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DILIGENCE PAYS OFF

In effecting collections for a creditor, whether secured or unsecured, we are often reminded of the adage, “The race is to the swift.”  Illustrating this proposition is a case handled by Newman & Simpson, LLP which resulted in a published opinion, United National Bank v. Parish, et als.

In that case, Newman & Simpson represented the second mortgagee, PNC Bank, regarding its lien on a rental parcel of commercial real estate.  UNB held the first mortgage.  The debtor defaulted in its obligations to both lenders.  Both banks held assignments of rents.  When PNC filed its foreclosure in April 1999, it notified the tenant to pay the rent to it pursuant to its assignment of rents.  The tenant commenced making the payments to PNC in May 1999.  UNB filed its foreclosure action in August 1999.  By that time, PNC had collected four monthly payments from the tenant of $7,000 each.

In November 1999, UNB moved for an order which would require PNC to disgorge the rents previously received and to appoint a rent receiver.  PNC did not object to appointment of a rent receiver and acknowledged that upon asserting its rights, UNB possessed priority as to the future rents.  PNC did object to turning over the rents collected prior to UNB’s filing of its foreclosure.  UNB argued that its mortgage and assignment of lease were first in priority and that it was entitled to the rents collected notwithstanding PNC’s diligence.

The court noted that PNC was well within its rights to take possession and obtain the rents without court order, just as UNB was, had it chosen to act.  The court said:

As between two successive mortgagees it necessarily follows that when one exercises his possessory right, either personally or through a receiver in foreclosure, and the other does not do so, the one exercising the right becomes entitled to the rents received by him through the medium of his possession.  This must be so, because a mortgagee who does not exercise his possessory right acquires no right to receive the rents.

The court further noted that UNB’s less rapid action was not necessarily of any significance to a second mortgagee such as PNC since PNC could have readily concluded that UNB considered itself adequately secured.  In any event, the court held:

AS PNC correctly observes, it should not be deprived of the remedy it obtained for itself through the exercise of diligence.  If PNC had not collected the rents between April and August 1999, then the mortgagor would have collected them and neither creditor would have been compensated.  Certainly equity aids the vigilant and not those who sleep on their rights.  UNB should not be rewarded for having slumbered between April and August 1999 while PNC diligently sought to receive the rents due on the property.

Another way of looking at it is that when PNC seized the rents, the worst that could happen is that it might have to disgorge them.  On the other hand, had it not seized the rents, they would have been “water over the damn.–Gone beyond recall.”

This publication is intended for general information purposes only and does not constitute legal advice. The reader should consult legal counsel to determine how the law may apply to specific situations.