City of Chester v. PHCC LLC (In re City of Chester)

• Docket Number: 22-13032-AMC,Adv. Proc. 22-00084-AMC
• Decision Date: 03 November 2023
• Parties: IN RE CITY OF CHESTER, DEBTOR. v. PHCC LLC D/B/A PRESTON HOLLOW COMMUNITY CAPITAL, ET AL., DEFENDANTS. CITY OF CHESTER, PLAINTIFF,
• Court: U.S. Bankruptcy Court — Eastern District of Pennsylvania

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IN RE CITY OF CHESTER, DEBTOR.

CITY OF CHESTER, PLAINTIFF, v. PHCC LLC D/B/A PRESTON HOLLOW COMMUNITY CAPITAL, ET AL., DEFENDANTS.

No. 22-13032-AMC

Adv. Proc. No. 22-00084-AMC

United States Bankruptcy Court, E.D. Pennsylvania

November 3, 2023

OPINION

Honorable Ashely M. Chan United States Bankruptcy Judge.

I. INTRODUCTION

In this adversary proceeding initiated by Chapter 9 debtor, the City of Chester, Pennsylvania ("City") against PHCC LLC, d/b/a Preston Hollow Community Capital ("PHCC") and Preston Hollow Capital, LLC (together with PHCC, "Preston Hollow"), the holders of certain bonds issued by the City prepetition; U.S. Bank Trust Company, National Association, the indenture trustee ("Indenture Trustee") tasked with assuring repayment of those bonds and other obligations of the City; and the County of Delaware, Pennsylvania ("Delaware County"), a creditor by virtue of a prepetition contribution agreement between it and the City to assist with financing the construction of a soccer stadium in Chester, Pennsylvania, the City seeks the turnover of certain revenues received by the Indenture Trustee prepetition and to avoid the security interests of Preston Hollow, the Indenture Trustee, and Delaware County in certain revenues due to the City described in more detail in this Opinion.

The Court must now resolve cross-motions for summary judgment filed by the City, Preston Hollow and the Indenture Trustee, and Delaware County. Ultimately, the plain language of the operative trust indenture document clearly obligates the Indenture Trustee to turn over to the City the revenues it seeks. Additionally, while the security interests of Preston Hollow, the Indenture Trustee, and Delaware County in certain revenues due to the City are properly perfected, those security interests do not attach postpetition by virtue of § 552(a) of the Bankruptcy Code. Therefore, the City's motion for summary judgment will be granted in all respects.

II. FACTS AND PROCEDURAL HISTORY

A. 2009 Contribution Agreement with Delaware County

By way of background, in 2009, Delaware County issued certain General Obligation Bonds, Series 2009, in the original principal amount of $28,595,000 ("2009 Bonds") to raise funds to help finance the construction of Subaru Park in Chester, Pennsylvania. Case No. 22-84 ECF Doc. ("ECF") 123 at 3, Ex. A-1. On January 16, 2009, the City Council of Chester ("City Council") enacted an ordinance ("2009 Ordinance") authorizing the City to incur debt and pay certain funds to Delaware County to help finance this project. Case No. 22-84 ECF 101, Ex. A-1. The 2009 Ordinance also purports to grant Delaware County a security interest in certain revenues, herein called the "Harrah's Revenues,"^[1] payable to the City on a quarterly basis by the Pennsylvania Department of Revenue ("PA DOR"). Id. at § 6.

On February 15, 2009, the City and Delaware County executed a contribution agreement ("Contribution Agreement") whereby the City agreed to pay a portion of Delaware County's annual debt service obligations under the 2009 Bonds. Case No. 22-84 ECF 101, Ex. A-2 ("Contribution Agreement"). The Contribution Agreement also purports to grant Delaware County a security interest in the Harrah's Revenues. Id. at § 4.01. On February 18, 2009, Delaware County filed a UCC-1 Financing Statement ("2009 Financing Statement") in connection with the Contribution Agreement with the Pennsylvania Secretary of the Commonwealth ("PA SOC"). Case No. 22-84 ECF 101, Ex. A-5.

B. 2017 Bonds and the Trust Indenture

On July 26, 2017, the City Council enacted an ordinance ("2017 Ordinance") authorizing the City to incur additional debt in the form of two new series of bonds. Case No. 22-84 ECF 130, Ex. A-1 ("2017 Ordinance"). The 2017 Ordinance purports to grant a security interest in certain revenues payable to the City for the benefit of an indenture trustee, including the Harrah's Revenues discussed above, the Harrah's Table Game Revenues,^[2] and the Host Community Revenues.^[3] Id. at § 6.

Subsequently, the City issued two series of bonds: (1) the Series 2017A Guaranteed Revenue Bonds in the original principal amount of $12,000,000 ("Series 2017A Bonds"), and (2) the Series 2017B Guaranteed Revenue Bonds in the original principal amount of $7,210,000 ("Series 2017B Bonds," collectively with the Series 2017A Bonds, "2017 Bonds"). Case No. 22-84 ECF 123 at 4-5.

On August 1, 2017, the City and U.S. Bank, National Association ("U.S. Bank") executed an indenture of trust ("Trust Indenture") in connection with the 2017 Bonds. Case No. 22-84 ECF 123, Ex. 12 ("Trust Indenture"). The Trust Indenture purports to grant U.S. Bank as indenture trustee a security interest in the Harrah's Revenues, Harrah's Table Game Revenues, Host Community Revenues, and "Additional City Consideration"^[4] (collectively, "Pledged Revenues"). Id. at § 5.01. On August 31, 2017, U.S. Bank filed a UCC-1 Financing Statement ("2017 Financing Statement") in connection with the 2017 Bonds with the PA SOC. Case No. 22-84 ECF 130, Ex. A-24. On June 14, 2022, U.S. Bank subsequently filed a UCC-3 Amendment ("2022 Amendment") assigning the 2017 Financing Statement to the Indenture Trustee and a UCC-3 Continuation Statement ("2022 Continuation Statement," collectively with 2009 Financing Statement, 2017 Financing Statement and 2022 Amendment, "Financing Statements"). Case No. 22-84 ECF 130, Ex. A-25; A-26.

Pursuant to the Trust Indenture, the Indenture Trustee established a revenue fund ("Revenue Fund") which is comprised of separate bank accounts for certain revenues, including the Harrah's Revenues, the Harrah's Table Game Revenues, and the Host Community Revenues. Trust Indenture § 5.02. On August 31, 2017, the City sent letters ("Direction Letters") to the PA DOR and Covanta Delaware Valley, L.P. ("Covanta," collectively with the PA DOR, the "Payors") irrevocably directing the Payors to transmit the Pledged Revenues directly to the Indenture Trustee. Case No. 22-84 ECF 130, Ex. A-9. The Indenture Trustee is required to distribute the Pledged Revenues to various parties, including Delaware County and Preston Hollow, in accordance with § 5.02 of the Trust Indenture ("Section 5.02").

Pursuant to Section 5.02(e) of the Trust Indenture, the Indenture Trustee is also required to periodically return certain funds to the City, herein referred to as the "Excess Funds." The Indenture Trustee is required to establish a 2017A Sinking Fund Account and a 2017B Sinking Fund Account (collectively, the "Sinking Fund Accounts"). Trust Indenture § 5.04. The Trust Indenture provides that, once the amounts in the Sinking Fund Accounts are sufficient to pay the principal and interest due for the 2017 Bonds on the next succeeding Interest Payment Date,^[5] the Indenture Trustee shall transfer any Pledged Revenues or other funds deposited in the Revenue Fund to an account specified in writing by the City. Trust Indenture § 5.02(e).

On November 10, 2022 ("Petition Date"), following decades of economic hardship, the City filed a voluntary petition for bankruptcy relief under Chapter 9 of the Bankruptcy Code.^[6]Case No. 22-13032 ECF 1. As of the Petition Date, the total outstanding balance on the Series 2017A and Series 2017B Bonds was $9,149,365 and $6,107,250, respectively, and the City's annual obligation on account of the 2009 Contribution Agreement totaled $343,483. Case No. 22-84 ECF 123 ("City Memo. of Law in Supp. of Mot. for Summ. Judg.") 4-5.

On the Petition Date, the Indenture Trustee held $4,445,242.41 in the Revenue Fund. City Memo. of Law in Supp. of Mot. for Summ. Judg. 9; Case No. 22-84 ECF 125-2 ("Bond Parties' St. of Undisputed Facts") ¶ 24. At that time, the next Interest Payment Date under the 2017 Bonds was February 15, 2023, at which point approximately $1,488,218.25 was due pursuant to the 2017 Bonds and to satisfy other requirements of the Trust Indenture. City Memo. of Law in Supp. of Mot. for Summ. Judg. 9. Therefore, as of the Petition Date, the Indenture Trustee held at least $2,957,024.16 in Excess Funds that was available for distribution to the City pursuant to Section 5.02(e) of the Trust Indenture, herein referred to as the "Prepetition Excess Funds." Id. On the Petition Date, the City commenced this adversary proceeding. Case No. 22-84, ECF 1. On February 13, 2023, the City filed an amended complaint ("Second Amended Complaint"). Case No. 22-84 ECF 54 ("Second Am. Compl."). In the Second Amended Complaint, the City asserted claims against Preston Hollow, the sole holder of the 2017 Bonds; the Indenture Trustee; Delaware Valley Regional Finance Authority ("Finance Authority"); Delaware County; Covanta; and Chester Downs and Marina, LLC d/b/a Harrah's Philadelphia Casino and Racetrack ("Harrah's").^[7] Id.

In Count I (Declaratory Judgment), the City asks this Court to enter an order declaring that the Pledged Revenues payable to the City after the Petition Date do not qualify as "special revenues" under the Bankruptcy Code and therefore, under § 552(a), are not subject to any liens of Delaware County, Preston Hollow, or the Indenture Trustee. Id. at ¶¶ 92-98. In Counts II (Breach of Contract) and III (Specific Performance), the City seeks entry of an order finding the Indenture Trustee liable for breach of contract and directing the Indenture Trustee to transfer the Prepetition Excess Funds to the City. Id. at ¶¶ 99-108. In Counts IV and VI (To Determine Validity, Priority, and Extent of Lien), the City seeks entry of an order stating that the Indenture Trustee Preston Hollow, and Delaware County (collectively, "Creditor Defendants") do not have valid and perfected security interests in the Pledged Revenues. Id. at ¶¶ 109-115, 121-127. In Counts V and VII (Avoidance of...