Opinion
NOT FOR PUBLICATION
ORDER ON MOTION TO PROHIBIT USE OF CASH COLLATERAL
PETER W. BOWIE, Chief Judge United States Bankruptcy Court
Debtor's main cash-generating activity at present is the operation of two 18-hole golf courses, as well as an associated driving range. The primary secured creditor, Far East National Bank seeks an order prohibiting debtor from using its purported cash collateral in the form of daily greens fees and driving range fees.
The Court has subject matter jurisdiction over the proceeding pursuant to 28 U.S.C. § 1334 and General Order No. 312-D of the United States District Court for the Southern District of California. This is a core proceeding under 28 U.S.C. § 157(b)(2)(M).
Debtor borrowed $11,500,000 from Far East. As collateral for the loan, debtor executed a deed of trust, a security agreement, and an assignment of leases and rents. In paragraph H of the trust deed recitals, debtor granted to Far East "Borrower's interest in all of the following described property and all proceeds thereof":
H. All accounts . . ., including without limitation . . . all revenues, receipts, income, accounts receivable and other receivables, including without limitation license fees, golf club and membership initiation fees, green fees, driving range fees ....
Debtor also provided Far East with a UCC Financing Statement with comparable recitals, which was duly recorded with the California Secretary of State. For purposes of the present discussion the Court presumes that Far East has a valid, perfected security interest in all the identified collateral of Premier Golf under California law. The issue before the Court at the present time is the effect, if any, of 11 U.S.C. § 552 on Far East's security interests.
Section 552(a) of Title 11, United States Code, provides:
(a) Except as provided in subsection (b) of this section, property acquired by the estate or by the debtor after the commencement of the case is not subject to any lien resulting from any security agreement entered into by the debtor before the commencement of the case.
As § 552(a) makes express, § 552(b) sets out the exception to the foregoing. It States:
(b) (1) . . . [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 property of the debtor acquired before the commencement of the case and to proceeds, products, offspring, or profits of such property, then such security interest extends to such proceeds, products, offspring, or profits acquired by the estate after the commencement of the case to the extent provided by such security agreement and by applicable nonbankruptcy law ....
Subpart (b) (2) was added in 1994 to recognize the security interests of "hotel financiers", and is not directly at issue in this proceeding.
In In re Bering Trader, Inc., 944 F.2d 500 (8th Cir. 1991), the court briefly explained:
Section 552(a) states the general rule that a prepetition security interest does not extend to property acquired by the estate after the filing of the petition. Section 552(b) provides an exception for some proceeds, products, offspring, rents or profits of encumbered property.
944 F.2d at 501. The court then looked at the purpose of § 552(a):
Section 552(a) is intended to allow a debtor to gather into the estate as much money as possible to satisfy the claims of all creditors. [Citations omitted.] Section 552(b) balances the Code's interest in freeing the debtor of prepetition obligations with a secured creditor's rights to maintain a bargained-for interest in certain items of collateral. It provides a narrow exception to the general rule of 552(a).
944 F.2d at 502. (Emphasis in original.)
Far East argues, in effect, that its prepetition security agreement was both so specific and so broad that it clearly covers post-petition greens fees and driving range fees, just as it did prepetition. Such a reading, however, reads § 552(a) virtually out of existence. The "narrow" exception of § 552(b) was not intended to be instruction to lawyers on how to write around the broad general purpose of § 552(a). Indeed, if read as Far East contends, the exception would swallow the rule. In re Bering Trader. Inc.. 944 F.2d 500, 502 (9th Cir. 1991).
With the understanding that the § 552(b) exception is intended to be a "narrow" exception to the general rule of § 552(a), which cuts off security interests in revenues generated postpetition by a debtor, the challenge for the Court has been to ascertain whether Congress intended postpetition greens fees and driving range fees to be the sorts of postpetition revenues that fall within the § 552(b) exception.
In In re GGVXX, LTD.. 130 B.R. 322 (Bankr. D.Col. 1991), the court recognized the dearth of authority on the issue. There, the court concluded that greens fees and similar fees are not cash collateral. 130 B.R. at 326. Undermining that conclusion to some degree, however, is the rationale of the court in looking to hotel and motel revenues by analogy. That view was altered in 1994 by the decision in In re Days California Riverside Ltd. Ptnrship. 27 F.3d 374 (9th Cir. 1994), followed a few months later by the amendment to § 552(b) to add (b)(2), expressly adding hotel and motel room rent revenues to the exception.
The court in In re Everett Home Town Limited Partnership, 146 B.R. 453 (Bankr. D.AZ 1992), reviewed GGVXX, and reached its own conclusion that greens fees are not within the § 552(b) exception "because such revenue although produced by the use of the real property upon which the business is conducted, the income is not proceeds of the property but the result of the services provided by the business." 146 B.R. at 456. This Court agrees. While non-exclusive transient use of the real property is a component of golf play, the business of a golf course is planting, seeding, mowing, repositioning holes daily, watering, fertilizing, maintaining a property people can move across. Without all of that, a course will rapidly revert to nature's control and be of little or no use unless converted to farmland or housing. So it is the business that generates the revenues and while it involves use of the land in a sense, it is not rents or other forms of the § 552(b) exceptions.
Far East has argued that if greens fees and range fees are not a form of rental of their real property collateral, then the fees are at least revenue from licenses to use the real property. The bank points to its UCC filing in support of its claimed security interest. One of the difficulties with that argument, however, is the UCC is not generally applicable to interests in real property. Cal. Comm. Code § 910 9(d).
The Bank argues that greens fees and driving range fees are "either real property or personal property", and they have a security interest in both. As already noted, for the purpose of this discussion, that may have been accurate prepetition. But it begs the question of the effect of § 552(a), and it does not help resolve what Congress intended by the "narrow" exception of "proceeds, products, offspring or profits" of property secured prepetition. As already discussed, the Bank's approach would write the general rule of § 552(a) out of existence. Congress was looking to protect the secured creditor's interest in its prepetition collateral, and to the extent it was consumed, dissipated, transformed or transmuted, the value received postpetition for that prepetition interest should acquire protected status as cash collateral to the extent applicable state law otherwise would provide.
For the reasons already stated, the Court finds and concludes that postpetition revenues generated by this debtor from greens fees and driving range fees are not encumbered by any security interest of Far East National Bank because of the operation of 11 U.S.C. § 552(a). Further, the Court finds and concludes that the Bank's claimed security interest does not fit any of the "narrow" exceptions to the general rule of § 552(a). Accordingly, the Bank's motion to prohibit the debtor from using its alleged cash collateral is denied because postpetition greens fees and driving range fees are not its cash collateral within the meaning of 11 U.S.C. § 363.
IT IS SO ORDERED.