Assignments of Rents: Now You've Got It, Now You Don't
Not all assignments are created equal. Houston Bankruptcy Judge Marvin Isgur recently reminded us of the differences in his August opinion in In re Amaravathi Limited Partnership, 2009 WL 2432315.
The court studied the issue of when the post-petition rents from an income producing project— in this case apartments—still constituted “property of the estate” of the project owner even though they had been assigned to a lender and placed by the debtor into the lender’s lockbox. The judge, a former bankruptcy practitioner and an executive with an apartment developer prior to attending law school, gave a cogent analysis of the issues, and held that the post-petition rents are property of the estate and cash collateral that may be used by the debtor in a chapter 11 proceeding.
The court described the three kinds of assignments of rents commonly found in Texas real estate loans:
- The collateral assignment, which is a basic lien, and requires some action by the lender to “activate” its right to the rents
- The absolute assignment, in which the lender is given legal title to the rents with a license back to the debtor for the purpose of collection with the proviso that the lender acquires the right to receive the rents automatically upon a default
- The true assignment or “true sale,” which is accompanied by a pro tanto discharge of the debt or purchase obligation in an amount equal to the amount of rent received
In determining the rights of the parties under an assignment of rents, the parties’ description of the kind of assignment is not controlling, there is a presumption that the grant is of a collateral assignment, and courts will look to the parties’ rights under the loan documents in determining what kind of assignment has been created.
The court held that even in the case of an absolute assignment, the debtor retained an equitable interest in the rents, that this interest sufficed to make post-petition rents property of the estate, and that post-petition rents were cash collateral, which could be used subject to providing the lender adequate protection and other appropriate safeguards following notice and a hearing.
What’s a lender to do?
- In each transaction, discuss with your attorney the benefits of having an absolute assignment of rents rather than a collateral assignment.
- Make sure your documents permit you to move quickly, and in several different ways, if you have to revoke the borrower’s license to collect rents. These rights should include the right to collect rents from tenants directly, in person or via a lockbox, and the right to ask a court to appoint a receiver.
- Regardless of what kind of assignment you have, police your collateral, especially after default, and move quickly if the borrower is not cooperative.
If you have any questions, comments, or your own example, then please post a comment.
