Federal Deposit Insurance Corp. v. International Property Management, Inc.
929 F.2d 1033 (1991)
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Rule of Law:
Under Texas law, an assignment of rents clause will be construed as an absolute assignment, transferring the right to rents automatically upon the mortgagor's default without further action by the mortgagee, if the contract language unambiguously expresses the parties' intent to create such an immediate transfer.
Facts:
- FWG Partner Ltd. (FWG) obtained a $5 million construction loan from Commerce Savings Association (CSA) to build an apartment complex.
- FWG executed a promissory note and a deed of trust, which contained an assignment of rents clause.
- The clause specified that the assignment of rents was 'intended to be absolute, unconditional and presently effective.'
- The clause also stated, 'It shall never be necessary for Holder to institute legal proceedings of any kind whatsoever to enforce the provisions of this Section 5.2.'
- FWG subsequently defaulted on the loan.
- International Property Management, Inc. (IPM), the management company, continued to collect rents from the property after FWG's default but before the lender took any legal action to claim them.
Procedural Posture:
- The Federal Deposit Insurance Corporation (FDIC), as conservator for CSA, filed suit against International Property Management, Inc. (IPM) in federal district court.
- The FDIC sought and obtained a temporary restraining order and a preliminary injunction to prevent IPM from disbursing rental proceeds.
- FWG Partner Ltd. (FWG) intervened in the lawsuit, filing a counterclaim against IPM for the rents collected prior to the temporary restraining order.
- IPM deposited the disputed funds with the court registry and was dismissed from the case.
- The FDIC and FWG filed cross-motions for summary judgment in the district court.
- The district court granted summary judgment in favor of the FDIC, ruling that the clause constituted an absolute assignment.
- FWG, as the appellant, appealed the district court's grant of summary judgment to the U.S. Court of Appeals for the Fifth Circuit.
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Issue:
Does an assignment of rents clause that states it is 'absolute, unconditional and presently effective' and requires no legal proceedings for enforcement operate automatically to transfer the right to rents to the mortgagee upon the mortgagor's default under Texas law?
Opinions:
Majority - Judge King
Yes. An assignment of rents clause that explicitly states it is absolute and requires no further legal action for enforcement automatically transfers the right to rents to the mortgagee upon the mortgagor's default. The court, guided by the precedent in Taylor v. Brennan, distinguished between a standard collateral pledge of rents (which requires affirmative action by the mortgagee post-default) and an 'absolute assignment.' While Texas law is reluctant to construe such clauses as absolute, the controlling factor is the intent of the parties as expressed in the contract. Here, the language was 'clear and unambiguous' in stating the assignment was 'absolute, unconditional and presently effective' and that no legal proceedings were necessary for enforcement. This explicit language overcame the general public policy disfavoring such assignments and demonstrated a clear intent for the right to rents to transfer immediately upon default, without any further action from the mortgagee.
Analysis:
This decision solidifies the 'absolute assignment' exception under Texas law, providing a clear blueprint for lenders on how to draft an enforceable clause that grants them an immediate right to rents upon a borrower's default. It emphasizes the judiciary's deference to the principle of freedom of contract, showing that courts will enforce specific, unambiguous terms even when they contravene a general rule disfavored by public policy. The ruling reduces uncertainty for lenders by confirming that they can contract around the common law requirement to take affirmative action (like appointing a receiver) to perfect their interest in post-default rents, thereby strengthening their security position.
