In re Kearney Hotel Partners

• Decision Date: 20 October 1988
• Docket Number: 87 B 10557 (HCB),Adv. No. 88-5639A.,Bankruptcy No. 87 B 10130 (HCB),87 B 10443 (HCB)
• Citation: 92 BR 95
• Parties: In re KEARNEY HOTEL PARTNERS, Akron South Hotel Partners, HPA Partners, Consolidated Debtors. KEARNEY HOTEL PARTNERS, Akron South Hotel Partners and HPA Partners as Debtors-in-Possession, Plaintiffs, v. Wallace A. RICHARDSON, Trustee Under Deed of Trust for Kearney Convention Center, Inc. Defendant.
• Court: U.S. Bankruptcy Court — Southern District of New York

92 B.R. 95 (1988)

In re KEARNEY HOTEL PARTNERS, Akron South Hotel Partners, HPA Partners, Consolidated Debtors KEARNEY HOTEL PARTNERS, Akron South Hotel Partners and HPA Partners as Debtors-in-Possession, Plaintiffs, v. Wallace A. RICHARDSON, Trustee Under Deed of Trust for Kearney Convention Center, Inc. Defendant.

Bankruptcy Nos. 87 B 10130 (HCB), 87 B 10443 (HCB), 87 B 10557 (HCB), Adv. No. 88-5639A.

United States Bankruptcy Court, S.D. New York.

October 20, 1988.

Law Offices of Robert L. Howard, New York City, by Robert L. Howard, for plaintiffs.

Stroock & Stroock & Lavan, New York City, by Fred S. Hodara, for defendant.

DECISION AND ORDER

HOWARD C. BUSCHMAN, III, Bankruptcy Judge.

By cross-motions for summary judgment, we are called upon to determine whether (i) a security interest in hotel room revenues in Nebraska is to be perfected under the Uniform Commercial Code or falls within the exemption of U.C.C. § 9-104(j) and (ii) whether a security interest in rents may be perfected after the filing of a bankruptcy petition pursuant to 11 U.S.C. § 546(b) and thereby escape avoidance under 11 U.S.C. § 544(a) even though the perfection would not relate back to a time pre-petition under applicable state law. We hold that the Nebraska courts would not apply U.C.C. § 9-104(j) to hotel room revenues principally because such revenues are not derived from the creation of an interest in property and because to hold otherwise in light of 11 U.S.C. § 546(b) adds considerable uncertainty to hotel financing. We further hold that 11 U.S.C. § 546(b) is to be interpreted to permit perfection only if the act of perfection relates back under applicable state law principally because the legislative history unequivocally so states.

I.

The Debtors, HPA Partners ("HPA"), Kearney Hotel Partners ("Kearney"), and Akron South Partners seek an order granting summary judgment on their complaint seeking to avoid, pursuant to § 544(a) of the Bankruptcy Code, 11 U.S.C. §§ 101 et seq. (1986) (the "Bankruptcy Code" or the "Code"), a pre-petition assignment of cash collateral of a Holiday Inn owned by Kearney in Kearney, Nebraska. By cross-motion, defendant Wallace A. Richardson, Trustee under a Deed of Trust for Kearney Convention Center, Inc., seeks summary judgment denying such relief and thereby establishing its entitlement to all such cash collateral except that attributable to sales of food and beverage and similar services. With respect to the two issues described above, the parties agree that the facts are not in dispute and the motions were limited to these two issues at the hearing held on September 23, 1988.¹

By a Deed of Trust with Security Agreement and Assignment of Leases and Cash Collateral (the "Deed of Trust") dated October 23, 1983 Oppenheimer HPA Partners (now known as "HPA Partners") granted to Kearney Convention Center, Inc. ("KCCI"), as seller, a purchase money security interest in a hotel operating in Kearney, Nebraska under the Holiday Inn trademark, together with the real property on which it is situated (the "Premises") and related fixtures, rents and proceeds.

Under the Deed of Trust, as security for all of the indebtedness evidenced by a promissory note or secured by the Mortgage, HPA Partners assigned all of the Cash Collateral derived from the property to KCCI (Deed of Trust Art. 4(c)). Cash Collateral is defined in Section 1.1(b) of the Deed of Trust as including "all rents, income, receipts, revenues, issues, profits, and other income of any nature now due or which may become due or to which Mortgagor may now or hereafter . . . become entitled to. . . ."

KCCI properly filed and recorded the Deed of Trust on October 28, 1983 in the Office of the Register of Deeds for the County of Buffalo, State of Nebraska, as required under Nebraska law for the perfection of an interest in realty. Neb.Rev. Stat. § 76-237 (Reissue 1981). Contemporaneous with the filing of the Deed of Trust, KCCI filed a Uniform Commercial Code financing statement (UCC-1) in the same office. KCCI, however, did not take the second step of filing a financing statement with the Office of the Nebraska Secretary of State that is necessary to perfect a security interest in personalty under Article 9 of the U.C.C.Neb.Rev.Stat. § 9-401 (Reissue 1980).

HPA defaulted, in the fall of 1986, on the obligations it owed to KCCI under the Deed of Trust and Note. The value of the Premises was, at the time of the default, and apparently remains inadequate to secure the debt owed to KCCI by HPA.

After HPA's default, KCCI sought to foreclose and noticed a non-judicial foreclosure sale for January 27, 1987. KCCI did not commence a judicial proceeding and seek the appointment of a receiver pursuant to Nebraska law. Neb.Rev.Stat. §§ 25-1081(2), -1082 (Reissue 1985). Before KCCI could consummate the foreclosure sale, HPA conveyed its interest in the Premises to a newly formed entity, Kearney Hotel Partners ("Kearney") on or about January 22, 1987.

Kearney filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code on January 26, 1987 in this Court. This case (87-B-10130) was later substantively consolidated, by court order entered on May 8, 1987, with the Chapter 11 cases filed by Akron South Hotel Partners on March 13, 1987 (87-B-10443) and by HPA Partners on March 27, 1987 (87-B-10557) (collectively the "Debtors" or "Plaintiffs"). The Debtors remained in possession of their properties and in operation of their businesses pursuant to Sections 1107 and 1108 of the Bankruptcy Code.

The Premises are subject to a senior lien held by the Equitable Life Assurance Society of the United States of America ("Equitable"). On or about April 23, 1987, Equitable filed a Motion for Relief From Automatic Stay Or in the Alternative For Adequate Protection pursuant to § 362(d) of the Code (the "Equitable Motion"). On consent of the Debtors and Equitable, this Court entered an order on May 11, 1987, directing, inter alia, that Kearney "shall deposit all cash receipts of the Premises whether heretofore or hereafter received, in a bank accounts separate from all other bank accounts of the Debtor," pending the completion of a consolidated preliminary and final hearing on the Equitable motion (the "Equitable Order").

KCCI served a Notice of Perfection of Lien Pursuant to Deed of Trust with Security Agreement and Assignment of Leases and Cash Collateral (the "Notice of Perfection") on August 27, 1987 pursuant to § 546(b) of the Bankruptcy Code. KCCI filed a Motion for Relief from the Automatic Stay, Sequestration of Cash Collateral and, in the Alternative, Adequate Protection on September 3, 1987.

The Debtors, KCCI and Equitable entered into a Stipulation and Order Regarding Adequate Protection and Related Matters (the "Stipulation"), on November 9, 1987 pursuant to which the Debtors agreed, inter alia, to pay KCCI adequate protection payments in respect of KCCI's alleged interest in the Premises. Since the question of whether KCCI had perfected an interest in hotel room revenues was disputed by the parties, the Stipulation further provided at paragraph 7 that the Equitable Order regarding the segregation of cash receipts generated by the hotel "shall remain in full force and effect and shall be deemed to be for the benefit of KCCI as well as of Equitable."

In this adversary proceeding, the complaint asserts that the KCCI's security interest in the cash collateral of the hotel is voidable pursuant to § 544(a) of the Bankruptcy Code and seeks judgment declaring that KCCI has no valid cash collateral lien upon the rents and profits of the Kearney Holiday Inn, or, alternatively, if KCCI is found to have such a lien, determining the amount thereof, and permitting the Debtors to use the remainder. In his answer, defendant denies that the KCCI lien is voidable and asserts counterclaims seeking judgment declaring (i) that it had a perfected and non-voidable lien on all of the cash collateral of the hotel and that (ii) the filing by KCCI of its § 546(b) notice served to effectuate KCCI's interest in the rents and profits to the extent that such interest was not previously fully perfected.

At issue here are the room receipts of the hotel and payments under a gas station lease and payments by the owner of vending and entertainment machines for rental of space at the hotel where the machines are located. KCCI does not claim an interest in the proceeds of food and beverage sales and telephone receipts, which it concedes are proceeds of personalty. It appears that room revenues amounted to $2,817,017.54, or approximately 83% of the hotel's gross income, from the date of the petition through July 31, 1988. The gas station lease and the vending/entertainment machine space rental apparently generated profits of $82,721.14 for the same time period, or approximately 3% of gross income.

II.

KCCI asserts that it has a valid, fully perfected and unavoidable security interest in the cash collateral of the Kearney Holiday Inn, including the revenues from the use of its hotel rooms, through having recorded the Deed of Trust and thereby perfecting an interest in realty under Nebraska law. It claims that the room revenues are the proceeds of an interest in realty, comparing these revenues to rents attributable to leases on residential or commercial property. In opposition, the Debtors maintain that the interest in the hotel room revenues is not an interest in realty, but rather an interest in personalty that must be perfected pursuant to Article 9 of the Nebraska Uniform Commercial Code. Accordingly, they argue that since KCCI failed to file a financing statement with the Nebraska Secretary of State, as is required to perfect an interest in personalty, KCCI has an unperfected security interest in the hotel room revenues.

The courts in Nebraska have not yet addressed the issue of whether a security interest in hotel room revenues is to be perfected under the U.C.C. or...