Rents assigned to a secured mortgagee in New Jersey belong to the creditor and cannot be used by the debtor in a bankruptcy case. This is the principle established by our US Court of Appeals by its 1995 holding in In re Jason Realty and reaffirmed many times since. So it was that earlier this month Bankruptcy Judge Michael Kaplan applied the Jason Realty principles to kill an attempt by a chapter 11 debtor to force the under-secured mortgagee to apply the assigned rents in reduction of the secured portion of the claim instead of to the unsecured deficiency claim.
This recent case is In re Surma which can be found on West Law at 2014 WL 413572, Bkrtcy. D.N.J., February 04, 2014. There, the debtor used bankruptcy law to bifurcate mortgage debt into a secured portion equal to the value of the real estate and an unsecured portion equal to the amount of the debt which exceeded the value. Then, under a plan of reorganization, the debtor proposed to use the rent to pay only the secured claim, relegating the unsecured deficiency to the same treatment as all other general unsecured creditors whose claims would be severely discounted. When the mortgagee objected, the Court sustained the objection stating that the rents were the property of the mortgagee, nor the debtor, thus requiring the debtor to pay the secured debt from other funds and allowing the mortgagee to apply the rents to the deficiency claim.
The lesson here is for mortgage lenders to make sure to have properly worded rent assignments that are absolute with only a license back for the debtor to collect and use until an event of default with or without action by the secured party to take control.
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