Fin. Security v. Tollman-Hundley

United States Court of Appeals,

Eleventh Circuit.

No. 94-8342.

FINANCIAL SECURITY ASSURANCE, INC., Plaintiff-Appellant,

v.

TOLLMAN-HUNDLEY DALTON, L.P., Defendant-Appellee.

Feb. 12, 1996.

Appeal from the United States District Court for the Northern
District of Georgia. (No. 4:93-CV-356-HLM), Harold L. Murphy,
District Judge.

Before COX, Circuit Judge, and CLARK and WOOD, Jr.*, Senior Circuit
Judges.

PER CURIAM:

This case involves a security agreement pursuant to which the

debtor granted the creditor a security interest in the debtor's

hotel and in all rents, issues and profits associated with its

operation. After the debtor filed a voluntary petition under

Chapter 11 of the Bankruptcy Code, the creditor relied upon its

prepetition security interest to seek accounting of the

postpetition hotel revenues. Applying § 552 of Title 11 of the

Bankruptcy Code, the bankruptcy court concluded that the

prepetition security interest did not extend to postpetition hotel

revenues derived from rent; thus, the postpetition revenues were

property of the debtor's estate. The district court affirmed.

Having carefully studied § 552 and the applicable Supreme Court

precedent, we conclude that the bankruptcy court and the district

court improperly looked to state law to define the language of §

*
Honorable Harlington Wood, Jr., Senior U.S. Circuit Judge
for the Seventh Circuit, sitting by designation.
552 and, therefore, misconstrued this section. We reverse.
I. BACKGROUND

In February, 1989, Tollman-Hundley Dalton, L.P. ("THD"), which

owned and operated a Holiday Inn in Dalton, Georgia, borrowed

$10,151,088.00 to refinance an existing loan on the hotel.

Financial Security Assurance, Inc. ("FSA") provided the financial

accommodations and eventually succeeded to all rights of the

original lender. THD granted FSA a security interest in the hotel

real property and improvements, related tangible and intangible

personal property, and all rents, issues and profits associated

with the hotel and its operation. The parties have stipulated that

the security agreement was intended to cover all hotel revenues.

Thus, FSA held a first-priority, properly-perfected security

interest in the hotel and the revenues generated therefrom.

In October 1990, THD defaulted on its monthly payment to FSA.

On February 25, 1991, FSA accelerated the payments due under the

security agreement, revoked THD's license to collect rents, and

filed an action in the Superior Court of Whitfield County, Georgia,

to obtain the appointment of a receiver to collect the hotel

revenues. On March 1, 1991, however, prior to the appointment of

a receiver, THD filed a voluntary petition under Chapter 11 of the

Bankruptcy Code, staying the action for appointment of a receiver.

THD operated the hotel as a debtor-in-possession from March 1,

1991, through April 7, 1992, when FSA obtained relief from the

automatic stay and foreclosed its interest in the hotel. FSA

contends that, during this 13-month period, the hotel generated

more than $4,000,000 in gross revenues. All of the hotel's
postpetition operating expenses have been paid and approximately

$400,000 of postpetition hotel revenues remains to be distributed.

It is this $400,000 of revenues that is at issue in the appeal.

FSA filed a motion with the bankruptcy court for abandonment

and accounting of the hotel revenues, and THD filed a motion

seeking authorization to use the revenues for a plan of

liquidation. FSA took the position that it was entitled to the

hotel revenues under the terms of the prepetition security

agreement; THD disagreed, arguing that the prepetition security

interest did not extend to the postpetition revenues and,

therefore, the revenues were property of the debtor estate.

To resolve the outstanding motions, the bankruptcy court

looked to 11 U.S.C. § 552, which governs prepetition security

interests in a debtor's postpetition revenues. Section 552(a)

provides the general rule that postpetition property of the debtor

or estate is not subject to any lien resulting from any prepetition

security agreement; section 552(b) provides an exception for liens

resulting from prepetition security agreements that cover

"proceeds, product, offspring, rents, or profits." Relying on the

Supreme Court's decision in Butner v. United States,1 the

bankruptcy court held that state law defines the terms "proceeds,

product, offspring, rents or profits." The court then undertook a

thorough review of Georgia law and concluded that, "under Georgia

law hotel revenues are not properly characterized as rent."2 The

1
440 U.S. 48, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979).
2
In re Tollman-Hundley Dalton, L.P., 162 B.R. 26, 29
(Bankr.N.D.Ga.1993).
bankruptcy court further concluded that hotel revenues do not

constitute "profits," noting that "FSA has been unable to cite any

Georgia authority for the proposition that hotel revenues comprise

profits."3 Thus, the bankruptcy court held:

In sum, the court finds that under Georgia law hotel
revenues do not constitute "rents" or "profits" for the
purposes of section 552(b). Therefore, under section 552(a)
FSA does not have any interest in the postpetition revenues
generated by the Hotel.4

FSA appealed, and the district court affirmed, following the

reasoning of the bankruptcy court. This appeal followed.
II. DISCUSSION

The version of § 552 applicable to this appeal provides:

(a) Except as provided in subsection (b) of this section,
property acquired by the estate or by the debtor after the
commencement of the case is not subject to any lien resulting
from any security agreement entered into by the debtor before
the commencement of the case.

(b) Except as provided in sections 363, 506(c), 552, 544,
545, 547, and 548 of this title, 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 nonbankruptcy law, except
to any extent that the court, after notice and a hearing and
based on the equities of the case, orders otherwise.5

3
Id. at 30.
4
Id.
5
11 U.S.C. § 552 (1988). Congress amended § 552 with the
Bankruptcy Reform Act of 1994, Pub.L. No. 103-394, 108 Stat. 4106
(codified as amended 11 U.S.C. § 552 (1994)). The amendment is
not applicable to cases, such as this one, commenced prior to
October 22, 1994. Pub.L. 103-394 § 702, 108 Stat. 4150. As is
discussed later in this opinion, the amendment, while
inapplicable to this case, aids our construction of the version
THD does not dispute that FSA's prepetition security interest

covered hotel revenues. THD argues that this security interest

nevertheless does not reach postpetition revenues generated by the

hotel due to the application of § 552(a). In response, FSA argues

that its security interest falls within the exception to § 552(a)

set out in § 552(b); specifically, FSA contends that the

postpetition hotel revenues constitute "rents" within the meaning

of § 552(b) and, therefore, its security interest extends to these

revenues.6

The district court, following the reasoning of the bankruptcy

court, held "that Butner requires that state law define the terms

"proceeds, product, offspring, rents, or profits' in section

552(b)."7 We disagree.

Butner, like this case, was a Chapter 11 bankruptcy proceeding

in which a dispute arose between the bankruptcy trustee and a

mortgagee over the right to the rents collected during the period

between the filing of the mortgagor's bankruptcy petition and the

foreclosure sale of the mortgaged property. Unlike this case,

however, the security agreement in Butner did not specifically

cover rents; rather, the mortgagee relied upon North Carolina law,

which gave a mortgagee a security interest in rents collected on

the mortgaged property if certain conditions were met. And, unlike

of § 552 that is applicable.
6
FSA also contends that the hotel revenues constitute
"profits" within the meaning of § 552(b). Because we conclude
that the revenues fall within the definition of "rents," we need
not decide whether they also constitute "profits."
7
Financial Security Assurance, Inc. v. Tollman-Hundley
Dalton, L.P., 165 B.R. 698, 702 (N.D.Ga.1994).
this case, Butner did not involve § 552. The issue litigated

before the bankruptcy court, the district court, and the court of

appeals in Butner was whether, notwithstanding that the security

agreement did not specifically cover rents, the mortgagee

nevertheless had a security interest in rents under North Carolina

law.

The Supreme Court granted certiorari in Butner not to decide

the state law question, but to resolve a conflict among the

circuits as to whether state law or a federal rule of equity

determined a mortgagee's security interest in property following

the filing of a bankruptcy petition. In holding that state law

determined this interest, the Supreme Court said:

Property interests are created or defined by state
law.... The [federal rule of equity], at least in some
circumstances, affords the mortgagee rights that are not his
as a matter of state law. The rule we adopt avoids this
inequity because it looks to state law to define the security
interest of the mortgagee.8

Thus, the Supreme Court held that North Carolina law determined

whether the mortgagee's security interest covered rents from the

mortgaged property.

The questions litigated in Butner are not at issue in this

case. From Butner we learn that we must apply Georgia law to

determine whether FSA's security interest extends to the hotel

revenues. Unlike the security agreement in Butner, the security

agreement at issue here specifically covers rents, issues and

profits of the mortgaged property. THD does not dispute that,

under Georgia law, such an agreement covers hotel revenues. Thus,

8
Butner, 440 U.S. at 55-56, 99 S.Ct. at 918-19.
while Butner is relevant to this case, it is applicable only to

confirm what the parties do not dispute: absent § 552, FSA's

security interest extends to the hotel revenues.

The crux of this case is whether § 552 operates to cut off

FSA's right to postpetition hotel revenues. Butner is of no

assistance in resolving this issue. Contrary to the district

court's determination, nothing in Butner suggests that state

defines the language of the federal Bankruptcy Code in general, or

of § 552 in particular. Neither does § 552 dictate such a result.

Section 552(b) provides that a prepetition security interest in

derivative property may extend to postpetition derivative property

"to the extent provided by [the] security agreement and by

applicable nonbankruptcy law." This reference to "nonbankruptcy

law," or state law, is consistent with Butner: it prevents a

creditor from using a debtor's bankruptcy to acquire rights to

which he would not otherwise be entitled under state law. The

reference to "nonbankruptcy law" does not suggest that state law

defines the language of § 552.

Thus, we hold that the district court erred in looking to

Georgia law to define the language of § 552, specifically, to

define the term "rents" as used in § 552(b).9 To construe this

9
Two circuit courts, like the district court in this case,
have relied on Butner to justify looking to state law to define
the term "rents" as used in § 552(b). See Financial Security
Assurance, Inc. v. Days California Riverside Limited Partnership,
27 F.3d 374, 376 (9th Cir.1994); T-H New Orleans Limited
Partnership v. Financial Security Assurance, Inc., 10 F.3d 1099,
1104 (5th Cir.1993), cert. denied, --- U.S. ----, 114 S.Ct. 1833,
128 L.Ed.2d 461 (1994). For the reasons explained above, we
decline to follow these two circuits.
term, we look to the plain meaning of the statute.10

In Black's Law Dictionary, the term "rent" is defined:

"Consideration paid for use or occupation of property. In a

broader sense, it is the compensation or fee paid, usually

periodically, for the use of any rental property, land, buildings,

equipment, etc."11 Clearly, hotel revenues fall within the "broader

sense" of this definition. A plain reading of § 552(b) indicates

that Congress intended "rents" to be construed in this broader

sense. The term "rents" in § 552(b) is encompassed within the

phrase "proceeds, product, offspring, rents, or profits." With

this phrase, Congress intended to cover a wide range of derivative

property. It did not, therefore, intend that the term "rents," or

any other term used in the phrase, be construed in a restrictive

sense. Accordingly, we hold that the term "rents" as used in §

552(b) includes hotel revenues.

Our conclusion is supported by the Bankruptcy Reform Act of

1994, which amended § 552(b). The amendment is as follows:

(a) POSTPETITION EFFECT OF SECURITY INTEREST.—Section
552(b) of title 11, United States Code, is amended—

(1) by inserting "(1)" after "(b)".

(2) by striking "rents," each place it appears, and

(3) by adding at the end the following:

"(2) Except as provided in sections 363, 506(c), 522,
544, 545, 547, and 548 of this title, and notwithstanding
section 546(b) of this title, 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

10
See United States v. Ron Pair Enterprises, Inc., 489 U.S.
235, 241-42, 109 S.Ct. 1026, 1030-31, 103 L.Ed.2d 290 (1989).
11
Black's Law Dictionary at 1297 (6th ed. 1990).
 agreement extends to property of the debtor acquired before
the commencement of the case and to amounts paid as rents of
such property or the fees, charges, accounts, or other
payments for the use or occupancy of rooms and other public
facilities in hotels, motels, or other lodging properties,
then such security interest extends to such rents and such
fees, charges, accounts, or other payments acquired by the
estate after the commencement of the case to the extent
provided in such security agreement, except to any extent that
the court, after notice and a hearing and based on the
equities of the case, orders otherwise.".12

Thus, the current version of § 552(b) explicitly covers hotel

revenues. This current version is applicable only to cases

commenced after October 21, 1994;13 accordingly, it is not

applicable to this case. Nevertheless, the current version of §

552(b) aids our construction of the previous version applicable to

this case.

The legislative history of the Bankruptcy Reform Act of 1994

indicates that Congress intended the amendment to § 552(b) to

clarify the law, not to change the law. Specifically, the

legislative history of the pertinent provision provides:

Section 215 also clarifies the bankruptcy treatment of
hotel revenues which have been used to secure loans to hotels
and other lodging accommodations. These revenue streams,
while critical to a hotel's continued operations, are also the
most liquid and more valuable collateral the hotel can provide
to its financiers. When the hotel experiences financial
distress, the interests of the hotel operations, including
employment for clerks, maids, and other workers can collide
with the interests of persons to whom the revenues are
pledged. Section 215 recognizes the importance of this
revenue stream for the two competing interests and attempts to
strike a fair balance between them.14

12
Bankruptcy Reform Act of 1994, Pub.L. No. 103-394, 108
Stat. 4106, 4126 (codified as amended at 11 U.S.C. § 552(b)
(1994)).
13
Pub.L. 103-394 § 702, 108 Stat. 4106, 4150.
14
H.R.Rep. No. 103-385, 103d Cong., 2nd Sess., reprinted in
1994 U.S.C.C.A.N. 3340, 3357 (emphasis added).
 Thus, the 1994 amendment to § 552(b) was intended by Congress

to clarify that this subsection covers hotel revenues. This is

consistent with our holding that § 552(b) as in effect prior to the

1994 amendment encompasses hotel revenues.
CONCLUSION

For the reasons explained above, we hold that the term "rents"

as used in the version of § 552(b) predating the 1994 amendment

encompasses hotel revenues. Accordingly, the decision of the

district court is REVERSED and the case is REMANDED for further

proceedings consistent with this opinion.

CLARK, Senior Circuit Judge, concurring in part and dissenting
in part:

I agree philosophically with the majority's result in this

case, but regrettably I read the statute differently. I agree that

the current [1994] version of 11 U.S.C. § 552 would require the

majority's result. This case is governed by the § 552 which was in

effect prior to October 22, 1994, with which the majority agrees.

The majority takes the change in the statute by the 1994 Act as

bolstering its interpretation of the 1984 statute.

Section 552 has as its subject the "Postpetition effect of

security interest." The 1984 statute, with which we are concerned,

provided that a security interest conveyed in an agreement entered

into between a creditor and a debtor prior to bankruptcy extended

after commencement of a bankruptcy case to "proceeds ... rents, or

profits" of the property "to the extent provided by such security

agreement and by applicable nonbankruptcy law...." It is my view

that the district court was correct in interpreting the phrase

"non-bankruptcy" law to mean state law, in this case, Georgia law.
I agree with the courts in the Fifth and Ninth Circuits whose

opinions are cited in Note 9 of the majority opinion for the

proposition that state law defines the meaning of the word "rents"

as used in § 552(b).

I am also persuaded by the changes made in the 1994 version of

§ 552(b) by Congress. The new version of § 552(b) is quoted in the

majority opinion on pages 9-10 and I shall not duplicate it here.

The 1994 change reflects that Congress thought the phrase in the

1984 law "applicable non-bankruptcy law" referred to state laws.

In House Report No. 103-385, 103rd Cong. 2nd Session, reprinted in

1994 U.S.C.C.A.N. 3340 at 3357, in explaining changes wrought by

the Bankruptcy Reform Act under consideration, the report states:

Under current section 552 of the Bankruptcy Code, real
estate lenders are deemed to have a security interest in
postpetition rents only to the extent their security interest
has been "perfected" under applicable State law procedures.16
Inclusion under section 552, in turn, allows such proceeds to
be treated as "cash collateral" under section 363(a) of the
Bankruptcy Code, which prohibits a trustee or
debtor-in-possession from using such proceeds without the
consent of the lender or authorization by the court. In a
number of States, however, it is not feasible for real estate
lenders to perfect their security interest prior to a
bankruptcy filing; and, as a result, courts have denied
lenders having interests in postpetition rents the protection
offered under sections 552 and 363 of the Bankruptcy Code. 17
Section 214 provides that lenders may have valid security
interests in postpetition rents for bankruptcy purposes
notwithstanding their failure to have fully perfected their
security interest under applicable State law. This is
accomplished by adding a new provision to section 552 of the
Bankruptcy Code, applicable to lenders having a valid security
interest which extends to the underlying property and the
postpetition rents.
16
Butner v. United States, 440 U.S. 48, 99 S.Ct. 914, 59
L.Ed.2d 136 (1979).
17
See, e.g., In re Multi-Group III Ltd. Partnership, 99
B.R. 5 (Bankr.D.Ariz.1989); In re Association Center Ltd.
Partnership, 87 B.R. 142 (Bankr.W.D.Wash.1988); In re TM
Carlton House Partners, Ltd., 91 B.R. 349 (Bankr.E.D.Pa.1988);
 In re Metro Square, 93 B.R. 990 (Bankr.D.Minn.1988).

Each of the Bankruptcy Court decisions cited in Note 17 holds

that State law governs and limits the meaning of the word "rents"

as used in § 552(b). Those decisions, and law review articles

which have criticized § 552(b) as it existed prior to this 1994

change, interpret the previously existing section as did the

district court whose opinion we review here. I applaud the 1994

change. It belatedly brings the statute into line with the

philosophy of the Uniform Commercial Code which had as its purpose

making the laws of all states alike so that financial institutions

across the country could lend across state lines with confidence.

I think the district and bankruptcy court judges correctly

interpreted the statute and court decisions which bound them.