CHAPTER 10.03. Perfection

• Jurisdiction: United States

10.03. Perfection

Perfection of this security interest is governed by state law, not the Bankruptcy Code.⁹ Decisions in some jurisdictions have held that the mere recording of the assignment of rents is not sufficient to perfect the security interest under state law.¹⁰ Moreover, courts have gone farther and held that the lender's demand on tenants to pay rents to the lender is not sufficient to "perfect" the security interest. Rather, the only means of perfection is for the lender to take possession of the property or the rents themselves prior to commencement of the bankruptcy proceedings.¹¹

Even a requirement that a demand on tenants is necessary to "perfect" the security interest can be problematic. Such a demand, although required to protect the lender's interest, may be inconsistent with how the lender wishes to deal with both the property and the debtor's operation of the property, and could lead to the lender becoming a mortgagee-in-possession with the obligations of that status.

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Notes:

^[9] Butner v. United States, 440 U.S. 48 (1979) (right of mortgagee in rents due from tenants of mortgagor is issue of state law).

^[10] For example, In re TM Carlton House Partners, 91 B.R. 349 (E.D. Pa. 1988). See generally H. J. Weg, The Secured Creditor's Rights to Rents from Real Property, 17 Real Est. L. J. 29 (1988). See also 5B Rohan on Real Estate Financing § 14.06[13] at 14-155 (2017). It is worth noting that most court decisions use the term...