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involved a note secured by a mortgage on commercial property as well as an Assignment of Leases and Rents that provided the lender with an absolute and unconditional assignment of the borrower's rights to the rents.Upon the borrower's default, the lender issued an appropriate notice to collect rent directly from the tenants, commenced a foreclosure action, requested the appointment of a receiver and obtained a default judgment.Although the lender commenced a foreclosure action, had a receiver appointed, and obtained summary judgment of foreclosure prior to the debtor's bankruptcy petition, the court ruled that these measures were insufficient to obtain control of the property's rental revenues.
The answer depends not on bankruptcy law, but on the law of the governing jurisdiction – and then potentially on the measures that the lender undertakes following a default.
Two cases out of New York illustrate the importance of a lender's diligence in enforcing its rights under a mortgage and assignment of rents.
Both mortgages and deeds of trust may incorporate an assignment of rents and leases that allows the lender to collect rent money held by,or due to, the property owner by tenants once the owner defaults or fails to make payments.
An assignment of rents and leases may also be recorded as a separate document.
Under "lien theory," a lender must foreclose its lien before taking title to the collateral or, at a minimum, the lender must take affirmative steps in order to make a case for control over rents.
Some states, such as Maryland, have enacted legislation to dispense with this requirement in order to eliminate inconsistent determinations as to what constitutes sufficient affirmative efforts by a lender – a dilemma reflected in the cases described above.Payments under an absolute assignment will ordinarily be paid to the borrower or owner of the property as long as the loan secured by the deed of trust is not in default.In a collateral assignment, the borrower is generally considered to retain ownership of the rents until the lender takes action to enforce the assignment or gains possession of the property through foreclosure.One concern for the lender in this instance is that, in a judgement, other creditors will take priority, causing the lender to lose its security interest in the rent.Under an absolute assignment, if a borrower defaults on the deed of trust, the lender may request appointment of a receiver to collect the rents until foreclosure of the deed of trust or a determination of ownership of rents by a court of law.However, the court observed that because New York operates under a "lien theory" of mortgages, an assignment of rents could not be "absolute" and a secured lender would acquire "title" to the property's rents only after foreclosing its lien at a sale.The court ruled that the lender's efforts to exercise control over the rents gave the lender only an enforceable interest in the rents – but not title – and permitted the debtor to utilize the rents, in the first instance, as cash collateral.Dec.11.2012 In exchange for a loan secured by commercial property, a lender often receives an absolute assignment of the property's leases and rents.But who owns those rents once the borrower files for bankruptcy protection?On the eve of the foreclosure sale, the borrower filed for chapter 11 protection in the U. Bankruptcy Court for the Southern District of New York.The lender quickly filed for relief from the automatic stay to proceed with foreclosure, and asserted that the assignment was self-executing and absolute; that its terms gave the borrower only a revocable license to the rents while no default existed; and that the assignment expressly did require the lender to undertake any affirmative acts to enforce it.