Hon. Elizabeth W. Magner, U.S. Bankruptcy Judge.
This matter came before the Court on October 14, 2015, on cross Motions for Summary Judgment filed by Bay Bridge Building Limited Company, LLC's ("Bay Bridge") and 800 Bourbon Street, LLC ("800 Bourbon or Debtor").
Summary Judgment is proper when no genuine issues of material fact exist, and the moving party is entitled to judgment as a matter of law.
On June 11, 2008, 800 Bourbon filed a voluntary petition for relief under chapter 11 of the Bankruptcy Code ("2008 Bankruptcy").
The 2008 Bankruptcy was closed on August 17, 2011. Chisholm and Chisholm Properties Circuit Events, LLC have not paid Bay Bridge's 2008 claim in full.
On October 15, 2014, 800 Bourbon and Louisiana Interests, Inc. filed voluntary petitions for relief under chapter 11 of the Bankruptcy Code (collectively "Debtors"). Debtors filed a Joint Disclosure Statement
On July 15, 2015, after the Disclosure Statement was approved, Bay Bridge filed proof of claim no. 5 in 800 Bourbon's bankruptcy case ("Bay Bridge claim"). The Bay Bridge claim for $1,979,886.47 is allegedly secured by the building owned by 800 Bourbon and with the same address. Bay Bridge's claim is evidenced by four (4) promissory notes signed by Johnny Chisholm on behalf of 800 Bourbon more particularly described:
Bay Bridge also holds a collateral mortgage note dated April 21, 2005, secured by a collateral mortgage ("Mortgage") on the property at 800 Bourbon Street. The same Promissory Notes and Mortgage formed the basis for Bay Bridge's proof of claim in the 2008 Bankruptcy.
On July 21, 2015, 800 Bourbon filed the instant adversary proceeding objecting to Bay Bridge's proof of claim.
On July 22, 2015, directly prior to the confirmation hearing, the Court held an auction of substantially all of the assets of Debtors, including Bay Bridge's collateral. The prevailing bid for for $8,175,000 was approved by an Order entered on August 3, 2015.
As a result of the agreement, Bay Bridge released its lien against 800 Bourbon's property and now seeks distribution of the funds held in escrow.
Bay Bridge recorded its Mortgage on April 29, 2005. Bay Bridge reinscribed the Mortgage on July 23, 2015.
A properly filed proof of claim constitutes "prima facie evidence of the validity and amount of the claim."
800 Bourbon contends that Bay Bridge has no claim under the 2009 Plan because the 2009 Plan provides, "Bay Bridge shall not be entitled to receive any payments from the Debtor/Reorganized Debtor or the Bankruptcy Estate, for any hand notes signed by the Debtor." However, the 2009 Plan also provides that Bay Bridge has an in rem claim:
The 2009 Plan further provides that the terms of the agreement between Bay Bridge, 800 Bourbon, Chisholm and Chisholm Properties Circuit Events, LLC are stated in the signed letter agreement attached as Exhibit C to 800 Bourbon's 2009 Disclosure Statement.
In 2009 and in order for 800 Bourbon to have a feasible plan of reorganization, Bay Bridge agreed to waive 800 Bourbon's personal obligation. As part of the bargained for agreement, 800 Bourbon agreed that Bay Bridge retained an in rem claim. This Court confirmed the 2009 Plan that incorporated this agreement. 800 Bourbon is now seeking for this Court to interpret this provision differently.
The provision regarding payments was an acknowledgment by Bay Bridge that it would not receive any distributions under the 2009 Plan. The provision that provides Bay Bridge an in rem claim is not at odds with this understanding.
The 2009 Plan provides that Bay Bridge has an in rem claim to the extent that it has an allowed secured claim. 800 Bourbon maintains that Bay Bridge did not have an allowed secured claim, so it has no in rem claim. A properly filed proof of claim is "prima facie evidence of the validity
The 2009 Plan provides:
Therefore, the 2009 Plan is clear that Bay Bridge had an allowed secured in rem claim of $1,360,571.01.
Bay Bridge contends that 800 Bourbon is estopped from attacking the validity of the Mortgage because its claim was allowed in the 2009 Plan.
The 2009 Plan provides:
The 2009 Plan recognized the debt and Mortgage, but it did not excuse Bay Bridge from maintaining the perfection of its security post-confirmation. Therefore, 800 Bourbon is not estopped from raising Bay Bridge's failure to maintain perfection following the confirmation of the 2009 Plan.
Res judicata is also inapplicable. For res judicata to apply the same claim or issue must be involved in both actions.
At the outset it is helpful to examine the factual and legal underpinnings of 800 Bourbon's challenge to the Bay Bridge claim. The facts of this case are not in dispute.
Bay Bridge holds four (4) promissory notes made by 800 Bourbon. As of the filing date, Bay Bridge held a collateral mortgage note secured by a collateral mortgage against 800 Bourbon's real property. Bay Bridge alleges that the collateral mortgage and mortgage note were pledged to it to secure the repayment of the promissory notes. The debt is in rem so it is only enforceable against the property. Bay Bridge's mortgage was originally recorded in the mortgage records for Orleans Parish on April 29, 2005, and is subordinate in rank to the secured claims
800 Bourbon does not challenge the amount owed to Bay Bridge.
Section 544(a) provides that a trustee may avoid a transfer of property of the estate if a hypothetical creditor could do so, whether or not such a creditor actually exists.
Bay Bridge, on the other hand, contends that pursuant to 11 U.S.C. § 544 a trustee or debtor-in-possessions's avoidance powers arise on the petition date. It argues that because the Mortgage was perfected as of the petition date, it has a valid lien that cannot be avoided under 11 U.S.C. § 544.
Section 544 is designed to avoid prepetition transfers by a debtor to a creditor. Generally, for a prepetition transaction to be avoidable, the creditor must have improved its position to the detriment of other creditors.
Section 544 avoidance actions create a legal fiction as of a particular date, the petition date. Section 544 actions view rights between a debtor and creditor at a snapshot in time. Debtor disputes that Bay Bridge's lien was effective on the petition date, arguing:
Debtor has not provided any statutory or jurisprudential law for its position and this Court could find none.
Bay Bridge's lien was properly perfected from April 29, 2005, until April 29, 2015, which was after the petition date. Therefore, Bay Bridge's lien was perfected on the petition date, October 15, 2014. Because Bay Bridge's lien was perfected on the petition date, there was no prepetition transfer.
As explained above, Bay Bridge held a properly perfected security interest on the petition date. However, the filing of a bankruptcy does not excuse a creditor from maintaining its security interest postpetition. Although Bay Bridge argues to the contrary, nothing in the jurisprudence or Bankruptcy Code enshrines the creditor's secured status or ranking as of the petition date and nothing in the Code excuses it from guarding against loss.
Although no cases could be found on point. DeBaillon v. Wilson (In re Jack/Wade Drilling, Inc.)
Unquestionably, the lienholders were secured on the petition date. However, the Court had little difficulty finding that their secured positions were lost postpetition because they failed to filed the Notice of Privilege within 180 days of completion. As the Wilson case explains, the failure to protect the secured status of a lien postpetition results in the loss of security.
"[T]he validity and extent of a security interest in property of the estate is controlled by state law unless some other federal interest requires a different result."
Under Louisiana law, recordation not only gives effect as to third parties, but it also establishes priority among lienholders: "The mortgagee is preferred to the unsecured creditors of the mortgagor and to others whose rights become effective after the mortgage becomes effective as to them."
"[T]he effect of recordation of an instrument creating a mortgage ... ceases ten years after the date of instrument."
Under Louisiana law, once the perfection of a mortgage lapses, the reinscription perfects the security interest and provides a new ranking as of that date rather than continuing the pre-existing interest.
Bay Bridge argues that its interests are "frozen" as of the petition date. Its position is taken from several opinions applying common law. To summarize, these courts hold that a creditor's status under a properly perfected security interest on the petition date is frozen or fixed for purposes of the bankruptcy case. Bay Bridge argues that these same cases excuse a secured creditor's obligation to maintain its secured status postpetition. Closer reading of the cases does not support this argument.
In each cited case, the debtor or trustee was attempting to avoid a lien under section 544, which for reasons previously explained is inapplicable to the facts of this case. Second, although the liens in question lapsed postpetition, applicable state law preserved the creditor's position.
For example, in Highland Constr. Mgmt. Servs. v. Wells Fargo, N.A. (In re Highland Constr. Mgmt. Servs.),
In Highland, postpetition a secured creditor failed to timely file a U.C.C. Continuation Statement. In an effort to determine the effect of this lapse, Highland Construction looked to applicable state law. Virginia Code § 8.9A-515(c), provided:
Although Highland characterizes this as a "freeze" of the creditor's position as of the petition date, in actuality it is the application of state law that creates the "freeze."
Virginia, like many other common law states, treats the recordation of a U.C.C. Financing Statement as a notice requirement. The rationale is that once on notice, always on notice, so a lapse in recordation has no effect on existing creditors. Once a bankruptcy is filed, no new interests can be created after the petition date without court approval. Therefore, all interests in competition with the secured creditor are fixed as of the petition date. Since Virginia law provides that the lapse of a security filing has no affect as to creditors in existence as of the date of the lapse, the lapse postpetition has no effect on the
I.R. Toranto v. Dzikowski
Like Highland, in Toranto, the secured creditor failed to file a continuation statement postpetition. Under Florida law, any action taken by the creditor would not have been to continue or maintain the lien but recreate the lien. Pursuant to section 362(b)(3), an action to "create, perfect, or enforce" a lien is stayed. As a result, Florida law tolled the lapse until thirty (30) days after the stay terminated. Louisiana has no such provision.
Bay Bridge also cites In re Neuenschwander
A debtor may object to a claim based on any number of grounds including, but not limited to, a dispute as to the amount owed, a defect in the collateral documentation or a failure to perfect its security interest. In this case, Debtor argues that Bay Bridge has lost its secured position due to a lapse in perfection.
There is no language to support a finding that under the Bankruptcy Code a creditor's rights are frozen on the petition date excusing it from maintaining its secured position during the administration of the case for purposes of an objection to claim. As discussed in the next paragraph, the Bankruptcy Code clearly contemplates the opposite.
The filing of a bankruptcy petition operates as a stay to "any act to create, perfect, or enforce any lien against property of the estate."
Bay Bridge cited General Electric Credit Corp. v. Nardulli & Sons, Inc.
The Bankruptcy Code specifically allows creditors such as Bay Bridge to file continuation statements without violating the automatic stay. As stated above, property rights are determined by state law. The fact that a lien exists on the petition date does not mean that the lien cannot be lost if the lienholder fails to comply with state law.
Having found that Bay Bridge was required to maintain the perfection of its security interest postpetition, the Court must now consider the effect loss of perfection has on the estate. The effect is not as one might expect.
Bay Bridge holds an in rem claim against 800 Bourbon. In the typical bankruptcy case, if perfection of a security interest is lost, the creditor becomes unsecured. In the case of an in rem debt, the entire claim is lost. For the reasons set forth below, this is not the result in this case.
800 Bourbon and its sister corporation, Louisiana Interests, Inc., had the good fortune of selling their assets en globo for $8,175,000.00. By separate ruling, this Court allocated $6,195,832.00 of the proceeds to this estate. Without reference to Bay Bridge's claim, the funds on hand are sufficient to satisfy all administrative, priority, secured and unsecured creditors and leave a residual surplus of approximately $3,557,891.00.
Under Louisiana law, mortgages must be recorded in order to effect third parties.
800 Bourbon contends that as debtor-in-possession, it is a separate legal entity which is not bound by the terms of the Mortgage. The basis of its argument is founded in section 544. When a debtor-in-possession avoids a lien pursuant to section 544, it is not the same entity as the prepetition debtor. Instead, a fiction is created whereby the debtor stands in the shoes of a bona fide purchaser of real property or a judgment creditor. It also may avoid a prepetition transfer by standing in the shoes of any actual creditor of the estate. As stated above, section 544 is not applicable in this case because it only
Except in the case of an avoidance statue, or right specifically granted in the Bankruptcy Code (i.e. the cram down provision of § 1129(a)(7)(A)(ii)), the debtor-in-possession's rights are defined by those held by the debtor prepetition. For example, the United States Supreme Court ruled in N.L.R.B. v. Bildisco and Bildisco
In this case, Bay Bridge had a security interest and lost it through a failure to timely reinscribe postpetition. This lapse is sufficient, without anything more, to negate the security interest as to third parties. For the reasons set forth above, this Court need not refer to any avoidance statute to conclude that this has occurred. Instead, the loss of secured position flows as a natural consequence of Bay Bridge's own conduct without reference to any third party.
However, having satisfied all third party claims, the above result does not address Bay Bridge's rights vis-á-vis 800 Bourbon. 800 Bourbon is a party to the Mortgage held by Bay Bridge. Therefore, Bay Bridge's Mortgage is effective against 800 Bourbon regardless of recordation. Challenge to Bay Bridge's claim is not dependent on its relationship to third party interests as they are all satisfied. Thus, the Court is back to state law and the effect of a lapse in perfection vis-á-vis the mortgagor and mortgagee. As explained above, perfection is not a requirement to enforce a mortgage between the parties.
Section 108(c)(2) provides:
Section 108(c)(2) applies only to civil court proceedings:
The United States Supreme Court has made it clear that "[a]ny increase over the judicially determined valuation during bankruptcy rightly accrues to the benefit of the creditor, not to the benefit of the debtor."
Bay Bridge's Cross Motion for Summary Judgment is GRANTED, and 800 Bourbon's is DENIED. As prayed for by Bay Bridge in its Cross Motion for Summary Judgment, the allegations in 800 Bourbon's Complaint are denied, and the funds escrowed for Bay Bridge's claim will be released to Bay Bridge. A separate Judgment will be entered in accord with this Opinion.
