DRMG, LLC v. Superior Acquisitions, Inc. et al

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UNITED STATES BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
In re
SUPERIOR ACQUISITIONS, INC., 	No. 10-13730
Debtor(s).
______________________________________/
DRMG, LLC,
Plaintiff(s),
v. 	A.P. No. 11-1034
LINDA GREEN, Trustee,
Defendant(s).
_______________________________________/
Memorandum on Motion to Dismiss
_________________
This adversary proceeding seeks a determination of rights between a bankruptcy trustee and a
secured creditor as to rents from real property. 	Chapter 11 Trustee and defendant Linda Green has
made a motion to dismiss the complaint. For purposes of the motion, the court assumes that
everything in the complaint is true.
Somewhat simplified, the facts are as follows: The debtor owns real property and rents it out to
the California Department of Motor Vehicles. Plaintiff DRMG, LLC, holds a deed of trust on the
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Entered on Docket
June 27, 2011
GLORIA L. FRANKLIN, CLERK
U.S BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
Case: 11-01034 Doc# 24 Filed: 06/27/11 Entered: 06/27/11 13:38:41 Page 1 of 3

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property which contains and absolute assignment of rents. Prior to bankruptcy, the debtor defaulted
and DRMG sent a notice to the DMV stating that rents should henceforth be paid to it. DRMG
collected some rents before bankruptcy. However, because of budget problems, the DMV did not pay
rents which accrued before bankruptcy until after the petition was filed. Postpetition, the DMV paid
about $90,000.00 in rent, most of which was attributable to prepetition rent.
The Trustee argues that the rents are property of the estate subject to DRMG’s security interest
and may accordingly be used by the Trustee pursuant to section 363(c) of the Bankruptcy Code so long
as she can demonstrate that DRMG is adequately protected. DRMG argues that it is the lawful owner
of the rents and therefore may keep them even if the Trustee could show that it is adequately protected.
Under California law, no special rights are created by denoting an assignment of rents as
“absolute.” All assignments of rents in California create only “a present security interest in existing
and future leases, rents, issues, or profits of real property.” Cal. Civ. Code § 2938(a). DRMG argues
that this changes when there has been a default and demand has been made to the tenant, but the court
sees nothing in the statute which give the assignee anything more than the right to collect the rents
under such circumstances. Nowhere in the statute is there any indication that unpaid rents are ever
anything more than collateral. Nor does it seem to matter whether the unpaid rents are on account of
prepetition or postpetition rent obligations; the assignee has nothing more than a security interest in
them.
The court sees no authority for DRMG’s core position that because its assignment of rents was
absolute it became the owner of the rents upon default and demand on the tenant. This position is
undercut by the statute itself, which gives no special rights to an assignee under an absolute
assignment 1 and gives the assignee no rights beyond the right to collect the rents after default.
This result is hardly unfair to DRMG. The Bankruptcy Code does allow the Trustee to use the
1Section 2938(a) limits secured creditors to a security interest “irrespective of whether the
assignment is denoted as absolute, absolute conditioned upon default, additional security for an
obligation, or otherwise.”
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Case: 11-01034 Doc# 24 Filed: 06/27/11 Entered: 06/27/11 13:38:41 Page 2 of 3

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rents, but she must first show that DRMG is protected from loss if the rents are used. This furthers the
purposes of reorganization while fully protecting the secured creditor’s interest. This is exactly the
balance intended by Congress in fashioning § 363.
For the foregoing reasons, it shall be deemed without controversy in this adversary proceeding
that any rents not received by DRMG before filing are property of the bankruptcy estate subject to
DRMG’s security interest and may not be used by the Trustee absent consent of DRMG or order of the
court. If the parties agree that this Memorandum resolves all issues, counsel for the Trustee shall
submit an appropriate form of declaratory judgment.
Dated: June 27, 2011
SAlan Jaroslovsky
U.S. Bankruptcy Judge
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Case: 11-01034 Doc# 24 Filed: 06/27/11 Entered: 06/27/11 13:38:41 Page 3 of 3