In re TM Carlton House Partners, Ltd., Bankruptcy No. 88-10774S.
| Decision Date | 04 October 1988 |
| Docket Number | Bankruptcy No. 88-10774S. |
| Citation | 91 BR 349 |
| Parties | In re TM CARLTON HOUSE PARTNERS, LTD., Debtor. |
| Court | U.S. Bankruptcy Court — Eastern District of Pennsylvania |
Joanne Zack, Philadelphia, Pa., for Equity Sec. Holders.
Mark S. Lieberman, Chicago, Ill., Marvin Krasny, Philadelphia, Pa., for Skokie.
Cole Silver, Philadelphia, Pa., for Teebesco.
Geoff Veith, Philadelphia, Pa., for Capital Group.
Martin J. Weis, Lawrence G. McMichael, Philadelphia, Pa., for debtor.
Mark J. Packel, Philadelphia, Pa., for Creditors' Committee.
Stephen Raslavich, Philadelphia, Pa., for Bergs.
David Smith, Philadelphia, Pa., for Concap.
James J. O'Connell, Philadelphia, Pa., Asst. U.S. Trustee.
The parties interested in the Debtor's instant motion to continue its right to use cash collateral under the same terms as were agreed upon on April 28, 1988, appear to agree that the issue which we must decide in resolving the motion is whether the rents collected by the Defendant, a partnership operating a structure covering an entire city block in the city of Philadelphia housing about 600 residential and business tenants, is cash collateral subject to the security interest of the second mortgagee of the Debtor's property, SKOKIE FEDERAL SAVINGS & LOAN ASSOCIATION (hereinafter referred to as "Skokie"). A secondary issue which the parties also appear to agree is before us is whether the Debtor is using its cash collateral wisely, and whether we should restrict its use beyond the restrictions already imposed in the April 28, 1988, Order.
We have serious misgivings as to whether Skokie has made an adequate record at the hearing on this motion to meet its burden of proving the validity, priority, and extent of its security, as required by 11 U.S.C. § 363(o)(2). Skokie entered neither its mortgage nor the notice sent to the Debtor which allegedly perfected its security interest in the rents properly into the record. However, the Debtor concedes in its post-trial Brief that "it is not disputed that the Skokie wrap mortgage contains an assignment of rents clause and that on April 1, 1988, counsel for Skokie filed a notice pursuant to 11 U.S.C. § 546(b) in an attempt to perfect their sic lien on those rents post-petition." Debtor's Supplemental Memorandum of Law in Support of Continued Use of Cash Collateral, at 2-3.
Accepting these concessions of the Debtor, we nevertheless hold that Skokie has not established that it has a security interest in any of the rents collected by the Debtor, nor that further restrictions on the use of cash collateral are warranted. We shall therefore direct that the Debtor may continue to use cash collateral, pursuant to our Order of July 19, 1988, subject to the terms set forth on April 28, 1988, through October 24, 1988, the date that the Debtor's exclusivity period pursuant to 11 U.S.C. § 1121(b) expires.
This case was commenced by the filing of an involuntary Chapter 11 petition against the Debtor on March 7, 1988, by three allegedly unsecured creditors of the Debtor. However, by filing an adversary proceeding at Adversary 88-0381S, seeking to enjoin the Debtor from using cash collateral, pursuant to § 303(f), on March 8, 1988, Skokie quickly established itself as the most vigorous of the Debtor's creditors. Although we denied Skokie provisional relief in the Adversary proceeding after a hearing on March 15, 1988, we scheduled a hearing on the involuntary petition on March 29, 1988. The Debtor indicated on that date that it would be filing a consenting answer, which it did on March 31, 1988, at which time we entered an order for relief. Also, on that date, a brief interim cash collateral order was entered by agreement of counsel for all of the multifarious interested parties present, effective through April 28, 1988.
On April 28, 1988, it appeared that Skokie, continuing its role as the most vigorous contestant of the Debtor's current management, would not agree to an order permitting continued use of cash collateral without numerous conditions, some to which the Debtor refused to agree. After hearing the points of difference, we briefly related our own views on these points of difference. The parties thereupon entered into negotiations for agreed terms through July 19, 1988, which were apparently successful, and were dictated into the record later that day.
A hearing to consider whether the cash collateral order should be extended beyond that date was listed on July 19, 1988. We learned for the first time, at that hearing, that the apparent agreement of April 28, 1988, had never been reduced to writing because one of the conditions required the Defendant to deposit all of its real estate tax escrow accounts with Skokie, and the United States Trustee had never approved Skokie as a depository for all of these funds of the estate, pursuant to 11 U.S.C. § 345. Also Skokie, joined by CONSOLIDATED CAPITAL EQUITY PARTNERS, the first mortgagee on the Debtor's property (hereinafter referred to as "Concap"), argued that the rents from the realty were cash collateral subject to Skokie's security interest, and that the court should so rule in determining whether to limit the Debtor's use of cash collateral more extensively thereafter than it had in the terms of the April 28, 1988, agreement. The United States Trustee was not present to describe any reservations about Skokie as a depository. Upon the willingness of all parties present to so resolve this impasse in this fashion, we entered an Order directing the Debtor to deposit the entire tax escrow account with Skokie. The United States Trustee apparently subsequently moved that we reconsider this Order, but that matter has been continued several times pending approval of Skokie as a depository.
The only party that presented any witnesses at the July 19, 1988, hearing was the Debtor, who called Thomas A. Cooney, the chief operating officer of General American Equities, a general partner of the Debtor, and Michael Axler, an expert real estate appraiser. Mr. Axler testified that the value of Debtor's realty at present was $44,568,262.00, and that its value was constantly appreciating and would increase to over $48,000,000.00 in a year. Mr. Cooney testified that the Debtor had accumulated over $500,000.00 in cash since the filing and would continue to accumulate about $200,000.00 monthly. However, he testified that the Debtor considered it prudent to retain this cash for costs and fees necessary to refinance the Debtor's present loan structure. At present, Concap was said to hold a mortgage of about $27 million, bearing interest at ten (10%) percent per annum and eighteen (18%) percent on default; Skokie, a wrap-around mortgage, including a wrap-around assignment of rents, in the principal amount of $44.9 million, including the Concap note, bearing interest at 13.5 percent per annum and twenty (20%) percent upon default; and John G. Berg and Maureen Heverly, a third-position wraparound mortgage in the principal amount of $50 million, including both prior mortgages, bearing interest at 14.5 percent per annum and sixteen (16%) percent upon default. Delinquent local estate taxes for 1986 and 1987, totalling over $1.5 million, were said to be accruing interest at 19.5 percent per annum. Skokie, joined by Concap, argued that its interest in cash collateral, including the rents, would not be adequately protected unless the Debtor were required to remit payments to Skokie, Concap, and/or the City forthwith, which was not required in the April 28, 1988, agreement, rather than "hoarding" this money.
At the close of the hearing, we ordered that the terms of the April 28, 1988, agreement would remain in effect pending our decision on the motion, and that any interested parties could submit Briefs in support of their respective positions on or before August 2, 1988. Only the Debtor, Skokie, and the Official Unsecured Creditors' Committee (hereinafter referred to as "the Committee"), supporting the Debtor, have opted to do so.
The skimpiness of the record is a drawback in addressing the issue of whether Skokie has a valid security interest in the Debtor's rents, and hence whether these rents are indeed Skokie's cash collateral. Skokie's mortgage was "introduced" into the record only by incorporation of its attachment to the Complaint in the since-abandoned Adversary No. 88-0381S in its post-trial briefing. The Notice of Perfection of Security Interest in Rents and Leases in Lieu of Seizure of Property or Commencement of Action Pursuant to 11 U.S.C. § 546(b) () was, by itself, simply filed of record on April 1, 1988. However, neither of these documents was formally made part of the record on the instant motion. See In re Aughenbaugh, 125 F.2d 887, 889 (3d Cir.1942); and In re Nicolet, Inc., 80 B.R. 733, 742-44 (Bankr.E.D.Pa.1987). Introducing these documents into the record here would appear to have been the minimal means by which Skokie could have met its burden of proving the validity, priority, and extent of its security pursuant to 11 U.S.C. § 363(o)(2). Compare In re 1606 New Hampshire Avenue Associates, 85 B.R. 298, 309-11 (Bankr.E.D.Pa.1988) (hereinafter cited as "N.H. Ave"). Only the Debtor's apparent stipulation that we can consider these matters as part of the record here, see pages 350-51 supra, presents us with any real basis to conclude that we have a record sufficient to even consider Skokie's position. The drawbacks arising from the deficiencies in the record do, in several specific instances of the interpretation of applicable law, fall upon Skokie.
The parties appear to agree that the primary sources for resolution of the issue of whether the Debtor's rents are Skokie's cash collateral are the prior court decisions in Butner v. United States, 440 U.S. 48, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979); In re DiToro, 17 B.R. 836, reconsidered, 22 B.R. 392 (Bankr.E.D.Pa.1982...
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