In re Buttermilk Towne Ctr. Llc

• Decision Date: 23 December 2010
• Docket Number: 10–8062.,Nos. 10–8036,10–8046,s. 10–8036
• Citation: 442 B.R. 558
• Parties: In re BUTTERMILK TOWNE CENTER, LLC, Debtor.
• Court: U.S. Bankruptcy Appellate Panel, Sixth Circuit

442 B.R. 558

In re BUTTERMILK TOWNE CENTER, LLC, Debtor.

Nos. 10–8036

10–8046

10–8062.

United States Bankruptcy Appellate Panel of the Sixth Circuit.

Argued: Nov. 10, 2010.Decided and Filed: Dec. 23, 2010.

ARGUED: Timothy P. Palmer, Buchanan Ingersoll & Rooney PC, Pittsburgh, Pennsylvania, for Appellant. Beth A. Silvers, Taft Stettinius & Hollister LLP, Cincinnati, Ohio, for Appellee. ON BRIEF: Timothy P. Palmer, Buchanan Ingersoll & Rooney PC, Pittsburgh, Pennsylvania, for Appellant. Timothy J. Hurley, Paige Leigh Ellerman, Taft Stettinius & Hollister LLP, Cincinnati, Ohio, for Appellee.Before: BOSWELL, HARRIS, and RHODES, Bankruptcy Appellate Panel Judges.

OPINION

STEVEN W. RHODES, Bankruptcy Judge.

The dispositive issue in this appeal is whether a debtor in a “single asset real estate” case can provide adequate protection to a creditor for the use of rents as cash collateral without an equity cushion in the property. The Panel finds that Stearns Bldg. v. WHBCF Real Estate (In re Stearns Bldg.), 165 F.3d 28 (6th Cir.1998) (unpublished table decision) is controlling. Accordingly, the Panel must reverse the bankruptcy court's determination that the debtor has provided adequate protection for the use of cash collateral.

I. ISSUES ON APPEAL

1. Did the bankruptcy court err in holding that post-petition rents, revenues and/or profits derived from the operation of the Appellee's leased real property constitute property of the estate under 11 U.S.C. § 541 and cash collateral under 11 U.S.C. § 363?

2. Did the bankruptcy court err in holding that cash collateral in the form of post-petition rents may be utilized by the Appellee to fund ordinary administrative expenses of the estate, including professional fees?

II. JURISDICTION AND STANDARD OF REVIEW

The Bankruptcy Appellate Panel of the Sixth Circuit has jurisdiction to decide this appeal. The United States District Court for the Eastern District of Kentucky has authorized appeals to the BAP. A final order of a bankruptcy court may be appealed by right under 28 U.S.C. § 158(a)(1). For purposes of appeal, an order is final if it “ ‘ends the litigation on the merits and leaves nothing for the court to do but execute the judgment.’ ” Midland Asphalt Corp. v. United States, 489 U.S. 794, 798, 109 S.Ct. 1494, 1497, 103 L.Ed.2d 879 (1989) (citations omitted).

Conclusions of law are reviewed de novo. Mitan v. Duval (In re Mitan), 573 F.3d 237 (6th Cir.2009); Elm Rd. Dev. Co. v. Buckeye Ret. Co., LLC, Ltd. (In re Hake), 419 B.R. 328 (6th Cir. BAP 2009). “Under a de novo standard of review, the reviewing court decides an issue independently of, and without deference to, the trial court's determination.” Palmer v. Washington Mutual Bank (In re Ritchie), 416 B.R. 638, 641 (6th Cir. BAP 2009) (emphasis in original) (citing General Elec. Credit Equities, Inc. v. Brice Rd. Devs., LLC (In re Brice Rd. Devs., LLC), 392 B.R. 274, 278 (6th Cir. BAP 2008)).

Factual findings underlying the bankruptcy court's ruling are reviewed for clear error. In re Mitan, 573 F.3d at 241. “A finding of fact is clearly erroneous ‘when although there is evidence to support it, the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed.’ ” Riverview Trenton R.R. Co. v. DSC, Ltd. (In re DSC, Ltd.), 486 F.3d 940, 944 (6th Cir.2007) (quoting Anderson v. City of Bessemer City, N. C., 470 U.S. 564, 573, 105 S.Ct. 1504, 1511, 84 L.Ed.2d 518 (1985)).

III. FACTS

Debtor, Buttermilk Towne Center is the owner and operator of a commercial real estate development. On or about August 1, 2004, Buttermilk Towne Center entered into a Construction Financing Agreement, (“Financing Agreement”), with LaSalle Bank, now known as Bank of America. The loan proceeds were used to fund the purchase of approximately $34,000,000 of Taxable Industrial Build Revenue Bonds. Bank of America is the 100% owner of the bonds. To maintain the tax-exempt status of the bonds used to finance the project, the fee interest in the real estate for the project was conveyed to the City of Crescent Springs, (“City”), which in turn leased the property back to Buttermilk Towne Center pursuant to a ground lease.

The bonds are to be repaid through lease payments to be made by Buttermilk Towne Center to the City under the ground lease. Buttermilk Towne Center's obligations under the Financing Agreement are secured by an Open–End Mortgage Security Agreement dated August 1, 2004, (“Mortgage”). Pursuant to the Mortgage, Bank of America holds a mortgage lien in both the fee interest in the underlying property and Buttermilk Towne Center's interest in the ground lease.

As lessee under a ground lease, Buttermilk Towne Center subleases space in the development to tenants who pay rent to Buttermilk Towne Center. The rents generated from these subleases constitute the entirety of the Buttermilk Towne Center's revenues.

Contemporaneously with the Mortgage, Buttermilk Towne Center executed an Assignment of Rents and Subleases in favor of Bank of America, (“Assignment”). Under the Assignment, Buttermilk Towne Center assigned and transferred all rents and profits derived from the project to Bank of America subject to a license back to Buttermilk Towne Center to collect and use such rents, provided that Buttermilk Towne Center was not in default of its obligations. Buttermilk Towne Center's limited revocable license to collect and use the rents was to terminate automatically and without notice upon the occurrence of an Event of Default. Bank of America recorded the Mortgage and Assignment in the real property records in Kenton County, Kentucky.

Buttermilk Towne Center's obligations under the Financing Agreement matured on December 31, 2009. Buttermilk Towne Center's failure to repurchase the bonds from Bank of America on or by December 31, 2009, is an Event of Default under the Financing Agreement.

Buttermilk Towne Center filed a chapter 11 Bankruptcy Petition on April 28, 2010. Contemporaneously with the petition, Buttermilk Towne Center filed an Expedited Motion for Interim Use of Cash Collateral seeking to place $260,000 in escrow for payment of professional fees. Bank of America filed an objection to use of the rents as cash collateral, arguing that the rents are not property of the estate due to the Assignment.

The bankruptcy court held that the rents are property of the bankruptcy estate and constitute cash collateral and scheduled a final hearing date for a determination regarding adequate protection. (“Rent Order” May 18, 2010 Memorandum Opinion and Order, Case No. 10–21162, Dkt. # 66). Bank of America filed a timely appeal of the May 18, 2010 rent order.

On May 17, 2010, Bank of America filed a second objection to the use of cash collateral arguing that it is not adequately protected because there is no equity cushion in the property and it already has a lien in the rents.

The bankruptcy court conducted an evidentiary hearing on May 25, 2010, regarding the issue of adequate protection. Donald Feathers, an independent contractor for a property management company which manages the Debtor's operations, testified that future rents will exceed the amount needed to pay the Bank's debt in full. The bankruptcy court ruled that Bank of America is adequately protected and approved the cash collateral order. (June 29, 2010 Order) ¹

Bank of America has appealed the June 29, 2010, order. Bank of America argues that Sixth Circuit case law requires an equity cushion in single asset real estate cases to support a finding of adequate protection. Bank of America asserts that since there is no equity cushion, the order finding that Bank of America is adequately protected should be reversed.

On July 30, 2010, Buttermilk Towne Center filed its second motion for use of cash collateral seeking permission to continue to use cash collateral to pay expenses, including professional fees. Bank of America objected to the second cash collateral motion for the same reasons stated in its two previous objections.

On August 10, 2010, the bankruptcy court entered the second cash collateral order overruling Bank of America's objections for the reason stated in the May 18, 2010 Memorandum Opinion and Order and the June 29, 2010 Memorandum Opinion and Order. Bank of America filed a timely appeal of the August 10, 2010 order.

IV. DISCUSSION

A.

The first issue arises from the May 18, 2010 Memorandum Opinion and Order (Dkt. # 66). In its initial objection to the use of cash collateral, Bank of America asserted that the rents were not property of the estate due to an “absolute assignment.” The bankruptcy court overruled Bank of America's objection, finding that the rents were property of the estate. What constitutes property of the estate is determined by state law. Butner v. United States, 440 U.S. 48, 54, 99 S.Ct. 914, 915, 59 L.Ed.2d 136 (1979).

Bank of America argues that due to the Assignment of Rents from Buttermilk Towne Center, Bank of America owns the rent proceeds and they are not property of the estate. Bank of America concedes that there is no Kentucky law directly on point, but asserts that under Kentucky law contracts must be enforced to effectuate the intent of the parties and that it was the parties' intent that Bank of America have an absolute assignment of the rents. Bank of America relies on Jason Realty, L.P. v. First Fidelity Bank, N.A. (In re Jason Realty, L.P.), 59 F.3d 423 (3rd Cir.1995).

Buttermilk Towne Center asserts that the Assignment of Rents was for security purposes and that the rents are property of the bankruptcy estate pursuant to both state and federal law. Buttermilk Towne Center argues that none of the case law cited by Bank of America is directly on point or applies Kentucky law. Additionally, Buttermilk Towne Center asserts that the rents are property of the estate pursuant to § 541(a)(6).²

The bankruptcy court agreed with Buttermilk Towne Center. Applying Kentucky law, the...