T-H New Orleans Ltd. Partnership v. Financial Security Assurance, Inc. (In re T-H New Orleans Ltd. Partnership)

Citation: 5 F.3d 86Docket: Nos. 92-3941, 92-3942, 92-3959 and 92-3983

Court: Court of Appeals for the Fifth Circuit; October 7, 1993; Federal Appellate Court

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In 1988, T-H New Orleans Limited Partnership (T-H NOLP) acquired the Days Inn Hotel in New Orleans. In 1989, T-H NOLP, along with six other hotel partnerships under the control of Monty Hundley and Stanley Tollman, sought to restructure their mortgage debt through a mortgage bond financing, securing $87,000,000 in loans from a newly established business trust. This involved executing various financial instruments, including a Collateral Mortgage Note and a Nonrecourse Guarantee, which limited T-H NOLP’s liability to its net worth at the time of the Guarantee's execution or when enforced, whichever was greater (initially $18,425,000). To fund the mortgage loans, the issuer issued $87,000,000 in bonds backed by a surety bond from Financial Security Assurance Incorporated (FSA), which was given control over the security agreements.

By 1990, T-H NOLP and the other partnerships defaulted on the loans. FSA subsequently accelerated the Mortgage Note and demanded payment, leading T-H NOLP to file for bankruptcy. FSA filed a motion for relief from the automatic stay and for adequate protection regarding hotel revenues. The bankruptcy court granted FSA relief from the stay, determining that the secured property was unnecessary for T-H NOLP’s reorganization, citing flaws in T-H NOLP’s reorganization plan, including inadequate provisions for FSA’s debt and improper classification of creditors. The district court upheld the relief from the stay but overturned the decision on the adequate protection motion, ruling that FSA lacked a security interest in hotel revenues. Both T-H NOLP and FSA are appealing to this court.

Bankruptcy court findings of fact are reviewed for clear error, while conclusions of law are freely reviewable. T-H NOLP asserts that the court misinterpreted its reorganization plan and disclosure statement, leading to a wrongful conclusion that T-H NOLP lacked a reasonable chance for successful reorganization. T-H NOLP argues the court incorrectly limited FSA's bidding rights to the secured amount of its claim during the hotel sale, affecting the decision to grant FSA relief from the automatic stay. Under 11 U.S.C. § 362(a), an automatic stay halts foreclosure when a debtor files for bankruptcy. Relief from this stay is warranted if the debtor has no equity in the property and it is not necessary for effective reorganization, as specified in § 362(d)(2). T-H NOLP acknowledges it has no equity in the hotel, leaving the key issue as whether the hotel is essential for a successful reorganization, which requires a reasonable probability of success within a reasonable time frame.

The bankruptcy court found T-H NOLP owed FSA $16,954,983 against the hotel's appraised value of $12,200,000, resulting in an under-secured nonrecourse deficiency claim of about $4,754,983. T-H NOLP's plan aimed to address FSA's claim under 11 U.S.C. § 1111(b)(1)(A)(ii), allowing under-secured nonrecourse creditors to elect recourse if the debtor retains secured property. However, subsection (ii) stipulates that a nonrecourse deficiency claim is not treated as recourse when the collateral is sold, allowing the creditor to credit bid up to the full claim amount. FSA's claim is nonrecourse, meaning its recovery is limited to the hotel itself.

The bankruptcy court ruled that T-H NOLP's plan was unconfirmable because it failed to address FSA's nonrecourse deficiency claim of $4,754,983, rendering the application of subsection (ii) inappropriate. Consequently, the court lifted the automatic stay, asserting that no reasonable chance for successful reorganization existed. However, the plan outlined that T-H NOLP would retain the hotel for up to two years to market it and, if unsuccessful, would deed it to FSA. Should a purchaser be found, FSA could credit bid the full amount of its allowed claim. The disclosure statement clarified that FSA, as an under-secured nonrecourse creditor, would not be allowed to make any election under 1111(b) of the Code. The court's conclusion that the plan was unconfirmable due to its treatment of FSA's claim was deemed erroneous, as the plan did allow for FSA to bid its full claim amount.

Additionally, the bankruptcy court criticized the plan for improperly gerrymandering creditor classes to manipulate the voting process, referencing the precedent set in In re Greystone III Joint Venture. In Greystone, the court found that classifying similar claims differently to secure a favorable vote violated reorganization principles. The current plan similarly deviated from these principles by separately classifying the unsecured claim of the Tollman-Hundley Management Group, an affiliate of T-H NOLP, from other general trade creditors, thereby aligning with the gerrymandering concerns highlighted in the Greystone case.

The bankruptcy court determined that T-H NOLP improperly segregated the unsecured claim of the Tollman-Hundley Management group to enable it to vote on a plan against Greystone’s objections. The court found no justification for this separate classification, which was similar to other unsecured creditors' claims, deeming the plan "unfairly discriminatory and inequitable" and therefore "unconfirmable." Although the court identified this classification issue as a defect that T-H NOLP could amend, it denied T-H NOLP's request to file an amended plan. Consequently, the appellate court remanded the confirmability issues back to the district court with instructions to allow T-H NOLP to amend the plan and for the bankruptcy court to reassess the amended plan's potential for successful reorganization.

Additionally, the FSA claimed that post-petition hotel revenues constituted its cash collateral under the terms of its security agreements, pursuant to 11 U.S.C. § 552(b). While § 552(a) generally protects post-bankruptcy acquisitions from pre-bankruptcy liens, § 552(b) offers an exception for security interests that extend to after-acquired property, provided the security agreement meets two criteria: it must cover designated categories of property and the property must fit within those categories. The FSA's security agreements fulfilled the first requirement, allowing the mortgagee to secure interests in leases, rents, fixtures, and personal property related to the mortgaged property, as defined in the agreement.

Leases encompass all agreements granting a possessory interest in the Mortgaged Property, including written or verbal leases, subleases, licenses, and agreements related to utility, maintenance, management, or services. FSA’s security interest includes the hotel’s revenues, fulfilling the requirement of 552(b). The core issue is whether these revenues qualify as 'proceeds, products, offspring, rents, or profits' under 552(b), specifically whether they can be classified as 'rent' under Louisiana law, which both parties agree governs this determination. The pivotal Louisiana case is Pioneer Bank and Trust Co. v. Oeschner, where the court ruled that hotel revenues are akin to rent since they compensate for the property's use. The Louisiana Sequestration statute allows for the seizure of revenues produced by property under seizure. The Louisiana Supreme Court concluded that the revenues from hotel guests, similar to rent, are generated by the property, as the mortgage covers all associated property.

Pioneer Bank's interpretation supports that hotel revenues qualify as 'rents' under Louisiana law, and thus, FSA is entitled to have these revenues segregated for its benefit. An exhaustive review of the legislative history of 552(b) revealed no intent from Congress to exclude hotel revenues from the definition of 'rents.' The term 'rents' encompasses revenues from various properties, including apartments and commercial spaces, and without explicit exclusion in the legislation, hotel revenues should be included. T-H NOLP argues that hotel revenues are classified as 'accounts receivable' under the Louisiana Accounts Receivable Act, suggesting that these revenues arise from the service aspect of hotel operations rather than from the rental of property. However, this argument is rejected on two grounds: first, the statutory definition specifically excludes indebtedness from the leasing of immovable property, which encompasses hotel room revenues; second, the physical attributes of the hotel, such as location and structure, are deemed more critical to revenue generation than the services provided. The conclusion is that hotel revenues can be classified as rent for the purposes of 552(b), irrespective of the service dependency argued by T-H NOLP.

Several bankruptcy and district court rulings have reached conclusions that differ from the current decision, primarily due to their reliance on statutory provisions from other states regarding rent classification, which are not applicable under Louisiana law. The language of the loan documents indicates that both the borrower and lender intended for hotel revenues to serve as security for the loan, highlighting that these revenues are critical to the lender's valuation of the collateral. If a lender can access and control hotel revenues under Louisiana’s sequestration laws, it is unjust to deny the lender the benefits agreed upon at closing, which aligns with standard lending practices.

The court reverses the bankruptcy court's determination that the plan was unconfirmable due to FSA's inability to credit bid the full amount of its claim. However, it affirms the bankruptcy court's finding that T-H NOLP improperly manipulated claims to push through its plan against FSA's objections, violating prior court rulings. Additionally, the district court's reversal of the bankruptcy court’s allowance for FSA to segregate hotel revenues for its benefit is deemed erroneous. The case is thus affirmed in part and reversed in part, with instructions to remand to the bankruptcy court for further proceedings.

Notices of default and acceleration were sent to six hotel partnerships, leading to five filing for bankruptcy and one currently undergoing foreclosure in Florida state court. FSA's appeals are interconnected across several case numbers, addressing issues related to the segregation of hotel revenues, plan confirmability, and a motion for relief from stay. Confirmation of the plan requires approval from two-thirds of the amount and more than half the number of each impaired class, or at least one impaired class must consent to the plan while meeting specific cramdown criteria.