In Re: Jason Realty

Opinions of the United
1995 Decisions States Court of Appeals
for the Third Circuit
7-6-1995
In Re: Jason Realty
Precedential or Non-Precedential:
Docket 94-5691
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"In Re: Jason Realty" (1995). 1995 Decisions. Paper 182.
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UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
No. 94-5691
In re: JASON REALTY, L.P.,
Debtor
FIRST FIDELITY BANK, N.A.
v.
JASON REALTY, L.P.,
Appellant
No. 95-5133
JASON REALTY, L.P.,
Appellant,
v.
FIRST FIDELITY BANK, N.A.
On Appeal from the United States District Court
for the District of New Jersey
(D.C. Civil Nos. 94-02857 and 94-06359)
Argued May 24, 1995
BEFORE: GREENBERG, ROTH and ALDISERT, Circuit Judges.
(Filed July 6, 1995)
Jonathan I. Rabinowitz (argued)
Bernard Schenkler
Paul Rosenblatt
Ravin, Sarasohn, Cook,
Baumgarten, Fisch & Baime
103 Eisenhower Parkway
Roseland, New Jersey 07068
Attorneys for Appellant
Joseph Lubertazzi, Jr. (argued)
Sheila E. Calello
McCarter & English
Four Gateway Center
100 Mulberry Street
Newark, New Jersey 07102
Attorneys for Appellee
OPINION OF THE COURT
ALDISERT, Circuit Judge.
These consolidated appeals arise out of the bankruptcy of
Jason Realty, L.P., a single-asset, New Jersey limited
partnership that owns and operates a two-story retail and office
building. On this property, First Fidelity Bank, N.A., holds a
note, a mortgage, and an assignment of rents. At issue here is
the assignment agreement, which assigned the rents, income and
profits from the property to the bank, but granted Jason Realty
the privilege to collect the rents until the event of default.
Jason Realty defaulted prior to filing its Chapter 11 petition.
The parties now dispute title to the rents.
The major question for decision is whether the assignment
was an absolute assignment, as interpreted by the district court,
or a collateral pledge, as construed by the bankruptcy court. We
agree with the district court that the assignment vested First
Fidelity with title to the rents and granted Jason Realty a
license to collect the rents until default. Upon default, Jason
Realty had no interest in the rents. Accordingly, the rents are
not property of the estate and are not available as cash
collateral nor as a funding source for the debtor's
reorganization plan. Therefore, we will affirm the orders of the
district court.
The orders of the bankruptcy judge and the district court
are final and appealable. Commerce Bank v. Mountain View
Village, Inc., 5 F.3d 34, 36-37 (3d Cir. 1993). We have
jurisdiction under 28 U.S.C. § 158(d). Because there is no
dispute as to the facts presented below, the interpretation and
application of the assignment contract and the Bankruptcy Code
raise only questions of law subject to plenary review. See In re
Deseno, 17 F.3d 642, 643 (3d Cir. 1994); FRG, Inc. v. Manley, 919
F.2d 850, 854 (3d Cir. 1990).
I.
The contest here is between Jason Realty, L.P., the debtor,
and First Fidelity Bank, N.A., a creditor. Jason Realty is the
owner of commercial real estate in Aberdeen, New Jersey. On
September 14, 1989, Jason Realty executed a promissory note in
favor of Howard Savings Bank for the repayment of approximately
$750,000.00. On this date, it also executed two additional
agreements: a mortgage and an assignment of leases. The
assignment provided:
THAT the Assignor for good and valuable consideration,
receipt whereof is hereby acknowledged, hereby grants,
transfers and assigns to the Assignee the entire
lessor's interest in and to those certain leases . . .
TOGETHER with all rents, income and profits arising
from said leases.
App. at 78. The assignment included the following "terms,
covenants and conditions":
So long as there shall exist no default by the
Assignor in the payment of the principal sum, interest
and indebtedness secured hereby and by said Note and
Mortgage, . . . the Assignor shall have the privilege
to collect . . . all rents, income and profits arising
under said leases or from the premises described
therein and to retain, use and enjoy the same. * * *
Upon payment in full of the principal sum, interest
and indebtedness secured hereby and by said Note and
Mortgage, this Assignment shall become and be void and
of no effect.
App. at 80 and 82. On October 2, 1992, First Fidelity purchased
the note, mortgage and assignment from Howard Savings Bank.
Jason Realty defaulted on the note by failing to make the
principal and interest payments due on November 1, 1993, and each
month thereafter. On January 28, 1994, First Fidelity sent
notices to the tenants of the mortgaged property demanding that
they pay their rent directly to First Fidelity. On March 3,
1994, First Fidelity instituted a foreclosure action in a New
Jersey state court, and on March 18 filed an application for
appointment of a receiver. One week thereafter, Jason Realty
filed a voluntary Chapter 11 petition. Accordingly, the
foreclosure action was stayed.
On April 4, 1994, the bankruptcy court authorized Jason
Realty's preliminary use of the rents to pay expenses in
accordance with the budget submitted to the court and set a final
hearing date for April 25, 1994. At the final hearing, the
bankruptcy court held that the rents, amounting to approximately
$12,500 per month, constituted cash collateral and granted Jason
Realty's motion for continued use of cash collateral. The court
also directed Jason Realty to pay First Federal $6,041.00 per
month as adequate protection. The court entered a final order
authorizing the debtor's continued use of cash collateral. First
Fidelity filed an appeal to the district court which reversed the
bankruptcy court's order and held that the rents were not
property of the estate and could not be used as cash collateral.
The appeal at No. 94-5691 challenges this order.
On November 8, 1994, First Fidelity moved for relief from
the automatic stay. Jason Realty filed a cross-motion seeking to
compel First Fidelity to pay operating expenses for the real
property under 11 U.S.C. § 506(c). On December 5, 1994, the
bankruptcy court issued an order granting relief from the
automatic stay and denying the cross-motion. Jason appealed to
the district court, which affirmed. The appeal at No. 95-5133
challenges this order.
II.
The issue before us is whether the assigned rents should
have been classified as property of the estate under 11 U.S.C. §
541(a)(1). Property of the estate consists of all property in
which the debtor holds an interest upon the commencement of
bankruptcy. See 11 U.S.C. § 541(a)(6). Generally, a debtor-in-
possession, as trustee, see 11 U.S.C. § 1107(a), is free to use,
sell or lease property of the bankruptcy estate in the operation
of the debtor's business. See 11 U.S.C. § 363(c)(1). Thus,
classification of the instant rents is significant because the
rents could become part of the bankruptcy estate and fund the
debtor's reorganization.
The district court concluded that Jason Realty had no
interest in the rents at the commencement of bankruptcy on March
25, 1994, because it had assigned the rents on September 14,
1989. Although Jason Realty had a license to collect the rents,
the license was revoked when Jason Realty defaulted on the note
on November 1, 1993, prior to the commencement of bankruptcy.
Jason Realty argues (and the bankruptcy court held1) that
the estate held an interest in the rents, because the assignment
merely pledged the rents as security. Jason Realty contends that
it retained title to the rents and that the rents are now "cash
1
. The bankruptcy court did not supply detailed reasoning in its
oral opinion that held that this was not an absolute assignment.
The court "incorporated the extensive analysis in the Debtor's
papers as its own opinion," Appellant's Brief at 13, and stated:
I don't think I can really add anything to the reasons
stated in opposition by the debtor, because I believe
they're all well stated and I believe the authorities
are on point and correct. The Pennsylvania case, the
Third Circuit case [Commerce Bank] involving
Pennsylvania law is not applicable here for the simple
reason that Pennsylvania is a title state not a lien
state. And the Soreles (sic) case is on point and you
can no more take the rents here without Court order
than you could do it in foreclosure without getting a
receiver appointed. In any event, for all of the
reasons stated in the debtor's opposing papers, the
objection is overruled.
App. at 149.
collateral." Cash collateral takes many forms and includes "the
... rents ... of property subject to security interest as
provided in section 552(b) of this title." 11 U.S.C. § 363(a).
Subject to certain conditions, a bankruptcy court may authorize
the use of cash collateral by a debtor. Id.We must determine whether the assignment conveyed title to
First Fidelity or, instead, pledged the rents as security.
Assignments of rents are interests in real property and, as such,
are created and defined in accordance with the law of the situs
of the real property. Butner v. United States, 440 U.S. 48, 55
(1979); Commerce Bank, 5 F.3d at 37. A federal court in
bankruptcy is not allowed to upend the property law of the state
in which it sits, for to do so would encourage forum shopping and
allow a party to receive "a windfall merely by reason of the
happenstance of bankruptcy." Butner, 440 U.S. at 55. Thus, in
determining whether the parties' assignment of rents transferred
title or, instead, created a "security interest," our goal must
be to ensure that First Fidelity "is afforded in federal
bankruptcy court the same protection [it] would have under state
law if no bankruptcy had ensued." Id. at 56. We thus turn to
New Jersey law to classify the parties' interests in the rents.
III.
It is settled in New Jersey that an assignment of rents
passes title to the assignee. Paramount Bldg. & Loan Ass'n of
City of Newark v. Sacks, 107 N.J. Eq. 328, 152 A. 457 (N.J. Ch.
1930). An assignment of a right is a manifestation of the
assignor's intention to transfer it by virtue of which the
assignor's right to performance by the obligor is extinguished in
whole or in part and the assignee acquires right to such
performance. Restatement (Second) of Contracts § 317; see
generally Aronsohn v. Mandara, 98 N.J. 92, 484 A.2d 675, 678-79
(N.J. 1984). The precise wording determines the effect of the
assignment. See In re Winslow Center Assocs., 50 B.R. 679, 681
(Bankr. E.D. Pa. 1985); In re Pine Lake Village Apartment Co., 17
B.R. 829, 834 (Bankr. S.D.N.Y. 1982); Matter of Glen Properties
168 B.R. 537 (D.N.J. 1993).
An absolute assignment transfers title to the assignee upon
its execution. New Jersey Nat'l Bank & Trust Co. v. Wolf, 108
N.J. Eq. 412, 155 A. 372 (N.J. Ch. 1931). An assignment is
absolute if its language demonstrates an intent to transfer
immediately the assignor's rights and title to the rents. In re
Winslow Center Assocs., 50 B.R. at 681-82 (applying New Jersey
law). The instant assignment was quintessentially absolute,
because it was a total assignment in per verba de praesenti:
Jason Realty "hereby grants, transfers and assigns to the
assignee the entire lessor's interest in and to those certain
leases ... Together with all rents." These parties mutually
agreed in words of the present to transfer full title to the
rents. This exchange inescapably and unambiguously expressed an
agreement to assign present title.
Notwithstanding this language, Jason Realty argues that the
overall effect of the assignment was to create a pledge for
security. It contends that the assignment was collateral and
effected (only) a future transfer of rights dependent upon a
later default. Jason Realty lists several characteristics of
this assignment that, it suggests, indicate the assignment was
collateral: (1) the assignment was part of a financing
transaction; (2) the mortgage acknowledged that the assignment
was given as "additional security"; (3) the assignment was made
"for the purpose of securing [t]he payment of the principal sum,
interest and indebtedness by a certain Note" and referenced "the
indebtedness secured hereby"; (4) rights and liabilities were set
forth in the event that First Fidelity acquired title (indicating
a future event); (5) upon payment of the indebtedness, the
assignment would be null and void, thus reverting the rents to
Jason Realty; (6) the debt to First Fidelity was not extinguished
or reduced upon execution of the assignment in 1989 or upon
enforcement in 1994; (7) First Fidelity was obligated to apply
the fruits of the assignment to the amount due on the note; and
(8) Jason Realty's use of the rents was unrestricted.
Appellant's contention is unavailing. We are not moved by
the fact that the assignment was part of a financing transaction
and served as additional security for repayment of the note. An
assignment clause within a mortgage may be independent of the
mortgage security. New Jersey Nat'l Bank & Trust Company, 108
N.J.Eq. at 414; 155 A. at 373 (citing Stanton v. Metropolitan
Lumber Company, 107 N.J. Eq. 345, 152 A. 653 (Ch. 1930)).
Moreover, we are impressed that the instant assignment was
contained in an agreement separate from the mortgage. First
Fidelity proceeded here as an assignee of rents under rights
conferred on a special instrument bearing the title "Assignment
of Lease or Leases," App. at 78, and not in its capacity as a
mortgagee enforcing rights contained in the instrument bearing
the title "mortgage." App. at 55.
It also is well-established under New Jersey law that an
absolute assignment may have conditions. Stanton, 107 N.J. Eq.
at 348, 152 A. at 654-55. The fact that a right is conditional
on the performance of a return promise or is otherwise
conditional does not prevent its assignment before the condition
occurs. See Restatement (Second) of Contracts, §§ 320 and 331.
Under New Jersey law, an assignment may be conditioned upon
default. In Stanton, the court interpreted an assignment clause
in a mortgage that provided "if default be made . . . said rents
and profits are . . . assigned to the mortgagee." 108 N.J.Eq. at
346; 155 A. at 654. The court stated:
Th[is] assignment, though conditional, became absolute
upon default of the mortgage debt, and was valid and
enforceable against the assignor; . . . As the rents
accrued, after the default, the ownership was in the
assignee; . . .
The assignment is not, as contended, an assignment of
rents as may accrue after the mortgagee should enter
into possession, and conditional upon its entering
into possession or upon the appointment of a receiver.
The provisions of the mortgage above quoted grants the
right to take possession upon default; in addition the
rents are assigned upon default; . . . The assignment
of rents is distinct and independent of the means
granted the mortgagee to collect them. The title to
them was to pass to the mortgagee upon default whether
the procedure was or not adopted, not that it was to
pass only if it was set in motion.
Id. at 348, 152 A. at 654-55 (emphasis added). We have not been
directed to any New Jersey authority that overrules, amends or in
any way dilutes these authorities.
The instrument evidences an absolute assignment of title to
the rents, with the assignor receiving a license to collect the
rents. Our reasoning is informed by Judge Debevoise of the
District of New Jersey, who interpreted a similar assignment
clause in Matter of Glen Properties, 168 B.R. 537 (D.N.J. 1993).
That assignment provided that the assignor "for value received .
. . does hereby sell, assign, transfer, set over and deliver unto
the Assignee all leases . . . together with the immediate and
continuing right to collect and receive all of the rents." Id.
at 540-41. The assignment also provided "That so long as there
shall exist no default by Assignor in the payment of any
indebtedness secured hereby, Assignor shall have the right under
a license granted hereby . . . to collect upon . . . all of said
rents." Id. at 540. We fail to perceive a meaningful difference
between the assignment clause in Glen Properties and the
assignment presently before us, and concur in Judge Debevoise's
conclusion that it is "quite clear" that such language evidences
an absolute assignment. Id. at 541.
Accordingly, the district court properly concluded that the
rents were assigned to First Fidelity and were not property of
the bankruptcy estate.
IV.
In part III, we conclude that the law of New Jersey is
clear. And, of course, the bankruptcy courts are strictly bound
to apply this state's law to property interests under the
teachings of Butner. Yet the bankruptcy judge here concluded
that an assignment, absolute on the face of the instrument, was
collateral. Apparently, this result is borne of misgivings on
the part of the bankruptcy court regarding the repercussions that
our holding in Commerce Bank, interpreting Pennsylvania law,
would have on single-asset reorganizations in New Jersey. See
Commerce Bank, 5 F.3d at 38. Although our decision here may
create serious obstacles for debtors whose sole income stream is
rents, Butner mandates that we interpret the assignment as New
Jersey courts would construe it outside the bankruptcy context.
Our review of the bankruptcy court's holding in this case and of
those in In re Mocco, 176 B.R. 335 (Bankr. D.N.J. 1995) and in In
re Princeton Overlook Joint Venture, 143 B.R. 625 (Bankr. D.N.J.
1992), suggest the need to reemphasize the interaction of the
mandates of the Bankruptcy Code, the principle of Butner and the
doctrine of stare decisis.2
2
. In In re Mocco, 176 B.R. 335 (Bankr. D.N.J. 1995), for
example, a bankruptcy court was faced with an assignment almost
identical in language to the one before us. In its
interpretation, the bankruptcy judge refused even to address the
reasoning of the Chief Judge of the District of New Jersey in
this case, stating, "this court is not bound by Jason, an
unpublished opinion." Id. at 342 n.4. The bankruptcy judge also
refused to follow the New Jersey district court precedent in the
published opinion in Matter of Glen Properties, saying flatly,
"This court disagrees." Id. at 345.
In a reorganization under Chapter 11, a bankruptcy court's
objective is to preserve, if possible, an ongoing business. The
perennial problem facing bankruptcy judges is to strike a proper
balance between rights of the creditor and debtor. To do this,
the judges make wide use of equitable and discretionary powers as
provided by the Bankruptcy Code and Rules. Judges recognize that
in many cases, especially single-asset cases involving commercial
real estate, the use of cash collateral by the debtor is
essential to a successful reorganization. They recognize that
the only source of potential cash collateral is the rent
generated by the leases. Understandably, they will endeavor to
craft a recovery that will permit some use of the rents by the
debtor.
Under New Jersey law, however, such a goal cannot be
reached by merging the rights of an assignee of leases with those
of a mortgagee. These concepts are not fungible, but embrace
separate and distinct attributes of property law, as well as
degrees of gradation of title and basic differences as to how and
when title passes between the debtor and the secured creditor.
Thus, in the case at bar, although it was clear that First
Fidelity was proceeding as an assignee of leases, the bankruptcy
judge refused to follow the teachings of Commerce Bank on the
basis that mortgages are treated differently in New Jersey than
in Pennsylvania: Pennsylvania is "a title state and not a lien
state." App. at 149. The judge confused assignee apples with
mortgagee oranges.
We have found this same confusion in other cases where
there is a substantial issue of an assignee's right to rents.
See, e.g., In re Mocco and In re Princeton Overlook Joint
Venture. There is often a failure to recognize the differences
between those cases where the mortgagee attempts to collect rents
solely on the strength of the mortgage instruments, see Eisen v.
Kostakos, 282 A.2d 421 (N.J.App. Div. 1971); Scult v. Bergen
Valley Builders, Inc., 197 A.2d 704 (N.J.App. Div. 1964), and
instances where the creditor proceeds solely, as here, as an
assignee under an assignment of rents clause, see Stanton v.
Metropolitan Lumber Co., 152 A. 653 (N.J.Ch. 1930); In re Winslow
Center Assoc., 50 B.R. 679 (Bankr. E.D.Pa. 1985).
As we note, this confusion appears in the present case. In
its decision, the bankruptcy court relied on Midlantic Nat'l Bank
v. Sourlis, 141 B.R. 826 (D.N.J. 1992), in which the court
addressed whether the assignee/creditor had an interest in rents
for the purposes of Section 363. In Sourlis, the court held that
an assignee had "a perfected security interest in the rents as of
the date of proper state-law recordation." Id. at 834. Although
the court in Sourlis spoke only of creditors having security
interests in rents, the court did not address the possibility
that a debtor could assign all of its rights in rents to the
creditor. It therefore provides little guidance here.3
3
. The court in Sourlis does, however, give an accurate summary
of New jersey law on the distinction between the situations in
which a mortgagee and in which an assignee wish to collect rents:
Under New Jersey law, a mortgagee must take
affirmative steps, such as taking possession of the
Moreover, the facts in Sourlis do not form an appropriate
analogy to the facts before us, because the creditor took no
active steps pre-petition to implement the assignment clause.
The creditor did not direct the tenants to make the payments to
it prior to the commencement of any bankruptcy proceedings. The
creditor "did not seek to take possession of or manage the
properties or seek the appointment of a receiver prior to the
debtor's filing a voluntary petition in bankruptcy under Chapter
11." Id. at 828. Apparently, the creditor's first attempt to
assert ownership rights of the rents was in its motion to
restrain the debtor's use of the rents as cash collateral in the
bankruptcy proceedings.
In conclusion, we have discussed this question at some
length in order to avoid future confusion. It is important in
interpreting New Jersey law that the otherwise worthy desire for
achieving a reorganization under Chapter 11 should not trump the
rights of an assignee of a lease under a pre-petition assignment.
V.
(..continued)
property or securing the appointment of a receiver, to
entitle the mortgagee to collect rents from the
mortgaged property. Eisen, Scult. However, also
under New Jersey law, a mortgagee with an assignment
of rents is entitled to enforce its assignment and
collect the rents upon default without taking
possession of the property or seeking the appointment
of a receiver. Stanton, Winslow.
Id. at 831-32.
We are satisfied that our determination of the appeal at
No. 94-5691 controls the outcome of the appeal at No. 95-5133.
A party is entitled to relief from the automatic stay
pursuant to 11 U.S.C. § 362(d)(2) under the following standard:
On request of a party in interest and after notice and
a hearing, the court shall grant relief from the stay
provided under subsection (a) of this section, such as
by terminating, annulling, modifying or conditions
such stay --
* * * *
(2) with respect to a stay of an act against
property under subsection (a) of this section, if --
(A) the debtor does not have an equity in
such property; and
(B) such property is not necessary to an
effective reorganization.
11 U.S.C. § 362(d)(2).
With respect to the first prong, Jason Realty concedes that
it has no equity in the real property. In order to satisfy its
burden on the second prong, Jason Realty had to demonstrate that
there was "a reasonable possibility of a successful
reorganization within a reasonable time." United Sav. Ass'n v.
Timbers of Inwood Forest Assocs., Ltd., 484 U.S. 365, 376 (1988).
Jason Realty's proposed plan for reorganization uses the rents
assigned to First Fidelity to fund the plan. We previously have
held that when rents are not property of the debtor's estate,
they may not be used to fund a plan of reorganization. Commerce
Bank, 5 F.3d. at 38. As a panel of this court, we lack the power
to overrule the decision of a previous panel; moreover, even if
we had the power, we are not inclined to accept Appellant's
argument. We are satisfied that no provision of the Bankruptcy
Code permits Jason Realty to "create" an interest in the rents to
enable it to use First Fidelity's property in a plan of
reorganization. In the circumstances of this case, the rents are
unavailable for use, allocation or utilization in any plan
proposed by Jason Realty.
We have considered all arguments advanced by the parties
and conclude that no further discussion is necessary. The
judgments of the district court will be affirmed in all respects.