In re Old Colony, LLC

• Decision Date: 16 July 2012
• Docket Number: No. 10–21100–HJB.,10–21100–HJB.
• Citation: 476 B.R. 1
• Parties: In re OLD COLONY, LLC, Debtor.
• Court: U.S. Bankruptcy Court — District of Massachusetts

476 B.R. 1

In re OLD COLONY, LLC, Debtor.

No. 10–21100–HJB.

United States Bankruptcy Court,

D. Massachusetts,

Eastern Division.

July 13, 2012.

As Amended July 16, 2012.

Donald F. Farrell, Jr., Anderson Aquino LLP, James M. Liston, Bartlett Hackett Feinberg, P.C., Jeffrey D. Ganz, Riemer & Braunstein LLP, Boston, MA, for Debtor.

MEMORANDUM OF DECISION

HENRY J. BOROFF, Bankruptcy Judge.

Before the Court is a motion filed by Wells Fargo, N.A. (“Wells Fargo”) to determine the value of its secured claim against Old Colony, LLC (the “Debtor” or “Old Colony”) and Old Colony's corollary objection to Wells Fargo's proof of claim. The motion and objection require the Court not only to determine the value of Wells Fargo's real property collateral, but also to opine upon three ancillary legal issues, each of which has divided bankruptcy courts across the nation—namely: (1) whether a security interest in hotel room revenues is an interest in real property (perfected under state real property recording statutes) or personal property (perfected by filing a financing statement in accordance with the relevant state's adoption of Article 9 of the Uniform Commercial Code); (2) whether postpetition adequate protection payments paid by a debtor to an undersecured creditor holding a security interest in postpetition revenues should be characterized as payment on the principal balance of the secured claim; and (3) whether a secured party's postpetition attorneys' fees are an allowable component of its un(der)secured claim.

I. FACTSA. Background and Filing of the Bankruptcy Case

Old Colony is a Wyoming limited liability company formed in May 2007 by Joseph Cuzzupoli, the Debtor's managing member, and John Bullock.¹ The Debtor owns and operates The Inn at Jackson Hole (the “Inn”), an 83–room hotel located in Teton Village (near Jackson Hole), Wyoming. The Debtor purchased the Inn in 2007 with the intention of tearing it down and developing a new condominium-hotel. The purchase price of $26,000,000 for the Inn, the land, and the personal property (together, the “Property”), was paid by: (1) $6,000,000 from the Debtor; (2) a $16,500,000 loan from Jackson State Bank & Trust (“Jackson State”); and (3) $3,500,000 in seller financing.

The parties initially contemplated that the entire $20 million in financing would come from Jackson State. Shortly before closing, however, the Debtor learned that Jackson State would provide only $16.5 million of that amount because it claimed that its appraisal of the Property was outdated. Rather than delay the closing while waiting for an updated appraisal, the parties went forward with the transaction, with Johnson Resort Properties, Inc. providing the remaining $3.5 million in seller financing (the “Johnson Loan”), an interest-only loan with a one-year term. The Debtor intended to pay off the Johnson Loan upon the completion of an updated appraisal and the assumed disbursement of the remaining $3.5 million from Jackson State. However, after receipt of the updated appraisal, but prior to Jackson State loaning the additional funds, Jackson State was purchased by Wells Fargo, which declined to make the remaining disbursement.

The Debtor was unable to find an institutional lender to advance the funds needed to satisfy the Johnson Loan and its maturity date was fast approaching. The Debtor says that, in May 2008, it was thus “forced” to obtain financing through a private lender, JH Lending Trust (“JH Lending”), which loan came with an interest rate of 15% (the “JH Loan”). The Debtor had hoped to refinance either or both of the Wells Fargo and JH Loans, but the prospects for refinancing dwindled with the contraction of the financial markets (and crashing real estate values) following the economic downturn of 2008. Saddled with the high interest on the JH Loan, the Debtor was unable to keep up with its debt service. Negotiations between the Debtor and Wells Fargo to restructure the original loan (the “Wells Fargo Loan”) came to naught, and the Debtor filed this Chapter 11 Bankruptcy case on October 11, 2010 (the “Petition Date”) to stave off Wells Fargo's impending foreclosure.

Shortly after filing the petition, the Debtor filed an emergency motion requesting authorization to use cash collateral (including cash, rents, and revenues from hotel operations), in which both Wells Fargo and JH Lending asserted security interests. Wells Fargo and the Debtor stipulated to the Debtor's use of cash collateral on an emergency interim basis, but issues remained in dispute. After an evidentiary hearing held on November 29 and 30, 2010, the Court authorized the use of cash collateral in accordance with the Debtor's submitted operating budget (the “Cash Collateral Order”).

The Cash Collateral Order granted Wells Fargo and JH Lending Trust postpetition security interests in the collateral, but only to the extent of the prepetition enforceability of their liens. The order further provided that the lenders' respective liens would be recognized only to “the extent of any diminution in value of the Lender's cash and non-cash Collateral.” See Stip. Auth. & Approv. Interim Use Cash Collateral, Oct. 15, 2010, ECF No. 24; see also Order re: Debtor's Mot. for Use of Cash Collateral, Nov. 4, 2010, ECF No. 45; Hr'g Tr. Day 2 63:2–9 (Nov. 30, 2010).² The Cash Collateral Order also required the Debtor to pay $40,000 monthly to Wells Fargo “[a]s additional adequate protection for the use of Wells Fargo's alleged cash and non-cash collateral.” Cash Collateral Order 5 ¶ 5. However, the adequate protection payments would not be required “if the Court enter[ed] an order finding that Wells Fargo d[id] not have a perfected security in the revenue generated by the [Inn].” Id.

The parties agree that, as of the Petition Date and prior to the application of adequate protection payments, Wells Fargo was owed a total amount of $17,802,805.43, consisting of $16,500,000 in principal, $1,283,019.99 in interest, and $19,785.44 in prepetition legal fees and expenses. Stip. Fact 3–4 ¶ 12, Dec. 14, 2011, ECF No. 100. Further, the parties agree that Wells Fargo incurred $381,158.05 in postpetition legal fees and expenses through November 30, 2011. Stip. Fact 5 ¶ 20.

B. The Inn at Jackson Hole

The Inn is located in Teton Village, Wyoming, in the heart of the Jackson Hole ski area and near Grand Teton National Park and Yellowstone National Park. The 83–room Inn is slightly more than 40 years old and offers various amenities, such as a pool and hot tub with deck, above-ground parking, ski in and out access, and an on-site restaurant.³

As the recreational center for the Jackson Hole mountain resort, tourism drives much of Teton Village's economy. Before the economic downturn in 2008, property development in Teton Village was booming. The Debtor's own plans to raze the Inn and build a four-star, luxury condominium-hotel on the site reflect the demand for development opportunities at the time it purchased the Property. Based upon the Debtor's architectural and development plans, the Property appraised in 2008 at $32 million. Stip. Ex. 6 (the “2008 Appraisal”). With the crash of the financial markets shortly thereafter, however, the Debtor's redevelopment plans evaporated.

The Property thus continues to be operated as The Inn at Jackson Hole. The Debtor contracts with Metwest Terra Hospitality, LLC (“Terra”) to manage the Inn, and all of the employees at the Inn are Terra's employees. Terra is responsible for daily management, advertising, reservations, staffing, accounts payable, and maintenance of the Inn's books and records. The Debtor oversees Terra's services, “makes overarching macro-level decisions with respect to the Inn operations, such as establishing an annual budget for operations, negotiation of management agreements, and determination of policy matters,” and maintains the books and records for the Debtor's operations. Discl. Stmt. 5, July 1, 2011, ECF No. 79. According to the Debtor, the Inn has been cash flow positive since the Petition Date and the Debtor has paid all postpetition operating expenses (other than debt service and professional fees). Discl. Stmt. 8. Technically, the Debtor continues to operate the Inn as a debtor in possession.

C. The Disclosure Statement, Chapter 11 Plan, and Valuation Hearing

On July 1, 2011, the Debtor filed a disclosure statement (the “Disclosure Statement”) and plan of reorganization (the “Plan”) jointly proposed by the Debtor and Molokai Partners, LLC (“Molokai”), a New Jersey limited liability company.⁴ The Plan contemplates that the Debtor (or, rather, Molokai) will remain in possession of the Inn postconfirmation, which will continue to operate as a going concern. The Plan proposes that the Wells Fargo Loan will be bifurcated into its secured and unsecured components and estimates the secured claim (the “Secured Claim”) at $9 million, based on the Debtor's asserted valuation. The promissory note now held by Wells Fargo will be superseded by a “Wells Fargo Reorganization Note” in the amount of $9 million, secured by the prepetition first mortgage lien. The un(der)secured portion of Wells Fargo's claim (the “Unsecured Claim”) will be paid pro rata with other unsecured claims. The Plan is to be funded by a $1 million cash infusion from Molokai to be allocated as follows: $623,000 for distribution to unsecured creditors; $150,000 reserve to pay allowed administrative claims in the event the Debtor has insufficient cash on hand to pay all such claims; and $227,000 (plus any money left over from the reserve funds) for capital improvements to the Inn.

On August 31, 2011, after the filing of the Plan, Wells Fargo filed its “Motion of Wells Fargo Bank, N.A. for Valuation of Claim” (the “Valuation Motion”), and the Debtor subsequently objected to Wells Fargo's proof of claim (the “Claim Objection”).⁵ In the motion, Wells Fargo moved pursuant to 11 U.S.C. § 506(a)⁶ for an order determining the value of...