In re Lexington Hospitality Grp., LLC
| Decision Date | 01 November 2017 |
| Docket Number | CASE NO. 17-51568 |
| Parties | IN RE LEXINGTON HOSPITALITY GROUP, LLC DEBTOR |
| Court | U.S. Bankruptcy Court — Eastern District of Kentucky |
This matter is before the Court on the Debtor's Emergency Motion to Extend Cash Collateral Use [ECF No. 110]. The Debtor Lexington Hospitality Group, LLC seeks approval to use cash collateral pursuant to 11 U.S.C. § 363(c)(2)1 because it is unable to reach an agreement with the creditor, PCG Credit Partners, LLC ("PCG"). The Court held a preliminary hearing on October 2, 2017 [ECF No. 120] and set the matter for an evidentiary hearing [ECF No. 122]. An evidentiary hearing was conducted on October 19, 2017 [ECF No. 143]. The parties were ordered to further supplement the record [ECF No. 150] and the matter was submitted for a decision.
For the reasons stated herein, the Hotel Revenue (as defined herein) is not cash collateral for which the Debtor must seek consent or approval under § 363(c)(2). Therefore, the Debtor's Motion is granted.
The Debtor borrowed $6,150,000.00 at 12% interest for a period of 15 months pursuant to a loan agreement with PCG dated September 28, 2015 [Proof of Claim No. 6] ("Note") toacquire the Lexington Clarion Hotel and Conference Center at 5532 Athens Boonesboro Road, Lexington, Kentucky ("Hotel"). The Note is secured by the Mortgage and Security Agreement dated September 28, 2015, of record in Mortgage Book 8397, Page 41, in the Fayette County, Kentucky, Clerk's Office. [Proof of Claim No. 6; ECF No. 154-1 ("Mortgage").] The Mortgage includes a provision that assigns the Debtor's interests in leases and rents. [Mortgage, ¶¶ 1.01.f and 1.02.]
The Note is also secured by the All-Assets Security Agreement dated September 28, 2015, by and between PCG and the Debtor. [Proof of Claim No. 6; ECF No. 155-2 ("Security Agreement").] The Security Agreement recites the Debtor's grant of a security interest to PCG in all its collateral. [Security Agreement, Art. III.] Collateral, as defined in the Security Agreement, includes, but is not limited to, "Accounts" and "General Intangibles, including payment intangibles." [Id., Art. II(d).]
PCG filed Financing Statement No. 2015-2793238-2.01 with the Kentucky Secretary of State on October 13, 2015, to perfect its interest in the Collateral. [Proof of Claim No. 6; ECF No. 155-3 ("Financing Statement").] The Financing Statement begins by indicating that PCG has a security interest in:
All furnishings, equipment, machinery, goods, inventory, accounts, deposits, contracts, furniture, fixtures, leasehold improvements, buildings, tangible personal property, and all other property (excluding removable personal property owned by tenants) now owned or hereafter acquired by Debtor for use in Debtor's business on the property located at 5532 Athens-Boonesboro Rd. Lexington, KY 40509 (the "Real Property"), and all improvements thereon, . . .
The Financing Statement thereafter becomes more specific. It provides a general list of "chattels or goods" covered, including the proceeds thereof, a reference to the Mortgage and Security Agreement and a specific list of tangible personal property used at the Hotel. TheFinancing Statement does not identify "general intangibles" or "payment intangibles" in its description of the Collateral.
The Debtor defaulted on the Note and entered into the Forbearance Agreement with PCG dated February 9, 2017. [Proof of Claim No. 6.] On July 5, 2017, PCG notified the Debtor of its default under the Forbearance Agreement. [July 5, 2017 Letter, ECF No. 19-2.] PCG subsequently sought the appointment of a receiver in state court, but the Debtor filed bankruptcy before the request was addressed.
The Debtor filed a chapter 11 petition on August 3, 2017. PCG filed Proof of Claim No. 6 on September 15, 2017, in the amount of $8,633,153.10, with a default interest rate of 36%. PCG indicates the claim is secured by all of the Debtor's assets based on a "Mortgage/UCC Financing Statement." The Loan Agreement, Note, Mortgage, Security Agreement, Financing Statement, and Forbearance Agreement are attached to the Proof of Claim.
The Debtor sought permission to use cash collateral according to a proposed budget for August 2017 immediately upon filing its chapter 11 petition. [ECF No. 8 ("First Cash Collateral Motion").] The First Cash Collateral Motion indicates PCG may claim an interest in cash collateral. [Id.] The Debtor also filed the Notice of Filing Preliminary Evidence of Liens in Cash Collateral that attached the Financing Statement. [ECF No. 17.] An amended budget was filed on August 4, 2017, prior to the hearing on the First Cash Collateral Motion. [ECF No. 16.]
The Debtor and PCG entered into the Agreed Order for Interim Use of Cash Collateral [ECF No. 54] ("First Cash Collateral Order") based on another amended budget [First Cash Collateral Order, Exhibit A] that provided for a $5,000.00 adequate protection payment to PCG.The parties then shifted their focus to PCG Credit Partners, LLC's Motion to Dismiss [ECF No. 19], which was denied by the Memorandum Opinion and Order entered on September 15, 2017. [ECF No. 85.]
On August 23, 2017, the Debtor filed the Emergency Motion to Modify Cash Collateral Budget and Extend Cash Collateral Use. [ECF No. 56 ("Second Cash Collateral Motion").] The Debtor sought permission to continue cash collateral use into September 2017 based on an amended budget for August and September 2017 attached as Exhibit A to the Second Cash Collateral Motion. The Debtor amended the budget on August 24, 2017. [ECF No. 62.]2
PCG did not file an objection to the budget attached to the Second Cash Collateral Motion or its August 24 amendment. PCG did raise concerns about the Debtor's failure to share financial information at the hearing on August 29, 2017. PCG also suggested the numerous amendments raised doubts about the accuracy of the Debtor's budget. The Debtor attributed the problems to the absence of the person responsible for its account at the Debtor's bookkeeping company.
The Second Cash Collateral Motion was granted on an interim basis at the August 29 hearing. [ECF No. 69.] An order approving the Second Cash Collateral Motion was tendered on September 26, 2017, and entered the next day. [ECF No. 111 ("Second Cash Collateral Order").] The Second Cash Collateral Order indicates PCG had seen the order before it was tendered.3
On September 8, 2017, PCG filed the Emergency Motion to Prohibit Use of Cash Collateral and/or for Related Relief. [ECF No. 79.] PCG complained that the Debtors had submitted multiple budgets to PCG, again calling into question the accuracy of the information provided. Among other reasons, PCG argued that the budgets were not accurate because they failed to include income and expenses from the operation of a Bennigan's restaurant on site. [Id.]
A hearing on PCG's Motion to Prohibit Use of Cash Collateral was held on September 11, 2017. The Debtor's counsel conceded some inaccuracies, but argued the Debtor's revised budget, filed the same day, addressed the problems. [ECF No. 81.] The Debtor orally moved to extend cash collateral use and a tendered order based on the September 11 modified budget was entered on September 20, 2017. [ECF No. 90 ("Third Cash Collateral Order").] The Third Cash Collateral Order indicates that PCG had seen the order before it was tendered. A separate Order was entered granting in part and denying in part PCG's request to prohibit cash collateral use. [ECF No. 106.] The Debtor was also ordered to provide a full and complete accounting of all cash and cash collateral received and used by the Debtor from May 1, 2017, through September 13, 2017. [Id.]
The accuracy of the Debtor's budgets is not the only issue driving the dispute over cash collateral. PCG also objects to the Debtor's use of cash collateral to pay professional fees. On September 18, 2017, PCG filed a Limited Objection [ECF No. 88] to Debtor's Emergency Motion for Interim and Final Approval of Debtor's Application to Employ DelCotto Law Group PLLC as Its General Counsel Effective as of the Petition Date. [ECF No. 13.] PCG's objection was denied because the Debtor's counsel was not seeking immediate approval of a carve-out or escrow; counsel was only disclosing the likelihood of a future request. [ECF No. 135.]
The Debtor did, in fact, propose an escrow for legal fees in the Emergency Motion to Extend Cash Collateral Use filed on September 26, 2017. [ECF No. 110 ("Fourth Cash Collateral Motion").] The Debtor sought cash collateral use through October 31, 2017, according to a budget attached as Exhibit A, and later amended on September 29, 2017. [ECF No. 117.] The proposed budget included a $5,000.00 adequate protection payment to PCG and $25,000.00 for "Legal Fees - escrow/subject to court approval." The Debtor represented in the Fourth Cash Collateral Motion that it was unable to reach an acceptable carve-out arrangement for professional fees and expenditures necessary to avoid immediate and irreparable harm to the Debtor's estate.
A hearing on the Fourth Cash Collateral Motion was held on October 2, 2017. PCG continued to raise concerns regarding the accuracy of the financial information provided. PCG also continued to argue that the Debtor cannot use its cash collateral to pay the Debtor's post-petition legal fees without PCG's consent. The matter was set for an evidentiary hearing on October 19, 2017. [ECF No. 122.]
The Court held an evidentiary hearing on the Debtor's request to extend use of cash collateral on October 19, 2017. [ECF No. 143.] The Debtor's representative, Kenneth Moore, testified regarding the Debtor's finances. Also, the Debtor reiterated its claim that PCG does not have a perfected security interest in the cash collateral. [See ECF No. 127.] The Debtor believes that PCG's failure to properly...
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