ORDER
Before the Court is an appeal from an order of the United States Bankruptcy Court for the Middle District of Georgia granting the Appellant Debtor’s motion to use SunTrust Bank’s cash collateral. (Doc. 1). The Debtor contends the Bankruptcy Court erred in the conditions it placed on his use of the cash collateral. This Court disagrees. For the reаsons set forth below, the Bankruptcy Court’s decision is AFFIRMED.
I. STANDARD OF REVIEW
The Court has jurisdiction to hear this appeal pursuant to 28 U.S.C. § 158(a). In reviewing the decision of a bankruptcy court, a district court functions as an appellate court. See Williams v. EMC Mortg. Corp. (In re Williams),
II. FACTUAL AND PROCEDURAL BACKGROUND
The Debtor owns and manages several rent-producing properties, including one in Chattanooga that he leases to a nuclear pharmacy. In March 2008, the Debtor entered into a Deed of Trust with Sun-Trust, granting SunTrust a security interest in the Chattanooga property, an assignment of rents, and a security interest in those rents. (Doc. 1 at 189-90, ¶¶ 1, 3-4). On December 5, 2011, the Debtor filed a Chapter 11 bankruptcy petition. (Doc. 1 at 34). SunTrust filed a more than $3.3 million claim, which was reduced to roughly $1.1 million after the Debtor surrendered other properties in which SunTrust had security interests under separate commercial notes. The Parties agree that as of July 2012, the value of the Chattanooga property is $470,000. They also agree that SunTrust has an unsecured claim of more than $500,000. The Parties further agree that pursuant to 11 U.S.C. § 552(b)(2), SunTrust has a post-petition interest in rents produced by the Chattanooga property and these rents are SunTrust’s “cash collateral” as defined in 11 U.S.C. § 363(a).
The Debtor leases the Chattanooga property for $6,966.10 per month.
A few days after filing his Chapter 11 petition, the Debtor moved the Bankruptcy Court for authorization to use the cash collateral. (Doc. 1 at 144). SunTrust ob
The Bankruptcy Court granted the Debtor’s motion, but found SunTrust held two distinct security interests — one in the real property, and one in rents the property produced. Therefore, to adequately protect the SunTrust’s interest in rents, the Bankruptcy Court limited the Debtor’s use of the money to (1) $5,000 incurred to appraise the Chattanooga property; (2) any expenses incurred in negotiating a new lease on the property; and (3) up to $623.72 per month to pay unreimbursed maintenance expenses.
On November 30, 2012, the Debtor appealed the Bankruptcy Court’s order. This Court heard oral arguments March 12, 2013. Both Parties ask the Court to modify the Bankruptcy Court’s oрinion in their favor.
III. DISCUSSION
The Debtor raises several arguments on appeal. However, they need not be dissected in great detail to address the overarching issue: Whether SunTrust’s security interest in rents, which admittedly is cash collateral, is separate collateral entitled to its own adequate protection. Although the Eleventh Circuit has not addressed this issue, the weight of authority holds that a creditor’s interest in rents is separate from its interest in the land and corresponds to the amount of rents that accrue.
Section 552(b)(2) of Title 11, which governs the post-petition treatment of cash collateral in Chapter 11 proceedings, provides:
[I]f the debtor and an entity entered into a security agreement before the commencement of the case and if the security interest created by such security agreement extends to ... amounts paid as rents of [the debtor’s] property ..., then such security interest extends to such rents ... acquired by the estate after the commencement of the ease to the extent provided in such sеcurity agreement....
11 U.S.C. § 552(b)(2). Here, the Deed of Trust grants SunTrust a security interest in:
any and all leases and contracts affecting the [Chattanooga property] both presently existing and hereafter arising, and all rents, income, or profits which are now due or may hereafter become due ...; all of which are hereby assigned to [SunTrust] as further security for the repayment of the indebtedness.
(Doc. 1 at 189, ¶ 1). The agreement describes SunTrust’s interest as an assignment entitling the bank, upon the Debtor’s default, to “all rents ... now or hereafter due”:
[The Debtor] hereby assigns to [Sun-Trust] all rents, revenues, incomes and profits of the [Chattanooga property], including those now or hereafter due, subject only to the condition that [Sun-Trust] shall not collect such rents, revenues, incomes and profits so long as [the Debtor] is not in default under this Deed of Trust.... Should the [Chattanooga property] be involved in any insolvency, receivership, bankruptcy, or other proceedings affecting the possession of said [property], it is further covenanted and agreed that [SunTrust] shall be entitled to all of the rents, issues and profits realized from or during any such proceedings, whether or not there shall exist a default under this Deed of Trust. Such rents shall be treated as cash collateral.
(Doc. 1 at 190, ¶ 3).
By virtue of the Deed of Trust, SunTrust possesses a separate security interest in the rents produced by the Chattanooga property. Most of the few сourts addressing this issue have held that the value of this interest should be measured by the actual rents that have accrued or will accrue. See In re Landing Associates, Ltd.,
The Sixth Circuit’s unpublished opinion in Steams and the Sixth Circuit Bankruptcy Appellate Panel’s decision in Buttermilk Towne Center are particularly instructive. In Steams, the bankruptcy court had rejected the debtor’s request to use rents for administrative expenses, which he proposed to adequately prоtect by granting the creditor a replacement lien,
[The creditor] is entitled to receive adequate protection for Debtor’s use of the net rents generated post-petition if the rents constitute “cash collateral” and there is compliance with 11 U.S.C. § 552(b). Both requirements are met here. 11 U.S.C. § 363(a) expressly provides that rents are “cash collateral.” In addition, 11 U.S.C. § 552(b)(2) generally provides that, if there is a pre-petition security agreement that extends to pre-petition property and to amounts paid as rents of such property, then that security interest extends tо post-petition rents to the extent provided in the security agreement. In the present case, the pre-petition security agreement establishes that, upon default, “[Debtor] in such case does hereby bargain, sell, assign and set over to [the creditor] all the rents, income and profits, which, whether before or after foreclosure of thismortgage or during the period of redemption, shall accrue and be owing for the use or occupation of [the complex].” ... Hence, it is clear that Debtor must provide adequate protection if it is to use the net rents.
Stearns,
In Buttermilk Towne Center the debtor’s debt was also secured by, among other collateral, an assignment of rents.
The Debtor’s arguments in this case rest on the idea that SunTrust’s interest in rents is subsumed by its interest in the real property, and that so long as the real property’s value is not declining, all that must be protected is a lien in rents. In a very narrow and very abstract sense, this argument has some logic. When the value of property is determined by the income method of appraisal, the rents undergird the value of the property. So long as the stream of rents is guaranteed to continue, regardless of whether the rents accrue, the value of the property is maintained. Here, however, the Debtor’s argument ignores the nature of the interest actually assigned to SunTrust. SunTrust took more than security necessary to maintain the valuе of the property; it took an interest in the cash generated by the property. To treat SunTrust’s interest as an interest in only the existence of a lien in rents to protect the value of the property is to adopt a replacement lien theory, which does not provide adequate protection for SunTrust’s interest in the revenue the rents produce. See Buttermilk Towne Center,
Even though a few courts once followed it, the replacement lien theory has by now been generally discredited, and not just by the Sixth Circuit panels. Most courts recognize that a prepetition security interest in rents is a special kind of collateral that, pursuant to 11 U.S.C. § 552(b), continues in full force and effect after the petition is filed. As such, the replacement lien theory’s purported protection is seen as “illusory.” In re Smithville Crossing, LLC,
Given that SunTrust holds twо distinct pre-petition interests requiring adequate protection, and given that the value of its interest in rents is measured by the rents actually generated, the Debtor’s remaining arguments fall away. As an initial matter, the Debtor’s request for remand to con
Finally, the Court is not persuаded by the Debtor’s strenuous advocacy of “dual valuation” as discussed in In re Addison Props. Ltd.,
Accordingly, SunTrust has a secured interest in each dollar in rents that accumulates, and eaсh of those dollars is entitled to adequate protection. The Debtor may not use any of the rents to administer his bankruptcy or for other general purposes, because for each dollar in rents he spends, he deprives SunTrust of the adequate protection of that dollar. The Debtor’s use of rents is therefore limited to expensеs that are “directly related to the operation, maintenance, or preservation of the” Chattanooga property, or that “are reasonable and necessary to preserving or disposing of such property and are incurred primarily for the benefit of the secured creditor.” In re River Oaks Ltd. Partnership,
Over SunTrust’s objection, this Court agrees these uses are permissible. They are necessary to either maintain thе Chattanooga property or to preserve its value for SunTrust’s benefit. Therefore, this Court does not alter the Bankruptcy Court’s decision.
IY. CONCLUSION
This Court does not view any of the facts found by the Bankruptcy Court as clearly erroneous and therefore does not disturb its findings of fact. Furthermore, this Court, having reviewed the applicable law and the arguments of the Parties, agrees with the lower court’s conclusions of law and the application thereof. The decision of the Bankruptcy Court is AFFIRMED.
SO ORDERED.
Notes
. During oral argument, the Parties indicated this lease expired following the Bankruptcy Court's decision but has since been renewed. It is not clear to what extent, if any, the terms of the new lease have changed.
. However, the Debtor still incurs some un-reimbursed maintenance costs for minor repairs. When projecting his business expenses before the Bankruptcy Court, the Debtor estimated he spent $12,474.46 per month, about 20 percent of which represents unreimbursed expenses attributed to four pharmacies, including the Chattanooga pharmacy.
.SunTrust does not consent to the Debtor’s use of the cash collateral.
. At one time, some courts found this acceptable. The replacement lien theory was based on the idea that if a debtor continued to generate an income stream through rents, his use of the income would not diminish its value as collateral because the lender retained a lien in all future rents. In that fashion, the lien on each month's rents would replace the lien on the prior month's rents. See In re Mullen,