Memorandum of Decision Re: Hotel Revenues as Cash Collateral

FOR THE NORTHERN DISTRICT OF CALIFORNIA In re TMI GROWTH PROPERTIES - '82,                                       No. 1-88-01073      Debtor. ____________________________/ GREAT WESTERN BANK,      Plaintiff,    v.                                                                                            A.P. No. 1-89-0003 TMI GROWTH PROPERTIES - '82,      Defendant. ______________________________/
Memorandum of Decision
     Debtor and defendant TMI Growth Properties - '82 owns and operates a large Sheraton Hotel in Santa Rosa, California. Plaintiff Great Western Bank is the principal financier of the hotel, holding a deed of trust to the real property and a security interest in the hotel's furnishings, fixtures and equipment.      Great Western's deed of trust recites that it is assigned all "rents, issues, profits, royalties, tolls, earnings and income" from the hotel property. The complaint in this matter seeks to have the hotel's revenues sequestered and blocked as cash collateral.      Great Western admits that while it did file a UCC-1 financing statement to perfect its interest in the furniture and fixtures, no UCC-1 describes the revenue, receivables, or income from the hotel;it relies solely on the recorded deed of trust to establish its rights. TMI has moved for dismissal on the grounds that the complaint fails to state a claim because the deed of trust alone is insufficient to establish a right to the hotel revenues superior to the rights of the bankruptcy estate.      Great Western made its loan to the debtor for the specific purpose of financing the debtor's hotel. It is therefore clear that the parties, among themselves, intended to grant Great Western a security interest in the hotel revenues so that, if there was ever a default, Great Western could step in and operate the hotel while foreclosure proceedings were pending. The critical issue here, however, is whether the hotel revenues are "rents" or "earnings and income." If they are rents, then Great Western has a perfected security interest in them pursuant to section 9104(j) of the California Commercial Code, which excludes rents from the perfection requirements of Division Nine. However, if the hotel revenues are "earnings and income," then Division Nine is applicable; the debtor's rights in the revenues would then be superior to Great Western's pursuant to section 544(a) of the Bankruptcy Code.      There have been several reported cases in the last year or so on the issue of hotel revenues as rents. The most recently published, In re Ashkenazy Enterprises, Inc. (Bkrtcy.C.D.Cal.1986) 94 B.R. 645, applied California law in determining that hotel revenues are not rents. The same holding was made in In re Kearney Hotel Partners (Bkrtcy.S.D.N.Y.1988) 92 B.R. 95 (applying Nebraska law), and In re Greater Atlantic and Pacific Inv. Group, Inc. (Bkrtcy.N.D.Okl.1988) 88 B.R. 356 (Missouri law). See also In re Zeeway Corporation (9th Cir.BAP 1987) 71 B.R. 210 (racetrack proceeds not rents under Arizona law).      A few earlier bankruptcy cases have reached seemingly opposite results. In In re Morning Star Ranch Resorts (Bkrtcy.D.Colo.1986) 64 B.R. 818, the court assumed that motel proceeds were rents. In In re Flower City Nursing Home, Inc. (Bkrtcy.W.D.N.Y.1984) 38 B.R. 642, the court held that medicaid capital cost reimbursement funds were "rents and profits"; it did not discuss perfection requirements at all. The Court believes the reasoning in these cases is flawed and declines to follow them.      Great Western concedes that there are no California cases on the issue of hotel revenues as rents, but cites several cases where a California court assumed hotel revenues were rents. The problem with giving any weight to these cases is that they dealt with disputes between the debtor and the deed of trust holder. In such cases it does not matter whether hotel revenues are rents, or profits, or income; between debtor and secured party, a security interest is enforceable despite lack of perfection. Section 544(a) of the Bankruptcy Code gives the bankruptcy estate the rights of an intervening third party creditor. Thus, only cases involving disputes between the deed of trust holder and some other creditor have any bearing on this case. The leading nonbankruptcy case involving such a dispute, United States v. P.S. Hotel Corp. (E.D. Mo. 1975) 404 F.Supp. 1188, aff'd 527 F.2d 500 (8th Cir.1975), held squarely for the subsequent creditor.      Based on the foregoing cases, and especially the detailed reasoning in Kearney Hotel Partners, the Court rules that while the "earnings and income" clause in the deed of trust is sufficient to establish Great Western's security interest in the hotel revenues, "earnings and income" are not rents and are therefore not excepted from Division Nine perfection requirements by Commercial Code section 9104(j) which, like all exceptions to a general statute, should be narrowly construed. 58 Cal.Jur.3d, Statutes, section 116. Since TMI, as debtor in possession, has rights superior to those of unperfected lienholders, Great Western has no enforceable interest in the hotel revenues.      Because the Court finds no enforceable interest in the hotel revenue at all, it need not decide if such interest is limited by section 552 of the Bankruptcy Code.      TMI's motion for dismissal will be granted. Counsel for TMI shall submit an appropriate form of order.
Dated: March 13, 1989                                                                              _______________________                                                                                                                      Alan Jaroslovsky                                                                                                                      U.S. Bankruptcy