In re Landing Associates, Ltd.

• Decision Date: 28 November 1990
• Docket Number: Bankruptcy No. 90-51358-C.
• Citation: 122 BR 288
• Parties: In re the LANDING ASSOCIATES, LTD., Debtor.
• Court: U.S. Bankruptcy Court — Western District of Texas

122 B.R. 288 (1990)

In re the LANDING ASSOCIATES, LTD., Debtor.

Bankruptcy No. 90-51358-C.

United States Bankruptcy Court, W.D. Texas, San Antonio Division.

November 28, 1990.

COPYRIGHT MATERIAL OMITTED

Adrian M Overstreet, Overstreet, Winn & Edwards, Austin, Tex., for debtor.

H. Rey Stroubbe, III, Akin, Gump, Strauss, Hauer & Feld, Houston, Tex., for creditor, USAT.

OPINION

LEIF M. CLARK, Bankruptcy Judge.

CAME ON for hearing the Motion of The Landing Associates, Ltd., for determination of the allowed secured claim of a secured creditor, United Savings Association of Texas, F.S.B., by determining the value of the secured creditor's interest in the subject property pursuant to 11 U.S.C. § 506(a). At the hearing, this court requested supplemental briefs regarding the issues relating to the value of the USAT's interest in the real property and the rents. Upon consideration thereof, the court makes the following findings and conclusions.

FACTUAL BACKGROUND

The Landing Associates, Ltd. ("Landing" or "Debtor" or "Debtor in Possession") owns a 216-unit apartment complex ("real property") located on a 7.86 acre tract in San Antonio, Bexar County, Texas. The real property is subject to United Savings Association of Texas, F.S.B.'s ("USAT"'s) lien in the original principal amount of $4,888,000.00. USAT's lien consists of a Deed of Trust and Security Agreement, a UCC-1 Financing Statement and a Lease and Rental Assignment, securing the real property, the personal property and the rents from the real property ("the subject property") respectively. All of the documentation was executed in 1982. The Deed of Trust and Security Agreement and the Lease and Rental Assignment were filed in the Official Public Records of Real Property in Bexar County. The personal property covered by USAT's lien has an undisputed value of $20,000.00.

On May 2, 1989, the Debtor filed bankruptcy under Chapter 11 of the Bankruptcy Code.¹ Prior to the filing date, USAT held an undisputed valid security interest in the subject property. On May 26, 1989, USAT filed a "Notice of Perfection of Security Interest in Rents in Lieu of Seizure of Property or Commencement of Action" under Section 546(b). USAT's Proof of Claim lists its debt (on the subject property) owed on petition date as $5,242,988.81 and claims that interest accrues at the per diem contract rate of $2,378.95.

On August 13, 1990, this court entered an Order Authorizing the Use of Cash Collateral in which this court found that USAT had tacitly consented to the use of cash collateral prior to that date. The Debtor in Possession has utilized post-petition rents to pay the operating expenses of the apartment complex. The parties have stipulated that the cash on hand after expenses ("net cash collateral") is $784,971.48 and that such amount is increasing with net rents accruing each month. Not included in the expenses paid out of the gross rents are the property taxes for 1990. The Landing has been escrowing monies to pay the taxes when they become due. USAT, post-petition, unilaterally prepaid the 1990 property taxes.

The issue before this court is the value of USAT's secured claim as determined in accordance with Section 506(a) for the purpose of confirmation.

DISCUSSION

I. Outline of the Arguments

In determining the value of USAT's interest in the real property for plan purposes, the Debtor proposes that hypothetical costs of sale should be deducted from the total value of the real property. Secondly, the Landing contends that USAT's interest in rents² should not be valued apart from the real estate, arguing that the value of the rents has already been subsumed in the appraised value of the real property. Additionally, the Debtor proposes that the value of USAT's interest in the subject property should be determined as of the petition filing date, and that it should be allowed to use the net cash collateral generated since that date to pay down USAT's date-of-filing secured claim as part of its plan. The Debtor also contends that, because USAT is an undersecured creditor, USAT is not entitled to receive the net rents as adequate protection, as the real property is not declining in value.³

USAT counters that this Section 506(a) action is in effect an attempt to determine the validity or extent of USAT's interest in rents and that such a challenge can only be asserted in an adversary proceeding. Alternatively, USAT argues that its interest in rents should be separately valued, independent of and in addition to the value of USAT's interest in the real and personal property to arrive at USAT's total allowed secured claim. This would make USAT an oversecured creditor, entitling it to recover its costs, attorneys' fees and post-petition interest.

II. Scope of the 506(a) Valuation Hearing

Section 506(a) and Bankruptcy Rule 3012 provide the mechanism for arriving at the valuation of a secured creditor's interest in property, and by extension, for the setting of the creditor's allowed secured claim. 11 U.S.C. § 506(a); R.Bankr.P. 3012; In re Saunders, 112 B.R. 844 (Bankr.W.D.Tex.1990). Generally, the validity, priority and extent of a security interest are determined in an adversary proceeding. Bankr.R. 7001. The Landing has not objected to USAT's Proof of Claim nor has the Landing challenged the validity of USAT's claim to its interest in the real property, the post-petition/post-notice rents from the real property or the personal property. The Landing specifically has not challenged either the creation of USAT's security interest by virtue of the rent assignment or the "perfection" of that interest via the Section 546(b) notice. By the same token, USAT has not claimed entitlement to those rents collected by the debtor post-petition but prior to the Section 546(b) notice. The validity of USAT's interest in rents is thus not here under attack.

The thrust of the Landing's motion is that USAT's interest in the post-petition/post-notice rents has no value over and above USAT's interest in the real and personal property. That issue is so intertwined with the overall valuation issue that no party with an interest can legitimately claim prejudice. As noted by Judge Mahoney in C.M. Turtur Investments,

The issues the parties raise normally are determined in an adversary proceeding . . . I am determining the issues raised by the intervenors for the following reasons: (1) the due process requirement of notice to interested parties is not a factor here . . . (2) no one is prejudiced by my determination of these issues in this contested matter format . . . (3) a hearing of these issues . . . is a more efficient use of the judicial system than requiring a separate and distinct adversary proceeding (4) the principal issues to be decided are so related to the collateral issues that a duplication of efforts is avoided . . .

In re C.M. Turtur Investments, Inc., 93 B.R. 526, 528 (Bankr.S.D.Tex.1988), aff'd, 883 F.2d 35 (5th Cir.1989). The characterization of USAT's interest in rents is far from "adversarial." To the contrary, the court is merely called upon to define the legal nature of the asset to be valued, an inquiry little more remarkable than deciding whether, say, a fixture is realty or personalty. The question does not go to the validity, priority or extent of USAT's interest in property. USAT's Rule 7001 argument is rejected.

III. Valuation of USAT's Interest

A. Timing of the Valuation

Under Section 506(a), a creditor has an allowed secured claim to the extent of the value of such creditor's interest in such property. 11 U.S.C. § 506(a). Courts determine value on a case-by-case basis in light of the purpose of the valuation and the proposed disposition or use of the subject property. S.Rep. No. 989, 95th Cong., 2d Sess. 68 (1978) reprinted in 1978 U.S. Code Cong. & Admin.News 5787, 5854.

The Landing asserts that, because the purpose of the hearing is to determine the amount of USAT's allowed secured claim, such valuation should be made as of the date of the petition filing. See In re Reddington/Sunarrow Ltd. Partnership, 119 B.R. 809 (Bankr.D.N.M.1990). Argues the debtor, any value in the interest in rents which accumulates post-petition would therefore not be added to this allowed secured claim.

The case upon which the Landing relies, however, addressed valuation in the context of allocating adequate protection payments. See id. It might well be appropriate to value property as of the filing date in order to evaluate whether a creditor's interest has been adequately protected. After all, the function of adequate protection is to maintain the value of the creditor's interest in the property as of the filing date. See United Savings Association of Texas v. Timbers of Inwood Forest Assoc., Ltd., 484 U.S. 365, 372-73, 108 S.Ct. 626, 630-31, 98 L.Ed.2d 740 (1988). When the valuation is for purposes of plan confirmation, however, value must be determined as of that date. See In re Seip, 116 B.R. 709, 710-711 (Bankr.D.Neb.1990); Matter of Kain, 86 B.R. 506, 516 (Bankr.W.D. Mich.1988).

The structure of the statutory provision associated with the treatment of a secured claim in a plan supports this conclusion. A plan may be confirmed over the protestations of a secured creditor provided that the plan provides

(i) (I) that the holders of such claims retain the liens securing such claims, . . . to the extent of the allowed amount of such claims; and

(II) that each holder . . . receive on account of such claim deferred cash payments totaling at least the allowed amount of such claim, of a value, as of the effective date of the plan, of at least the value of such holder\'s interest in the estate\'s interest in such property . . .

(ii) for the sale . . . of any property that is subject to the liens securing such claims, free and clear of such liens, with such liens to attach to the proceeds of such sale . . .

(iii) for the realization by such holders of the indubitable equivalent of such

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