In re Timothy Dean Restaurant & Bar

• Citation: 342 B.R. 1
• Decision Date: 28 March 2006
• Docket Number: Adversary No. 02-10080.,Bankruptcy No. 01-02124.
• Court: United States Bankruptcy Courts. District of Columbia Circuit
• Parties: In re TIMOTHY DEAN RESTAURANT & BAR, a/k/a Timothy Dean's, Inc., Debtor. The Business Bank, Plaintiff, v. William Douglas White, Trustee, et al., Defendants.

Page 1

342 B.R. 1

In re TIMOTHY DEAN RESTAURANT & BAR, a/k/a Timothy Dean's, Inc., Debtor.

The Business Bank, Plaintiff, v. William Douglas White, Trustee, et al., Defendants.

Bankruptcy No. 01-02124.

Adversary No. 02-10080.

United States Bankruptcy Court, District of Columbia.

March 28, 2006.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Linda D. Regenhardt, Gary and Good man, Limited, Vienna, VA, for Debtor.

DECISION REGARDING MOTIONS FOR PARTIAL SUMMARY JUDGMENT AND CROSS-MOTION FOR SUMMARY JUDGMENT

S. MARTIN TEEL, JR., Bankruptcy Judge.

The Business Bank (the "Bank"), which lent money to the debtor, Timothy Dean's, Inc., brought this proceeding against William White, the trustee of the debtor's estate under chapter 7 of the Bankruptcy Code, 11 U.S.C. § 101 et seq., and SLT Realty Limited Partnership, doing business as the St. Regis Washington Hotel (the "Hotel"), the debtor's former landlord. The Bank seeks a determination of the extent, priority, and validity of its lien and other interests in various properties owned or formerly owned by the debtor: specifically, (1) a $66,666.67 security deposit currently in the possession of the Hotel; (2) guest charges and receivables owed to the debtor by the Hotel; (3) silverware purchased by the debtor using a check written by the Hotel for $12,500.00; (4) the proceeds of a settlement agreement entered into by the Hotel and the chapter 11 trustee (the "Settlement Agreement"); and (5) the proceeds of the sale of some of the debtor's wine inventory.

Although the Bank's request seems simple enough on its face, it raises complicated legal issues involving the interpretation and application of both the current and former versions of the Uniform Commercial Code (the "UCC"), most of which were not addressed in the parties' briefs. Consequently, the court has taken longer than it would have liked to finish this decision. Having explored and addressed the numerous complicated issues presented in this case, the court is now prepared to resolve the pending motions for summary judgment with respect to each of the five items at issue before the court.

I

The following facts are undisputed. Pursuant to a lease agreement entered into on April 14, 2000 (the "Lease"), the debtor leased and operated a restaurant at the Hotel. The Bank was the debtor's principal lender. To secure their claims against the debtor, both the Bank and the Hotel held security interests in various property of the debtor, and both filed financing statements.

Prior to or upon execution of the Lease by the debtor and the Hotel, the debtor deposited $66,666.67 with the Hotel as a security deposit pursuant to the terms of the Lease (Lease ¶¶ 1.1(p) & 21.1). The Lease provided that

[The Hotel] shall arrange for the Security Deposit to be deposited into an interest bearing account. [The Hotel] shall be entitled to deduct from the amounts so deposited, any administrative fees incurred by [the Hotel] in connection with the establishment and/or maintenance of the account so established.

(Id. at ¶ 21.1).

The Hotel has continuously held the debtor's security deposit in an account with Harris Bank under its sole and exclusive control and possession (Hotel Statement of Facts ¶ 5).¹ The debtor also granted the Hotel a security interest in certain personal property, which the Hotel perfected by filing a financing statement on February 13, 2001.

On May 11, 2000, the Bank agreed to lend the debtor $150,000.00. As security for the loan, the debtor granted the Bank a security interest in certain of the debtor's assets in an agreement executed by both parties (the "Security Agreement"), and the Bank filed financing statements in May and September of 2000. To facilitate the Bank's loan to the debtor, the Hotel contemporaneously entered into an agreement with the Bank that subordinated the Hotel's liens and security interests in certain property of the debtor to the Bank's secured interests (the "Subordination Agreement").

On August 24, 2001, the debtor signed a promissory note payable to the Hotel in the amount of $58,231.34. The debtor executed the note because it had not complied with its obligations under the Lease and owed $58,231.34 to the Hotel as of that August. Under the provisions of the note, the debtor was to make two payments under the note in October of 2001, two additional payments in November of 2001, and three payments in December of 2001.

On October 16, 2001, the debtor commenced its bankruptcy case under chapter 11 of the Bankruptcy Code. One month later, the court entered an order granting the Hotel relief from the automatic stay imposed by 11 U.S.C. § 362 so that the Hotel could exercise its right to set off asserted pre-petition debt owed to the debtor against asserted pre-petition debt owed by the debtor to the Hotel (the "Stay Relief Order"). On January 7, 2002, the court entered another order allowing the debtor to use the proceeds of its receivables for its current operations, including payroll and other expenses incurred in the ordinary course of business (the "Cash Collateral Order"). Both the Hotel and the Bank consented to this relief.

The Cash Collateral Order gave the Bank a replacement lien on new receivables for the use of its collateral on a dollar for dollar basis and ordered the debtor to continue to make payments in the form of setoffs to the Hotel under the Lease and promissory note. The court also granted a separate motion filed by the Hotel that authorized the Hotel to exercise its right to set off post-petition obligations owed by the Hotel to the debtor against post-petition amounts owed to the Hotel by the debtor (the "Adequate Protection Order").

Even after offsetting its debts to the debtor, the Hotel asserted a pre-petition claim of $20,563.88. In addition, the Hotel sought damages for "missing silver, china, glass and linens" in' the amount of $56,578.94, for a total claim of $77,142.82. The Hotel exercised a post-petition setoff of its remaining claims as calculated in the Hotel's Exhibit 2 (affidavit of Firdaus Kadir, Controller of the Hotel) and Exhibit 16 (copies of periodic accounts).

On March 28, 2002, the court ordered the appointment of a chapter 11 trustee. On May 2, 2002, the court approved a settlement agreement between the Hotel and the chapter 11 trustee that resolved outstanding disputes regarding the debtor's motion to assume the Lease and the Hotel's motion for relief from the automatic stay to terminate the Lease (the "Settlement Agreement"). Pursuant to the terms of the Settlement Agreement, the Hotel was to pay the chapter 11 trustee the sum of $135,000.00 subject to reduction for inventory losses, unpaid rent, and damages to the premises, as well as any liquor charges. The order approving the Settlement Agreement was subsequently modified by an order entered on May 29, 2002, which allowed the Bank to assert any purported interests it might have in the security deposit, in guest charges, and in up to $118,000.00 of the proceeds paid to the chapter 11 trustee.

The debtor's case was converted to a chapter 7 case on July 16, 2002, and White was appointed as the chapter 7 trustee on July 22, 2002. White does not dispute that either he or the chapter 11 trustee sold some of the debtor's wine inventory for the benefit of the estate.

II

The Hotel and White have filed motions for partial summary judgment with respect to the property described above, and the Bank has filed a cross-motion for summary judgment in addition to its oppositions to those motions.² Pursuant to Rule 56 of the Federal Rules of Civil Procedure as incorporated by FED. R. BANKR. P. 7056, summary judgment may be granted in one party's favor if the moving party can show that "there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law."

Applying Rule 56 to the issues before the court, and for the reasons set forth below,³ the court concludes that:

• the Hotel's interest in the debtor's security deposit is superior to that of the Bank, and that interest is unaffected by the Subordination Agreement;

• the Hotel properly set off pre-petition guest charges owed to the debtor notwithstanding the Bank's security interest in those amounts, and the Bank lacks standing to contest the Hotel's setoff of post-petition guest charges because the Bank has no interest in those charges;

• the Hotel is entitled to the return of silverware worth $12,500.00;

• White is entitled to the proceeds of the Settlement Agreement because the Bank's lien does not encompass property acquired by the debtor post-petition or the proceeds of such property and the Cash Collateral Order does not alter the scope of the Bank's lien; and

• the Bank is not entitled to summary judgment with respect to the proceeds of the debtor's wine inventory because it has not produced evidence demonstrating that the proceeds derive from wine purchased between May 15, 2000, and October 17, 2001.

A. The Debtor's Security Deposit under the Lease

The court will grant the Hotel's motion for partial summary judgment with respect to the security deposit and deny the Bank's cross-motion for summary judgment on the same issue. Although the Hotel may not set off the debtor's security deposit against the debtor's debts to the Hotel, the Hotel possesses a perfected security interest in the security deposit that is superior to any interest asserted by the Bank. Moreover, because the Bank does not have a secured interest in the security deposit at all under the former UCC provisions and other law governing that agreement, its Subordination Agreement with the Hotel does not confer upon it any priority over the rights of the Hotel.

1. The Hotel's asserted right of setoff

The Hotel argues that its pre-petition claims against the debtor (after accounting for setoffs against other amounts owed the debtor) exceed the amount of the security deposit,...