In Re Village Green I, 10-24178-GWE.

• Court: United States Bankruptcy Courts. Sixth Circuit. U.S. Bankruptcy Court — Western District of Tennessee
• Citation: 435 B.R. 525
• Docket Number: No. 10-24178-GWE.,10-24178-GWE.
• Parties: In re VILLAGE GREEN I, GP a Nevada general partnership, Debtor.
• Decision Date: 30 July 2010

435 B.R. 525

In re VILLAGE GREEN I, GP a Nevada general partnership, Debtor.

No. 10-24178-GWE.

United States Bankruptcy Court,W.D. Tennessee.

July 30, 2010.

435 B.R. 526

COPYRIGHT MATERIAL OMITTED.

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John L. Ryder, Memphis, TN, for Debtor.

MEMORANDUM OPINION GRANTING DEBTOR'S MOTION FOR ORDER (I) AUTHORIZING USE OF CASH COLLATERAL PURSUANT TO 11 U.S.C. §§ 363 AND 361, (II) GRANTING ADEQUATE PROTECTION PURSUANT TO 11 U.S.C. §§ 363 AND 361 AND (III) SCHEDULING A FINAL HEARING PURSUANT TO RULE 4001 AND DENYING MOTION FOR RELIEF FROM THE AUTOMATIC STAYGEORGE W. EMERSON, JR., Bankruptcy Judge.

This matter is before the Court on the motion of the Debtor, Village Green I, GP, a Nevada general partnership, (“Debtor”) “(I) Authorizing Use of Cash Collateral Pursuant to 11 U.S.C. §§ 363 and 361, (II) Granting Adequate Protection Pursuant to 11 U.S.C. §§ 363 and 361, and (III) Scheduling a Final Hearing Pursuant to Rule 4001(c)” and the Response thereto filed by Federal National Mortgage Association (“Fannie Mae”), the Motion for Relief from the Automatic Stay filed by Fannie Mae, and Debtor's objection thereto.

I. PROCEDURAL BACKGROUND

Debtor Village Green I, GP, filed its voluntary petition for relief under Chapter 11 of the Bankruptcy Code on April 16, 2010. On May 18, 2010, the Debtor filed its “Motion for Conditional Use of Cash Collateral, (I) Authorizing Use of Cash Collateral Pursuant to 11 U.S.C. §§ 363 and 361, and (II) Granting Adequate Protection Pursuant to 11 U.S.C. §§ 363 and 361 and (III) Scheduling a Final Hearing Pursuant to Rule 4001(c)” (the “cash collateral motion”), which was set for a hearing on June 3, 2010. On June 2, 2010, Fannie Mae filed its Response to the Debtor's cash collateral motion. At the hearing on June 3, 2010, the parties agreed to continue the hearing on the Debtor's motion, pending the future filing and setting of Fannie Mae's motion for relief from the automatic stay so that the hearing on the debtor's cash collateral motion would coincide with the motion for relief from the automatic stay. The parties have now filed supporting memoranda and a joint stipulation setting forth the facts and, for purposes of these two motions only, stipulating as to the authenticity and admissibility of the Exhibits listed therein.

This matter is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A) and (G).

II. FACTS

Debtor is a general partnership whose partners are EP Village Green Owner,

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LLC and Village Green II, GP. On the Debtor's Chapter 11 petition, the Debtor listed the location of its principal assets as “3450 Fescue Lane, Memphis, Tennessee, 38115-4184,” which is the address of the Village Green Apartments. This is a single asset real estate case as defined in 11 U.S.C. § 101(51)(B), and Fannie Mae is the Debtor's only secured creditor.

On or about September 30, 2003, Village Green, LTD, the prior owner of the property, entered into a Multifamily Note (the “Note”), in the principal sum of $9,200,000.00, with American Property Financing, Inc. That same day, Village Green, LTD, also executed a Multifamily Deed of Trust, Assignment of Rents and Security Agreement (the “Deed of Trust”), securing payment of the Note. The Deed of Trust, which encumbered the real property known as the Village Green Apartments, located at 3450 Fescue Lane, Memphis, Tennessee was also recorded with the Shelby County Register of Deeds that same day. Also on that date, American Property Financing, Inc. assigned and/or endorsed the Note to Fannie Mae along with all of its rights, title and interest as lender under the Deed of Trust. On October 13, 2003, a UCC Financing Statement was filed with the Shelby County Register of Deeds, setting forth Village Green, LTD. as debtor to Fannie Mae, secured party and covering certain real property as collateral. Village Green, LTD. also executed a number of collateral agreements (“Collateral Agreements”) including a Replacement Reserve and Security Agreement, Assignment of Management Agreement, Operations and Maintenance Agreement, and a Completion Repair and Security Agreement, each of which were assigned to Fannie Mae.

On December 29, 2005, Debtor executed an Assumption and Release Agreement whereby Debtor assumed all of the obligations of Village Green LTD. as set forth in the Note, Deed of Trust and Collateral Agreements. The Assumption and Release Agreement was recorded with the Shelby County Register of Deeds. On that same day, the Debtor entered into a Master Lease Agreement with EP Village Green Operator, LLC (“Village Green Operator”), whereby Village Green Operator would collect rents, pay bills and remit net proceeds to the Debtor. Village Green Operator also entered into an Assignment of Leases and Rents, Security Agreement and Subordination of Master Lease, for the benefit of Fannie Mae as assignee, on December 29, 2005.

The Debtor and Fannie Mae have stipulated that there is no equity in the subject real property. The value of the property listed on Debtor's Schedule A is $6,500,000.00 and the amount of Fannie Mae's claim on Schedule D is listed at $8,500,000.00 of which $2,000,000.00 is unsecured. Prior to the petition date, the Debtor was in default under the terms of the Note and Deed of Trust. The Debtor's monthly operating report for the month ending April 30, 2010 reflected that the Debtor's delinquent mortgage payments at the time of filing were $354,708.17. See Joint Stipulation of Facts, Docket No. 58, Ex. 13, p. 6.

At the hearing on the two motions, the parties conceded that the issue upon which both of their motions depend is whether or not the rents collected by Village Green Operator and paid to the Debtor are property of the Debtor's estate, and thus eligible as cash collateral, or whether the language of the Deed of Trust granted a pre-petition absolute assignment to Fannie Mae, effectively terminating the Debtor's interest in the rents. As admitted by Fannie Mae's counsel at the hearing on this matter, Fannie Mae's motion hinges upon the Debtor's lack of available cash collateral

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to effectuate a reorganization. Counsel for the Debtor conceded that its ability to formulate a plan and reorganize is dependent on the use of rents as cash collateral and that if the rents are not available as cash collateral, relief from the stay is appropriate.

The pertinent provisions of the Multifamily Deed of Trust, Assignment of Rents and Security Agreement (“Deed of Trust”) are as follows:

Page 1, Paragraph 3, “Borrower, in consideration of the Indebtedness and the trust created by this instrument, irrevocably grants, conveys, bargains, sells, confirms and assigns to Trustee, in trust, with power of sale, the Mortgaged Property, including the Land ... TO SECURE TO LENDER the repayment of the Indebtedness evidenced by Borrower's Multifamily Note payable to Lender dated as of the date of this Instrument, and maturing on October 1, 2013, in the principal amount of $9,200,000.00 and all renewals, extensions and modifications of the Indebtedness, and the performance of the covenants and agreements of Borrower contained in the Loan Documents”. (emphasis in the original).

“(Paragraph) 1. Definitions. The following terms, when used in this Instrument (including when used in the above recitals), shall have the following meanings: ... (s) ‘Mortgaged Property’ means all of Borrower's present and future right, title and interest in and to all of the following: ... (10) all Rents and Leases; ...”

“(Paragraph) 3. Assignment of Rents; Appointment of Receiver; Lender in Possession.”

(a) ... Borrower and Lender intend this assignment of Rents to be immediately effective and to constitute an absolute present assignment and not an assignment for additional security only. For purposes of giving effect to this absolute assignment of Rents, and for no other purpose, Rents shall not be deemed to be a part of the Mortgaged Property, “as that term is defined in Section 1(s). However, if this present, absolute and unconditional assignment of Rents is not enforceable by its terms under the laws of the Property Jurisdiction, then the Rents shall be included as a part of the Mortgaged Property and it is the intention of the Borrower that in this circumstance this Instrument create and perfect a lien on Rents in favor of Lender, which lien shall be effective as of the date of this Instrument.”

“(Paragraph) 30. Governing Law; Consent to Jurisdiction and Venue.”

(a) This Instrument and any Loan Document which does not itself expressly identify the law that is to apply to it, shall be governed by the laws of the jurisdiction in which the Land is located (the “Property Jurisdiction”). Ex. 2 to Joint Stipulation of Facts, No. 58.

A separate Assignment of Leases and Rents, Security Agreement and Subordination of Master Lease (“Assignment of Leases”), was executed by EP Village Green Operator, LLC, as assignor and Fannie Mae, as assignee, on December 29, 2005. Ex. 9 to Joint Stipulation of Facts, Docket No. 58. At the hearing on this matter, the Court heard proof that the Debtor is a general partnership whose partners are EP Village Green Owner, LLC, and Village Green II, General Partnership. The Debtor acknowledged the Assignment of Leases through the signature of its general partners, but appears to have no obligations whatsoever vis-a-vis the Assignment of Leases. No proof was offered to the Court to explain how the Debtor might be obligated thereunder, through its general partners or otherwise.

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There may be documents which explain why EP Village Green Operator, LLC, executed the Assignment of Leases instead of the Debtor, but there was no testimony or argument to this effect at the hearing on this matter. Counsel for Fannie Mae stated at the hearing that the assignment language in the Assignment of Leases was exactly the same as the Deed of Trust and could be analyzed in identical fashion. While the language may indeed be the same, the...