Rental Income is Not Property of Bankruptcy Estate if Assignment of Rents is Perfected Prepetition

In In Re Town Center Flats, LLC, the District Court for the Eastern District of Michigan overturned the bankruptcy court’s ruling that rental income in a single-asset-real-estate Chapter 11 case was property of the estate and constituted cash collateral.  Prior to the bankruptcy filing, the mortgagee had filed its notice of default and served it on the tenants, which are the steps required to enforce the assignment of rents under Michigan Law.

The District Court overturned a 20-year old decision by the bankruptcy court which had held that rental income was cash collateral, and part of the bankruptcy estate, notwithstanding a creditor’s perfection of the assignment of rents.  The issue is a “make or break” issue in a single asset case, because the real property usually has no equity and the debtor has no other source of income.  If the debtor cannot use rents to finance a plan, the case will likely be converted to a Chapter 7 case quickly.

NOTE: this decision has since been upheld by the 6th Circuit Court of Appeals.

© Steve Sowell 2018