Rental income assigned to lender were not part of bankruptcy estate

Rental income from the Chapter 7 debtors’ real property that was assigned to the lender before the bankruptcy filing was not part of the estate.

In the case of In re Cordova, a bankruptcy trustee sought a court order requiring the debtors to turn over rental income that they had received and were receiving from real property owned by them in Paterson, New Jersey. The bankruptcy court denied the trustee's motion and the federal district court upheld the ruling, finding that the rental income had been previously assigned to the lender and, thus, the rental payments were not part of the bankruptcy estate.

Background and procedural history

In 2012, the debtors filed a joint petition for bankruptcy relief under Chapter 7. They were the owners of several real estate parcels. The property in Paterson, New Jersey, was valued at $171,000 and rental income gross receipts in 2011 totaled $26,400. In 2007, the debtors signed an "assignment of rents" provision with the lender.

At the time of the bankruptcy, the debtors were collecting the rents on the property, rather than the lender. According to the court records, instead of making payments on the mortgage, the debtors were apparently using the rental income for their personal living expenses.

The trustee initiated proceedings in the bankruptcy court, asking the court to compel the debtors to turn over the rents. The bankruptcy court denied the request, finding that the rents were not part of the estate because the debtors had no ownership rights in the rents.

The trustee filed an appeal in federal district court.

The district court's ruling

The district court upheld the bankruptcy court's ruling. The rents the debtors were collecting were not property belonging to the bankruptcy estate and thus were not be available to the bankruptcy trustee. The rents were absolutely assigned to the lender in 2007, and they were therefore were not property belonging to the debtors when they filed bankruptcy in 2012.

Since the real property was located in New Jersey, the question regarding whether there had been an absolute assignment was governed by New Jersey state law. The 2007 agreement signed by the debtors stated that it was an "absolute assignment" and that the debtors "absolutely and unconditionally" assigned and transferred to the lender all the rents and revenues derived from the property. These terms clearly expressed an intent by the parties to immediately transfer title to the rental income to the lender. The assignment was unequivocal, unconditional and the transfer of title took place immediately at the time of the signing of the agreement, which was five years before the debtors' bankruptcy petition was filed. Since the rents were absolutely assigned well before the bankruptcy filing took place, they could not be included as part of the debtors' estate, as title to the leasehold payments passed at the time of the assignment.

The fact that the lender had not been actively pursuing a claim for the rents at the time of the bankruptcy filing did not meant that they should be turned over to the estate and used to satisfy the claims of the debtors' creditors. The lender subsequently filed a suit in state court for the appointment of a rent receiver.

Contact an attorney

Individuals seeking bankruptcy relief should an attorney experienced in such matters to ensure the protection of their legal rights.

Keywords: bankruptcy, rental income, Chapter 7