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Sovereign Bank v. Schwab

July 6, 2005

SOVEREIGN BANK, SUCCESSOR BY MERGER WITH MAIN STREET BANK TO HERITAGE NATIONAL BANK AND THE SCHUYLKILL HAVEN TRUST CO., APPELLANT
v.
WILLIAM G. SCHWAB, TRUSTEE FOR KEITH S. KIRBY AND KATHY A. KIRBY



Appeal from the United States District Court for the Middle District of Pennsylvania (D.C. No. 03-cv-01049). District Judge: Honorable James M. Munley.

The opinion of the court was delivered by: Restani, Judge.

PRECEDENTIAL

Argued: January 10, 2005

Before: ROTH and CHERTOFF*fn1 , Circuit Judges, RESTANI*fn2 , Chief Judge, United States Court of International Trade

OPINION OF THE COURT

Sovereign Bank ("the bank") appeals the district court's final order that affirmed the decision of the bankruptcy court ordering the bank to turn over rents to the bankruptcy estate. Because we conclude that the rents were not the property of the bankruptcy estate, we reverse.

I. Factual and Procedural History

The bank held mortgages on three rental properties in Pennsylvania. The mortgages contained assignment of rents provisions, and gave the bank the right to take possession of the properties and collect the rents upon default.*fn3 After the owners of the properties defaulted, the bank filed a mortgage foreclosure action and in April 1999, obtained a default judgment. In September 2000, the bank sent notice to the properties' tenants informing them that it would be collecting their rental payments.*fn4 Later that month, the court of common pleas granted the bank's petition for preliminary judgment and appointed the bank as receiver "to take possession, charge and control of the mortgaged propert[ies]." [Sept. 21, 2000 Order, App. Vol. 2 at 210]. In January 2001, the mortgaged properties were sold to the bank for cost by the county sheriff.

In February 2001, the mortgagors filed a Chapter 7 petition and William G. Schwab was appointed as bankruptcy trustee ("the trustee"). The trustee commenced a bankruptcy adversary action seeking turnover of the rental funds collected by the bank in its capacity as receiver. [App. Vol. 2 at 22--24]. In response, the bank filed an answer and a motion for summary judgment. [App. Vol. 2 at 31--40, 57--63]. The bankruptcy court found in favor of the trustee, and ordered the bank to turn over the rents to the bankruptcy estate, as funds in the hands of a custodian. The court explained that "because [the bank] took control of th[e] property as a custodian and not the owner . . . the legal interest did not transfer . . . ." [App. Vol. 2 at 456]. The district court affirmed the bankruptcy court's decision. [App. Vol. 1 at 2--6]. The bank now appeals to this court.*fn5

II. Discussion

The issue on this appeal is whether rents collected by the bank are property of the bankruptcy estate. Property of the bankruptcy estate is defined as "all legal or equitable interests of the debtor in property as of the commencement of the case" wherever located by whomever held. 11 U.S.C. § 541(a)(1) (2000). Thus, determining whether the rents here are the property of the bankruptcy estate requires an inquiry into whether the debtor had any legal or equitable interests in those rents as of the date of the bankruptcy petition.*fn6

The bank argues that the debtor's interest in the rents was extinguished pre-petition when the owner defaulted and the bank exercised its rights under the mortgage's assignment of rents provision. The trustee, on the other hand, contends that the debtor maintained an interest in the rents because they were collected by the bank in its capacity as a receiver.

We conclude that the debtor had no interest in the rents when the petition was filed, because (A) the bank took title to the rents pre-petition, and (B) its subsequent appointment as receiver did not affect that title. Accordingly, we hold ...


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