FOR THE NORTHERN DISTRICT OF CALIFORNIA
TMI GROWTH PROPERTIES - '82, No. 1-88-01073
GREAT WESTERN BANK,
v. A.P. No. 1-89-0003
TMI GROWTH PROPERTIES - '82,
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
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.
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.
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
, 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 _______________________