In Re Dbsi Inc.

• Decision Date: 12 May 2010
• Docket Number: No. 08-12687(PJW).,08-12687(PJW).
• Citation: 432 B.R. 126
• Parties: In re DBSI, INC., et al., Debtors.
• Court: U.S. Bankruptcy Court — District of Delaware

432 B.R. 126

In re DBSI, INC., et al., Debtors.

No. 08-12687(PJW).

United States Bankruptcy Court D. Delaware.

May 12, 2010.

William R. Firth, III, Gibbons P.C., Wilmington, DE, Geraldine E. Ponto, Gibbons P.C., Newark, NJ, for Trustee, James R. Zazzali.

L. Jason Cornell, Fox Rothschild, LLP, Wilmington, DE, Terry C. Copple, Alex P. McLaughlin, Davison, Copple, Copple & Copple, LLP, Boise, ID, for Bank of the Cascades.

Donald J. Detweiler, Sandra G.M. Selzer, Dennis A. Meloro, Greenberg Traurig, LLP, Wilmington, DE, Michael H. Goldstein, Nathan A. Schultz, Adam M. Starr, Santa Monica, CA, for Official Committee of Unsecured Creditors.

MEMORANDUM OPINION

PETER J. WALSH, District Judge.

This opinion is with respect to four motions brought by Bank of the Cascades (the “Bank”), as Indenture Trustee for the holders of bonds issued by DBSI 2001A Funding Corporation, DBSI 2001B Funding Corporation, and DBSI 2001C Funding Corporation (together, the “Funding Corporations”). Three of the motions seek entry of orders, pursuant to 11 U.S.C. § 362, lifting the automatic stay to allow the Bank to foreclose on its alleged collateral and exercise state law remedies (the “Lift Stay Motions”). (Doc. 3562, 3564, and 3567.) The remaining motion seeks a declaratory judgment that the Bank's actions with respect to seizure of funds in certain accounts do not violate the automatic stay (the “Declaratory Judgment Motion”). (Doc. # 4371.) For the reasons discussed below, I will deny the Lift Stay Motions and the Declaratory Judgment Motion.

BACKGROUND

In 2001, Farmers & Merchant State Bank (“F & M”), as Indenture Trustee, entered into a separate indenture agreement (collectively, the “Indentures”) with each of the Funding Corporations. (Doc. # 4566, p. 3.) The Indentures contemplated that the Funding Corporations would issue bonds totaling $25,000,000 (the “Bonds”). (Doc. # 4566, p. 3.)

The Indentures also contemplated that the funds raised through the Bonds' sales would be loaned (the “Bond Loans”) by the Funding Corporations to DBSI Realty Corporation (“DBSI Realty”). Pursuant to the virtually identical terms of each Indenture, F & M was to create several separate trust accounts for the benefit of the bondholders to capture various amounts as they became due under the Indentures and the Bond Loans. (Doc. # 4371, ¶ 10.) One such account was the Bond Proceeds/Loan Repayment Account where F & M was to deposit the proceeds from the sale of the Bonds and repayment of the Bond Loans. (Doc. # 4371, ¶ 10.)

In 2001, UCC-1 financing statements related to the Indentures (the “Indenture Financing Statements”) were filed with the Idaho Secretary of State. (Doc. # 4371, ¶ 10.) The Indenture Financing Statements listed each Funding Corporation as the debtor and F & M as the secured party. (Doc. # 4371, ¶ 10.) The collateral description in the Indenture Financing Statements included all of the relevant Funding Corporation's interest in:

(i) loans made to certain named DBSI partnerships or subsidiary partnerships that are 100% equitably owned and controlled by the named partnerships;

(ii) all collateral pledged by the named partnerships (or subsidiaries) for said loans;

(iii) all monies and securities held by F & M (later, the Bank) in any account created under the applicable Indenture;

(iv) all property transferred, mortgaged, pledged or assigned as security for payment or performance of certain named DBSI partnerships (or subsidiaries) under said loans or loan collateral agreements; and

(v) all income, revenue, issues, proceeds, revisions, substitutions, replacements, profits and proceeds of and from the foregoing.

(Doc. # 4566, ex. B.)

Investors ultimately purchased a total of $23,521,000 of the available Bonds and, on December 31, 2004, the Bond Loans were made. (Doc. # 4371, ¶ 5-6.) In connection with the Bond Loans, the Funding Corporations and DBSI Realty executed certain Term Loan Agreements and Fixed Interest Rate Promissory Notes, all dated December 31, 2004. (Doc. # 4566, p. 5.) As consideration for the Bond Loans, DBSI Realty executed security agreements (the “Master Lease Security Agreements”) that purported to grant each Funding Corporation a security interest in DBSI Realty's interest as lessee in certain master leases (the “Master Leases”). (Doc. # 4566, p. 5.) As described below, it appears that DBSI Realty was not a party to any of the Master Leases listed in the Master Lease Security Agreements. The Bond Loans were guaranteed by DBSI Housing, Inc. (later, DBSI, Inc. by virtue of a name change) (“DBSI Housing”). (Doc. # 4371, ¶ 7.)

The Master Lease Security Agreements were assigned to F & M (the “ Assignments”) on the same day that they were executed. (Doc. # 4371, ¶ 8.) Following a merger in 2006, the Bank succeeded to F & M's rights under the Assignments, as well as F & M's rights and duties as trustee under the Indentures. (Doc. # 4566, p. 6.)

The Bank has not alleged that UCC-1 financing statements for either the Master Lease Security Agreements or the Assignments were filed with any state agency. The Indenture Financing Statements, however, were amended in 2005 (the “Amended Financing Statements”). (Doc. # 4566, p. 6.) The Amended Financing Statements changed the name of the debtor from the individual Funding Corporations to “DBSI Group of Companies” and expanded the collateral description to include:

(i) loans made to DBSI Realty and evidenced by a promissory note from DBSI Realty to DBSI Group of Companies;

(ii) all collateral pledged by DBSI Realty for said loans;

(iii) all monies and securities held by F & M (later, the Bank) under the Indenture and all interest, profits, proceeds or other income derived therefrom;

(iv) all property transferred, mortgaged, pledged or assigned as security for payment or performance of DBSI Realty under said loans or loan collateral agreements; and

(v) all income, revenue, issues, proceeds, revisions, substitutions, replacements, profits and proceeds of and from the foregoing.

(Doc. # 4566, ex.B.)

The Master Leases

Prior to the execution of the Indentures and continuing thereafter, various DBSI-affiliated companies, as lessors, entered into Master Leases with other DBSI-affiliated companies, as lessees. (Doc. # 5078, ex. E-1-E-10.) DBSI Housing was often the lessee under the Master Leases, although in several instances other DBSI-affiliated companies were named as lessee. (Doc. # 5078, ex. E-1-E-10.) DBSI Realty was not a party to the relevant Master Leases. (Doc. # 5078, ex. E-1-E-10.) Nonetheless, by the Master Lease Security Agreements described above, DBSI Realty purported to convey security interests in various Master Leases to the Funding Corporations as collateral for the Bond Loans. (Doc. # 4566, p. 3.)

The Master Leases required the lessees to record memoranda of the Master Leases (the “Master Lease Memoranda”) in the real property records where the leased premises were located. (Doc. # 5078, ex. E-1, ¶ 34.) The recorded Master Lease Memoranda before the Court refer to specific Master Leases and provide the names of the lessors and lessees, but do not refer to F & M, the Bank, the Assignments, or security interests extrinsic to the Master Leases. (Doc. # 5078, ex. E-1-E-10.)

With the exception of base rent, each Master Lease contains substantially identical language, including provisions related to assignment and the lessor's lien rights. (Doc. # 5078, ex. E-1-E-10.) The Master Leases provide that the lessee (generally DBSI Housing) granted the lessor (a DBSI-affiliated company) a lien on all of the lessee's property on the leased premises and all sums collected from the lessee's sublesseeses. (Doc. # 5078, ex. E-1, ¶ 19.) The Master Leases do not, however, create or describe liens or security interests between parties other than the lessor and lessee.

The Debtors' Bankruptcy Filing and Post-Petition Events

On November 10, 2008 (the “Petition Date”), the above-captioned debtors and debtors-in-possession (the “Debtors”) filed voluntary petitions under Chapter 11 of Title 11 of the United States Code (the “ Bankruptcy Code”).

On November 12, 2008, the Bank issued notices of default to the Funding Corporations and DBSI Inc. (as successor to DBSI Housing) due to the Funding Corporations' failure to remit quarterly interest payments for October 2008. (Doc. # 4566, p. 6.)

On November 14, 2008, the Bank assumed control of the Bond Proceeds/Loan Repayment Accounts and applied the funds in such accounts to amounts the Bank alleged the Debtors owed it. (Doc. # 4371, ¶ 11.)

On November 21, 2008, the Office of the United States Trustee appointed an official committee of unsecured creditors (the “Committee”). (Doc. # 138.) On September 11, 2009, this Court entered an Order appointing James R. Zazzali as Chapter 11 trustee (the “Trustee”) for the Debtors' estates. (Doc. # 4375.)

On May 15, 2009, the Bank filed the Lift Stay Motions seeking relief from the automatic stay to foreclose on its alleged collateral and to exercise state law remedies. (Doc. 3562, 3564, and 3567.)

On September 10, 2009, the Bank filed the Declaratory Judgment Motion seeking an order from this Court holding that the Bank had not violated the automatic stay by exercising control over the funds in the Bond Proceeds/Loan Repayment Account. (Doc. # 4371.)

By the Lift Stay Motions, the Bank represented to this Court that it holds security interests in certain collateral, including the Funding Corporations' alleged interests in the Master Leases. (Doc. # 3567, ¶ 10.) The Bank further represented that such security interests are perfected by virtue of the filed Indenture Financing Statements. (Doc. # 3567, ¶ 10.) The Bank argues that relief from stay is necessary and appropriate because the Debtors have not made any payments under the Indenture since the Petition Date and allegedly have no equity in the collateral. (Doc. # 3567, ¶¶ 21-30.)

By the Declaratory Judgment Motion, the Bank asserts that the funds in the Bond Proceeds/Loan...