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ARTICLE · 25 JULY 2013

Assignment Of Rents: Absolute May Not Be So Absolute – Round 2

Pepper Hamilton LLP
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In jurisdictions where courts hold that an absolute assignment of leases and rents can totally and finally divest a debtor of its interest in rents, a bankruptcy is probably not feasible unless the debtor's principals have very deep pockets.

United StatesInsolvency/Bankruptcy/Re-Structuring
Vicki Harding
Vicki Harding

In re Augusta Center, LLC, 491 B.R. 298 (Bankr. S.D. Ga. 2013) – The debtor owned and operated a hotel property.  After it filed bankruptcy, it asked the court for authorization to use cash collateral (e.g. rents and revenues of the hotel).  The lender objected, arguing that the debtor had absolutely conveyed its interest in rents and revenues so that the bankruptcy estate did not have any remaining interest.  The bankruptcy court denied the lender's objection.

As discussed in a prior blog ( Assignment of Rents: Absolute May Not Be So Absolute), there are special rules applicable to a debtor's use of "cash collateral" – meaning cash or cash equivalents in which both the bankruptcy estate and a third party have an interest.  This specifically includes rents or profits of property and payments for use or occupancy of hotels.  To the extent that rents constitute cash collateral, the debtor must get either the consent of the mortgagee or court approval.

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