In re Buttermilk Towne Center, LLC

Summarized by J. Debbeler , Bricker Graydon LLP
15 years 2 months ago

Citation:

2010 FED App. 0010P

Tag(s):

6th Circuit

Ruling:

Sixth Circuit BAP held that a debtor in a Chapter 11 single asset real estate case cannot provide adequate protection to a creditor for the use of rents as cash collateral by the use of a replacement lien on future rents where there is no equity cushion in the subject property present. Also, rents pledged by a debtor to a creditor pursuant to the grant of an "absolute assignment" with a license for the debtor to use the rents does not withdraw the rents from being property of the estate even if pre-petition possession of the rents was sought by the creditor in letters to the tenants.

Procedural context:

Bank of America was the holder of $34 million bond debt secured by a mortgage on commercial real estate owned by debtor and occupied by tenants. Debtor was unable to pay bond debt at maturity, filed a Chapter 11 and sought the right to use the rents as cash collateral. Bakruptcy court held the rents due from tenants to debtor were property of the estate notwithstanding "absolute assignment" of rents to creditor. Bakruptcy court allowed interim use of cash collateral but ordered funds escrowed to pay debtor's counsel's attorney fees. Bankruptcy Court authorized final use of rents by debtor as cash collateral. Creditor appealed to BAP.

Facts:

Bankruptcy Court had determined that rents were property of the estate under Kentucky law notwithstanding "absolute assignment" to the creditor of the rents and license to debtor to use the rents. Creditor sent rent letters to tenants pre-petition. Bankruptcy court found that the loan documents containing an assignment of the rents were for security purposes rather than complete relinquishment of debtor's rights in the rents. BAP agreed with Bankruptcy court on these issues. Bankruptcy court was reversed by BAP due to prior Sixth Circuit authority (Stearns) which BAP found prohibited the use of cash collateral with a replacement lien in rents where there was no equity cushion in the debtor's property pledged to the creditor. Th creditor had an interest in future rents and the granting of a replacement lien in those same future rents was insufficient where the debtor had no equity in the property. Use of cash collateral granted to debtor by orders of the bankruptcy court reversed by BAP

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