In re Builders Grp. & Dev. Corp., 13–04867 (ESL).

• Decision Date: 23 October 2013
• Docket Number: No. 13–04867 (ESL).,13–04867 (ESL).
• Citation: 502 B.R. 95
• Parties: In re BUILDERS GROUP & DEVELOPMENT CORP., Debtor.
• Court: U.S. Bankruptcy Court — District of Puerto Rico

502 B.R. 95

In re BUILDERS GROUP & DEVELOPMENT CORP., Debtor.

No. 13–04867 (ESL).

United States Bankruptcy Court, D. Puerto Rico.

Oct. 23, 2013.

Gerardo A. Carlo Altieri, G.A. Carlo–Altieri & Associates, San Juan, PR, Kendra Loomis, San Juan, PR, for Debtor.

OPINION AND ORDER

ENRIQUE S. LAMOUTTE, Bankruptcy Judge.

This case is before the court upon CPG/GS PR NPL, LLC's (hereinafter referred to as “CPG” or “Creditor”) Urgent Motion for Entry of Order Determining the Foreclosure of Rents and/or Prohibiting the Use of CPG/GS' Cash Collateral alleging that Builders Group & Development Corp. (hereinafter referred to as “Builders Group” or “Debtor”) has no right to use CPG's post-petition rents because the same were foreclosed and ownership of the rents was transferred pre-petition to CPG pursuant to Articles 1416 et seq. of the Puerto Rico Civil Code (“PR Code”), 31 L.P.R.A. § 3941 et seq. CPG alleges that the rents do not constitute property of the estate pursuant to 11 U.S.C. § 541(a)(6) (Docket No. 35). Builders Group in its Opposition to CPG's Urgent Motion for Entry of Order Determining the Foreclosure of Rents and/or Prohibiting the Use of Cash Collateral argues that: (i) the Debtor's interest in the rents, which constitute cash collateral, can only be extinguished by a foreclosure of the rent producing collateral pursuant to state law; thus the foreclosure of the Cupey Professional Mall is required to effect a foreclosure on the post-petition rents; and (ii) since the Cupey Professional Mall is owned by Builders Group and is property of the estate pursuant to 11 U.S.C. § 541(a)(1), the rents derived from property of the estate form part of the bankruptcy estate under 11 U.S.C. § 541(a)(6). For the reasons set forth below this court finds that the rents constitute property of the estate under state law and that the same constitute cash collateral to CPG's debt. The court also finds that the Debtor has not provided adequate protection to CPG for its two separate interests; namely, its mortgage on the real property and its security interest in the post-petition rents.

Jurisdiction

The Court has jurisdiction pursuant to 28 U.S.C. §§ 1334(b) and 157(a). This is a core proceeding pursuant to 28 U.S.C. §§ 157(b)(2)(K) and (M). Venue of this proceeding is proper under 28 U.S.C. §§ 1408 and 1409.

Procedural Background

Builders Group filed a bankruptcy petition under Chapter 11 of the Bankruptcy Code on June 12, 2013. The Debtor included CPG in its Schedule DCreditors Holding Secured Claims—as a secured creditor of two (2) mortgage loans from 08/10/2011, which amount to $9,400,000.00. The Debtor listed the value of the property subject to the mortgage lien in the amount of $11,900,000.00.

On July 10, 2013, CPG filed a Notice of Foreclosure of Rents and Adequate Protection informing that: (i) on or around April 7, 2011 it foreclosed on the rents of Debtor's properties, thus the same does not constitute property of the estate pursuant to 11 U.S.C. § 541; and (ii) to the extent that it has not foreclosed on certain of Debtor's rents pre-petition, it does not consent to the use of its cash collateral, and thus demands adequate protection of its secured interests in the properties of Debtor (Docket No. 33). On July 11, 2013, Builders Group filed a Motion in Response to Notice of Foreclosure of Rents and Adequate Protection alleging that: (i) CPG fails to attach any documentation to support its allegation that it foreclosed on the rents of Builders Group properties on or around April 7, 2011; (ii) the only foreclosure that Builders Group is aware of is a complaint for foreclosure filed on August 16, 2011, months after the alleged foreclosure of rents; (iii) “[u]pon information and belief, Builders [Group] was current with Firstbank at the time of the discounted sale to CPG and CPG continued to collect, but is mute with respect to accounting for the application of the rents to the loan for approximately the last eighteen months and the disappearance of $500,000 in escrow held by Firstbank at the time of the sale;” (iv) “Builders [Group] contends that the $2,500,000.00 of equity cushion in the Cupey Professional Mall provides adequate protection to CPG's interest in the collateral, but also offers to pay $23,961.00 in monthly adequate protection payments, essentially non-default rate interest, and well beyond the $15,000.00 tentatively agreed to between the parties prepetition;” and (v) Builders Group intends to file a motion for the use of cash collateral and objects to CPG's Notice of Foreclosure (Docket No. 34).

On July 12, 2013, CPG filed an Urgent Motion for Entry of Order Determining the Foreclosure of Rents and/or Prohibiting the Use of CPG/GS' Cash Collateral alleging: (i) Builders Group has no right to use CPG's cash collateral, given that the same was foreclosed and transferred pre-petition to CPG and does not constitute property of the estate; (ii) Builders Group has no equity in its assets because they are substantially encumbered by CPG; and (iii) “there exists no reorganization or refinancing alternatives that could even remotely provide a viable exit strategy pursuant to which creditors, such as CPG/GS, will be paid the amount and value of their security interest” (Docket No. 35). CPG argues that the cash collateral, in this case the rents, are not property of the estate and thus belong to CPG based on the following: (i) other courts have applied a similar reasoning to pre-petition foreclosures of rents such as the one performed by CPG pursuant to the foreclosure letters; (ii) in In re Northwest Commons, Inc., 136 B.R. 215, 219 (Bankr.E.D.Mo.1991), the Court held that after a secured lender had exercised its contractual right under the mortgage deed to notify the debtor's tenants to pay the secured lender directly all amounts due for rents as a result of a default by the debtor on its obligations to the secured lender, such notification constituted a pre-petition foreclosure on the cash collateral (“When a mortgagee completes all steps necessary to enforce its rights under an assignment of rent clause pre-petition, all interests of the Debtor in the rents are extinguished and the rents do not become property of the estate or cash collateral”) Id. at 220.; (iii) in In re Century Investment Fund VIII Limited Partnership, 937 F.2d 371, 375 (7th Cir.1991), the Court stated in dicta that, “if a mortgagee has protected its security interests in a mortgagor's property and rental proceeds by perfecting its liens under the requirements of state law, then those interests do not later become the property of the bankruptcy estate;” (iv) in In re VIII South Michigan Associates, 145 B.R. 912, 914–915 (N.D.Ill.1992), the court followed a similar reasoning by stating that a creditor who sent demand letters to tenants after the debtor's default but prior to the debtor's chapter 11 proceeding, divested the bankruptcy estate from ownership of the rents because the creditor had “perfected” and “enforced” its rent assignment;” (v) “... other cases have reached similar results, concluding that if a creditor takes sufficient steps to ‘enforce’ the assignment (usually making demand after default and sending notices to tenants for direct payment of the rents), the creditor cuts off ownership of the rents because the creditor has taken the steps required under the assignment and state law to entitle it to immediate possession of the rents. See In re South Pointe Associates, 161 B.R. 224 (Bankr.E.D.Mo.1993)( “The court finds that under Missouri law, a creditor holding an assignment of rents is entitled to possession of the rents after default and sending demand letters to tenants. Because the creditor completed these enforcement steps pre-petition, the court rules that the creditor cut off the debtor's ownership in the rents and the rents were not property of the estate”); In re Mount Pleasant Limited Partnership, 144 B.R. 727 (Bankr.W.D.Mich.1992) (“The court finds that under Michigan assignment of rents statute, the holder of assignment of rents is entitled to possession of rents upon serving a notice of default and demand for rents on tenants. Once these enforcement steps are completed, the creditor cuts off debtor's ownership of the rents”) (Docket No. 35). CPG further alleges that: “... following Puerto Rico law, properly sent the [f]oreclosure [l]etters prior to the [p]etition date and, accordingly, and in line with the cases described above, divested the Debtor of all title and interest in the foreclosed rents” (Docket No. 35).

On July 15, 2013, the Debtor filed a Motion for Entry of an Interim Order on an Expedited Basis requesting (i) authorization to use the cash collateral; namely the rents generated by the shopping mall, (ii) to grant the adequate protection monthly payments in the amount of $23,961.00 to CPG and (iii) the scheduling of a final hearing to determine whether the rents (cash collateral) are property of the estate or of the Creditor (Docket No. 38). On July 18, 2013, Builders Group filed a Motion in Opposition to CPG's Urgent Motion for Entry of Order Determining the Foreclosure of Rents and/or Prohibiting the Use of Cash Collateral arguing that the post-petition rents are property of the estate based on the following: (i) the cases cited by CPG conclude that; “the debtor's interest in the rents, which constitutedcash collateral, can be extinguished only by a foreclosure of the rent producing collateral pursuant to state law;” (ii) “[a]pplied to the present case, CPG has to conclude that foreclosure on the Mall is required to effect a foreclosure on the post-petition rents;” (iii) “[t]he statutory language set forth in §§ 363(a), 363(c)(2)(B), 541(a)(6) and 552 contemplates rents, including those which are the subject of perfected assignments, as property of the estate. In this sense, the notification to tenants and collection of rents prepetition by a mere letter notice is really an...