties’ intent. However, the parties do not agree as to what that intent entailed. Bank of America asserts that the Assignment of Rents was intended to give ownership of the rents to Bank of America and only give Buttermilk Towne Center a license to collect the rents. Bank of America notes that the Assignment provides: “Assignor hereby grants, transfers, sets over and 2 11 U.S.C. § 541(a)(6) states that the bankruptcy estate is comprised of “[p]roceeds, product, offspring, rents, or profits of or from property of the estate, except such as are earnings from services performed by an individual debtor after the commencement of the case.” Recent cases have suggested that the question of whether rent proceeds are estate property is not a question of state law, but rather federal law. The Panel does not reach this issue. See In re Bryant Manor, LLC, 422 B.R. 278, 288 (Bankr. D. Kan. 2010); In re Amaravathi Ltd. P’ship, 416 B.R. 618 (Bankr. S.D. Tex. 2009); In re Las Torres Dev. LLC, 408 B.R. 876 (Bankr. S.D. Tex. 2009). 7 assigns to Assignee, all of the right, title and interest of Assignor in and to: (a) all of the rents, revenues, issues, profits . . . arising from the [project].” Assignment of Rents, ¶ 2(a). Buttermilk Towne Center asserts that the Assignment of Rents was to give Bank of America a security interest in the rents. Buttermilk Towne Center points to paragraph C in the Assignment which states that the Assignment is a “Grant of Security Interest” “given to secure” payment to Bank of America. The Panel holds that Buttermilk Towne Center’s interpretation of the nature of the Assignment of Rents better reflects the parties’ intent. There are three characteristics of the assignment that show it was intended to be a security interest. First, the debtor retained the right to collect the rents so long as it was not in default of the mortgage. Second, even if a default occurred, giving Bank of America the right to collect the rents, the rents could only be used to reduce Buttermilk Towne Center’s debt to Bank of America. Third, the Assignment of Rents automatically terminated when Buttermilk Towne Center’s debt to Bank of America was satisfied. These key provisions of the contract do not support an interpretation that Bank of America became an absolute owner of the rents. Rather, they show that the parties intended the assignment to serve as additional security for the debt. Although the facts in Jason Realty are similar to the present case, the Panel is not persuaded by the holding. In Jason Realty, the Third Circuit, interpreting New Jersey law, held that an Assignment of Rents conveyed absolute ownership of the rents to the secured lender, thus the rents were not property of the estate. The present case is not governed by New Jersey law. Moreover, the Panel does not find that Kentucky law would require the same holding. Additionally, as observed in In re Guardian Realty Group, LLC, 205 B.R. 1 (Bankr. D. D.C. 1997): The majority of cases to consider language in a security agreement granting a mortgagee an alleged absolute assignment of rents have found the true nature of the mortgagee’s interest to be no more than security even in those states following the “title theory” of mortgages. See e.g., In re McCann, 140 B.R. 926, 927 (Bankr. D. Mass. 1992); In re Bethesda Air Rights Limited Partnership, 117 B.R. 202, 206 8 (Bankr. D. Md.1990) (“title theory” state); In re Willowood East Apartments of Indianapolis II, Ltd., 114 B.R. 138, 141 (Bankr. S.D. Ohio 1990). Bank of America also relies on In re Kingsport Ventures, L.P., 251 B.R. 841 (Bankr. E.D. Tenn. 2000). In Kingsport Ventures, the court found an absolute assignment of rents divested the debtor of a property interest under Tennessee law. Id. at 848. A subsequent Tennessee case discussed and distinguished Kingsport Ventures: Moreover, the language in the assignment document in Kingsport Ventures, L.P., eliminated any doubt possibly inferred by the parties by clarifying that the assignment is “not an assignment for additional security only.” Kingsport Ventures, L.P., 251 B.R. at 848. Here, no such clarification exists in the documents. The provisions addressing the license to collect rents and the termination of the license also differ. In re 5877 Poplar, L.P., 268 B.R. 140, 147 (Bankr. W.D. Tenn. 2001). The present case is more like 5877 Poplar. While isolated portions of the assignment may appear absolute, when read in the context of the entire document, it is clear that the assignment was intended to serve as additional security only. The Sixth Circuit has held: In Kentucky, it has been declared that the entire tenor and affect of an instrument pledging rents, issues and profits in addition to the real estate mortgaged is that such a pledge is deemed secondary security, with the lien continuing as an inchoate right which will be and must be perfected or consummated by asserting the right by some definite action looking toward possession and subjection. Green v. Vanston Bondholders Protective Comm. (In re American Fuel & Power Co.), 151 F.2d 470, 481 (6th Cir. 1945) (internal quotation marks and citations omitted). Bank of America has not presented any Kentucky case law that contradicts the Sixth Circuit’s statement of law on this issue. 9