Editor: Kate Glaze 2014 Issue Two

Carrington, Coleman, Sloman & Blumenthal, L.L.P. • 901 Main Street, Suite 5500 • Dallas, Texas 75202 • www.ccsb.com

Assignments of Rents are security instruments used to give a lender a security interest in “rents.” Rents generally include any money

payable for the right to occupy or possess real property, but can be defined to also include royalties, bonuses, profits, revenue, income

and other benefits derived from the mortgaged property. An assignment of rents is typically included in a deed of trust, or may be a

separate document especially when the security is an apartment building, shopping center, or other profit-generating property.

Since at least 1981, when the Texas Supreme Court decided Taylor v. Brennan, 621 S.W.2d 592

(1981), debtors preparing to file single asset, income producing properties into Chapter 11 under the

Bankruptcy Code have often relied upon some iteration of Taylor’s holding, coupled with Casbeer v.

State Federal Savings & Loan Assoc. of Lubbock (In re: Casbeer), 793 F.2d 1436 (5th Cir. 1986), to

fund a legal war chest using rents placed into debtors’ counsel’s trust account as a retainer. The

premise was that, despite the assignment of rents typically granted at the inception of a typical loan,

the secured lender’s lien in rents (as cash collateral) was not perfected merely by the original granting

and recording of the assignment of rent documents. Rather, the lender was required to take further

action to perfect the lien. Under Casbeer, if a Chapter 11 petition was filed prior to perfection of the

lien, perfection could be obtained post-petition by filing the appropriate pleadings. But, if perfection first

occurred post-petition, the debtor’s right to use (and its counsel’s right to enjoy) the legal war chest

remained intact and the Chapter 11 case proceeded onwards.

When the lender could find a way to head off the funding of the legal war chest, the delay and expense of a Chapter 11 case was often

avoided or cut short. However, perfecting the assignment of rents pre-petition took somewhat radical, costly, and sometimes risky action

that was not always successful. Merely accelerating the loan and posting the property for foreclosure was insufficient. Having a receiver

appointed was sometimes effective but cumbersome. Moreover, if the debtor sensed a receivership action to be in the works, the

formation of the war chest and the filing of the Chapter 11 case were simply accelerated. The same most often occurred if the lender

attempted to use any pre-foreclosure rights to intercept rent payments from tenants or lessees.

Some lenders reacted to this by taking the position that their assignment of rents was instead an absolute assignment of rents, perfected

at inception, and not a mere collateral assignment. Some even rewrote their standard assignment of rents language to so provide.

However, courts most often construed these assignments to still be only collateral assignments.1

In 2011, Texas enacted the Texas Assignment of Rents Act or “TARA,” effective June 17, 2011 and now codified as Section 64 of the

Texas Property Code, essentially abolishing the notion of the “absolute assignment” of rents for most purposes. TEXAS PROPERTY

CODE, Section 64.051(b). Generally, assignments of rents are now legally treated in Texas as collateral assignments even if

denominated as absolute assignments. Id. However, the requirement for the lender to take precipitous action in order to “perfect” its

lien in rents as cash collateral was alleviated. Now, the lender’s lien in rents as cash collateral arises upon recordation of the security

APITALcAssignment Of Rents: An Under-Utilized Tool In Single Asset

Bankruptcy Cases In Light Of Section 64 of the Texas Property Code

By Mike Sutherland214.855.3069 | msutherland@ccsb.com

By Lisa Lucas214.855.3114| llucas@ccsb.com

_______________________________________________________________________

1. See F.D.I.C. v. Int’l Prop. Mgmt., 929 F.2d 1033, 1036 (5th Cir. 1991); Wolters Village, Ltd. v. Village Properties, Ltd. (In re Village Properties, Ltd.), 732 F.2d 441,

443 (5th Cir. 1984); In re MRI Beltline Industrial, L.P., 476 B.R. 917, 920 (Bankr. N.D. Tex. 2012); In re Four Bucks, 2009 Bankr. LEXIS 1720, *5-6 (Bankr. N.D. Tex. June 19,

2009).

Capital - 2014 Issue Two

Carrington, Coleman, Sloman & Blumenthal, L.L.P. • 901 Main Street, Suite 5500 • Dallas, Texas 75202 • www.ccsb.comPage 2

instrument. TEXAS PROPERTY CODE, Section 64.052. The lender can, as appropriate under

the documents and facts, still attempt to intercept rents from tenants and lessees; however, this is

not required to perfect. TEXAS PROPERTY CODE, Section 64.053. The provisions of TARA likely

do not enable a lender, even if it wanted to do so, to reach back and recover payments made to

actual vendors who, in good faith and in the ordinary course, rendered services to the property

and received regular payments. However, a debtor’s counsel preparing for a prospective Chapter

11 case may be exposed in terms of claiming that any pre-petition retainer received into their trust

account is free and clear of any lien in cash collateral.

The full effects of TARA have to date been under-utilized by lenders and under-anticipated by the

debtor’s side of the bankruptcy bar and in local bankruptcy rules and practices. For the time

being, lenders have an advantage that is not always being properly implemented.

Local Bankruptcy Rules, along with the routine practices of many in the debtor’s side of the

bankruptcy bar, have not yet adapted to the enactment of TARA. In many instances of income producing, single asset properties heading

towards Chapter 11, the prospective debtors are still funding a legal war chest into counsel’s trust account just before filing a Chapter 11

case, typically using rents obtained in the cycle just before the filing. Many, including lenders and their counsel, are still incorrectly

assuming that the lender’s cash collateral rights do not extend into this retainer. For the time being, prompt action by the lender – such

as filing a motion to prohibit the use of cash collateral that expressly asserts cash collateral rights in the attorneys’ retainer under TARA

– might prevent debtor’s counsel from utilizing the retainer or even result in a turnover of those funds to the lender. This could possibly

lead to any Chapter 11 case being averted or having a much shorter shelf-life.

Of course, once the impact of TARA is more fully recognized, savvy debtors and their counsel will likely find legal means to work around

this impediment. Debtors who see default on the horizon might begin to accumulate and fund a legal war chest far earlier than the eve

of a Chapter 11 case. Alternatively, funding might instead be obtained from other sources. Additionally, debtors may focus on

establishing that the lender is oversecured by the property and non-retainer cash collateral, arguing that the use of cash collateral to pay

attorneys’ fees is permitted if the lender is oversecured or otherwise “adequately protected” by other collateral. Moreover, local

Bankruptcy Rules are likely to adapt along these lines, to better take TARA into account.

However, at least in the short term, lenders have a powerful tool in TARA that so far has not been fully explored. There will, of course,

be many instances where the lender might still prefer for a debtor to restructure its debt, whether by a continued “extend and pretend”

strategy, by out-of-court or in-court reorganization, or otherwise. These include situations where a lender simply does not want to take

collateral into REO, where a lender wants to avoid taking title, where no viable third-party purchaser at an acceptable purchase price

appears to be on the horizon, etc. Nonetheless, even in these situations, the lender will be well served by preserving its own leverage

to bring about a debt restructuring on the most favorable terms.

The full effects of TARA

have to date been under-

utilized by lenders and

under-anticipated by the

debtor’s side of the

bankruptcy bar and in

local bankruptcy rules

and practices.