December 22, 2016
When a bankruptcy case that involves commercial property, a question that often becomes a key issue is whether an assignment of rent is property of the bankruptcy estate. Most of the bankruptcy rulings in Michigan have held that prepetition assignment of rent remains property of the Debtor’s bankruptcy estate. See In re Newberry Square, 175 BR 910 (Bankr ED Mich, 1994). This issue can turn on whether the controlling state law follows a lien theory or title theory for mortgages. See In re Builders Group & Dev. Corp., 502 BR 95, 109 (Bankr. DPR, 2013). Michigan, like a majority of states, follows the lien theory and as a result case law in Michigan bankruptcy matters have found that prepetition assignment of rent remains property of the estate.
In the Newberry case, the court held that an assignment of rents gave the creditor a security interest in the rents, not ownership of the rents. Therefore, the Debtor’s interest in the rents was not terminated by pre petition actions effectuating the assignment and was in fact property of the estate.
Although the Newberry case was decided nearly 20 years ago, bankruptcy courts in Michigan continue to hold that prepetition assignment of rent remains property of the debtor’s estate. See In re Town Ctr Flats, LLC, 531 BR 176 (Bankr. E.D. Mich. 2015).
In sum, the prepetition assignment of rent is treated akin to a security interest. Because the prepetition assignment of rent is treated like a security interest, the debtor still retains a substantial amount in the interest. The Newberry case stated: “The debtors’ interests in the rents, which constituted cash collateral, can be extinguished only by a foreclosure of the rent producing collateral pursuant to state law. Id. at 911. Absent foreclosure, the prepetition assignment of rent remains property of the debtor’s estate.