## Facts

- Owners of a commercial building in Pascagoula, Mississippi executed a $445,198.71 promissory note secured by a deed of trust that included an assignment-of-rents clause.
- The deed of trust was properly recorded in the county land records.
- The building was leased to Jackson County, generating rental income.
- A trade creditor obtained a money judgment against several of the owners and pursued garnishment of the rental payments.
- The loan went into default, and the deed-of-trust holder’s servicer initiated foreclosure efforts.
- One owner filed bankruptcy, staying foreclosure and garnishment and forcing a priority dispute over the rents.
- The secured creditor asserted a perfected security interest in rents based on the recorded assignment; the judgment creditor argued additional steps (possession, receiver, or notice) were required to perfect the rents interest against third parties.

## Issues

1. Under Mississippi law, does an assignment-of-rents clause in a properly recorded deed of trust perfect the mortgagee’s secured interest in rents as against a later judgment creditor?

## Decision

- The Fifth Circuit affirmed the district and bankruptcy courts.
- The court held that, under Mississippi law, a mortgagee’s interest in rents granted by an assignment-of-rents clause in a properly recorded deed of trust is perfected upon recordation.
- Because the assignment was recorded before the judgment creditor’s garnishment efforts, the secured creditor had priority to the rents.

## Legal Principles

- In the absence of controlling state precedent, a federal court applying state law must predict how the state’s highest court would decide the issue.
- Under Mississippi law, recordation of a deed of trust containing an assignment-of-rents clause perfects the mortgagee’s security interest in rents against third parties.
- Perfection of an assignment-of-rents interest (priority against third parties) is distinct from later steps that may be required to collect or apply rents after default.

## Conclusion

A properly recorded deed of trust that includes an assignment-of-rents clause gives the mortgagee a perfected interest in rents upon recordation under Mississippi law, and that interest has priority over a subsequent judgment creditor’s attempt to reach the rents by garnishment in the debtor’s bankruptcy.


In re Millette, 186 F.3d 638 (5th Cir. 1999)