                                                                                                                           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Precedential or Non-Precedential: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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              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.
