§ 80.10     Claims Secured by an Assignment of Rents
Cite as:    Keith M. Lundin, Lundin On Chapter 13, § 80.10, at ¶ ____, LundinOnChapter13.com (last visited __________).
[1]

It is standard language in many mortgages that, in addition to the real property, the mortgage holder is granted a pledge or assignment of “rents, issues and profits.” Some courts, especially in the Third Circuit, have held that a pledge or assignment of rents creates an interest in collateral other than real property that forfeits the protection from modification in § 1322(b)(2).1 Other courts, including some in the Third Circuit, have concluded that rents are an attribute of the real property, not a separate interest in collateral that would forfeit the protection in § 1322(b)(2).2

[2]

As the court recognized in In re Jackson,3 there is a fundamental inconsistency between a pledge or assignment of rents clause and § 1322(b)(2). Why would a mortgage holder bargain for a pledge or assignment of rents if the only collateral is the debtor’s principal residence? If it is contemplated that the real property has other uses than as a debtor’s principal residence, then the assignment of rents clause reveals that the protection from modification in § 1322(b)(2) is not available.

[3]

State laws vary whether a pledge or assignment of rents is a personal property interest or a component of the mortgage holder’s interest in the real estate. In a state in which an assignment of rents is treated by statute or judicial opinion as an interest in personal property, a Chapter 13 debtor has a strong argument that a pledge or assignment of rents clause forfeits the protection from modification in § 1322(b)(2).


 

1  Sapos v. Provident Inst. of Sav. in the Town of Boston, 967 F.2d 918 (3d Cir. 1992) (A mortgage that included a secured interest in rents was not protected from modification by § 1322(b)(2).); Miami Valley Bank v. Lutz (In re Lutz), 192 B.R. 107, 109 (W.D. Pa. 1995) (“[T]he inclusion of the phrase ‘rents, issues and profits’ in the mortgage brings it within the ambit of the [Sapos v. Provident Inst. of Sav. in the Town of Boston, 967 F.2d 918 (3d Cir. 1992)] holding. . . . [S]ince rents have been held to constitute personalty, the mortgage in question does not qualify under § 1322(b)(2) and can be modified.”); Davis v. Dovenmuehle Mortgage, Inc. (In re Davis), No. 93-C7074, 1994 WL 700248, at *9–*11 (N.D. Ill. Dec. 8, 1994) (unpublished) (Additional security interest in “rents, issues, and profits” forfeits the protection from modification in § 1322(b)(2). “[T]he mortgage contains a clause explicitly assigning the rents, issues and profits, and identifying them as additional security. Thus, we conclude that by its own terms and by operation of Illinois law, the mortgage gives Dovenmuehle a security interest in rents, issues and profits that is in addition to its security interest in the real property that is the Debtors’ principal residence. As a result, Dovenmuehle’s claim falls outside the protection of section 1322(b)(2), and the Debtors may modify Dovenmuehle’s claim in their plan. . . . The fact that the mortgaged property is or is not income-producing, or that the parties contemplated it as one or the other, has no bearing on our determination of the nature of the security interest granted by the mortgage contract. . . . If the mortgagee did not intend to take an additional security interest in rents and profits because the property was a single family home rather than a multi-unit building, the assignment of rents clause could have been stricken when the mortgage was executed. . . . In addition, Dovenmuehle could have disclaimed and released its interest in the additional security before the current Chapter 13 bankruptcy filing.”); In re DaCosta, 204 B.R. 1, 4 (Bankr. D. Mass. 1996) (Mortgage on two family dwelling is subject to modification notwithstanding that the entire dwelling is used by the debtor as a principal residence because mortgage contains an assignment of rents, the forms used were commercial loan forms and the documents refer to other collateral. “In the instant case, the first floor rental unit in the Debtors’ residence is not income-producing. Rather, it has the potential to be income-producing. Accordingly, this Court could distinguish [Lomas Mortgage, Inc. v. Louis, 82 F.3d 1 (1st Cir. 1996)] . . . . [T]he assignment of rents for the potentially income producing unit in the Debtors’ residence is additional collateral that has independent value. . . . [T]he Note and mortgage executed by the DaCostas was not a standard FNMA form . . . . Rather, they contain the indicia of a commercial loan. The interest rate is tied to the so-called ‘Wall Street Prime’ . . . . The mortgage refers to ‘the operation of the realty,’ and contains numerous references to ‘additional collateral,’ . . . . Accordingly, . . . Debtors may modify the Bank’s claim under § 1322(b)(2).”); In re Del Valle, 186 B.R. 347, 349 (Bankr. D. Conn. 1995) (Mortgage secured by a two-family dwelling can be modified notwithstanding Nobelman v. American Savings Bank, 508 U.S. 324, 113 S. Ct. 2106, 124 L. Ed. 2d 228 (1993) and § 1322(b)(2) where instrument contains an assignment of rents and the property is income producing.); In re Tallo, 168 B.R. 573 (Bankr. M.D. Pa. 1994) (Applying Hammond v. Commonwealth Mortgage Corp. of America (In re Hammond), 27 F.3d 52 (3d Cir. 1994), mortgage that contains a security interest in “remainders, rents, issues, and profits” creates a security interest in property other than the debtor’s principal residence and is not protected from modification by § 1322(b)(2) or by Nobelman v. American Savings Bank, 508 U.S. 324, 113 S. Ct. 2106, 124 L. Ed. 2d 228 (1993).); Heckman v. Meridian Bank (In re Heckman), 165 B.R. 16, 17 (Bankr. E.D. Pa. 1994) (Security interest in “rents of the premises” is a security interest in property other than the debtor’s principal residence and forfeits the protection from modification in § 1322(b)(2). “This Court is bound by the Third Circuit’s decision in [Sapos v. Provident Inst. of Sav. in the Town of Boston, 967 F.2d 918 (3d Cir. 1992)]. In In re Sapos, the bank’s mortgage gave the bank a security interest not only in real property, but also in certain personal property and importantly, enumerated rents. . . . The Third Circuit held that the Chapter 13 debtor could strip down a mortgage lien when rents, among other things, were included as additional security in the mortgage.” Court acknowledges Nobelman v. American Savings Bank, 508 U.S. 324, 113 S. Ct. 2106, 124 L. Ed. 2d 228 (1993), but applies Sapos.); In re Jackson, 136 B.R. 797, 803 (Bankr. N.D. Ill. 1992) (Pledge and assignment of rents, issues and profits creates a security interest in property other than real estate. “The pledge and assignment of rents under the mortgage document does convey some equitable rights and security interest in the rents in addition to the real estate itself. . . . The assignment of rents derived from the property does not automatically flow from a mortgage on the debtor’s principal residence as an incident of ownership and thus such an assignment of rents creates an additional property right securing the mortgage obligation which removes the secured claim from the application of § 1322(b)(2). . . . This is consistent with the intended scope of § 1322(b)(2) since real estate used as the debtor’s principal residence will generally not generate rental income and the long term residential mortgage lender would not expect its claim to be paid from such income. Section 1322(b)(2) is intended to protect residential mortgage holders and therefore would not be concerned with assignments of rents as additional security. . . . By including, in addition to the standard boilerplate clause, language which pledged as additional security any rents or profits derived from the property, the lender in this case acknowledged that the property may be used for a commercial, income producing purpose. . . . This type of secured claim is outside the intended protection of § 1322(b)(2) and may therefore be modified under the debtor’s Chapter 13 plan.”). See also Chase Manhattan Mortgage Corp. v. Thompson (In re Thompson), 352 F.3d 519 (2d Cir. 2003) (Bankruptcy court properly rejected mortgage holder’s argument that rental income should be added to the stipulated market value of a three unit property when Chapter 13 debtor moved to bifurcate under § 506(a).).

 

2  Allied Credit Corp. v. Davis (In re Davis), 989 F.2d 208, 212 (6th Cir. 1993) (Deed of trust that included among other things conveyance of “rents, royalties, profits” was protected from modification because the additional security interests were “benefits which are merely incidental to an interest in real property, and . . . these incidental benefits [do] not constitute additional security for purposes of § 1322(b)(2).”); In re Rosen, 208 B.R. 345 (D.N.J. 1997) (Distinguishing Hammond v. Commonwealth Mortgage Corp. of America (In re Hammond), 27 F.3d 52 (3d Cir. 1994), security interest in rents and profits did not create an additional security interest and did not forfeit the antimodification protection in § 1322(b)(2).); In re Vincente, 257 B.R. 168 (Bankr. E.D. Pa. 2001) (Plan that would limit mortgage holder’s allowable claim to a maximum of $25,000 based on a finding that an interest in rents forfeits the protection from modification in § 1322(b)(2) cannot be confirmed when adversary proceeding pending for more than a year will determine the extent of the mortgage holder’s lien and bankruptcy court has rejected the debtor’s argument with respect to rents in other reported decisions.); In re Mendez, 255 B.R. 143 (Bankr. D.N.J. 2000) (Assignment of rents does not forfeit protection from modification in § 1322(b)(2) because rents are included in the definition of real property under New Jersey law.); Hackling v. Midfirst Bank (In re Hackling), 231 B.R. 590, 591 (Bankr. E.D. Pa. 1999) (“Midfirst’s retention of a security interest in rents does not constitute additional collateral and does not remove Midfirst’s mortgage from the antimodification protection of section 1322(b)(2).”); Steslow v. Citicorp Mortgage, Inc. (In re Steslow), 225 B.R. 883 (Bankr. E.D. Pa. 1998) (Because rents are real property under Pennsylvania law, an assignment of rents clause does not forfeit the protection from modification in § 1322(b)(2).); Lewandowski v. United States Dep’t of Hous. & Urban Dev. (In re Lewandowski), 219 B.R. 99 (Bankr. W.D. Pa. 1998) (Security interest in unaccrued rents pursuant to an assignment of rents clause constitutes “reversionary real property” and does not forfeit the protection from modification in § 1322(b)(2). None of the conditions triggering the assignment of rents clause had occurred.); Rolle v. Chase Manhattan Mortgage Corp. (In re Rolle), 218 B.R. 636, 640 (Bankr. S.D. Fla. 1998) (Security interest in “rents, issues, proceeds and profits” does not forfeit protection from modification because “[a]pplying Florida law, . . . the right to unaccrued or accruing rents generated by the Debtor’s residence is an incorporeal hereditament of the real property and runs with the land. . . . [A] lien on rents is indistinguishable from a lien on the real property . . . . Thus, a security interest in rents does not preclude section 1322(b)(2) protection.”); In re Cervelli, 213 B.R. 900, 903 (Bankr. D.N.J. 1997) (“[T]he language . . . granting the mortgagee . . . an assignment of rents upon default in the context of a single family residential mortgage document concerning the debtor’s principal residence . . . grants the mortgagee, an interest in nothing more than the interests which run with the land . . . . [T]his provisions [sic] makes no attempt to reach collateral that is personalty and not realty, . . . mortgage is not subject to strip off under the ‘additional collateral’ limitation of § 1322(b)(2).”); In re Gleckman, 212 B.R. 204, 205 (Bankr. D.R.I. 1997) (“[T]he non-uniform covenant, purporting to give additional security to HFC in the form of an assignment of rents, is additional security for purposes of § 1322(b)(2) if it assigns something of independent value, and more than a mere enhancement of the real property already serving as security for the obligation. Where an interest in ‘rents and profits’ is taken in purely residential, non-rental property, courts have rejected the proposition that the interest constitutes additional security.” Assignment of rents did not forfeit antimodification protection because property was not and never had been rented and there was no evidence of any attempt to take an additional security interest other than the real property itself.); In re Anderson, 209 B.R. 639, 642 (Bankr. M.D. Pa. 1997) (Abandoning In re Tallo, 168 B.R. 573 (Bankr. M.D. Pa. 1994), and distinguishing Johns v. Rousseau Mortgage Corp. (In re Johns), 37 F.3d 1021 (3d Cir. 1994), Hammond v. Commonwealth Mortgage Corp. of America (In re Hammond), 27 F.3d 52 (3d Cir. 1994), Wilson v. Commonwealth Mortgage Corp., 895 F.2d 123 (3d Cir. 1990) and Sapos v. Provident Institute of Savings in the Town of Boston, 967 F.2d 918 (3d Cir. 1992), home mortgage secured by “rents” is protected from modification by § 1322(b)(2) “since it encumbers nothing but the real property that constitutes the Debtors’ residence.”); In re Fountain, 197 B.R. 748, 752 (Bankr. D.N.H. 1996) (Assignment of rents clause, without more, does not forfeit protection from modification in § 1322(b)(2). “The Fountains have consistently occupied their home, they have never rented or considered renting any part of it to others, and Raytheon has never indicated any intent to foreclose upon the property and rent it to any third parties. There is no indicia in the mortgage documents that Raytheon has any rights to collect rents or take control of any of the other items listed in the mortgage documents until and unless Raytheon were to foreclose upon the Fountains and assume possession and control of their real property. The Court finds on these facts that the provision regarding rents, etc. in the mortgage documents was standard ‘boilerplate’ language that added little or no independent value to the security interests held by Raytheon, and such provision therefore does not result in the forfeiture by Raytheon of the anti-modification protection provided by section 1322(b)(2) of the Bankruptcy Code.”); Wilkinson v. Fleet Mortgage Corp. (In re Wilkinson), 189 B.R. 327, 331 (Bankr. E.D. Pa. 1995) (Security interest in “rents, issues, and profits” does not forfeit the protection from modification. Hammond v. Commonwealth Mortgage Corp. of America (In re Hammond), 27 F.3d 52 (3d Cir. 1994), does not change this result. “[I]n the case before us rent, issues, and profits constitute real property under Pennsylvania law.”); Brown v. Citicorp Mortgage, Inc. (In re Brown), 189 B.R. 3, 4–5 (Bankr. E.D. Pa. 1995) (“Because the security interest in unaccrued rents is a security interest in real property that is the debtor’s principal residence, the inclusion of rents in a mortgage on real property in Pennsylvania does not subject the claim secured by the mortgage to modification under § 1322(b)(2). . . . In the matter before us, the mortgage is almost identical to that in [Nobelman v. American Savings Bank, 508 U.S. 324, 113 S. Ct. 2106, 124 L. Ed. 2d 228 (1993)] and [Citicorp Mortgage, Inc. v. Hirsch (In re Hirsch), 166 B.R. 248 (E.D. Pa. 1994)]. That is, the mortgage at issue herein provides Citicorp with a security interest in ‘. . . rents . . . .’ Under Pennsylvania law, unaccrued rents, the only collateral at issue in the instant matter, are reversionary real property. Thus, Citicorp’s secured claim cannot be modified.”); In re Harris, 167 B.R. 813, 814 (Bankr. D.S.C. 1994) (“‘[R]ents, issues, and profits’ . . . are a part of the debtor’s principal residence and, as such, do not exclude the residence from the protection of 11 U.S.C. [§] 1322(b)(2).”); In re Spano, 161 B.R. 880, 886–87 (Bankr. D. Conn. 1993) (Because Bankruptcy Code does not define “real property” for purposes of the protection from modification in § 1322(b)(2), it is appropriate to look to Connecticut law. “[U]nder Connecticut law a security interest in land includes certain rights to rents arising from the land, indicating that the land and the rents are integral parts of the bundle of real property rights. . . . I therefore conclude that the rents are part of the ‘real property that is the debtor’s principal residence,’ and that the respondent’s security interest in rents does not remove it from the protection of the other than clause of § 1322(b)(2).”); In re Lee, 137 B.R. 285, 287 (Bankr. E.D. Wis. 1991) (Assignment of rents clause in mortgage “does not create additional collateral distinct from that normally considered incidental to ownership of realty. The assignment of rents is part of the security interest in the real property that is the debtor’s principal residence. It does not pertain to other property within the contemplation of § 1322(b)(2).”); Wright v. C&S Family Credit, Inc. (In re Wright), 128 B.R. 838 (Bankr. N.D. Ga. 1991) (Security interest in rents and profits is part of the creditor’s contract right to take constructive possession of property after default. It does not constitute a separate item of collateral.).

 

3  136 B.R. 797 (Bankr. N.D. Ill. 1992).