KSB

Judge Karlin

12-40685 H D Gerlach Company Inc (Doc. # 206) - Document Text

SO ORDERED.
SIGNED this 27th day of March, 2013.

 

 

IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS


In re:
HD Gerlach Company, Inc., Case No. 12-40685
Chapter 11
Debtor.

Order Granting Second Motion to Use Cash Collateral

This chapter 11 bankruptcy petition was filed on May 9, 2012 by Debtor HD
Gerlach Company, Inc. (“HD Gerlach Co.”). This matter is before the Court on HD
Gerlach Co.’s second motion to use cash collateral, which is opposed by Creditor
Central National Bank.1 The parties filed a joint stipulation of facts, and have fully
briefed the issue.2 Because 11 U.S.C. § 541(a)(6) definitively states that the “proceeds,
product, offspring, rents, or profits of or from property of the estate” are considered

1 Doc. 107 (Debtor’s second motion to use cash collateral); Doc. 123 (objection ofCentral National Bank).

2 Doc. 161 (joint stipulation of facts with exhibits); Doc. 182 (opening brief of CentralNational Bank); Doc. 194 (response brief of HD Gerlach Co.); Doc. 200 (reply brief ofCentral National Bank).

Case 12-40685 Doc# 206 Filed 03/27/13 Page 1 of 17


property of the bankruptcy estate, the Court grants Debtor’s second motion to use cash
collateral.

Factual and Procedural History

Debtor owns and operates an apartment complex commonly known as
Wanamaker 22 Apartments. Central National Bank is a secured creditor of the Debtor
by virtue of a promissory note dated September 10, 2010. The promissory note is
secured by, among other things, a properly recorded real estate mortgage executed by
Debtor on Wanamaker 22 Apartments. Central National Bank obtained an appraisal
of the Wanamaker 22 Apartments on August 24, 2010, which estimated the as-is
market value of the property to be $2,020,000.

In addition to the promissory note and mortgage, Debtor executed two
assignment of rent agreements relating to the Wanamaker 22 Apartments: the first on
April 2, 1992, and the second on September 10, 2010. Both assignments were properly
recorded. The 1992 assignment of rents states it was entered “as further security for
the payment of the indebtedness and performance” of the agreements secured by the
parties’ mortgage.3

The second assignment was also entered “in consideration of the loan” entered
between Central National Bank and Debtor.4 The second assignment of rents further
states, in pertinent part:

3 Doc. 161 Exh. C at p.1.
4 Doc. 161 Exh. C at p.11.


-2


Case 12-40685 Doc# 206 Filed 03/27/13 Page 2 of 17


1.
ASSIGNMENT. . . . Grantor absolutely assigns to Lender all ofGrantor’s interest in the leased and tenancy agreements . . . nowor hereafter executed . . ., including all rents, income, and otherprofits . . . .
. . .

2.
PAYMENT TO LENDER. Upon a default . . . , Lender may providenotice to Grantor that all rents, income and profits arising fromthe Leases . . . shall be paid directly to Lender or its nameddesignee and applied to the payment of interest and principalowing Lender or Grantor’s Indebtedness to Lender.
. . .

6.
DEFAULT AND REMEDIES. Upon default . . ., Lender may at itsoption take possession of the Real Estate and the Improvementsthereon and have, hold, manage, lease and operate the premises onterms and for a period of time that Lender deems proper. Lendermay continue to collect and receive all rents, income and profitsfrom the Real Estate, and Lender shall have full power toperiodically make alterations, renovations, repairs or replacementsto the premises as Lender may deem proper. Lender may apply allrents, income and profits to the payment of the cost of suchalterations, renovations, repair and replacements and anyexpenses incident to taking and retaining possession of the RealEstate and the management and operation of the Real Estate.
Lender may keep the Real Estate properly insured and maydischarge any taxes, charges, claims, assessments and other lienwhich may accrue. . . .
. . .

9.
INDEPENDENT RIGHTS. This Assignment and the powers andrights granted are separate and independent from any obligationcontained in the Mortgage and may be enforced without regard towhether Lender institutes foreclosure proceedings under theMortgage. This Assignment is in addition to the Mortgage andshall not affect, diminish or impair the Mortgage. However, therights and authority granted in this Assignment may be exercised
-3


Case 12-40685 Doc# 206 Filed 03/27/13 Page 3 of 17


in conjunction with the Mortgage.5

On December 14, 2011, Central National Bank notified Debtor that the
indebtedness owed under the promissory note had been accelerated. Thereafter, on
March 28, 2012, Central National Bank instructed each tenant of the Wanamaker 22
Apartments to pay their monthly rent directly to Central National Bank. In addition,
on March 28, 2012, Central National Bank notified Debtor’s counsel of the delivery of
the tenant notifications, and also filed a lawsuit in state court against Debtor and its
principals, Harold and Paula Gerlach.

This lawsuit sought foreclosure of both the mortgage on Wanamaker 22
Apartments and of Central National Bank’s security interest in certain personal
property collateral owned by the Gerlachs. On April 24, 2012, all parties to the lawsuit
entered into an agreed order appointing Associated Management Services as the
property manager of the Wanamaker 22 Apartments. Central National Bank never
requested the appointment of a receiver in the foreclosure proceedings.

On May 9, 2012, Debtor filed its voluntary Chapter 11 bankruptcy petition. The
same day, Debtor filed a motion for turnover of the rents collected prepetition, a motion
for authorization to use all rents (both pre and postpetition) as cash collateral, and a
motion to approve rejection of executory contract. On June 7, 2012, an agreed order
was entered resolving these motions, and temporarily authorizing Debtor’s use of rents
from the Wanamaker 22 Apartments until November 5, 2012. Under the agreed order,

5 Doc. 161 Exh. C at pp.11–13.

-4


Case 12-40685 Doc# 206 Filed 03/27/13 Page 4 of 17


Debtor made five adequate protection payments to Central National Bank, each for
$11,500.

When the authorized period to use rents was about to expire, on October 30,
2012, Debtor filed the second motion to use cash collateral that is the subject of the
current dispute.6 Central National Bank objected to the motion,7 and the Court
conducted its first hearing on the motion on December 18, 2012. At that hearing, the
Court allowed Debtor to use cash collateral with the same terms as the parties’ prior
cash collateral order, and continued the hearing on the motion to January 9, 2013.8 At
the January 9 hearing, the Court required the parties to brief the cash collateral
motion, required Debtor to make monthly adequate protection payments of interest in
the interim, and implemented monthly reporting requirements.9 The parties thereafter
agreed on the amount of the interim interest payment, but ultimately not on the date
the first payment was due, and a subsidiary round of motions ensued.10 The Court was

6 Doc. 107.

7 Doc. 123.

8 Doc. 143.

9 Doc. 172. The parties could not agree on an order reflecting the terms discussed atthe conclusion of the January 9, 2013 hearing, so the Court drafted and entered an order onFebruary 11, 2013.

10 See Doc. 181 (Central National Bank’s motion to prohibit further use of rents);
Doc. 183 (Debtor’s objection to Central National Bank’s motion to prohibit further use ofrents); Doc. 184 (Debtor’s motion to amend previous order). To summarize the dispute, dueto an internal inconsistency on the date of payment in the Court’s February 11, 2013 Order,
the parties could not agree whether Debtor’s first payment was due on February 21st or25th. Counsel for Central National Bank demanded payment on the 21st, and when it wasnot received, rather than bringing the matter to the Court for clarification, or better yet,
simply waiting one additional business day to see if the payment was received, contacted

-5


Case 12-40685 Doc# 206 Filed 03/27/13 Page 5 of 17


again forced to intervene and set the date for the first interim payment.11

By virtue of 28 U.S.C. § 157(b)(2)(M), this is a core proceeding over which this
Court has jurisdiction under 28 U.S.C. §§ 1334 and 157(a).

Analysis

Debtor seeks to use the rents from the Wanamaker 22 Apartments as cash
collateral under 11 U.S.C. § 363(c)(2), which states that a debtor “may not use, sell, or
lease cash collateral” unless “each entity that has an interest in such cash collateral
consents” or “the court, after notice and a hearing, authorizes such use . . . in
accordance with the provisions of this section.” For rents to constitute cash collateral
as that term in defined by § 363(a),12 the rents must be “property of the estate” under
11 U.S.C. § 541(a).

Generally, courts look to state law to determine what constitutes property of the
estate under § 541(a).13 The question here is whether Congress has modified that
general rule with respect to rents by enacting § 541(a)(6), which states:

Debtor’s counsel on a Friday afternoon, and filed his motion to further prohibit use of rentsthat same day, after the close of business.

11 Doc. 205.

12 Section 363(a) of title 11 defines cash collateral as “cash, negotiable instruments,
documents of title, securities, deposit accounts, or other cash equivalents wheneveracquired in which the estate and an entity other than the estate have an interest andincludes the proceeds, products, offspring, rents, or profits of property . . ., whether existingbefore or after the commencement of a case under this title.”

13 See Butner v. United States, 440 U.S. 48, 54–55 (1979) (“Congress has generallyleft the determination of property rights in the assets of a bankrupt’s estate to state law.
Property interests are created and defined by state law. Unless some federal interestrequires a different result, there is no reason why such interests should be analyzeddifferently simply because an interested party is involved in a bankruptcy proceeding.”).

-6


Case 12-40685 Doc# 206 Filed 03/27/13 Page 6 of 17


The commencement of a case under . . . this title creates an estate. Such
estate is comprised of all the following property, wherever located and bywhomever held: . . . Proceeds, product, offspring, rents, or profits of orfrom property of the estate, except such as are earnings from servicesperformed by an individual debtor after the commencement of the case.

This Court previously held, in In re Bryant Manor, LLC, 14 that federal bankruptcy
law—specifically § 541(a)(6)—controls the issue of whether post-petition rents of a
chapter 11 debtor are property of the estate: “Congress, in enacting § 541(a)(6), defined
the treatment of rents in this case, and that statute brings post-petition rents into the
bankruptcy estate, effectively preempting any state law that might provide for
different treatment.”15

In Bryant Manor, the Court was tasked with determining whether the debtor
retained an interest in postpetition rents following the appointment of a receiver in
prepetition foreclosure proceedings. Just like in this case, the debtor operated an
apartment complex, and its creditor held a perfected security interest in the debtor’s
real property and any rents or leases from the real property.16 Regarding the
assignment of rents, the Court characterized that assignment as follows:

Although the Assignment incorporated admittedly strong language of anabsolute nature, the Assignment was executed simultaneously with themortgage documents, the mortgage indicated that the Assignment wasincorporated into it, no independent consideration was given for theAssignment, the Assignment was effectively conditioned upon default(because Debtor could use the rents for any purpose until a default), theAssignment limited how the Assignee could use the rents (i.e., it could not

14 422 B.R. 278 (Bankr. D. Kan. 2010).
15 Id. at 289.
16 Id. at 280–81.


-7


Case 12-40685 Doc# 206 Filed 03/27/13 Page 7 of 17


distribute the money to its shareholders but had to be used in connectionwith the subject real property), the Assignment required Assignee toaccount to Debtor for the rents collected/received, and the Assignmentterminated upon satisfaction of the debt.17

The debtor Bryant Manor, although current on its loan obligations at the time,
contacted the creditor to pursue a loan modification. The creditor informed debtor that
if it “wanted to renegotiate the terms of the loan through a loan modification, it would
have to place itself in default.”18 Unsurprisingly, the debtor then defaulted on the loan,
and renewed attempts to negotiate a loan modification. The negotiations were not
fruitful, and the parties were unable to agree on the terms of a modification. At that
point, the creditor filed a foreclosure action and a receiver was appointed, as
authorized by the parties’ mortgage and security agreement. The appointed receiver
thereafter took control of all incoming rents.

The debtor then filed a bankruptcy petition, seeking to use its cash collateral
and to have the receiver removed. The evidence showed that the creditor was
significantly under secured on the property: the debtor owed more than $3.28 million
and the property was valued at $800,000.

The Court in Bryant Manor assessed whether federal bankruptcy law
automatically brought the rents into the bankruptcy estate, regardless of the state law
on the subject. The Court quoted the Supreme Court in Butner v. United States, 19

17 Id. at 281.
18 Id. at 282.
19 440 U.S. 48 (1979).


-8


Case 12-40685 Doc# 206 Filed 03/27/13 Page 8 of 17


wherein the Supreme Court stated that Congress had the power to define “the

mortgagee’s interest in the rents and profits earned by property in a bankrupt

estate.”20 At the time Butner was decided, there was no such federal statute (i.e.,§

541(a)(6) had not yet been enacted). Now, “the Bankruptcy Code unambiguously

defines the interests in the rents and profits earned by property in a bankrupt

estate.”21

Section 541(a)(6)’s “clear, unambiguous language”22 dictates that “rents derived

from [property of the bankruptcy estate] also constitute property of the bankruptcy

estate as a matter of federal bankruptcy law.”23 In strong language, the Bryant Manor

opinion states:

[T]here is no need to turn to state law for resolution of this issue.
Congress, in enacting § 541(a)(6), defined the treatment of rents in thiscase, and that statute brings post-petition rents into the bankruptcyestate, effectively preempting any state law that might provide fordifferent treatment. Thus, even if the Court had found that Kansas law
transferred complete legal title to the rents to [the creditor], § 541(a)(6)
would still operate to bring those rents into the bankruptcy estate.

. . . [T]his statutory scheme makes sense in light of the twin goalsof bankruptcy, which are (1) permitting the debtor to obtain a fresh start,
and (2) ensuring that claims are paid. Congress likely recognized that thebetter policy is to allow the estate to use the rents to reorganize whileadequately protecting the interest of the mortgagee in the rents. Acontrary decision would effectively deny Chapter 11 relief to any debtorwho is dependent on rents, such as hotels, apartment complexes,

20 Id. at 54.

21 Bryant Manor, 422 B.R. at 288 (internal quotations omitted).

22 Id.

23 Id. at 288–89.

-9


Case 12-40685 Doc# 206 Filed 03/27/13 Page 9 of 17


shopping centers, office buildings, senior residence facilities, and the

like.24

The Bryant Manor holding relies extensively on In re Amaravathi Ltd. P’ship, 25 a

similar case concerning the right to rents collected by a bankruptcy estate. In

Amaravathi, the bankruptcy court also concluded that § 541(a)(6) controlled the

outcome of the case, stating: “It mandates that rents generated from property of the

estate are included within the bankruptcy estate.”26 Other Circuit Court decisions

squarely addressing the matter have reached the same conclusion.27

Based on the express language of § 541(a)(6), the postpetition rents of the

Wanamaker 22 Apartments are property of the HD Gerlach Co. bankruptcy estate.

Debtor is thus authorized to use those rents, as cash collateral, under § 363(c)(2).

24 Id. at 289 (internal quotations omitted).

25 416 B.R. 618 (Bankr. S.D. Tex. 2009).

26 Id. at 638.

27 See In re Wheaton Oaks Office Partners Ltd. P’ship, 27 F.3d 1234, 1240 (7th Cir.
1994) (holding that rents are cash collateral and property of the estate under § 541(a)(6));
Vienna Park Props. v. United Postal Sav. Ass’n (In re Vienna Park Props.), 976 F.2d 106,
111, 114 (2d Cir. 1992) (holding that rents are property of the estate under § 541(a)(6).

The Sixth Circuit BAP identified the issue, but did not address § 541(a)(6) in In re
Buttermilk Towne Ctr., LLC, 442 B.R. 558, 562 n.2 (6th Cir. BAP 2010) (noting that Bryant
Manor suggests that the question of whether rent proceeds are estate property is not aquestion of state law, but federal law; not reaching issue).

As noted in the Amaravathi decision, two Third Circuit cases hold that state laws (inPennsylvania and New Jersey) require that postpetition rents are not property of theestate, but neither case addresses the effect of § 541(a)(6) upon postpetition rents. See
Sovereign Bank v. Schwab, 414 F.3d 450, 453 (3d Cir. 2005) (holding that assignment ofrents under Pennsylvania law resulted in the bank taking title to the rents and that debtorno longer possessed an interest in the rents upon filing bankruptcy); First Fid. Bank, N.A.

v. Jason Realty, L.P. (In re Jason Realty, L.P.), 59 F.3d 423. 428–29 (3d Cir. 1995) (holdingthat absolute assignment of rents under New Jersey law requires conclusion that rents arenot estate property under § 541(a)(1); subsection (a)(6) not addressed).
-10


Case 12-40685 Doc# 206 Filed 03/27/13 Page 10 of 17


“Congress, in enacting § 541(a)(6), defined the treatment of rents in this case, and that
statute brings post-petition rents into the bankruptcy estate, effectively preempting
any state law that might provide for different treatment.”28

Creditor Central National Bank argues to the contrary. It contends that the
assignment of rents (detailed in the parties’ stipulation of facts and described more
fully above) was absolute—that even if Debtor paid off its debt in full today, Central
National Bank would forever be entitled to keep the rents from Wanamaker 22 based
on the assignment. Therefore, Central National Bank argues, there was simply no
interest left for the Debtor at the time its bankruptcy petition was filed, and the rents
are not property of the bankruptcy estate under § 541.

Central National Bank relies on two authorities for its position: K.S.A. § 58-2343
and an unpublished Kansas Court of Appeals case, Leavenworth/Lansing Physicians
Bldg., LLC v. Cristiano. 29 Neither is persuasive. Section 58-2343 deals with the
assignment of rents of real property, and its subsection (c) states:

Upon default by a borrower under the terms of an assignmentinstrument, the lender shall be entitled to enforce the assignmentinstrument in accordance with its terms and applicable law, and mayapply to the district court having jurisdiction for appropriate relief to gainpossession and control of the rents in enforcement of the assignmentinstrument. Upon such application, the court shall enter such orders andtake such actions as appear necessary to collect, protect, and preserve thelender’s interest therein pending final disposition of an action upon theobligations secured by the assignment instrument.

28 Bryant Manor, 422 B.R. at 289.
29 No. 102,699, 2010 WL 4977144 (Kan. Ct. App. Nov. 12, 2010) (unpublished).


-11


Case 12-40685 Doc# 206 Filed 03/27/13 Page 11 of 17


In Leavenworth/Lansing Physicians Bldg., the Kansas Court of Appeals addressed this
statute, and stated: “Although no Kansas case has interpreted this language, it
appears that the statute creates a self-help right for the lender. The statute allows
lenders to contact tenants directly to collect assigned rents. . . . K.S.A. 58-2343 allows
the Bank to collect rents under the assignment without judicial enforcement. . .”30

The Kansas Court of Appeals was then tasked with determining whether the
assignor (also the lessor in that case) still maintained a cause of action to recover the
rents from a lessee when the assignee (the bank) had already collected the rents via
self help after the assignor/lessor defaulted.31 The Court of Appeals noted the general
rule in Kansas that “an assignment passes all the assignor’s title and interest under
a contract to the assignee and divests the assignor of all right of control over the
subject matter of the assignment.”32 The Court of Appeals then concluded that the
“extremely broad” language of the assignment in that case divested the assignor “of all
right to control over the subject matter of the assignment.”33 As a result, the Court of
Appeals concluded that the assignor did not retain standing to recover rents under the
lease from the lessee.34

Contrary to the assertion in Leavenworth/Lansing Physicians Bldg. and the

30 Id. at *9–10.
31 Id. at *10.
32 Id.
33 Id.
34 Id. at *11.


-12


Case 12-40685 Doc# 206 Filed 03/27/13 Page 12 of 17


argument made by Central National Bank, although K.S.A. § 58-2343 was enacted in
1991, subsequent cases have confirmed that Kansas is a lien theory state, and requires
judicial foreclosure to exercise rights under a mortgage. For example, in Premier Bank

v. J.D. Homes of Olathe, 35 a 2002 Kansas Court of Appeals case, the court reiterated
the Kansas position on mortgage law:

Kansas is a lien theory state, not a title theory state. In a titletheory jurisdiction, the mortgage is viewed as a form of title to property.
. . . In lien theory state, a mortgagee is not entitled to immediatepossession of the property upon default because the mortgage is merelya lien and not a form of title. . . .

Under Kansas law, a mortgagee does not acquire an interest in theproperty, either before or after the promise to pay is broken, but acquiresonly a lien securing the indebtedness described in the instrument.36

Also, in the 1993 Kansas Court of Appeals case Hoelting Enterprises v. Trailridge

Investors, L.P., 37 the court squarely addressed an assignment of rents under the lien

theory, without reference to K.S.A. § 58-2343. The published Hoelting Enterprises

opinion expressly rejected the position seemingly stated in the unpublished

Leavenworth/Lansing Physicians Bldg. decision:

Under Kansas law, therefore, a purely executory agreement aloneis not effective to vest in a mortgagee the right to rents and profits. Theright to rents and profits may vest in a mortgagee, however, if (1) themortgagor defaults and the court appoints a receiver, or (2) the mortgageassigns the rents and the mortgagee reduces the rents to his possessionby proper legal action. Proper legal action that may vest in a mortgageethe right to rents and profits pursuant to such an assignment includes a

35 50 P.3d 517 (Kan. Ct. App. 2002).
36 Id. at 519.
37 844 P.2d 745 (Kan. Ct. App. 1993).


-13


Case 12-40685 Doc# 206 Filed 03/27/13 Page 13 of 17


court’s appointment of a receiver, and a mortgagor’s voluntary consent to

the mortgagee obtaining possession of the rents.38
The Hoelting Enterprises opinion mentions K.S.A. § 58-2343, but only as it relates to
perfection of the security interest in the rents, not with regard to vesting of the right
to those rents in the mortgagee.39

The statute (K.S.A. § 58-2343) itself implies that judicial involvement is still
necessary:40 although the statute provides that the lender “shall be entitled to enforce
the assignment in accordance with [the assignment’s] terms,” the statute also seems
to imply that judicial involvement is necessary by stating that “the court shall” enter
orders and take actions necessary to “collect, protect, and preserve the rents.” On the
other hand, the statute does use the word “may” when referring to judicial
enforcement, implying that judicial involvement is not required.

Further complicating matters, however, is that the statute seems to require
court action for “final disposition.” Either interpretation of § 58-2343(c)—that judicial
involvement is or is not necessary—is far from clear, making the statute ambiguous.41

“If a statute is ambiguous, a court may seek guidance from [legislative] intent,

38 Id. at 749–50 (internal citations omitted).

39 Id. at 751–52.

40 See Office of Thrift Supervision v. Overland Park Fin. Corp. (In re Overland Park
Fin. Corp.), 236 F.3d 1246, 1251 (10th Cir. 2001) (“In any case of statutory construction, thestarting point of our analysis must begin with the language of the statute itself.”).

41 See Allen v. Geneva Steel Co. (In re Geneva Steele Co.), 281 F.3d 1173, 1178 (10thCir. 2002) (stating that “[a]n ambiguity exists when a statute is capable of being understoodby reasonably well-informed persons in two or more different senses” (internal quotationsomitted)).

-14


Case 12-40685 Doc# 206 Filed 03/27/13 Page 14 of 17


a task aided by reviewing the legislative history.”42 The legislative history of K.S.A.
§ 58-2343 sheds only minimal light on the Kansas legislature’s intent. The minutes of
the Senate Committee where the bill (that would later become K.S.A. § 58-2343) was
introduced indicate that the bill was intended as only a clarification of the law
regarding how lenders perfected their interest in an assignment of rents, and not a
change in the law regarding an enforcement of an assignment.43 Other portions of those
same minutes, however, state that the committee intended to study whether “the
language in the bill needs to be changed so as not to eliminate self-help,”44 which would
have been a change to how an assignment of rents was enforced by a lender. It does
seem clear, however, that the issue K.S.A. § 58-2343 sought to address (at least
initially) was the perfection of a rent assignment, not an assignment’s enforcement.

Regardless, apparently unlike the situation in the Leavenworth/Lansing
Physicians Bldg case (although not extensively addressed therein), the assignment of
rents that was executed between Central National Bank and Debtor and that was later
pursued by Central National Bank was not absolute in this case, despite Central
National Bank’s argument to the contrary. Here, the parties’ assignment requires that
rents be applied to the balance of the note, stating that all rents shall be paid to
Central National Bank and applied to the principal and interest owed by Debtor. The

42 Id.

43 S. Comm. on Financial Institutions & Insurance, at 1 (Kan. Feb. 14, 1991)
(minutes of committee meeting where bill introduced); Attach. 1 (proposal for legislation).

44 S. Comm. on Financial Institutions & Insurance, at 2 (Kan. Feb. 14, 1991).

-15


Case 12-40685 Doc# 206 Filed 03/27/13 Page 15 of 17


parties’ Assignment implies that the rights within the Assignment ride along with the
parties’ Mortgage, and the Assignment was conditioned upon default of that Mortgage.
Even the agreed order entered between the parties in the state court foreclosure
litigation stated that rents collected by Central National Bank were to be applied to
the balance of the note. Under the long-standing case law in Kansas discussed above,
the parties’ “purely executory agreement”45 was not effective to vest in Central
National Bank the right to the rents of the Wanamaker 22 Apartments.

Neither K.S.A. § 58-2343 nor the holding in the unpublished decision in
Leavenworth/Lansing Physicians Bldg. changes the outcome required by this Court’s
prior holding in Bryant Manor. There is no published Kansas decision stating that
Kansas has changed it’s long-standing position as a lien theory state, and the text of
the statute is not clear enough to require a holding that the facts of this case show an
absolute assignment of the rents from the Wanamaker 22 Apartments that would
defeat § 541(a)(6). To the contrary, the “clear, unambiguous language”46 of § 541(a)(6)
dictates that “rents derived from [property of the bankruptcy estate] also constitute
property of the bankruptcy estate as a matter of federal bankruptcy law.”47

Conclusion

The Court finds that 11 U.S.C. § 541(a)(6) controls the outcome of this case: the
“proceeds, product, offspring, rents, or profits of or from property of the estate” are

45 Hoelting Enterprises, 844 P.2d at 749.

46 Bryant Manor, 422 B.R. at 288.

47 Id. at 288–89.

-16


Case 12-40685 Doc# 206 Filed 03/27/13 Page 16 of 17


property of the bankruptcy estate. The Court grants the second motion to use cash
collateral48 of Debtor HD Gerlach Co.,49 and the Debtor’s offer, codified in the Court’s
orders of January 11, 2013 and January 19, 2013 (as modified), to pay interest and
provide certain reports to Central National Bank, remains in effect.

It is so ordered.

# # #

48 Doc. 107.

49 The April 10, 2013 hearing previously scheduled to announce this decision iscancelled.

-17


Case 12-40685 Doc# 206 Filed 03/27/13 Page 17 of 17

 

You are here: Home Opinions Judge Karlin 12-40685 H D Gerlach Company Inc (Doc. # 206)