Cash collateral is defined in the Bankruptcy Code as including cash, negotiable instruments, deposit accounts, or other cash equivalents in which both the bankruptcy estate and another entity have an interest. A debtor may not use cash collateral unless it obtains either a court order or consent of the other entity with the interest. In Premier Golf, the bank argued that its security interest extended to post-petition driving range and green fees, so that the fees constituted cash collateral and the debtor was required to obtain a court order or the bank’s consent to use the cash.
Section 552(a) of the Bankruptcy Code generally provides that property acquired postpetition is not subject to a prepetition security interest. However, under Section 552(b) a prepetition security interest can extend to “proceeds, products, offspring, or profits” of prepetition collateral, as well as “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.”
The bank argued that the green fees and driving range fees were rents for use of the property, or alternatively were proceeds or profits of its personal property collateral. The bankruptcy court disagreed and held that they were not cash collateral.
On appeal the bankruptcy appellate panel first addressed whether the fees constituted rents. It adopted the “Zeeway” approach, finding that income produced by real property is rents, while income resulting from services rendered or a specific business conducted on the property does not. See Zeeway Corp. v. Rio Salado Bank (In re Zeeway Corp.), 71 B.R. 2010 (9th Cir. B.A.P. 1987). Examples of income that does not constitute rents include gate receipts at a racetrack, income from sale of crops, income from a restaurant or retail store, and income received by a nursing home for care of patients. (There had been a long running dispute about the treatment of hotel revenue. However that particular issue was resolved by the addition of the language quoted above regarding charges for hotel rooms.)
The court noted other cases finding that green fees were not rents, and agreed with the bankruptcy court that the key to generating the fees was regular planting, seeding, mowing, repositioning holes, watering, fertilizing, and maintaining the golf course so that the fees constituted income generated by services. Further, unlike hotel cases where arguably payment is for use and occupancy of real property, in the case of a golf course payment is primarily for use of real property as entertainment.
Next the bank argued that the fees were proceeds of its intangible property collateral, focusing on licenses to use the golf course. The bankruptcy appellate panel agreed that a license to use a golf course is not an interest in real estate, and thus proceeds are personal property for purposes of UCC Article 9. However, given the restrictions in Section 552, revenue from operation of the debtor’s business postpetition does not constitute revenue since Section 552(b) was intended to cover only post-petition property directly attributable to prepetition collateral.
Given the debtor’s post-petition work in maintaining the golf course, the court concluded the revenue was not for issuance of the license but rather the result of the debtor’s postpetition services. Thus, although the court conceded that fees may have been “collected on” the golf club licenses, they were not proceeds of the bank’s collateral.
Similarly, the transaction was a simultaneous grant of a use license in exchange for a post-petition payment that constituted “money.” Consequently the fees also did not constitute proceeds of a prepetition payment intangible.
Finally, the court addressed whether the fees constituted “profits,” and concluded that this exception referred to a sale of an interest that arises out of ownership. Thus, the green fees and driving range fees were not profits of the bank’s security interest in the real property.
Consequently, the court found that the bank did not have an interest in the golf course driving range and green fees, and accordingly the fees did not constitute cash collateral so that the debtor could use them without the bank’s consent.
A debtor’s ability to control and use cash generated post-petition is critical to the success of its bankruptcy. Many issues concerning the status of interests in post-petition revenue were resolved by amendments to Section 552 of the Bankruptcy Code. However, as indicated by this case, there continue to be issues turning on whether a secured party has an interest in post-petition income that is not clearly rents.
Conversely, although it was not an issue in this case, there continue to be issues turning on whether a debtor has a continuing interest. Section 552 was modified to make it easier for a lender to establish its interest in post-petition rents. However, sometimes arguments are made that post-petition rents do not constitute cash collateral because the debtor does not have any interest due to an absolute assignment of rents to the lender. Typically the outcome depends on the treatment of an absolute assignment of rents under applicable state law.
Vicki R. Harding, Esq.