In re Green Corp., Bankruptcy No. 92-10903.

• Decision Date: 18 May 1993
• Docket Number: Bankruptcy No. 92-10903.
• Citation: 154 BR 819
• Parties: In re The GREEN CORPORATION, Debtor. CASCO NORTHERN BANK, N.A., Movant, v. The GREEN CORPORATION, Respondent.
• Court: U.S. Bankruptcy Court — District of Maine

154 B.R. 819 (1993)

In re The GREEN CORPORATION, Debtor CASCO NORTHERN BANK, N.A., Movant, v. The GREEN CORPORATION, Respondent.

Bankruptcy No. 92-10903.

United States Bankruptcy Court, D. Maine.

May 18, 1993.

Thomas M. Brown, Eaton, Peabody, Bradford & Veague, Bangor, ME, for debtor/respondent.

George J. Marcus, Pierce, Atwood, Scribner, et al., Portland, ME, for Casco Northern Bank/movant.

MEMORANDUM OF DECISION

JAMES B. HAINES, Jr., Bankruptcy Judge.

INTRODUCTION

A bankruptcy court in this district recently held that motel room revenues were not "rents" within the meaning of Bankruptcy Code § 552(b)¹ and assignment of rent clauses executed in favor of a secured lender by four Chapter 11 debtors. In re Majestic Motel Assoc., 131 B.R. 523 (Bankr.D.Me.1991). Holding reservations about Majestic Motel's rule, and having failed to reach an accommodation with the debtor in this case, Casco Northern Bank, N.A. ("Casco"), has moved to limit the Green Corporation's unconditioned, postpetition use of room receipts from motel operations.

Casco's motion asks this court to hold that motel room receipts constitute "proceeds, product, offspring, rents, or profits" under § 552(b); are within the scope of the debtor's assignment of leases and rents to it; are "cash collateral" under § 363(a); and, therefore, are subject to the cash collateral use restrictions of § 363(c)(2). I conclude, however, that Majestic Motel is good law, that its rule applies here, and that Casco's motion must be denied.²

FACTS

The Green Corporation filed its voluntary Chapter 11 petition on December 21, 1992. Its assets include a motel, including a restaurant and bar, known as The Heritage Motor Inn (the "Heritage"), in Millinocket, Maine. The debtor also owns an adjacent building, leased to a commercial tenant, unrelated to the motel operation.

Casco was the debtor's principal prepetition lender. On June 15, 1987, it loaned the debtor $1,300,000.00. The 1987 loan is secured by real and personal assets associated with the Heritage under a loan agreement, a mortgage and security agreement, each dated June 15, 1987.³ On September 15, 1988, Casco advanced an additional $350,000.00.⁴

In addition to conveying a mortgage on the debtor's Millinocket real estate⁵ and granting a lien on substantially all of the debtor's personal property at the Heritage,⁶ the 1987 mortgage conveys and assigns certain revenues to Casco to secure repayment:

As further security for payment of the indebtedness and performance of the obligations, covenants and agreements secured hereby, Grantor hereby transfers, sets over and assigns to Grantee:

A. All rents, profits, revenues, royalties, bonuses, rights and benefits under any and all leases or tenancies now existing or hereafter created of the premises or any part thereof, and all rights against guarantors of any leases with the right to receive and apply the same to said indebtedness, and Grantee may demand, sue for and recover such payments, but shall not be required to do so; provided, however, that so long as grantor is not in default hereunder, the right to receive and retain such rents, issues and profits is reserved to Grantor. To carry out the foregoing, Grantor agrees (1) to execute and deliver to Grantee such conditional assignments of leases and rents applicable to the mortgaged premises as the Grantee may from time to time request, while this mortgage and the debt secured hereby are outstanding, and further (2) not to cancel, accept a surrender of, reduce the rentals under, anticipate any rentals under, or modify any such leases or tenancies or consent to an assignment or subletting thereof, in whole or in part, without Grantee\'s written consent. Nothing herein shall obligate the Grantee to perform the duties of the Grantor as landlord or lessor under any such leases or tenancies, which duties Grantor hereby covenants and agrees to well and punctually perform.

Id. at 2.

The debtor has accumulated substantial funds from its postpetition motel operations after paying ordinary expenses. Although it agrees with Casco that the bank has valid, perfected liens on all of the debtor's prepetition assets, it asserts that Casco's liens do not continue in motel revenues generated postpetition.⁷

DISCUSSION

1. Section 552 and Rents: Identifying the Issue.

Section 552(a) establishes the general rule that prepetition security interests, even "floating" liens and liens with "after acquired property" provisions, do not extend to property acquired by the debtor after the bankruptcy filing. Sec. 552(b) provides a limited exception to the general rule for "proceeds, product, offspring, rent or profits" of encumbered property.⁸ See In re Cross Baking Co., Inc., 818 F.2d 1027, 1029-30 (1st Cir.1987).

Section 552(b) expressly directs that the extent to which the security interest reaches such property is governed by the security agreement's terms and applicable non-bankruptcy law, in this case the law of Maine. Philip Morris Capital Corp. v. Bering Trader, Inc. (In re Bering Trader, Inc.), 944 F.2d 500, 502 (9th Cir.1991) (applying Washington law); Unsecured Creditors Comm. v. Marepcon Fin. Corp. (In re Bumper Sales, Inc.), 907 F.2d 1430, 1437 (4th Cir.1990) (collecting cases). See 4 Lawrence P. King, Collier on Bankruptcy ¶ 552.02 at 552-8 (1993). See generally Butner v. United States, 440 U.S. 48, 56, 99 S.Ct. 914, 918, 59 L.Ed.2d 136 (1979) (property rights of debtor and creditors are defined by pertinent state law).⁹

Under § 363(o)(2), the burden is on Casco, as the party asserting that its lien survives the petition, to prove that it is so.¹⁰

The "security agreement" in question is the assignment of rents provision within the mortgage granted Casco by the debtor. Thus, the issue is, assuming that they are within the contractual assignment,¹¹ whether motel room revenues constitute "proceeds, product, offspring, rents or profits of" the debtor's Millinocket real estate under Maine law.

2. The Majestic Motel Holding.

In Majestic Motel, Judge Goodman considered assignment of rent clauses in mortgages granted to the secured lender by three debtors that operated motels and one that ran a seasonal campground. 131 B.R. at 524-25. There was no dispute that the bank held a valid, perfected interest in "rents and profits" from the debtors' real estate. Id. at 525. Looking to state law, the court concluded that motel room revenues and receipts from transient campers for temporary campsite use were not "rents" or "profits" under Maine law. Id. "Rent," it concluded means "payments on behalf of a tenant for his interest in real estate." Id. Focusing on the language of § 552(b), Majestic Motel distinguished between revenues generated by the underlying real estate (e.g., "rents and profits") and those that flow from the operation of a business on the property. Id. at 526. It observed that, taken together, "rents and profits" does not include "business profits arising out of the operation of the mortgaged premises not rented to others but occupied and used by the mortgagor." Id. (quoting Detroit Trust Co. v. Detroit City Serv. Co., 262 Mich. 14, 42-43, 247 N.W. 76 (1933)).

3. Casco's Contentions:

Casco urges this court to look to the "economic reality" of its relation to the debtor and to the intent of the parties in negotiating a comprehensive security interest in all motel assets, real and personal. It contends that doing so will betray the unsoundness of Majestic Motel's rule and lead to a contrary conclusion. The bank suggests that Majestic Motel need not be repudiated but, rather, that there is room to "refine" its rule to take into account the fact that motel room revenues are composed in substantial part of charges derivative of the use of real property so as to constitute, in some portion, "rents." It cites two recent cases, neither of which was available when Majestic Motel was decided, in support of its position.

In In re S.F. Drake Hotel Assoc., 131 B.R. 156 (Bankr.N.D.Cal.1991), aff'd 147 B.R. 538 (N.D.Cal.1992), the bankruptcy court held that the lender held a continuing, postpetition security interest in revenues from hotel operations. The crux of its holding was the court's view that, at bottom, hotel room revenues are predominantly a function of the provision of shelter on, or in, the debtor's real property. Thus, the substantial services a hotel provides are, in essence, adjunctive:

Any services that a hotel provides are incidental to room occupancy. The hotel guest\'s primary objective is shelter. That shelter is provided by the land and improvements of the hotel. A hotelier cannot operate a hotel without the real property and improvements, no matter what the extent of the services provided.

131 B.R. at 159. The court accepted the "logical appeal" of the propositions that revenue generated from any occupancy of real property for "residential" use is rent and that the character of the revenue should not be determined by the length of the tenant's stay or by the level of incidental services provided. Id. at 160.

The S.F. Drake court found no reason why hotel room revenues should be viewed as "accounts," declaring that "the conclusion that room revenue is not rent generated by real property is counterintuitive." Id. It stated that "the common understanding of rent as compensation for use of property," taken together with the "knowledge that a lodger primarily seeks shelter, not service" leads to the conclusion that room revenue is "rent" in the real property law sense. Id. at 160-61. Finally, the court observed that the parties intended that the lender be given a lien on virtually all of the debtor's assets, including revenue from the hotel, and defined "rents" broadly in the security documents to encompass "all economic benefits" from the use or occupancy of the hotel. "With the intent of the parties so clearly stated, no reason exists to use the term `account' to defeat their intent." Id.

Casco also...