In Re Ocean Place Development, LLC.
OPINION
I. INTRODUCTION
This matter comes before the Court by way of a Motion filed by Debtor, Ocean Place Development, LLC (“Debtor” and/or “Ocean Place”) for a final order approving the use of cash collateral. AFP 104 Corp. (“AFP” and/or “Lender”), the secured lender, objects to Debtor’s Motion and additionally requests that this Court dismiss the Debtor’s bankruptcy case for cause, including bad faith, or, alternatively, vacate the automatic stay. AFP contends
For the reasons set forth below, the Court finds that
Jason Realty
is inapplicablе in this case because the hotel revenues at issue are not “rents” within the meaning of
Jason Realty.
Specifically, the Court differentiates between a lessee or tenant and a hotel guest licensee, who holds only a personal contract with respect to the property as opposed to an ongoing interest in the property. As a result, the Court finds that the hotel revenues are properly classified as personal property — not an interest in realty — that falls within the ambit of estate property and subject to the Article 9 provisions of the Uniform Commercial Code.
II. PROCEDURAL HISTORY/FACTS
On Fеbruary 15, 2011, Ocean Place, a beachfront resort property in Long Branch, New Jersey, filed a voluntary petition for relief under Chapter 11 of Title 11 of the United States Code. The Debtor continues to operate its business and manage its properties as a debtor-in-possession pursuant to
As of the petition date, the Debtor owed approximately $57,245,372.26 to AFP pursuant to a Loan Agreement dated April 25, 2006, as amended from time to time, entered into by and between the Debtor as borrower and Barclays Capital Real Estate Inc. as lender. That amount includes a per diem interest charge of $14,531 per day and also is subject to an attorney’s fees award of approximately $95,000. Borrowings under the Loan Agreement are evidenced by two promissory notes in the amounts of $8,875,000 and $44,000,000 and are secured by a variety of instruments including a Mortgage, Assignment of Rents and Leases, Security Agreement, as well as UCC and fixture filings, executed together with the Loan Agreement (Collectively “Loan Documents”). The Loan Documents include a broad definition for the term “rents,” both in the Mortgage
... all revenues and credit card receipts collected from guest rooms, restaurants, bars, meeting rooms, banquet rooms and recreation facilities, all receivables, customer obligations, installment payment obligations and other obligations now existing or hereafter arising or created out of the sale, lease, sublease, license, concession or other grant of the right of the use and occupancy of property or rendering of services by Borrower or any operator or manger of the hоtel or the commercial space located in the Improvements or acquired from others ..., license, lease, sublease and concession fees and rentals, health club membership fees, food and beverage wholesale and retail sales, service charges, vending machines sales and process, if any ... whether paid or accruing before or after the filing by or against Borrower of any petition for relief under the Bankruptcy Code.
In connection with the Loan Agreement and the Security Instrument, the Debtor entered into a Lockbox — Deposit Account Control Agreement with Barclays, the Bank of New York and West Paces. Among other things, the Lockbox Agreement requires that deposits of all rents and income generated from the Debtor’s property be placed into a designated depository account at the Bank of New York for the benefit of the Lender. The Lock-box Agreement also established a lockbox for the collection and processing of the remittances for eventual deposit into the designated depository account at the Bank of New York.
The borrowing under the Loan Documents matured on January 9, 2008. From their inception and up to the January 9, 2008 maturity date, the Debtor was current in its obligations to Barclays. For approximately two years from the maturity date through January of 2010, the Debt- or paid Barclays interest at the default rate of intеrest of approximately 9.8%. In January of 2010, the Debtor defaulted on the loan. On or about October 26, 2010, AFP purchased from Barclays all of Bar-clays’ rights under the Loan Documents. Following the purchase of Barclays’ interest in the Debtor, AFP obtained a foreclosure judgment and scheduled a foreclosure sale of the Debtor’s assets for February 22, 2011. One week prior to the scheduled foreclosure sale, the Debtor filed this Chapter 11 case, after receiving two statutory adjournments.
On February 17, 2011, among other First Day matters, the Court held a hearing on the Debtor’s Motion for an Order of the Bankruptcy Court Authorizing the Use of Cash Collateral. That same day, the Court entered an Interim Order Authorizing the Use of Cash Collaterаl.
On March 9, 2011, the Court conducted an evidentiary hearing with respect to the Final Cash Collateral Motion and the Motion to Dismiss the Debtor’s bankruptcy case filed on behalf of AFP. The Court heard testimony on behalf of the Debtor by William R. Dixon, Jr., the vice president of the Debtor’s Manager, and Gary Williams, a principal of Coakley & Williams, the putative new property manager of the Debtor. The Court also heard the testimony, on behalf of AFP, of Anthony Miceli, the Chief Financial Officer of United Capital Corporation, of which AFP is an indirect subsidiary. Mr. Miceli is also the president of AFP. In addition to each witness’s testimony, the Court also accepted into evidence the declarations of Mr. Dixon, Mr. Williams and Mr. Miceli.
On March 10, 2011, thе Court denied AFP’s Cross Motions for dismissal or stay relief, and granted the Debtor’s Motion for
III. JURISDICTION
The Court has jurisdiction over this proceeding under
IV. DISCUSSION
Ocean Place requests authorization to use cash collateral pursuant to
The trustee may not use, sell, or lease сash collateral under paragraph (1) of this subsection unless—
(A) each entity that has an interest in such cash collateral consents; or
(B) the court, after notice and a hearing, authorizes such use, sale or lease in accordance with the provisions of this section.
Id.
“The ability to use cash collateral under
The “cash collateral” which the Debtor seeks to use to reorganize is defined in
“cash, negotiable instruments, documents of title, securities, deposit accounts or other cash equivalents whenever acquired in which the estate and an entity other than the estate have an interest and includes the proceeds, products, offspring, rents or profits of property and 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 subject to a security interest.... whether existing before or after the commencement of a case under this title.”
Id.
(emphasis added). As such, property cannot be cash collateral unless it is also
Accordingly, the Court’s entry of a final order authorizing the use of cash collateral hinges, in large part, on whether the hotel room revenues are property of the estate which can be used by the Debtor for purposes of both operations and eventual reorganization. The courts in New Jersey have not yet addressed the issue of whether a security interest in hotel room revenues is either an interest in realty, or an interest in personalty that must be perfected and enforced pursuant to Article 9 of the New Jersey version of the Uniform Commercial Code. 3 Our task is thus to determine: (1) how the hotel room revenues collected by the Debtor should be characterized; and (2) even if deemed personalty, whether the Debtor’s use of the hotel revenues in its reorganization efforts is inconsistent with the Third Circuit’s holding in Jason Realty. Central to answering both questions is a discussion of the scope and applicability of Article 9 in the instant proceeding.
SCOPE, APPLICABILITY, AND CHARACTERIZATION OF THE HOTEL ROOM REVENUES UNDER ARTICLE 9 OF THE UNIFORM COMMERCIAL CODE
As noted in both
Wachovia Bank Nat. Ass’n v. EnCap Golf Holdings, LLC,
However, the applicability of Article 9 is not without limit. Pertinently, Section 9 — 109(d)(ll) provides that Article 9 does not extend to “the creation or transfer of any interest in or hen on real property, including a lease or rents thereunder.” °
Id.
Thus, were the hotel revenues
As in any case involving the construction of a statute, the starting point is the language of the statute itself.” Ernst & Ernst v. Hochfelder,425 U.S. 185 , 197,96 S.Ct. 1375 ,47 L.Ed.2d 668 (1976) quoting Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 756,95 S.Ct. 1917 ,44 L.Ed.2d 539 (1975) (Powell J. concurring). The language of [§ 9-109(d)(ll) ] clearly excludes only interests in real estate, including “a lease or rents thereunder,” from the requirements of Article 9. By this, mortgages, leases and other instruments conveying an interest in real estate are excluded. Conversely, the language gives no indication that the income from the use of real estate ... are excluded. Although the realty may be the subject of a mortgage, the creation of a security interest in such income is not the creation of an interest in realty. Rents are different. They are income from the creation of an interest in property. Thus the statutory language of [§ 9 — 109(d)(ll) ] indicates that only the creation or transfer of an interest in realty and the income from that interest in realty are excluded from Article 9. The Official Commentary offers no other interpretation. Security interests in income not attributable to the creation of an interest in realty are, therefore, governed by Article 9 generally. U.C.C. § 9-102(1).
Judge Buschman continued:
The significance of the plain meaning of the statutory language ... lies in the general rule that “... guests in a hotel ... are mere licensees and not tenants, and ... they have only a personal contract and acquire no interest in the realty....” In re Greater and Atlantic and Pacific Inv. Group,88 B.R. 356 , 359 (Bankr.N.D.Okla.1988) (quoting from 49 Am.Jur.2d Landlord and Tenant 6 (1970)). See also DeWolf v. Ford,193 N.Y. 397 ,86 N.E. 527 , 530 (1908) (A room in an inn is not, in a legal sense, the “dwelling house” of a guest, and the relation is not that of landlord and tenant, for notwithstanding the guest’s occupancy, it is the house of the innkeeper) ... It simply would distort the statutory language to hold that a guest in a hotel is a lessee and that the fee paid, although perhaps referred to in common parlance as rent,’ is rent attributable to a lease.
Id.
Instead, the Court finds that the hotel room revenues are “accounts” or “payments intangible” as defined by Article 9.
See also In re Northview Corp.,
Moreover, the Official Comments to the UCC, which clarify and relate the philosophy undergirding Article 9, further support the Court’s construction. In particular, the Official Comment to Section 9-101 states:
The growing complexity of financing transactions forces us to keep piling new statutory provisions on top of our inadequate and already sufficiently complicated nineteenth-century structure of security law ... The aim of this Article is to provide a simple and unified struсture within which the immense variety of present-day secured financing transactions can go forward with less cost and with greater certainty. Under this Article the traditional distinctions among security devices, based largely on form, are not retained; the Article applies to all transactions intended to create security interests in personal property and fixtures.
Id. (emphasis added). Furthermore, with respect to the scope of Article 9, the Official Comment to Section 9-109 provides: “When a security interest is created, this Article applies regardless of the form of the transaction or the name that the parties have given to it.” Id. 5 The Court is persuaded that the preceding commentary suggests that the UCC drafters intended that courts look beyond the labels given by the parties when determining whether the UCC, specifically Article 9, is applicable in any given proceeding. It is through this lens that the Court analyzes the hotel room revenues.
Towards this end, the Court does not find the expansive definition of “rents” provided in the Loan Documents disposi-tive. As aforementioned, the parties agreed to the following broad definition of rents in its Assignment of Rents and Leases:
“Rents” include “.all revenues and credit card receipts collected from guest rooms, restaurants, bars, meeting rooms, banquet rooms and recreation facilities, all receivables, customer obligations, installment payment obligations and other obligations nоw existing or hereafter arising or created out of the sale, lease, sublease, license, concession or other grant of the right of the use and occupancy of property or rendering of services by Borrower or any operator or manager of the hotel or the commercial space located in the Improvements or acquired from others ..., license, lease, sublease and concession fees and rentals, health club membership fees, food and beverage wholesale and retail sales, service charges, vending machines sales and process, if any ... whether paid or accruing before or after the filing by or against Borrower of any petition for relief under the Bankruptcy Code.”
See Boyle Decl., Ex. C and E, at p. 3. However, the Official Commentary makes clear that Article 9 encompasses all transactions in which a security interest has been created in personal property. Accordingly, the fact that the term “rents” was applied in the Loan Documents does not, in and of itself, remove the transaction from the protection of Article 9’s umbrella. The Lender itself arguably believed and understood that its security interest in these revenues was governed by the UCC. Barclays’ and AFP’s UCC-1 filings reinforce this fact. 6 The nature of the transaction and the actions taken by and on behalf of the Lender persuade the Court that Article 9 undeniably governs here. In reaching this conclusion, the Court is likewise wary of lending support to a creditor’s ability to draft itself outside of Article 9’s integral protections for obligors and debtors, e.g., redemption rights (U.C.C. § 9-628) and collateral disposition requirements (U.C.C. § 9-610).
Finally, examination of New Jersey statutes further reveals that the New Jersey legislature continues to recognize a distinction between a guest in a hotel and a tenant under a lease.
7
For example, the Truth-in-Renting Act,
N.J.S.A.
46:8-43,
et seq.,
the purpose of which is to set forth the rights and responsibilities of residential tenants and landlords in New Jersey, specifically excludes from the application of the Act “dwelling units ... in hotels, motels, or other guest houses serving transient or seasonal guests.”
N.J.S.A.
46:8— 44 (defining “Landlord” under the Truth-in-Renting Act).
See also N.J.S.A.
2A:18-59.2 which provides, in the context of an eviction, that the anti-eviction act “shall not apply to a hotel, motel or other guest house, or part thereof, rented to a transient guest or seasonal tenant....”
Id.
Consistent with the aforementioned exclusions is New Jersey’s judicial and legislative treatment of the rights of access and ensuing liabilities to which a landlord and hotel proprietor are respectively exposed.
Johnson v. Kolibas,
The chief distinction between a tenant and a lodger or roomer lies in the character of their possession. The criterion is the right of exclusive possession. While the tenant has exclusive legal possession of the premises, the lodger only has the right to use the premises, subject to the landlord’s retention of control and right to access of them.
Id.
at 61-63,
In sum, notwithstanding the definition of “rents” provided in the Loan Documents, AFP has failed to present the Court with any source, ease law or supplemental evidence to support its position that, in either New Jersey or New York, hotel revenues should be treated like leasehold interests. Instead, to treat the interests in an essentially identical manner, merely as a result of the parties’ designation of the revenues as “rents,” would stand in direct contravention of the panoply of New Jersey statutes dealing with “hotels,” “landlords,” and “tenants,” the UCC Article 9 provisions, and the case law discussed above interpreting the relevant UCC provisions. As such, the Court finds that the hotel revenues are personal property in which AFP holds a perfected security interest and properly considered property of the Debt- or’s estate.
JASON REALTY IS INAPPLICABLE WITH RESPECT TO INTERESTS IN PERSONAL PROPERTY
The Court now turns its attention to whether its finding that the interests in the Debtor’s hotel room revenues are interests in personal property, and thus property of the estate available to the Debtor in its reorganization efforts, conflicts with the Third Circuit seminal case of
Jason Realty
and/or case law adopting the Third Circuit’s holding in
Jason Realty. Jason Realty
addressed the rights of an assignee of a lease under a pre-petition assignment.
The Third Circuit in
Jason Realty
examined the language of the assignment and concluded that, notwithstanding its role as part of a financing transaction and as additional security for repayment of the note, the assignment was an absolute assignment that had transferred title to the as-signee upon execution.
Id.
at 428-29. As such, the Debtor no longer retained an interest in the rents and the rents were not property of the estate.
Id.;
Looking to New Jersey law,
Jason Realty
explained that “it is settled in New Jersey that an assignment of rents passes title to the assignee.”
Id.
(citing
Paramount Bldg. & Loan Ass’n of City of Newark v. Sacks,
107 N.J.Eq. 328,
More significantly, the
Jason Realty
court was assigned with an inapposite task. The Third Circuit was to determine whether the assignment of an undeniable interest in real property conveyed title to the lender or, instead, pledged the rents as security.
AFP further relies on
In re Kingsport Ventures, L.P. d/b/a Kingsport Comfort Inn,
In sum, the Court finds that Jason Realty, and the cases extending Jason Realty outside of the real property realm, are inapplicable in the instant proceeding because the revenues at issue are interests in personal property, not real property. To rule otherwise would countenance the ability of lenders to take security interests in personal property in a manner to evade the protections afforded to obligors under Article 9. This Court respectfully finds that the Jason Realty court did not intend such a result. To use the oft-quotеd idiomatic Jason Realty language, the Lender confused “hotel revenue apples” with “leasehold proceed oranges.”
V. CONCLUSION
For the foregoing reasons, this Court finds that the hotel room revenues generated by the Debtor are not “rents” within the meaning of Jason Realty. As such, the revenues do not fall within the Section 9-109(d)(ll) exception to Article 9 for “interest[s] in ... real property, including a lease or rents thereunder.” Instead, the hotel room revenues are personal property in which AFP maintains a valid security interest. Accordingly, the hotel revenues are available for use as cash collateral in the Debtor’s reorganization efforts so long as AFP remains adequately protected. For the reasons expressеd in the Court’s oral decision, the Court deems AFP’s collateral position to be adequately protected.
In sum, the Court denies AFP’s Motion to dismiss and has carried AFP’s motion to vacate the automatic stay until July 18, 2011 at which date the Court will assess what, if any, progress the Debtor has made toward successful reorganization. The Court grants the Debtor’s Motion for a final order approving the use of cash collateral. An order reflecting this Court’s ruling has already been entered.
Notes
. The Court notes that on March 25, 2011, the Court entered an Order authorizing the Debt- or's entry into a management agreement with Coaldey and Williams ("C & W”) hotel management company. C & W replaced West Paces.
. To the extent that any of the findings of fact might constitute conclusions of law, they are adopted as such. Cоnversely, to the extent that any conclusions of law constitute findings of fact, they are adopted as such.
. New Jersey’s adoption of the UCC can be found in N.J.S.A. 12A:9-101, et seq.
. Section 9-102 defines "account,” as "a right to payment of a monetary obligation, whether or not earned by performance (i) for property that has been or is to be sold, leased, licensed, assigned, or otherwise disposed of ...” "Payment intangible” is defined as a "general intangible under which the account debtor's principal obligation is a monetary obligation.”
Id.
The Court need not determine which definition is more apt.
Klingner v. Pocono International Raceway, Inc.,
. Additionally, while not dispositive, the Court finds further support in § 9-202: Title to Collateral Immaterial — "Except as otherwise provided with respect to consignments of sales of accounts, chattel paper, payment intangibles, or promissory notes, the provisions of this article with regard to rights and obligations apply whether title to collateral is in the secured party or the debtor.” Id. Thus the manner in which the transaction itself is structured — as an assignment of title, for example — is not, in and of itself, outcome determinative.
. Barclays’ UCC filings seek an assertion of a security interest in the following: "All of Debtor’s assets and personal property, including without limitation, all of Debtor’s accounts, equipment, inventory, goods, accessions, software, general intangibles, payment intangibles, deposit accounts, instruments, money, chattel paper (whether electronic or tangible), investment property, letters of credit, letters of credit rights, supporting obligations, commercial tort claims, oil, gas and mineral rights (whether before extraction or extracted collateral), and all proceeds of the foregoing, (whether cash or non-cash proceeds), including insurance proceeds.” AFP received an assignment of this UCC filing on or about November 3, 2010. See Boyle Decl., Exhibit C.
. Interests in real property, including rents, аre created and defined in accordance with the law of the situs of the real property.
Jason Realty,
. The Court is cognizant that under a draft of the Uniform Assignment of Rents Act ("UARA”), adopted by the Uniform Law Commission in 2005, "rents” would include security interests in hotel room revenues. Unif. Assignment of Rents Act §§ 1-21, 7 (Pt. IB) U.L.A. 7 (2005) ("The [UARA] establishes that rents include any sum paid by a ... licensee ... for die right to possess or occupy the real property of another.”). However, New Jersey (as with all but two states) has expressly declined to adopt the UARA. Unless and until it does so, the Court is constrained to follow existing New Jersey law, namely the provisions of New Jersey Uniform Commercial Code Article 9 and New Jersey property law, discussed throughout this opinion. Moreover, those jurisdictions to which we have cited for support — New York and Oklahoma— have not adopted the UARA.
. In fact, this Court does not necessarily dispute that the transactions undertaken between Ocean Place and AFP reveal both a security agreement and an absolute assignment of rents. However, the Court reinforces its position that as interests in personal property, the Court must determine the respective parties' interests as defined by and under the UCC, not according to New Jersey property law concerning title according to an assignment of rents.
. It is of no moment that Jason Realty did not explicitly address the UCC. In fact, this omission is understandable because the rents collected from the commercial building clearly fall within the current § 9-109(d)(ll) exception for “rents,” which was § 9-104(j) under the version of the UCC in effect at the time of the Jason Realty decision. Accordingly, the Court would have had no reason to discuss the UCC provisions.