In re Morning Star Ranch Resorts, Bankruptcy No. 86 B 7192 C
| Decision Date | 17 September 1986 |
| Docket Number | Bankruptcy No. 86 B 7192 C,Adv. No. 86 M 798. |
| Citation | 64 BR 818 |
| Parties | In re MORNING STAR RANCH RESORTS, Debtor. Michael Dean CHAUSSEE, Plaintiff, v. MORNING STAR RANCH RESORTS COMPANY, Defendant. |
| Court | U.S. Bankruptcy Court — District of Colorado |
Joseph Genchi, Estes Park, Colo., for Morning Star Ranch Resorts Co.
Robert Duitch, Colorado Springs, Colo., for Michael Dean Chaussee.
THIS MATTER comes before the Court on the Plaintiff's Motion for Issuance of a Temporary Restraining Order. The facts indicate that the Debtor owns a motel/resort operation in Estes Park, Colorado, which he purchased in the fall of 1985. In order to make the purchase the Debtor borrowed the sum of $250,000 from Mr. Michael Dean Chaussee ("Plaintiff"). That loan is payable, with interest at the rate of 21%, on or before September 30, 1986. At the time that the loan was taken out the Debtor pre-paid interest to the extent of $25,000, but has made no interest payments on the note for several months. The note to the Plaintiff is secured by a deed of trust on the resort property which contains a standard provision giving Plaintiff the right, upon default, to have a receiver appointed to collect the rents and profits of the property. That provision of the deed of trust then provides:
All rents collected by lender or the receiver shall be applied, first, to payment of the costs of preservation and management of the Property, second, to payment due upon prior liens, and then to the same secured by this deed of trust.
The Debtor defaulted in his payments to the Plaintiff. Foreclosure was commenced and a state court receiver was appointed. Thereafter, the within Chapter 11 case was filed on August 7, 1986. Upon the filing of this case, the receivership was terminated and the property was returned to the Debtor.
Immediately after this case was filed the Plaintiff, through his counsel, filed a motion to dismiss or convert and for an order prohibiting use of cash collateral. A hearing was held before the Honorable Judge Patricia Clark, U.S. Bankruptcy Judge for the District of Colorado, who heard the matter, declined to hear the Debtor's motion to use cash collateral, and entered an order denying the Debtor the right to use cash collateral. Thereafter, Judge Clark recused herself from the case. The instant adversary proceeding was filed on September 3, 1986. The complaint, and the motion for a restraining order, allege that the Debtor has, in fact, continued to utilize cash collateral in violation of the mandate of Judge Clark. The Plaintiff seeks a turnover of all funds collected, both in the past and any rents or profits collected in the future, as well as damages for any misuse of cash collateral in the interim.
The evidence produced at the hearing on the temporary restraining order indicates that the Debtor corporation is owned by Mr. Robert C. Bialk. Mr. Bialk and his wife, as employees of the Debtor, have operated the resort property since it was purchased by the Debtor. They have provided essentially all of the services at the resort, including the maid service, taking reservations, maintenance, laundry, etc., except for hiring temporary help when such was necessary. For this, they each received a salary of $500 a month. Since this case was filed, and notwithstanding Judge Clark's order, the Debtor has continued to operate, has continued to collect room charges from guests staying at the resort, and has paid operating expenses. No salaries have been paid to Mr. Bialk or his wife, however. The swimming pool has been closed and insurance has been obtained insuring the property. Mr. Bialk testified that the Debtor purchased the property for $585,000, that the Debtor has expended funds in repairing and improving the property and, in his estimate, the property is worth in excess of $750,000. The Debtor has no other source of funds to pay the cost of operation and maintain the property other than the income received from guests at the resort.
The motion for temporary restraining order which brought this matter on for hearing is prospective in that it seeks to control the future operations and cash proceeds derived by the Debtor from the operations of the property. The complaint also seeks damages for the Debtor's misuse of funds up to this point in time but that issue is not presently before the Court and will not be considered.
In essence, the complaint and temporary restraining order are the equivalent of a motion by the creditor under 11 U.S.C. § 363(e) to prohibit the use of property, including the rents to be derived from operations. By its nature, the motion raises the issue as to the Debtor's use of cash collateral on an ongoing basis. Thus even though the issue arises in this adversary proceeding, the Court is called upon to determine whether the Debtor in this case is entitled to continue to operate the resort, to collect the rents, and to pay the operating expenses of those operations.
The Plaintiff has given notice under 11 U.S.C. § 546(b) of his intent to claim an interest in the rents and profits and asserts that such rents and profits are cash collateral, subject to, and within the terms and conditions and within the meaning of, 11 U.S.C. § 363. In In re Colter, 46 B.R. 510 (Bankr.D.Colo.1984), Judge Gueck analyzed whether notice given under 11 U.S.C. § 546(b) perfects an inchoate lien in rents so that the lien on the rents becomes choate and the rents cash collateral governed by 11 U.S.C. § 363. Judge Gueck held that filing post-petition notice under 11 U.S.C. § 546(b) perfected the creditor's interest in rents and that rents received from a Chapter 11 debtor's real property were cash collateral subject to 11 U.S.C. § 363. Debtors appealed this decision to the District Court asserting that rents are not cash collateral and that they had the right to unfettered use of rents during the bankruptcy proceeding. In Consolidated Capital Income Trust v. Colter, Inc., 47 B.R. 1008 (D.Colo.1985), Judge Matsch affirmed Judge Gueck's decision. Judge Matsch stated that the beneficiary of a deed of trust with an assignment of rents perfects his interest by giving post-petition notice under 11 U.S.C. § 546(b). He then held that rents in this case were cash collateral and could be used by the debtors only in conformance with 11 U.S.C. § 363, stating:
Whether or not the condition of the property is such that restrictions on the use of the rents by the debtors is justified to protect the security of the mortgagee will be determined by the bankruptcy judge under Section 363, which is essentially equivalent to the determination made under § 38-39-112 C.R.S. Id. at 1011.
The state statute referred to above concerns the appointment of a receiver in a state action or proceeding to foreclose a mortgage or deed of trust, and the use of the rents collected from the property. Receivers are generally appointed when their services are necessary to preserve the estate until the Court can determine the rights of the litigants. As such, receivers serve as officers of the Court. Hart v. Ed-Ley Corp., 482 P.2d 421, 425 (Colo.App. 1971). Judge Matsch indicates in Consolidated Capital Income Trust v. Colter, Inc., supra, that the analysis necessary to the appointment of a receiver is essentially the same determination for conditioned use of cash collateral that must be made by the Bankruptcy Court under 11 U.S.C. § 363(e). Bankruptcy law refers to state property laws for such determination under authority set forth in a case decided under the Bankruptcy Act. Butner v. U.S., 440 U.S. 48, 99 S.Ct. 914, 27 L.Ed.2d 193 (1979). In Butner, the Supreme Court analyzed the relationship between state and federal law concerning property interests, particularly the interest of a mortgagee in rents earned by mortgaged property. The Court determined that absent an overriding federal interest, state laws should govern property interests. The Court rejected the assertion that there is an equitable basis for a uniform federal rule to afford mortgagees an automatic interest in rents as soon as a mortgagor filed for protection under the bankruptcy code. The Court stated:
. . . the federal bankruptcy court should take whatever steps are necessary to ensure that the mortgagee is afforded in federal bankruptcy court the same protection he would have under state law if no bankruptcy had ensued. Id. at 54, 99 S.Ct. at 918.
This precedent is still applicable even though it analyzed a case decided under the Bankruptcy Act. Matter of Village Properties, Ltd., 723 F.2d 441 (5th Cir.1984); In re Colter, supra. Thus, any matter arising in this Bankruptcy Court concerning security interests in rents and profits from Colorado properties must refer to and be limited by the protection granted those interests under Colorado law as the situs of the property. Butner v. U.S., supra; Erie Railroad Co. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938).
In Colorado, a mortgagee or assignee of rents who has been granted the right to collect rents and profits upon default in a security instrument has only an inchoate lien. It is only upon taking affirmative steps to perfect that lien that one secures a right to rents and profits. The perfection of the lien then dates from when the action is begun. Megginson v. Hall, 111 Colo. 104, 137 P.2d 411, 413 (Colo.1943); Moncrieff v. Hare, 38 Colo. 221, 87 P. 1082, 1085, 1088 (Colo.1906); Application of Northwestern Mutual Life Ins. Co., 703 P.2d 1314, 1318 (Colo.App.1985). Such affirmative steps include taking possession of the property, causing rents to be sequestered, or seeking appointment of a receiver pursuant to C.R.S. §§ 38-39-112, 38-39-113 (1982). Consolidated Capital Income Trust v. Colter, Inc., supra at 1010; Van Schaick v. McCarthy, 116 F.2d 987, 992 (10th Cir.1941); Central States Life Insurance Co. v. Carlson, 98 F.2d 102, 105 (10th Cir.1938), In re...
To continue reading
Request your trial