Illinois Bankruptcy Court holds that a mortgagee is entitled to post-petition rents without taking possession where it has a properly perfected assignment of rents

In In Re Benanti, 15-71018 (Bankr. C.D. Ill. Oct. 26, 2015) the U.S. Bankruptcy Court for the Central District of Illinois held that a mortgagee was entitled to post-petition rents over the Chapter 7 Trustee’s objection, even though it had not taken possession of the property because rents are cash collateral and the mortgagee had properly perfected an assignment of rents. The mortgagee had moved to modify the stay not only as to the debtors’ various rental properties, but also the rents generated from those properties. The Trustee claimed that he stands in the shoes of the debtors, and that generally the debtors retain the right to collect rents from the properties after filing this case. The Trustee agreed to the modification of the stay to the individual properties, but objected to the modification of the rents asserting that although the mortgages included an assignment of rent provision, the mortgagee failed to take all of the steps under state law to obtain the right to collect the rents. Specifically, the Trustee argued that under state law a mortgagee can only collect rents after being placed in actual or constructive possession of the property, citing _Comerica Bank-Illinois v. Harris Bank Hinsdale_, 284 Ill. App. 3d 1030673 N.E.2d 380 (1996). The Court disagreed. It said that where the mortgagee has a properly perfected assignment of rents, then the rents generated from the debtors’ properties are cash collateral. As such, they may be used by the Trustee only if the mortgagee consents or where the Trustee has proven that the interest of mortgagee in the rents would be adequately protected notwithstanding the proposed use of such rents. The court in overruling the Trustee’s objection to the modification of the stay as to the rents relied upon _Matter of Wheaton Oaks Office Partners Ltd. Partnership_, 27 F.3d 1234 (7th Cir. 1994), which confirmed that post-petition rents are cash collateral so when an assignment of rents is contained in a properly recorded mortgage the rights of the mortgagee to those rents are not avoidable by the use of the trustee’s strong arm powers. The court indicated that the Wheaton Oaks rationale was bolstered by an amendment to § 552(b)(2) of the Bankruptcy Code specifically providing for the post-petition continuation of a security interest in rents if it is provided for in the security agreement.

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