HENRY J. BOROFF, Bankruptcy Judge.
Before the Court is a motion filed by Wells Fargo, N.A. ("Wells Fargo") to determine the value of its secured claim against Old Colony, LLC (the "Debtor" or "Old Colony") and Old Colony's corollary objection to Wells Fargo's proof of claim. The motion and objection require the Court not only to determine the value of Wells Fargo's real property collateral, but also to opine upon three ancillary legal issues, each of which has divided bankruptcy courts across the nation — namely: (1) whether a security interest in hotel room revenues is an interest in real property (perfected under state real property recording statutes) or personal property (perfected by filing a financing statement in accordance with the relevant state's adoption of Article 9 of the Uniform Commercial Code); (2) whether postpetition adequate protection payments paid by a debtor to an undersecured creditor holding a security interest in postpetition revenues should be characterized as payment on the principal balance of the secured claim; and (3) whether a secured party's postpetition attorneys' fees are an allowable component of its un(der)secured claim.
Old Colony is a Wyoming limited liability company formed in May 2007 by Joseph Cuzzupoli, the Debtor's managing member, and John Bullock.
The parties initially contemplated that the entire $20 million in financing would come from Jackson State. Shortly before closing, however, the Debtor learned that Jackson State would provide only $16.5 million of that amount because it claimed that its appraisal of the Property was outdated. Rather than delay the closing while waiting for an updated appraisal, the parties went forward with the transaction, with Johnson Resort Properties, Inc. providing the remaining $3.5 million in seller financing (the "Johnson Loan"), an interest-only loan with a one-year term. The Debtor intended to pay off the Johnson Loan upon the completion of an updated appraisal and the assumed disbursement of the remaining $3.5 million from Jackson State. However, after receipt of the updated appraisal, but prior to Jackson State loaning the additional funds, Jackson State was purchased by Wells Fargo, which declined to make the remaining disbursement.
The Debtor was unable to find an institutional lender to advance the funds needed to satisfy the Johnson Loan and its maturity date was fast approaching. The Debtor says that, in May 2008, it was thus
Shortly after filing the petition, the Debtor filed an emergency motion requesting authorization to use cash collateral (including cash, rents, and revenues from hotel operations), in which both Wells Fargo and JH Lending asserted security interests. Wells Fargo and the Debtor stipulated to the Debtor's use of cash collateral on an emergency interim basis, but issues remained in dispute. After an evidentiary hearing held on November 29 and 30, 2010, the Court authorized the use of cash collateral in accordance with the Debtor's submitted operating budget (the "Cash Collateral Order").
The Cash Collateral Order granted Wells Fargo and JH Lending Trust postpetition security interests in the collateral, but only to the extent of the prepetition enforceability of their liens. The order further provided that the lenders' respective liens would be recognized only to "the extent of any diminution in value of the Lender's cash and non-cash Collateral." See Stip. Auth. & Approv. Interim Use Cash Collateral, Oct. 15, 2010, ECF No. 24; see also Order re: Debtor's Mot. for Use of Cash Collateral, Nov. 4, 2010, ECF No. 45; Hr'g Tr. Day 2 63:2-9 (Nov. 30, 2010).
The parties agree that, as of the Petition Date and prior to the application of adequate protection payments, Wells Fargo was owed a total amount of $17,802,805.43, consisting of $16,500,000 in principal, $1,283,019.99 in interest, and $19,785.44 in prepetition legal fees and expenses. Stip. Fact 3-4 ¶ 12, Dec. 14, 2011, ECF No. 100. Further, the parties agree that Wells Fargo incurred $381,158.05 in postpetition legal fees and expenses through November 30, 2011. Stip. Fact 5 ¶ 20.
The Inn is located in Teton Village, Wyoming, in the heart of the Jackson Hole ski area and near Grand Teton National Park and Yellowstone National Park. The 83-room Inn is slightly more than 40 years old and offers various amenities, such as a pool and hot tub with deck, above-ground
As the recreational center for the Jackson Hole mountain resort, tourism drives much of Teton Village's economy. Before the economic downturn in 2008, property development in Teton Village was booming. The Debtor's own plans to raze the Inn and build a four-star, luxury condominium-hotel on the site reflect the demand for development opportunities at the time it purchased the Property. Based upon the Debtor's architectural and development plans, the Property appraised in 2008 at $32 million. Stip. Ex. 6 (the "2008 Appraisal"). With the crash of the financial markets shortly thereafter, however, the Debtor's redevelopment plans evaporated.
The Property thus continues to be operated as The Inn at Jackson Hole. The Debtor contracts with Metwest Terra Hospitality, LLC ("Terra") to manage the Inn, and all of the employees at the Inn are Terra's employees. Terra is responsible for daily management, advertising, reservations, staffing, accounts payable, and maintenance of the Inn's books and records. The Debtor oversees Terra's services, "makes overarching macro-level decisions with respect to the Inn operations, such as establishing an annual budget for operations, negotiation of management agreements, and determination of policy matters," and maintains the books and records for the Debtor's operations. Discl. Stmt. 5, July 1, 2011, ECF No. 79. According to the Debtor, the Inn has been cash flow positive since the Petition Date and the Debtor has paid all postpetition operating expenses (other than debt service and professional fees). Discl. Stmt. 8. Technically, the Debtor continues to operate the Inn as a debtor in possession.
On July 1, 2011, the Debtor filed a disclosure statement (the "Disclosure Statement") and plan of reorganization (the "Plan") jointly proposed by the Debtor and Molokai Partners, LLC ("Molokai"), a New Jersey limited liability company.
On August 31, 2011, after the filing of the Plan, Wells Fargo filed its "Motion of
While the parties differ as to the value of the Property, there is no dispute that Wells Fargo is undersecured. The parties further agree that Wells Fargo holds a perfected security interest in any assets described in the mortgage securing the Wells Fargo Loan (the "Mortgage"), Stip. Ex. 3, which was perfected by the recording of the Mortgage in the Wyoming land records. They also agree that Wells Fargo does not have a perfected security interest in any assets that would have required the filing of a Uniform Commercial Code ("UCC") Article 9 financing statement with the Wyoming Secretary of State in order to perfect a secured interest, since no such financing statement was filed. Stip. Fact 5.
In order to determine the amount of Wells Fargo's Secured Claim, four issues must be resolved. The first is the value of the Property, as it is undisputed that Wells Fargo's secured claim against the Property is validly perfected. The second is whether Wells Fargo holds a perfected security interest in the Debtor's cash and hotel lodging revenues. Third, the Court must determine the appropriate application of postpetition adequate protection payments received by Wells Fargo during the Chapter 11 case. And fourth, the Court must resolve the question of whether Wells Fargo's postpetition legal fees and expenses can be added to its Unsecured Claim.
A trial on the question of the Property's value was conducted over two days. Four witnesses testified and 19 exhibits were admitted into evidence. At the conclusion of the trial, the issue of valuation and the additional questions of law were taken under advisement, and the parties were invited to submit proposed findings of fact and conclusions of law. Both have done so. The following constitute the Court's findings of fact and conclusions of law pursuant to Federal Rule of Bankruptcy Procedure 7052.
Wells Fargo relies on an appraisal conducted by Andrew Cornish of Rocky
Cornish began his analysis by valuing the Property under the income capitalization approach, calculating the going-concern value of the Property at $10,306,897.89. He then used a modified sales comparison approach, and concluded that the value of the Property determined in this way is $10,970,000. He reached that valuation by reasoning as follows: first, using a classic sales comparison approach, he concluded that value of the Property as essentially "vacant" land was $8,275,000. But because he believed that immediate development of the Property was not feasible given the current market, Cornish next assumed that a prospective purchaser would likely conclude that the Inn should remain in operation during a "hold" period of 5 years before it was demolished and new development begun. Accordingly, using the stabilized net operating income determined during the income capitalization portion of his analysis, he added $2,770,000 to the value of the land — an amount equal to 5 years' net operating income — and subtracted the costs of demolition and a small amount of capital necessary to maintain the Inn during the hold period.
The Debtor criticizes Cornish's appraisal in several respects. With regard to the valuation of the land as vacant, the Debtor maintains that Cornish's approach was too speculative to warrant consideration. The Debtor also discounts the comparable sales relied on by Cornish as largely irrelevant. Two of the comparable sales pre-date the 2008 economic downturn, and the Debtor says they are too remote in time and economic circumstance to be given any weight. Cornish's remaining two comparables were based not on closed sales but on undisclosed purchase and sale agreements. In the Debtor's view, they are inadmissible. The Debtor further argues that Cornish did not substantiate his assumption that a 5-year "hold" period was appropriate.
The Debtor argues that, because the Plan provides for the Debtor to actually retain and operate the Inn, the Property should have been valued based on that proposed use. Accordingly, says the Debtor, the only appropriate valuation is that used by its appraiser, the income capitalization approach. And the Debtor criticizes Cornish's income capitalization analysis because, the Debtor says, it failed both to account for the value of the personal property at the Inn and to consider in more depth the true general expenses and capital expense requirements of the Inn in operation.
Christopher Kraus of PKF Consulting, Inc. conducted an appraisal of the Property on behalf of the Debtor. Stip. Ex. 5 (the "Debtor's Appraisal"). According to his appraisal report and testimony at trial, Kraus opines that best use of the Property is its continued operation as the Inn, because current market conditions do not support the demolition and redevelopment of the Property. He did not rely heavily on a sales comparison analysis due to the lack of comparable sales transactions. But using an income capitalization approach, and deducting $1,150,000 for needed capital
Wells Fargo criticizes Kraus's appraisal for failing to appropriately support his conclusion that the "highest and best use" of the Property was the continued operation of the Inn and not a purchase for future redevelopment. Wells Fargo says that Kraus did not explicitly perform a highest and best use analysis, because he was guided by Cuzzupoli in selecting a going-concern analysis from the outset. Wells Fargo notes that Kraus himself valued the Property at $32 million in 2008 as a redeveloped condominium-hotel, and his failure to consider the Property's value based on possible future redevelopment was an error. According to Wells Fargo, Kraus's summary conclusion regarding the best use of the Property was inconsistent with the Uniform Standards of Professional Appraisal, because it was not based on an objective, quantitative analysis of the Property as vacant land.
Wells Fargo also maintains that the $1,150,000 deduction for capital expenditures was inflated and reflects more than is necessary for the Inn to maintain its current operations. In its own analysis of the proposed capital expenses, Wells Fargo concludes that $706,200 of the claimed expenditures is for "non-essential" improvements. Furthermore, since the Plan contemplates only a $227,000 contribution for capital improvements, Wells Fargo says the remaining $443,800 in expenses is not justified. Thus, according to Wells Fargo, Kraus's concluded value of the Property should be revised to discount these unnecessary expenditures.
Wells Fargo further argues that Kraus's allocation of $498,000 to the value of personal property is not reliable or justified since he is not a personal property appraiser and does not distinguish between fixtures and personalty. Accordingly, Wells Fargo argues that no deduction from Kraus's concluded value should be made on account of the asserted value of the personal property.
In addition to granting a lien on the Property itself, the Mortgage also grants Wells Fargo a lien on all of the Debtor's "right, title, and interest in and to all present and future leases of the Property and all Rents from the Property." Mortgage 1. The Mortgage was properly recorded in the office of the Teton County Clerk, but no financing statement is on file with the Wyoming Secretary of State. Stip. Fact 5. The parties focus their arguments on the issue of whether the security interest in the Inn's room revenues (the "Room Revenues") is an interest in real property, perfected by the recording of the Mortgage, or an interest in personal property, which can only be perfected by the filing of a financing statement with the Wyoming Secretary of State pursuant to Article 9 of the UCC.
Not surprisingly, Wells Fargo argues that the Room Revenues are rents and that the assignment of those rents was perfected when it recorded the Mortgage. Wells Fargo urges the Court to adopt the approach taken in cases such as Financial Security Assurance, Inc. v. Days California Riverside Ltd. Partnership (In re Days California Riverside Ltd. Partnership), 27 F.3d 374 (9th Cir.1994), and T-H New Orleans Ltd. Partnership v. Financial
In further support of its argument, Wells Fargo points to Wyoming statutes that refer to the occupancy of a hotel room as a rental, arguing that this indicates that hotel room payments are considered rent under Wyoming law. Additionally, Wells Fargo notes that both the Restatement (Third) of Property and the Uniform Assignment of Rents Act define rent as a payment primarily for the possession, occupancy, or use of real property, and both include hotel room charges within that definition.
In response to the Debtor's assertion that a majority of courts consider hotel room revenues to be accounts receivable — personal property subject to the perfection requirements of Article 9 of the UCC — Wells Fargo argues that those courts applied an overly-formalistic approach in distinguishing the landlord/tenant relationship from the hotel owner/guest relationship. Wells Fargo says those cases also do not account for the references to hotel revenues as rents in Wyoming statutes and ignore economic realities. Finally, Wells Fargo maintains that, even if the Room Revenues do not constitute rent, they are subject to its prepetition lien as "proceeds" or "profits" of the Property.
The Debtor says that Wells Fargo's argument has been rejected by the majority of courts that have considered it. Therefore, the Debtor would have the Court adopt the majority approach and find that the Room Revenues are not rents, but rather accounts receivable — personal property for which a perfected security interest required the filing of a UCC statement in the Wyoming Secretary of State's office. Since no financing statement is on file, the Debtor concludes that Wells Fargo has no perfected security interest in the Room Revenues.
Relying on other statutory provisions, the Debtor maintains that Wyoming law "delineates and distinguishes between a `landlord and tenant' relationship and an `innkeeper and guest' relationship." Debtor's Post-Trial Mem. 20 ¶ 14, March 9, 2012, ECF No. 123. Accordingly, the Debtor argues that while a tenant may pay rent, a guest in a hotel does not. Instead, the hotel guest has only a license to use the property — creating an account receivable that is considered personal, not real, property under the UCC. The Debtor further contends that the loan documents themselves reflect the parties' understanding that the filing of a UCC financing statement was required to perfect the security interest in the Room Revenues, and that understanding validates the conclusion that the Room Revenues constitute personal property subject to Article 9.
Wells Fargo argues that because § 552(b) extends its perfected security interest
Wells Fargo further argues that, even if this Court were to conclude that its security interest in the Room Revenues was not perfected, it was entitled to receive the adequate protection payments to protect against a diminution in the Property's value. Relying on testimony at trial to the effect that the Inn's revenues have declined during the case, "which has likely resulted in a corresponding diminution in value of the Property," id. at 27 ¶ 82, Wells Fargo says it is entitled to the adequate protection payments as compensation for a reduction in the Property's value, which diminution in value should be measured during the confirmation process.
Because the Debtor maintains that Wells Fargo does not have a perfected security interest in postpetition Room Revenues, it also argues that those accumulated revenues could not have increased the amount of the Secured Claim. And since the Debtor says Wells Fargo's assertion that the Property has likely diminished in value postpetition has not been demonstrated, the Debtor further argues that the bank was not entitled to the payments as adequate protection. According to the Debtor, then, the payments can only be applied to reduce the amount of the Secured Claim, and should be deducted from the determined value of the Property.
Wells Fargo asks the Court to allow its request to add its postpetition attorneys' fees to the amount of the Unsecured Claim. Because its prepetition contracts with the Debtor provide that the bank's attorneys' fees can be charged against the Debtor, Wells Fargo says it is entitled to claim those fees as part of its unsecured claim in light of Travelers Casualty & Surety Co. of America v. Pacific Gas & Elec. Co., 549 U.S. 443, 127 S.Ct. 1199, 167 L.Ed.2d 178 (2007), where the Supreme Court, held that a prepetition contract allocating payment of attorneys' fees is enforceable in bankruptcy unless the Bankruptcy Code provides otherwise. Relying on SNTL Corp. v. Centre Insurance Co. (In re SNTL Corp.), 571 F.3d 826 (9th Cir.2009), and Ogle v. Fidelity & Deposit Co. of Maryland, 586 F.3d 143 (2d Cir. 2009), Wells Fargo says that its entitlement to attorneys' fees under prepetition
The Debtor argues that Wells Fargo is not entitled to legal fees or expenses, because those claims are "categorically disallowed" to undersecured or wholly unsecured creditors by § 506(b), which provides for the inclusion of postpetition attorneys' fees only if a creditor is oversecured. Because it is undisputed that Wells Fargo is undersecured, the Debtor maintains that Wells Fargo is entitled to no postpetition attorneys' fees, whether as part of its secured or unsecured claim. In addition, the Debtor asserts that even were Wells Fargo entitled to add the postpetition attorneys' fees to its unsecured claim, Wells Fargo has failed to demonstrate the reasonableness of its fees and expenses, and such a determination must be postponed for further hearing.
Because Wells Fargo is undersecured, § 506(a) mandates that the amount of the Secured Claim be determined by reference to the value of its collateral. 11 U.S.C. § 506(a) ("An allowed claim of a creditor secured by a lien on property in which the estate has in interest ... is a secured claim to the extent of the value of such creditor's interest in the estate's interest in such property...."); United Sav. Ass'n. of Texas v. Timbers of Inwood Forest Assoc., Ltd., 484 U.S. 365, 372, 108 S.Ct. 626, 98 L.Ed.2d 740 (1988) ("The phrase `value of such creditor's interest' in § 506(a) means `the value of the collateral.'"); In re SW Hotel Venture, LLC, 460 B.R. 4, 25 (Bankr.D.Mass.2011) ("the court must determine the value of the secured creditor's collateral").
As this Court has previously explained:
150 N. St. Assocs. Ltd. P'ship v. City of Pittsfield (In re 150 N. St. Assocs. Ltd. P'ship), 184 B.R. 1, 6 (Bankr.D.Mass.1995). In this case, neither expert relied on the cost approach to value the Property, instead utilizing — to different degrees — the sales comparison and income approaches.
Cornish
Cornish relied on four properties in undertaking a sales comparison analysis to determine the value of the Property as essentially "vacant land." The first sale ("Comparable 1") occurred in February 2008, arguably prior to the economic downturn, and related to a much smaller property containing an outmoded hotel. The fourth comparable used ("Comparable 4") was the prior sale of the Inn to the Debtor. As previously noted, that sale occurred in 2007, also prior to the economic downturn. To adjust for changing market conditions, Cornish discounted the sale prices of Comparables 1 and 4 by 55% and gave them less weight in the final determination of the Property's current value.
However, even with the 55% discount to account for the devaluation of property since the latter part of 2008, the Court finds that neither Comparable 1 nor Comparable 4 are reliable benchmarks for comparison to determine the Property's value today. Not only are those sales quite remote in time (between 3 and 4 years before Cornish's appraisal), but there was no reliable proof that even a discount of
Comparables 2 and 3 are likewise entitled to little weight, but for different reasons. Both were pending sales at the time of the appraisal and ultimately, according to Cornish's testimony, neither sale was ever consummated. Cornish testified that the failure of the pending sales to close had no effect on his opinion of valuation, since they represented a "meeting of the minds of a buyer and a seller that happened the first time in three or four years where they met at a particular price.... So — negotiations is as valuable information as I have, and it doesn't affect my current opinion." Trial Tr. Day 1 85:24-86:6.
While pending sales of properties other than the property being appraised may be admitted in connection with a valuation hearing, the Court cannot give them substantial weight here.
More importantly, the lack of closed sales and the fact that neither of the pending sales was ultimately consummated raise a substantial question as to whether purchase of the Property with the intent to later redevelop it (rather than a purchase of the Property in order to operate the Inn as a going-concern) is, as Cornish determined, actually financially feasible. Cornish concedes that "the development of new commercial product is currently not financially feasible due to the existing soft market." WF Appraisal 71. This conclusion is certainly unassailable, especially in light of the abundance of data cited throughout the appraisal.
As Cornish himself notes, the sales comparison approach is "applicable when an active market provides sufficient quantities of reliable data that can be verified from authoritative sources" and "is relatively unreliable in an inactive market or in estimating the value of properties for which no real comparable sales data is available." WF Appraisal 83. The market for vacant land to be purchased for future development in the Teton Village area is
Cornish's appraisal suffers from a further infirmity that diminishes its reliability as an adequate estimate of the current market value of the Property. Because he concludes that the Property, if purchased for redevelopment, would not actually be redeveloped immediately, he factors in the income from the Property that would be generated during the "hold" period. He hypothesizes a 5-year hold period, in part because he concluded that the Property would require significant maintenance at the end of those five years. See WF Appraisal 105. But he also testified that his 5-year hold hypothesis was reached intuitively and the determination was difficult because "[i]t's predicated on the emotions of the market and the velocity of sales." Trial Tr. Day 1 40:20-21; see also Trial Tr. Day 1 94:13-15 ("it just seems that five years was best replicating what I felt and what I felt a buyer would feel coming to the market"). He further testified that the hold period chosen by a potential purchaser could be shorter or longer, and that changes to the hypothesized hold period would affect the total value estimate. See Trial Tr. Day 1 64:18-22; 95:15-96:19. The Court finds that there was insufficient evidence (i.e., market or other data) to conclude that a 5-year hold period is an appropriate length of time to employ for the needed analysis. Given that the amount of time used as a hold period had such a direct impact on the ultimate estimated value of the Property, the Court concludes that the portion of value attributable to that income-producing hold period is unreliable.
In sum, the Court finds that the value of the Property asserted by Wells Fargo is too speculative and unreliable to sufficiently persuade the Court that its value should be adopted for purposes of the present Valuation Motion. Accordingly, the Court finds that the income capitalization approach is the more appropriate vehicle for estimating the value of the Property in this case.
Both Kraus
One area of major difference between Cornish and Kraus's values lies in their different analyses of the cost of capital improvements that are needed for the Property. Cornish factored in only $75,000 worth of capital expenditures in discounting the Property's market value. He chose that value, however, because he had already concluded that the Inn would be razed after 5 years, and the $75,000 reflected only those improvements he believed were necessary to maintain the Property through that 5-year period. Thus, his capital expenditure figure did not account for several maintenance issues that pose much larger cost challenges to the Property as a going concern. For instance, Cornish's appraisal "assumes the integrity of the rear retaining wall," WF Appraisal 5, which clearly is an issue of some concern. See Id. (describing problems with wall); see also Debtor's Appraisal III-14 (incorporating cost of repair of wall). Cornish also did not include any capital expenditures for replacement or maintenance of the roof, another high-cost maintenance item that is apparently a significant problem for the Property. See Stip. Ex. 7 (estimating cost of roof repair); Trial Tr. Day 2 80:13-14 (Feb. 17, 2012), ECF No. 117. Accordingly, the Court concludes that Cornish's appraisal does not appropriately take into account the cost of capital expenditures a potential purchaser would anticipate if buying the Property and would factor into the purchase price.
Even more problematic is Cornish's admission that his income capitalization approach did not use as "refined" an accounting of capital expenditures as would have
Wells Fargo takes issue with Kraus's $1.15 million deduction for capital expenditures, arguing that those expenditures are not necessary for the Inn to maintain its current performance levels. Given the age and condition of the Inn observed during his site visit, Kraus requested information regarding historical capital expenditures and management and ownership plans for capital expenditures going forward. Upon receipt of that information, he determined that the listed expenses were, in his experience, "a reasonable amount of capital that would need to be spent ... in order for [the Property] to ... really stay competitive, not lose market share and begin to further deteriorate." Trial Tr. Day 2 33:11-14. Richard Walls, Terra's Vice President of Finance and Administration employed by the Debtor to manage the operations of the Inn, also testified that the list of capital expenditures provided to Kraus were those items necessary to "maintain the revenues" and "hold the rate." Trial Tr. Day 2 80:9-10; 102:19.
Wells Fargo also intimates that the capital expenditure amount was inflated after the Debtor and Walls received a copy of a draft appraisal. However, Kraus's testimony was that he received an initial capital expenditure list prior to disseminating the draft appraisal, and that the subsequently-received list was simply an updated estimate of capital expenditures. Trial Tr. Day 2 57:7-59:17. The Court found his testimony on this point to be credible and supported by a relevant email exchange between Walls and Kraus submitted into evidence by Wells Fargo. See Wells Fargo Exs. 10, 11; Stip. Ex. 7. The emails contain no statement that would raise a suspicion that Walls was trying to inflate the capital expenses to lower the Property's value — indeed, the communications are nothing more than an inquiry by Kraus requesting updated information in order to finalize the appraisal and Walls's succinct response. The Court therefore concludes that the testimony of Kraus and Walls, as well as the relevant exhibits, support Kraus's use of the $1.15 million capital expenditure deduction in his appraisal.
Kraus concluded that the value of the personal property was $498,000, based on the replacement cost of the personal property contained in the rooms discounted to reflect its depreciation. The Court does not quarrel with that valuation. But, although Walls testified that the personal property in the rooms was not attached (with the exception of drapery hardware), the Court cannot discern from Kraus's appraisal whether and to what extent any of his personal property valuation reflected the value of fixtures. As such, the Court reiterates the position that it took at the conclusion of trial, that "Wells Fargo presented me with no evidence on the point
In sum, the Court finds that Kraus's appraisal is more reliable and persuasive and accords it substantial weight. The Court accepts the Debtor's asserted value of the Property, but without a discount for the purported value of personal property. Accordingly, the Court finds that the Property's value is $9,900,000.
The loan and mortgage executed by the Debtor clearly contemplated that Jackson State (and now Wells Fargo) would obtain a security interest in all of the Debtor's property — both real and personal. In addition to securing the Wells Fargo Loan with a lien on the Property, the Mortgage states:
Mortgage 1 ¶ 5 (emphasis supplied). Rents are defined as "all present and future rents, revenues, income, issues, royalties, profits and other benefits derived from the Property." Id. at 11.
Wyoming law governs the creation and perfection of the security interests under the Mortgage, Butner v. U.S., 440 U.S. 48, 55, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979), although the Wyoming Supreme Court has stated that "[d]ecisions of other courts offer persuasive support when questions of the interpretation of uniform laws arise."
Wyo. Stat. § 34-1-121; see also Countrywide Home Loans, Inc. v. First Nat'l Bank of Steamboat Springs, N.A., 144 P.3d 1224, 1228 (Wyo.2006). And under Wyoming Statute § 34-1-120, "[e]very conveyance of real estate within this state, hereafter made, which shall not be recorded as required by law, shall be void, as against any subsequent purchaser...." Wyo. Stat. § 34-1-120. A "conveyance" under the Recording Statutes is "construed to embrace every instrument in writing by which any estate or interest in real estate is created, alienated, mortgaged or assigned, or by which the title to any real estate may be affected in law or equity...." Wyo. Stat. § 34-1-102 (emphasis supplied).
Security interests in other types of property, however, are primarily subject to Wyoming's version of Article 9 of the UCC ("Article 9"). Article 9, in turn, excepts from its requirements "the creation or transfer of an interest in or lien on real property, including a lease or rents thereunder." Wyo. Stat. § 34.1-9-109(d)(xi). Thus, Article 9 perfection requirements do not apply to security interests in leases or rents to the extent that they involve "the creation or transfer of an interest in or lien on real property." Id.
The case law is now replete with decisions addressing whether revenues generated by a hotel are rents, and whether the room revenues are considered real or personal property interests. The context in which the issue is raised varies. Some of the cases involve issues of perfection — i.e., whether a security interest in hotel room revenues must be perfected according to the dictates of UCC Article 9 or under the state's real property recording statutes.
In other cases, courts have examined the nature of hotel room revenues in determining whether they constitute rents to which a postpetition security interest could attach
The Debtor is correct that a majority of the courts have held that hotel room revenues are not interests in real property, but constitute personal property, and that any lien on those revenues must be perfected by complying with Article 9 of the UCC. Many of those cases reject the notion that payment for use of a hotel room is an interest in real property because they are persuaded that hotel guests are "mere licensees and not tenants," and thus have only a personal contract with the hotelier and acquire no interest in realty.
In reaching this determination, the courts have relied on distinctions drawn in case law and various state statutes between the landlord/tenant relationship and the hotel guest/innkeeper relationship.
There is also some reliance in the case law on the view that hoteliers provide services, and that the provision of a room is incidental to that service. See, e.g., Green Corp., 154 B.R. at 824; Kearney, 92 B.R. at 101 ("as concerns the words `rents thereunder,' what is referred to are the rents payable to the lessor under the provision of a lease, not charges made by the lessee for services it provides to its patrons, even though those services include furnishing rooms in the leased premises for the use of its guest") (quoting United States v. P.S. Hotel Corp., 404 F.Supp. 1188, 1192 (E.D.Mo.1975), aff'd 527 F.2d 500 (8th Cir.1976)).
On the other side of the debate are those courts that have disagreed with the majority, holding instead that room revenues are rents, in the nature of an interest in real estate. Accordingly, a security interest in hotel room revenues is covered by an assignment of rents clause, the reference to rents in Article 9, or the after-acquired property exception in former § 552(b). And, because the room revenues, as rents, involve an interest in real property (at least to some degree), a security interest in those revenues is perfected when recorded in the relevant land records.
The courts taking the minority position have generally espoused a broader view of the meaning of rents, as used either in former § 552(b) or the exception provision
In determining that hotel room revenues constitute rents, the minority courts have seen little significance in the tenant/licensee distinctions relied on by the majority. As one court explained:
Mid-City Hotel, 114 B.R. at 640 n. 6 (emphasis supplied).
The minority does not, therefore, conclude that hotel guests acquire nothing more than a personal property right in a hotel room. Rather, in the words of one court, hotel room charges "arise primarily from the hotel occupant's use of the underlying real estate and hence are an interest in real estate." Travelers, 190 Ill.Dec. 340, 621 N.E.2d at 214 (citing In re Schaumburg, No. 87B 14301, 1989 WL 359490 (Bankr.N.D.Ill. Jan. 12, 1989)). And in Mid-City, even though the court held that hotel room revenues were not rents, but rather "profits," the court disagreed with those cases that "focused upon the alleged tenuousness of the connection between the mortgaged real estate and the revenues," as they "simply did not recognize the economic realities of the cases before them"; the room revenues were derived from interests in real estate subject to a mortgage and exempt from the UCC filing requirements. 114 B.R. at 642, 644.
This Court agrees with the minority and finds that the Wyoming Supreme Court would rule that hotel room revenues are indeed rents, as that term is commonly understood, for the reasons so amply described by the minority courts. That conclusion comports with the "plain and ordinary meaning of the word[]," which the Wyoming Supreme Court looks to in interpreting state legislation. Michael's Const., Inc. v. Am. Nat'l Bank, 278 P.3d 701, 705 (Wyo.2012).
The distinction between tenants and hotel guests does not answer the question of "what is rent?" As one commentator aptly noted in response to the argument that the tenant/hotel guest distinction informs the definition of rent: "[n]o one can question the premise that tenants pay rent, but it is quite another thing to say that only a tenant pays rent." R. Wilson Freyermuth, Of Hotel Revenues, Rents, and Formalism in the Bankruptcy Courts: Implications for Reforming Commercial Real Estate Finance ("Hotel Revenues"), 40 U.C.L.A. Law Rev. 1461, 1477 (1993). The minority view, as reflected in the Restatement, has the more logical answer: As payment for the right to "possess, use, or occupy the real property" of the Debtor, guests of the Inn paid rent. Restatement (Third) of Property (Mortgages) § 4.2(a). Accordingly, the Court concludes that the security interest in rents referred to in the
But the question under the only relevant Wyoming law is not whether the Room Revenues here can be described as rents, but whether the revenues "touch[] any interest in lands," Wyo. Stat. § 34-1-121, or relate to "the creation or transfer of an interest in or lien on real property," Wyo. Stat. § 34.1-9-109(d)(xi).
The various statutes referred to by the parties in this case are not particularly useful in making this determination. Wells Fargo notes that hotel room revenues have been referred to as rents in certain Wyoming statutes,
Clearly, the landlord-tenant relationship does involve an interest in an estate of land, and a security interest taken in such rents is perfected under the Recording Statutes. And it is also clear that Wyoming recognizes that landlord/tenant relationships are distinguishable from innkeeper/guest relationships. See, e.g., Flores v. Simmons, 999 P.2d 1310, 1312 (Wyo.2000) (distinguishing duties of landlord/tenant from those of innkeeper/guest). But that does not necessarily mean that anything less than the sort of real property interest obtained by a tenant cannot be characterized as some lesser "interest" in land. Hotel patrons pay to obtain the right to exclusive use of a piece of real estate (albeit small) for a period of time; "a hotel guest not only has the right to occupy building space for a delineated period, but he or she also has the right to exclude others, including, in many situations, the hotel management." Reporter's Note, Restatement (Third) Property: Mortgages § 4.2.
While tenants may acquire an "estate" in land, interests in land are different from "estates in land." See Darr v. Lone Star Indus., Inc., 94 Cal.App.3d 895, 901, 157 Cal.Rptr. 90 (1979) ("[a]n interest in land is not presumptively an estate in land"). Acknowledging the greater real property rights of a tenant does not require the Court to conclude that hotel guests have no interest in real property. It is difficult to draw lines and definitional boundaries around all the possible rights and interests that can be obtained in real property. However, sharp boundaries are not always to be found:
Golden W. Baseball Co. v. City of Anaheim, 25 Cal.App.4th 11, 36, 31 Cal.Rptr.2d 378 (1994), superseded by statute on other grounds, as noted in Hubbard v. Brown, 50 Cal.3d 189, 266 Cal.Rptr. 491, 785 P.2d 1183, 1185-86 (1990).
The shades and complexities inherent in property interests, and the fallacy of attempting to "pigeonhole" every property interest into some traditional property concept, have long been recognized by the Wyoming Supreme Court. That court has instead analyzed property interests in other contexts with an eye toward the "real world," and has not limited its property concepts to narrow, formalistic categories. See, e.g., Flores, 999 P.2d at 1313 (noting that while a mobile home is deemed personalty in some contexts, under the facts
In Denver Joint Stock Land Bank of Denver v. Dixon, for instance, the Wyoming Supreme Court demonstrated its willingness to take account of modern circumstances, especially in relatively new areas of property law. Noting that historical concepts of real and personal property are not always equipped to encompass changing property concepts, the court opined with regard to traditional property labels and definitions that: "Terminology is convenient, and in fact necessary, but it should not be abused." 57 Wyo. 523, 122 P.2d 842, 849 (1942).
This Court agrees with the minority view that common sense and experience compel the conclusion that hotel room charges "arise primarily from the hotel occupant's use of the underlying real estate and hence are an interest in real estate." Travelers, 190 Ill.Dec. 340, 621 N.E.2d at 214.
Pursuant to the Cash Collateral Order, "[a]s additional adequate protection for the use of Wells Fargo's alleged cash and non-cash collateral," the Debtor has been making monthly payments to Wells Fargo in the amount of $40,000. The parties dispute whether, in determining the amount of the Secured Claim, those payments should be credited to the secured portion of Wells Fargo's claim vis-à-vis the Property — i.e., deducted from the value of the Property and hence from the total amount of the Secured Claim.
While a majority trend is developing, there remains a split among the courts as to the appropriate allocation of postpetition payments to an undersecured creditor with a secured interest in both real property and postpetition revenues. As Judge Saris described in Beal Bank, S.S.B. v. Waters Edge Limited Partnership:
248 B.R. 668, 685 (D.Mass.2000). Judge Saris ultimately adopted the "addition" approach, id. at 686, and this Court agrees with that conclusion.
As previously discussed, § 506(a) provides that a secured creditor's claim is a secured claim to the extent of the value of the collateral. 11 U.S.C. § 506(a). The Court has already determined the value of the Property to be $9,900,000. Since the Court has also determined that Wells Fargo's security interest in the Room Revenues was validly perfected on the Petition Date, that security interest extends to postpetition Room Revenues by operation of 552(b)(2), which provides:
11 U.S.C. § 552(b)(2).
Because Wells Fargo's collateral consists of postpetition Room Revenues, the value of its Secured Claim has increased by operation of § 552(b) and § 506. In re Union Meeting Partners, 178 B.R. 664, 675 (Bankr.E.D.Pa.1995); In re Vermont Inv. Ltd. P'ship, 142 B.R. 571, 573 (Bankr. D.C.1992). The Room Revenues "constitute separate collateral apart from the underlying [Property] that generates the proceeds." In re Machinery, Inc., 287 B.R. 755, 764 (Bankr.E.D.Mo.2002) (collecting cases). Wells Fargo's collateral thus "consists of the sum of [its] separate security interests in the [Property] and the accumulated post-petition rents." Beal, 248 B.R. at 686 (emphasis in original); see also In re Landing Assocs., Ltd., 122 B.R. at 293. "Therefore, the accumulated rents must be added to the real Property in the valuation of [Wells Fargo's] secured claim." In re Columbia Office Assocs. Ltd. P'ship, 175 B.R. 199, 202-03 (Bankr.D.Md.1994); see also In re Flagler-at-First Assocs., Ltd., 114 B.R. 297, 301 (Bankr.S.D.Fla.1990).
Accordingly, "[t]he result is essentially a `wash' in that the additional collateral value
Postpetition attorneys' fees and expenses may be awarded to an over secured creditor pursuant to § 506(b), if reasonable and provided for in the underlying agreement or pursuant to state law. 11 U.S.C. § 506(b).
In Tricca, the Court considered whether an oversecured creditor was entitled to its prepetition legal fees, payment of which was contingent upon the debtor exercising her right of redemption in certain real property. When the Trustee sold the property postpetition and paid the mortgagee its full principal and interest, the Court found that the Trustee had exercised that right of redemption, thus triggering the contingency. When the creditor then filed a request for its legal fees and expenses under § 506(b) notwithstanding its failure to include that entitlement under the note and mortgage, the Trustee objected on grounds that the fees and expenses were not specifically provided for in the underlying agreement between the creditor and the debtor. The Court agreed with the Trustee's conclusion, holding that those fees could not be included as part of the creditor's secured claim pursuant to § 506(b). Id. at 219.
But the Court further considered whether the fees were allowable as a general unsecured claim. Noting that "[m]any cases ... seem to assume that where there is no agreement for payment of legal fees and costs, § 506(b) disallows an oversecured creditor's claim entirely," id. at 219, the Court explained why a closer look at the relevant Code provisions dictated otherwise:
But the Tricca issue is distinguishable from that before this Court. In Tricca, the asserted claim was for legal fees and expenses incurred prepetition. Here, the issue relates to legal fees and expenses incurred postpetition. And with respect to whether postpetition legal fees and expenses incurred by an undersecured creditor are allowable as a general unsecured claim, there is a split of authority.
In SNTL Corp. v. Centre Ins. Co. (In re SNTL Corp.), the Ninth Circuit Court of Appeals held that "the parties' execution of a prepetition agreement containing an attorneys' fees provision gives rise to a contingent, unliquidated attorney-fee claim." 571 F.3d 826, 843 (9th Cir.2009). Interpreting the definition of "claim" under § 101(5)(A), the Ninth Circuit found that the "right to collect the fee existed prepetition" even though the fees were not incurred until after the case was filed. Id.
In Woburn Assocs. v. Kahn (In re Hemingway Transport, Inc.), the First Circuit Court of Appeals similarly concluded that a contingent right to payment could constitute a prepetition claim under § 101(5)(A) and § 502(b), even though the contingency occurred postpetition. 954 F.2d 1, 8 (1st Cir.1992); see also Tricca, 196 B.R. at 220-221. In Hemingway, the First Circuit considered whether a prepetition indemnification contract created a prepetition contingent right to payment that constituted a claim under §§ 101(5) and § 502(b). In determining that the indemnification contract was a prepetition claim, despite the fact that the contingency did not occur until after the petition date, the First Circuit recognized that an indemnity agreement creates an existing "right to payment, albeit contingent, upon the signing of the agreement." Hemingway, 954 F.2d at 8 n. 9 (emphasis supplied) (quoting In re M. Frenville Co., 744 F.2d 332, 336 (3d Cir.1984), overruled on other grounds by In re Grossman's, Inc., 607 F.3d 114 (3d Cir.2010)).
And more recently, in Gencarelli, the First Circuit was careful to avoid any indication that it meant to obliterate the line between allowability of pre- and post-petition attorneys' fees. In that case, the First Circuit held that, where an estate is solvent, a prepetition contractual right to a prepayment penalty could be asserted against the debtor's estate as an unsecured claim even though the penalty was "unreasonable" and could not therefore be included in the creditor's secured claim under § 506(b). Stating that there was "no principled basis for treating attorneys' fees differently from prepayment penalties" in the context of the case before it, Gencarelli, 501 F.3d at 6 n. 1, the court held that "unsecured creditors may recover their attorneys' fees, costs and expenses from the estate of a solvent debtor where they are permitted to do so by the terms of their contract and applicable non-bankruptcy law." Id. (quoting Official Comm. Of Unsecured Creditors v. Dow Corning Corp. (In re Dow Corning Corp.), 456 F.3d 668, 683 (6th Cir.2006)). Emphasizing that the bankruptcy estate was solvent and that all creditors would be paid in full, the Gencarelli court took care to note that its "opinion should not be construed as speaking to the different question of whether an unsecured creditor can enforce a contractual right to post-petition fees against the estate of insolvent debtor under section 502." Gencarelli, 501 F.3d at 7 (emphasis in original).
This Court believes that, while no First Circuit case is directly on point, both the holdings and dicta in Hemingway, Adams, and Gencarelli strongly indicate the First Circuit's view that, where the bankruptcy
Knutson v. Tredinnick (In re Tredinnick), 264 B.R. 573, 577 (9th Cir. BAP 2001) (Tashima, J. concurring) (quoting In re Hines, 147 F.3d 1185, 1192 (9th Cir. 1998)).
Accordingly, Wells Fargo's Unsecured Claim may not be augmented by the inclusion of any postpetition attorneys' fees.
The Court finds that the value of Wells Fargo's real property collateral (the Property) is $9,900,000. The Court also rules that Wells Fargo holds a perfected prepetition security interest in the Room Revenues, and that security interest extends to the postpetition revenues by operation of § 552(b)(2). The postpetition adequate protection payments thus reduced the total amount of Wells Fargo's claim, but did not reduce the amount of the Secured Claim. Finally, the Court holds that Wells Fargo's postpetition attorneys' fees and expenses are not recoverable as part of its unsecured claim.
Consistent with the Debtor's representation that an amended plan and disclosure statement would be filed within 14 days from the issuance of this Memorandum, the Debtor will be ordered to file its amended disclosure statement and plan on
Stip. Ex. 1 (Loan Agreement) 13 § 6.1(b). The Loan Agreement further defined "Collateral" as including "any substitutions for, accessions and modifications to and other additions and replacements for any of the Collateral any other rights or interests arising out of in connection with any of the Collateral." Id. at 13 § 6.1(b)(i). Because no UCC financing statement is on file, however, the security interest in the personal property is not perfected.
Under § 552(a), property acquired postpetition is not subject to a prepetition security interest. Exceptions to that general rule are provided by § 552(b). Prior to 1994, § 552(b) extended prepetition security interests to postpetition property:
Thus, even if a creditor had a valid prepetition security interest in hotel revenues, if those revenues did not constitute "proceeds, product, offspring, rents, or profits" of the debtor's property, then the creditor had no postpetition extension of its lien. In 1994, the Bankruptcy Code was amended to clarify that valid prepetition liens in hotel revenues extend postpetition to the extent they are valid prepetition whether or not they would be considered rent under any particular state's law, thus ending the debate as to whether valid prepetition liens on hotel revenues were rendered unenforceable postpetition solely on grounds that they were not rents within the meaning of subsection (b). The reference to rents in former subsection (b), now subsection (b)(1), was deleted, and a new subsection (b)(2) was inserted, which provides:
11 U.S.C. § 552(b)(2) (emphasis supplied). While this amendment rendered irrelevant any distinction between rents and hotel room revenues under former subsection (b), it does not resolve state law questions regarding the creation and perfection of security interests in hotel room revenues.
As Judge Saris noted in Beal, however, and as the majority of courts has also concluded, acknowledging that an undersecured creditor's secured claim increases postpetition by operation of § 552(b) "does not rattle Timbers." Beal, 248 B.R. at 686. Nothing in Timbers prohibits an increase in the value of a secured claim as the result of a valid security interest in postpetition property. Id.; see also Machinery, Inc., 287 B.R. at 765; Union Meeting, 178 B.R. at 675; In re Bloomingdale Partners, 155 B.R. 961, 975-76 (Bankr. N.D.Ill.1993); Vermont Inv., 142 B.R. at 574. This conclusion also necessarily rejects a static view of secured claim valuation, recognizing that the amount of the secured portion of a claim may fluctuate for a variety of reasons, including a change in the value of underlying real property, payments made to the secured creditor postpetition, or the accumulation of postpetition collateral. For an excellent and thoughtful treatment of fluctuating values, their relation to secured claims, and their treatment throughout the course of a Chapter 11 case, see In re SW Hotel Venture LLC, 460 B.R. 4, 26-32 (Bankr.D.Mass.2011).
11 U.S.C. § 506(b).
