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In re Cordova

United States District Court, D. New Jersey

October 22, 2013

In re Jose CORDOVA and Nancy Pavic, Debtors.

Page 702

Gary S. Jacobson, Herold Law, PA, Warren, NJ, for Appellant.

Ronald Ira Levine, Hackensack, NJ, for Appellees.

OPINION

KEVIN McNULTY, District Judge.

Gary S. Jacobson, the Trustee (the " Trustee" ), appeals from an order of the United States Bankruptcy Court for the District of New Jersey denying his motion to turn over rents that the Debtors, Jose Cordova and Nancy Pavic, have received and are receiving from a property they own in Paterson, New Jersey. The Honorable Novalyn L. Winfield denied the motion, finding that the rents were not part of the Debtors' estate because they had been absolutely assigned to their lender, PHH Mortgage Corp. c/o J.P. Morgan Mortgage Acquisition Corp. (" PHH" ). The Trustee appeals from Bankruptcy Judge Winfield's ruling.

Judge Winfield's decision relies primarily on In re Jason Realty L.P., 59 F.3d 423 (3d Cir.1995). Jason held that, where the debtor has made a pre-petition absolute assignment of rents to a lender in connection with a loan, title immediately vests in the lender. Thus, even if the debtor retains a license to collect the rents, title to the rents remains with the lender, so they do not enter the estate upon a filing in bankruptcy. Jason — as one would ordinarily expect— presented a clash of rights between the lender and the debtor, in which the lender's rights were found to be superior.[1]

This case, however, presented the bankruptcy court with a configuration perhaps never contemplated by the United States Court of Appeals for the Third Circuit when it decided Jason Realty. At the time the bankruptcy court made its decision, PHH as lender was not participating; for whatever reason, PHH had made no effort to seize these rents, and the Debtors were freely enjoying them. The dispute over rents, then, did not pit the lender's superior rights against those of the debtor, as in Jason; it was a contest between trustee and debtor. Understandably, the Trustee felt that, if the lender was not currently claiming the rents, they should be part of the estate, available for the satisfaction of claims. Thus the Trustee sought to persuade the bankruptcy court that Jason should be distinguished for purposes of this (presumably rare) scenario. That argument, although it did not prevail, is a substantial one.

This Court held oral argument on September 11, 2013, and required counsel for PHH to appear. To some degree, the position of PHH was updated and clarified

Page 703

in a way that it had not been before. Among other things, it became clear that PHH was no longer standing pat; PHH had filed an action in state court, seeking a receiver for the collection of the rents in question.

Frankly, no reading of Jason is entirely satisfactory in this unusual context. That said, for the reasons set forth below, I conclude that the bankruptcy court's reading is the better one, and I will affirm the holding of the bankruptcy court.

I. BACKGROUND

On February 29, 2012, Cordova and Pavic filed for relief under Chapter 7 of the Bankruptcy Code. The United States Trustee appointed Gary S. Jacobson as the case trustee.[2] The facts underlying this appeal are essentially undisputed.[3]

A. The Debtors' Paterson Property

At the time they filed for bankruptcy, the Debtors owned multiple properties, including a parcel at 175 17th Avenue, Paterson, New Jersey (the " Property" ), valued at $171,000. (Trustee Br. at 3 [Docket No. 5] ). The Debtors noted that the Property historically produced rental income, including $26,400 in gross receipts in the prior year. ( Id. ). The monthly income at the time was $3,550.[4] ( Id. ).

The Property is subject to a secured claim of Century 21 Mortgage in the amount of $271,240. ( Id. ). In connection with the mortgage transaction with the lender, Pavic executed a 1-4 Family Rider (the " Rider" ) on August 30, 2007. The Rider contains an assignment of rents provision (the " Assignment" ):

Borrower absolutely and unconditionally assigns and transfers to Lender all the rents and revenues (" Rents" ) of the Property, regardless of to whom the Rents of the Property are payable. Borrower authorizes Lender or Lender's agents to collect the Rents, and agrees that each tenant of the Property shall pay the rents to lender or Lender's agents. However, Borrower shall receive the rents until: (i) Lender has given Borrower notice of default pursuant to Section 22 of the Security Instrument, and (ii) Lender has given notice to the tenant(s) that the Rents are to be paid to Lender or Lender's agent. This assignment of Rents constitutes an absolute assignment and not an assignment for additional security only.
If the Lender gives notice of default to Borrower: (i) all Rents received by Borrower shall be held by Borrower as trustee for the benefit of Lender only, to be applied to the sums secured by the Security Instrument; (ii) Lender shall be entitled to collect and receive all of the Rents of the Property; (iii) Borrower agrees that each tenant of the Property shall pay all Rents due and unpaid to

Page 704

Lender or Lender's agents upon Lender's written demand to the tenant; (iv) unless applicable law provides otherwise, all Rents collected by Lender or Lender's agents shall be applied first to the costs of taking control of and managing the Property and collecting the Rents, including but not limited to, attorney's fees, receiver's fees, premiums on receiver's bonds, repair and maintenance costs, insurance premiums, taxes, assessments and other charges on the Property, and then to the sums secured by the Security Instrument; (v) Lender, Lender's agents or any judicially appointed receiver shall be liable to account for only those Rents actually received; and (vi) Lender shall be entitled to have a receiver appointed to take possession of and manage the Property and collect the Rents and profits derived from the Property without any showing as to the inadequacy of the Property as security.
...
Borrower represents and warrants that Borrower has not executed any prior assignment of the Rents and has not performed, and will not perform, any act that would prevent Lender ...

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