In re Old Colony, LLC
476 B.R. 1, 2012 WL 2885431 (2012)
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Rule of Law:
A security interest in hotel room revenues is an interest in real property, not personal property, and is perfected by recording a mortgage in the land records. Postpetition adequate protection payments made to an undersecured creditor from such revenues do not reduce the value of the creditor's secured claim against the real property. An undersecured creditor may not add postpetition attorneys' fees to its unsecured claim, even if authorized by contract.
Facts:
- In 2007, Old Colony, LLC purchased The Inn at Jackson Hole in Wyoming, financing part of the $26 million purchase with a $16.5 million loan from a predecessor to Wells Fargo.
- The loan was secured by a mortgage on the Inn, which granted the lender a security interest in the real property and 'all Rents from the Property,' defined to include 'revenues, income...and other benefits derived from the Property.'
- The lender recorded the mortgage in the Teton County land records.
- No Uniform Commercial Code (UCC) Article 9 financing statement was ever filed with the Wyoming Secretary of State.
- After an economic downturn, Old Colony was unable to keep up with its debt service and could not refinance its loans.
- To prevent an impending foreclosure by Wells Fargo, Old Colony filed for Chapter 11 bankruptcy protection.
Procedural Posture:
- Old Colony, LLC ('Debtor') filed a voluntary petition for Chapter 11 bankruptcy in the U.S. Bankruptcy Court.
- The Debtor filed a motion to use cash collateral, including hotel revenues, leading to a court order authorizing its use provided the Debtor made monthly $40,000 adequate protection payments to Wells Fargo.
- The Debtor filed a plan of reorganization.
- Wells Fargo filed a Motion for Valuation of Claim under 11 U.S.C. § 506(a) to determine the value of its secured claim.
- The Debtor filed an objection to Wells Fargo's proof of claim, raising identical issues.
- The Bankruptcy Court conducted a trial on the valuation motion and the Debtor's objection.
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Issue:
Under Wyoming law, is a security interest in hotel room revenues perfected by the recording of a mortgage in the land records, rather than by filing a UCC financing statement?
Opinions:
Majority - Boroff, J.
Yes. A security interest in hotel room revenues constitutes an interest in real property and is perfected by recording a mortgage in the land records under Wyoming law. Adopting the minority view on this issue, the court rejected the formalistic distinction between a landlord-tenant relationship (which creates 'rents' as an interest in real property) and an innkeeper-guest relationship (which creates 'accounts' as personal property). The court reasoned that the common-sense understanding of 'rent' is payment for the use and occupancy of property, which applies to hotel rooms. Predicting that the Wyoming Supreme Court would favor a practical, 'real world' approach over historical formalism, the court held that room revenues 'touch an interest in lands' and are therefore properly perfected by recording the mortgage. Consequently, Wells Fargo's security interest was perfected and extends to postpetition revenues under 11 U.S.C. § 552(b). The court further held that postpetition 'adequate protection' payments made from these revenues do not reduce the secured portion of Wells Fargo's claim, as it is a 'wash' where the accumulating cash collateral is offset by the payments. Finally, the court ruled that an undersecured creditor like Wells Fargo cannot add its postpetition attorneys' fees to its unsecured claim, as claims are determined as of the petition date and postpetition fees are not part of the prepetition debt.
Analysis:
This decision places the court firmly within the 'minority' camp of a significant national circuit split regarding the characterization of hotel room revenues. It provides a detailed rationale for rejecting the formalistic tenant/licensee distinction in favor of an 'economic realities' approach, strengthening the position of secured lenders in hotel financings, particularly in jurisdictions without a clear statute. The ruling clarifies that lenders can rely on a properly recorded mortgage to perfect their interest in a hotel's primary income stream. Furthermore, the opinion reinforces a strict interpretation within the First Circuit's sphere of influence against allowing undersecured creditors to recover postpetition attorneys' fees, highlighting the limitations of contractual fee-shifting provisions in bankruptcy.
