involved a note secured by a mortgage on commercial property as well as an Assignment of Leases and Rents that provided the lender with an absolute and unconditional assignment of the borrower's rights to the rents.
Upon the borrower's default, the lender issued an appropriate notice to collect rent directly from the tenants, commenced a foreclosure action, requested the appointment of a receiver and obtained a default judgment.
Although the lender commenced a foreclosure action, had a receiver appointed, and obtained summary judgment of foreclosure prior to the debtor's bankruptcy petition, the court ruled that these measures were insufficient to obtain control of the property's rental revenues.
The court acknowledged other decisions that reached different results.
Bankruptcy courts can eliminate or reduce the amount you own on second mortgages in some bankruptcies through a process called lien stripping, and void a first mortgage if it has particular types of legal defects.
A creditor, who has lost patience with a debtor, may bring in a debt collector to assist him in collecting the money due.
One concern for the lender in this instance is that, in a judgement, other creditors will take priority, causing the lender to lose its security interest in the rent.
Under an absolute assignment, if a borrower defaults on the deed of trust, the lender may request appointment of a receiver to collect the rents until foreclosure of the deed of trust or a determination of ownership of rents by a court of law.
Instead of playing the odds in any particular bankruptcy case, lenders should protect against uncertainty by moving swiftly to enforce their rights under assignments of rent when borrowers default, particularly in lien theory states.
Measures that directly affect payment of rent, such as issuing a notice advising tenants to pay rent to the lender (where authorized by the loan documents) and obtaining the appointment of a receiver, can be effective measures.