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Rents May Not Be Property of the Estate in Chapter 7

Chapter-7-bankruptcy-attorneyAll property in which the debtor holds an interest at the commencement of bankruptcy is part of the estate pursuant to 11 U.S.C. §541(a)(1). A debtor is required to surrender to the trustee all property of the estate pursuant to 11 U.S.C. §521(a)(4). Chapter 7 trustees may argue that rents are property of the estate and therefore must be turned over to the trustee. The trustee would cite to 11 U.S.C. §541(a)(6) which states that property of the estate includes "proceeds, product, offspring, rents, or profits of or from property of the estate." The issue becomes whether or not the rent is property of the estate in the first place where the mortgagee has an absolute assignment of rents.

Absolute Assignment of Rents in Chapter 7 Bankruptcy

It has been well established in the bankruptcy legal community that the mortgagee can invoke an absolute assignment of rents, to collect the same from the tenant, in an instance where the debtor is continuing to rent a parcel of property and not maintaining mortgage payments. See, In Jason Realty, L.P., 59 F.3d 423 (3d Cir. 1995). Jason Realty teaches us that a debtor cannot continue to collect rents to fund a bankruptcy case when the mortgagee seeks to collect them pursuant to an absolute assignment of rents. The question becomes what is an assignment of rents? This issue will not be fully discussed here but when there is a Family 1-4 Rider attached to the mortgage, it is clear that this constitutes an absolute assignment of rents.

In cases where an absolute assignment of rents exists, the rents never become property of the estate, and cannot be recovered by a Chapter 7 trustee for the benefit of the estate's creditor body. See, In re Cordova, 500 B.R. 701 (2013). In Cordova, the District Court affirmed the bankruptcy court's ruling by Judge Winfield denying the trustee's motion to compel turnover of rents from mortgaged property. The District Court held that Judge Winfield correctly decided the matter in a case where the mortgagee had a clear assignment of rents. The bankruptcy court held that the mortgagee didn't authorize the trustee to collect the rents and therefore this was a right that only the mortgagee itself could invoke. Until the mortgagee decides to appoint a rent receiver and demand turnover of the rents, the debtor has the ability to continue to collect the same without fear of the trustee swooping in to demand the same.

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