Originally published in the August 27, 2012 issue of Thomson Reuters News & Insight.

Amid the recent proliferation of commercial mortgage defaults in New York, the question of whether property of a debtor’s bankruptcy estate includes the rental income of real property subject to a mortgage’s purportedly “absolute” assignment of rents has taken on great importance for both debtors and real property lenders.

Under the Bankruptcy Code, if such rents constitute property of the estate, a debtor-in-possession or trustee may have the right to use those funds as cash collateral during its bankruptcy case. On the other hand, if the rents are not estate property, the debtor cannot use those funds without the mortgagee’s consent. The second scenario vastly improves the lender’s strategic position in the bankruptcy, since rental income can often “make or break” a Chapter 11 reorganization, particularly in single asset real estate cases.

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