UNITED STATES COURT OF APPEALS
For the Fifth Circuit
Nos. 92-3941 c/w 92-3942
IN THE MATTER OF: T-H NEW ORLEANS LIMITED
PARTNERSHIP,
Debtor.
T-H NEW ORLEANS LIMITED
PARTNERSHIP,
Appellee,
VERSUS
FINANCIAL SECURITY ASSURANCE, INC.,
Appellant.
Nos. 92-3959 c/w 92-3983
IN THE MATTER OF: T-H NEW ORLEANS LIMITED
PARTNERSHIP,
Debtor.
T-H NEW ORLEANS LIMITED
PARTNERSHIP,
Appellant,
VERSUS
FINANCIAL SECURITY ASSURANCE, INC.,
Appellee.
Appeals from the United States District Court
for the Eastern District of Louisiana
(December 17, 1993)
Before EMILIO M. GARZA, and DeMOSS, Circuit Judges, and ZAGEL,1
District Judge.
DeMOSS, Circuit Judge:
On its on motion, the Court withdraws the opinion issued in
this case dated October 7, 1993, and substitutes the following:
I. FACTS AND PROCEDURAL HISTORY
In 1988, TH-New Orleans Limited Partnership (TH-NOLP), a hotel
partnership, acquired its major asset, the Days Inn Hotel on Canal
Street in New Orleans, Louisiana (the Hotel). In 1989, TH-NOLP
sought to restructure the underlying mortgage debt on the Hotel
through a mortgage bond financing transaction. To achieve that
end, TH-NOLP and six other hotel partnerships, all controlled by
Monty Hundley and Stanley Tollman, obtained separate but cross-
collateralized and cross-guaranteed first mortgage loans, which
were secured by the Hotel and other hotels, in the amount of
$87,000,000 from a newly created business trust (the issuer). With
the execution of the Mortgage Note and Loan Agreement, TH-NOLP
executed a Collateral Mortgage Note, a Collateral Real and
Collateral Chattel Mortgage and Assignment of Leases and Rents, a
Pledge of Collateral Mortgage Note (the Pledge), and a General
Assignment of Accounts Receivable. TH-NOLP also executed a
1
District Judge of the Northern District of Illinois, sitting
by designation.
2
Nonrecourse Guarantee, which guaranteed the payment of the six
other borrowers under the loan transaction. TH-NOLP's maximum
liability under the Guarantee is limited to the greater of TH-
NOLP's net worth on the date of execution of the Guarantee, which
was stipulated to be $18,425,000, or the net worth of TH-NOLP when
the Guarantee is enforced.
To raise the necessary money to make the mortgage loans to TH-
NOLP, the issuer issued $87,000,000 in bonds, the payment of which
was guaranteed by a surety bond issued by Financial Security
Assurance Incorporated (FSA). In return, the issuer of the bonds
assigned to FSA all its rights and interest in the security
agreements, and authorized FSA to be the "controlling party" and
their attorney-in-fact to take whatever actions FSA deemed
necessary to exercise its rights under the mortgage loans and
related collateral.
By 1990, TH-NOLP and the six other partnerships were in
default on the loans. After the parties were unable to reach a
settlement, FSA accelerated the Mortgage Note and demanded payment
of all amounts due under the Loan Agreement and Guarantee.2 TH-
NOLP filed for bankruptcy soon thereafter.
In the bankruptcy court, FSA filed a motion for relief from
the automatic stay under 11 U.S.C. § 362(d)(1) and (2); and a
motion for adequate protection or that the Hotel revenues be
2
Similar notices of default and acceleration were sent to
the six other hotel partnerships. Five of the six partnerships
filed for bankruptcy and foreclosure has been completed in those
cases. The other hotel partnership is currently in foreclosure
proceedings in Florida state court.
3
segregated. On March 19, 1992, the bankruptcy court granted FSA's
relief from the stay on the grounds that FSA had shown that the
secured property was not necessary to a successful reorganization.
That ruling was based on the bankruptcy court's decision that TH-
NOLP's plan of reorganization was unconfirmable, which was based on
the findings that (1) the plan did not permit FSA to bid the full
amount of its debt on the proposed sale of the Hotel, (2) the plan
made no provision for FSA's unsecured debt, and (3) TH-NOLP had
improperly classified creditors in its plan. The bankruptcy court
also granted FSA's motion for adequate protection or segregation of
Hotel revenues. TH-NOLP appealed to the district court, which
affirmed the bankruptcy court's order granting FSA relief from the
stay, but reversed the bankruptcy court's order granting FSA's
motion for adequate protection or segregation of Hotel revenues
because it held that FSA did not have a security interest in such
revenues. TH-NOLP and FSA now appeal to this court.3
II. DISCUSSION
The bankruptcy court's findings of fact are reviewed under a
clearly erroneous standard. In re Missionary Baptist Foundation of
America, 818 F.2d 1135, 1142 (5th Cir. 1987). The bankruptcy
court's conclusions of law are "freely reviewable on appeal." Id.
1. Relief from Stay
3
FSA's appeals are in case numbers 92-3941 c/w 92-3942,
which has been further consolidated with TH-NOLP's appeals in case
numbers 92-3259 and 92-3983. All of the issues are intertwined.
Case numbers 92-3941 c/w 92-3942 concern the motion for segregation
of hotel revenues or adequate protection. Case number 92-3259
concerns the confirmability of the plan, and case number 92-3983
concerns FSA's motion for relief from stay.
4
TH-NOLP contends that the bankruptcy court misinterpreted its
plan of reorganization and its disclosure statement, which led the
court to erroneously conclude that TH-NOLP did not have a
reasonable probability of a successful reorganization within a
reasonable period of time. Specifically, TH-NOLP contends that the
bankruptcy court erred when it interpreted the plan to provide that
FSA would be limited to bidding in the secured amount of its claim,
as opposed to the full amount of its claim, when the Hotel was
sold. Because of that alleged erroneous conclusion, TH-NOLP
contends the bankruptcy court improperly determined that FSA was
entitled to relief from the automatic stay to commence foreclosure
proceedings against the Hotel.
The provisions of 11 U.S.C. § 362(a) provide an automatic stay
against foreclosure proceedings when a debtor files a bankruptcy
petition. Relief from the stay is warranted under 11 U.S.C.
§ 362(d)(2) if:
(A) the debtor does not have an equity in such
property; and
(B) such property is not necessary to an effective
reorganization.
TH-NOLP concedes that it has no equity in the Hotel. The only
disputed issue is whether the Hotel is necessary to an effective
reorganization. The term "necessary to an effective reorganiza-
tion" has been interpreted to mean that the debtor has a reasonable
probability of a successful reorganization within a reasonable
period of time. United Savings Association of Texas v. Timbers of
Inwood Forest Associates., Ltd., 484 U.S. 365, 375 (1988).
In its memorandum opinion, the bankruptcy court found that TH-
NOLP owed $16,954,983 to FSA, and that the appraised value of the
5
Hotel was $12,200,000, leaving FSA with a under-secured nonrecourse
deficiency claim for approximately $4,754,983.
TH-NOLP's plan proposed to deal with FSA's claim under 11
U.S.C. § 1111(b)(1)(A)(ii), which provides in pertinent part:
(A) A claim secured by a lien on property of
the estate shall be allowed or disallowed
under section 502 of this title the same
as if the holder of such claim had
recourse against the debtor on account of
such claim, whether or not such holder
has such recourse, unless--
...(ii) such holder does not have
such recourse and such property is
sold under section 363 of this title
or is to be sold under the plan.
Section 1111(b)(1)(A) effectively provides under-secured
nonrecourse creditors, such as FSA, an opportunity to elect to have
their claims treated as recourse claims if their debtors retain the
secured property. In re Tampa Bay Associates, Ltd., 864 F.2d 47,
50 (5th Cir. 1989). Under subsection (ii), however, a nonrecourse
deficiency claim is not treated as a recourse obligation when there
is a sale of the collateral at which a creditor may credit bid up
to the full amount of its claim. Id. However, subsection (ii) may
only be utilized when a creditor is entitled to credit bid up to
the full amount of its claim, not just the amount of its secured
claim. Id. In re National Real Estate Ltd. Partnership II, 104
B.R. 968, 974 (Bankr. E.D. Wis. 1989).
FSA's claim against TH-NOLP is a nonrecourse claim; FSA's
recourse on its claim is limited solely to the collateral for the
debt--the Hotel. The bankruptcy court decided that TH-NOLP's plan
6
did not provide for the treatment of FSA's entire debt because it
did not address FSA's nonrecourse deficiency claim of $4,754,983;
therefore it held that application of subsection (ii) was improper.
Accordingly, the bankruptcy court held that the plan was
unconfirmable, in that no reasonable prospect for a successful
reorganization existed within a reasonable time, and lifted the
automatic stay.
We disagree with the bankruptcy court's reading of the plan.
Under the plan, TH-NOLP was to retain the Hotel for up to two
years, during which time it would "actively market the Hotel and
... use its best efforts to procure a purchaser ... for the highest
possible purchase price," and if it could not do so it would deed
the Hotel to FSA. If a purchaser was found, the plan provided that
FSA would be entitled to "credit bid the full allowed amount of its
finally allowed claim." Additionally, TH-NOLP's disclosure
statement provided:
[s]ince the Trustee [FSA] is an under-secured,
nonrecourse creditor and since the Plan
provides for, the abandonment and/or sale of
the Trustee's collateral security, with the
Trustee being permitted to credit bid its
entire nonrecourse claim prior to any sale,
the Trustee will not be permitted to make any
election under § 1111(b) of the Code.
Disclosure Statement at 13.
Based on the plain language of the plan and the disclosure
statement, we hold that the bankruptcy court erred in holding that
the plan was unconfirmable because it did not permit FSA to bid the
7
full amount of its claim, and consequently did not provide for
FSA's nonrecourse deficiency claim.
As an additional ground for its ruling, the bankruptcy court
held that the plan improperly gerrymandered classes of creditor's
claims so as to manipulate the voting process for the purpose of
facilitating a cramdown under 11 U.S.C § 1129 in violation of this
court's opinion in In re Greystone III Joint Venture, 995 F.2d 1274
(5th Cir. 1991), cert. denied, 113 S. Ct. 72 (1992).4 We address
briefly one aspect of the bankruptcy court's decision.
In Greystone, debtor Greystone, whose only asset was an office
building, filed for bankruptcy after its creditor, Phoenix Mutual,
who had an $8.8 million nonrecourse promissory note, posted the
property for foreclosure. When Greystone filed for bankruptcy, it
owed Phoenix Mutual $9,325,000, its trade creditors $10,000, and
the taxing authorities $145,000. The bankruptcy court valued
Phoenix Mutual's secured claim at $5,825,000, which was the
estimated value of the office building. Phoenix was left with an
unsecured deficiency of $3,500,000, which was the difference
between what the debtor owed Phoenix and its secured claim. The
debtor's proposed plan separately classified the nonrecourse
unsecured claim of Phoenix and the unsecured claim of the trade
creditors. The trade creditors voted to accept the plan, and the
4
The plan cannot be confirmed unless it is approved by two-
thirds in amount and more than one-half in number of each impaired
class, or at least one impaired class approves the plan and the
debtor meets the cramdown requirements of § 1129(b). See
Greystone, at 1277; 11 U.S.C §§ 1126(c), 1129(a)(8), and
1129(a)(10).
8
bankruptcy court confirmed it, in spite of Phoenix's objections,
under the cramdown provision of 11 U.S.C. § 1129.
On appeal, this court held the plan was non-confirmable
because it improperly gerrymandered the similar claims of Phoenix
and the trade creditors. In reaching this result, the court
announced in no uncertain terms the one commandment regarding
creditor claim classification:
....thou shalt not classify similar claims
differently in order to gerrymander an affirmative
vote on a reorganization plan.
995 F.2d at 1279 (emphasis added).
In the present case, the bankruptcy court's opinion indicates
that The Tollman-Hundley Management Group is an affiliate of the
TH-NOLP; and it had a general unsecured claim for approximately
$356,000, which was classified separate and apart from other
general trade creditors. The bankruptcy court inferred that TH-
NOLP segregated the Tollman-Hundley Management Group's unsecured
claim so that the Tollman-Hundley Group would be able to cast a
necessary vote to implement cramdown of the plan over FSA's
objections. The bankruptcy court found that TH-NOLP gave no
justification for the separate classification of its affiliate's
claim, even though it was "substantially similar" to the claims of
other general unsecured creditors; therefore it held the plan to be
"unfairly discriminatory and inequitable" and "unconfirmable" as
presented. But 11 U.S.C. § 1129(a)(10) expressly provides that if
a class of claims is impaired under the plan, the plan may be
confirmed only if at least one impaired class has accepted the
9
plan, "determined without including any acceptance of the plan by
any insider." (emphasis added). None of the parties on appeal
addressed the question of whether Tollman-Hundley Management Group
was truly an "affiliate" of TH-NOLP and therefore, by definition,
an "insider" for purposes of § 1129(a)(10).
Any finding by the bankruptcy court regarding improper
classification could have been cured by amendment; but the
bankruptcy court denied the request of TH-NOLP to file an amended
plan. Consequently, without ruling on the propriety or not of the
rulings on improper classification, we think justice will be better
served by remanding the issues of confirmability of the plan and
relief from the stay to the district court with instructions to
remand these issues to the bankruptcy court so that (1) the
bankruptcy court can make an express finding as to whether Tollman-
Hundley Management Group is an "affiliate" of TH-NOLP; (2) the
bankruptcy court can afford TH-NOLP an opportunity to amend the
plan if it so desires; and (3) the bankruptcy court can conduct
such further hearings as may be necessary to redetermine whether
the amended plan shows "a reasonable prospect for a successful
reorganization within a reasonable time." See Timbers of Inwood
Forest Associates Ltd., supra.
2. Section 552(b)
FSA contends (and the bankruptcy court held) that the post-
petition hotel revenues are its cash collateral and it has a right
for such revenues to be segregated for its benefit pursuant to the
10
terms of the Collateral Real and Collateral Chattel Mortgage and
Collateral Assignment of Leases and Rents and 11 U.S.C. § 552(b).
Section 552(a) provides the general rule that property
acquired by the debtor post-bankruptcy is not subject to a lien
created by a security agreement before bankruptcy. Section 552(b),
however, provides a significant exception:
11
if the debtor and an entity entered into a
security agreement before the commencement of
the case and if the security interest created
by such security agreement extends to property
of the debtor acquired before the commencement
of the case and to proceeds, product,
offspring, rents, or profits of such property,
then such security interest extends to such
proceeds, product, offspring, rents, or
profits acquired by the estate after the
commencement of the case to the extent
provided by such security agreement and by
applicable non-bankruptcy law, except to any
extent that the court, after notice and a
hearing and based on the equities of the case,
orders otherwise.
11 U.S.C. § 552(b).
A creditor must meet two requirements under § 552(b) for a
security agreement to survive post-bankruptcy:
1. The security agreement must extend to after-acquired
property of the designated categories; and
2. the after-acquired property must fit within the five
enumerated categories of § 552(b).
FSA's security agreements satisfy the first requirement.
Under the terms of the Collateral Assignment of Leases and Rents,
the debtor agreed to:
...transfer, pledge, collaterally assign and
deliver unto Mortgagee as security for the
payment and performance of the Obligations,
and grant a security interest in, all of the
right, title, and interest of the Mortgagor in
and to all of the following:
(a) The Leases;
(b) The Rents;
(c) The Fixtures; and
(d) The Personality.
12
The document defined Rents as:
[a]ll of the rents, revenues, income,
proceeds, profits, security and other types of
deposits, and other benefits paid or payable
and to become due or payable to Mortgagor by
parties to any Leases for using, leasing,
licensing, possessing operating from, residing
in, selling or otherwise enjoying any portion
or portions of the Mortgaged Property,
together with all cash and noncash proceeds of
any or all thereof.
It defined Leases as follows:
[a]ny and all leases, subleases, licenses,
concessions or other agreements written or
verbal, now or hereafter in effect, including
any FF&E Lease(s), Space Leases (as defined
below), Franchise Agreement(s) and license
agreement(s) which grant a possessory interest
in and to, or the right, license or concession
to use, all or any portion of the Mortgaged
Property, and all other agreements, such as
utility contracts, maintenance agreements,
Management Agreement (as defined below) and
Service Agreement(s) (as defined below) which
in any way relate to the use, occupancy,
operation, maintenance, enjoyment, or
ownership of all or any portion of such
Mortgaged Property, together with any renewal
or extension thereof and all leases,
subleases, licenses, concessions or other
agreements in substitution thereof, together
with all cash or noncash proceeds of all or
any thereof.
From the above language, it is apparent that FSA 's security
interest extends to the revenues of the Hotel; and, therefore,
satisfies the first requirement of § 552(b).
The crux of the dispute between the parties is whether the
revenues fall within the classification of "proceeds, products,
offspring, rents, or profits" in § 552(b). More specifically, the
issue is whether the Hotel revenues are "rent."
13
State law defines "rent" for purposes of § 552(b). See Butner
v. United States, 440 U.S. 48 (1979). Both parties agree that in
the present case Louisiana law controls the issue of whether hotel
revenues fit within the classification of rent. Both parties also
agree that Pioneer Bank and Trust Co. v. Oeschner, 468 So. 2d 1164,
1168 (La. 1985), is the dispositive Louisiana case on this issue;
however, they interpret it differently.
In Pioneer Bank, Oeschner executed a promissory note and
collateral mortgage to Pioneer Bank in connection with his purchase
of the Superdome Motor Inn. After Oeschner defaulted on the loan,
Pioneer Bank sued him to enforce the collateral mortgage and for a
writ of sequestration. Oschner argued that Pioneer Bank did not
have a right to sequester the Hotel revenues because it had a lien
only on the Hotel property, not the revenue.
The applicable Louisiana Sequestration statute, La. Code Civ.
Proc. art. 327, provided:
[t]he seizure of the property by the sheriff
effects the seizure of the fruits and issues
which it produces while under seizure. The
sheriff shall collect all rents and revenue
produced by property under seizure.
Therefore, the decisive question was whether the Hotel revenues,
which Pioneer was attempting to seize, were "rents or revenues"
within the meaning of the Louisiana sequestration statute. Pioneer
Bank, 468 So. 2d at 1168. The Louisiana Supreme Court concluded
that the statute allowed Pioneer Bank to have the property seized
under a writ of sequestration and to collect the revenues produced
by the Hotel. In reaching its result, the court reasoned:
14
....the revenues paid into Superdome Motor Inn
by its guests are, like rent, paid for the use
of the property. In that sense, they, like
rent, are produced by the property. Second,
the mortgage expressly covers all property,
movable and immovable, "used in connection
with the operation of the .... property." This
combination of facts, i.e., the nature of the
revenues and that the mortgage covers all
property used in the operation of the
property, leads us to conclude that the
revenues at issue are "produced by the
property."
Pioneer Bank, at 1168 (emphasis added).
In our view, Pioneer Bank supports our conclusion here that hotel
revenues are sufficiently "like rent" under Louisiana law to be
included within the term "rents" in § 552(b). Therefore, we hold
that FSA is entitled to have the Hotel revenues segregated for its
benefit.
We have carefully and exhaustively searched the legislative
history of § 552(b) for any indication that in using the term
"rents" Congress intended to exclude revenues generated by hotels
and motels for the use of their lodging rooms by third parties; but
we have been unable to locate even a scintilla of such intent.
Clearly, in our view, the term "rents" would include revenues
generated by apartments, office buildings, shopping centers, and
warehouses for the use and occupancy of space within such
facilities, and, absent some clear and express indication by the
Congress that the word "rents" was not to include revenues from
hotels and motels, we see no reason to provide such exclusion by
judicial interpretation. To the contrary, given the other broad,
generic terms utilized by Congress in § 552(b), we believe a
15
generic interpretation of "rents" as "payments made for the use of
property" is most consistent with congressional intent.
TH-NOLP contends that hotel revenues are "accounts receivable"
under the Louisiana Accounts Receivable Act. See e.g., In re Texas
Tri-Collar, Inc., 29 B.R. 724 (Bankr. W.D. La. 1983). In that
statute, "accounts receivable" are defined as follows:
"[a]ccounts receivable" or "account" means and
includes all or any part of any indebtedness
owing to the assignor in connection with all
or any part of the assignor's business,
profession, occupation or undertaking,
including but not limited to the sale of goods
or the performance of services or the leasing
of a movable property subject to the Louisiana
Lease of Movables Act. "Accounts receivable"
or "account" shall not mean or include:
(a) Indebtedness due to or arising out of
claims in tort;
(b) Indebtedness evidenced by a promissory
note, other than a lease note, or
negotiable instrument; or
(c) Indebtedness due to or arising out of the
leasing of immovable property.
La. R.S. § 9.3101(1).
According to TH-NOLP, the revenue received by a hotel operator
represents the payment by hotel guests on indebtedness owing to the
hotel operator in connection with hotel business, not "rent" of the
hotel property. TH-NOLP contends that it takes the combined
efforts of its numerous skilled and dedicated employees to generate
revenues from the Hotel, and without the combined efforts of these
individuals the "Hotel could not generate a dime of revenue."
Ultimately, TH-NOLP's premise is that hotel revenues are dependent
upon and generated from the service aspect of the hotel, and, as
such are in the nature of accounts receivable.
16
We disagree. First of all, sub-item (c) of the Louisiana
statutory definition quoted above expressly eliminates
"indebtedness due to or arising out of the leasing of immovable
property"; and in our view, revenues received by hotel and motel
operators for the use of their rooms fall squarely under this
exclusion. Secondly, in our view, the physical condition of the
Hotel and its location are more essential to the Hotel's ability to
generate revenue than the services it provides. Take away the land
and the bricks and mortar, and there is nothing upon which the
collateral services of entertainment, food, recreational
activities, laundry and cleaning could exist. The converse is not
true, for many chains of motels have been successful in providing
"simply a good night's rest at the most economical price."
Therefore, we reject the notion that a hotel's revenues are so
intertwined and dependent on the hotel's service that one cannot
conclude the revenues are rent for purposes of § 552(b).
We recognize that several bankruptcy and district court
decisions have reached a result contrary to that we reach here.
See e.g., In re Punta Gorda Associates, 137 B.R. 535 (Bankr. M.D.
Fla. 1992); In re GGVXX, Ltd., 130 B.R. 322 (Bankr. D. Colo. 1991).
However, those decisions involved the interpretation of other
states' statutory provisions regarding classification of rent, and
thus they are of little significance in the present case where we
are applying Louisiana law. Moreover, we are persuaded by the
clear language of the loan documents that the borrower intended,
and the lender expected, that the Hotel revenues would stand as
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hrd 17
security for the loan. The income flow generated by the Hotel
revenues are an integral part of the value that the lender assigns
to the collateralized property. If, as indicated by Pioneer, a
lender may reach and control revenues from a hotel for purposes of
Louisiana's sequestration remedies, we can see no reason for
depriving that same lender of the benefit of his expressly
bargained-for-security when the question is application of § 552(b)
in bankruptcy. To deprive the lender of what he bargained for at
closing, especially when that expectation matches the intent of the
borrower, is inequitable and ignores widely accepted lending
practices of the business community.
III. CONCLUSION
We reverse the holding of the bankruptcy court that the plan
was unconfirmable because it did not permit FSA to credit bid the
full amount of its claim. We VACATE the holding and REMAND the
issues of confirmability of the plan and relief from stay for
redetermination by the bankruptcy court. We also hold that the
district court erred in reversing the judgment of the bankruptcy
court which allowed FSA to segregate the Hotel revenues for its
benefit. Accordingly, we VACATE in part and REVERSE in part, and
REMAND this case to the district court with instructions to REMAND
to the bankruptcy court for further proceedings consistent
herewith.
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