• Secured Lender Has No Right to Golf Course Greens Fees In Bankruptcy
  • March 18, 2014 | Author: David E. Peterson
  • Law Firm: Lowndes, Drosdick, Doster, Kantor & Reed Professional Association - Orlando Office
  • A 2012 bankruptcy appeal held that a lender taking a mortgage on a borrower’s golf course and all of its other assets had no right to the greens fees and driving range fees generated during the borrower’s subsequent bankruptcy.

    In Far East Nat’l Bank v. United States Trustee (In re Premier Golf Props., LP), 477 B.R. 767 (Bankr. 9th Cir. BAP 2012), a bankruptcy appellate panel considered a situation where the lender held a mortgage on the real estate comprising the golf course itself, as well as all other assets of the borrower.  The collateral description in the security documents was very broad, specifically including for example accounts, contract rights, general intangibles, instruments, inventory, goods, revenues, receipts, “license fees, golf club and membership initiation fees, green fees, driving range fees, golf cart fees, membership fees and dues,” and so on.  After receiving the loan, the borrower filed a chapter 11 bankruptcy.

    Section 363(c)(2) of the Bankruptcy Code prohibits the debtor in possession from using “cash collateral” without consent of the secured creditor or bankruptcy court approval after finding that the creditor’s interest is adequately protected.  The term “cash collateral” includes cash equivalents such as cash, negotiable instruments and deposit accounts, as well as the cash proceeds of accounts, rents, and other intangibles that serve as collateral for a secured creditor’s claims.

    The lender in Premier Golf filed an emergency motion in the bankruptcy case seeking to prohibit the debtor from using the post-bankruptcy greens fees and driving range fees to fund its continuing operations, arguing that the greens fees and driving range fees were “cash collateral” of the lender, and therefore subject to the prohibition of section 363(c)(2).

    Certainly, the greens fees and driving range fees were included in the collateral described in the lender’s security documents.  However, the debtor argued that they were nevertheless not cash collateral of the lender by virtue of the operation of section 552 of the Bankruptcy Code.

    Section 552 states in part as follows:

    § 552. Postpetition effect of security interest

    (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.

    (b) (1)  Except as provided in sections 363, 506(c), 522, 544, 545, 547, and 548 of this title, if 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, except to any extent that the court, after notice and a hearing and based on the equities of the case, orders otherwise...

    Section 552(a) states the general rule that the secured creditor has no right to collateral acquired by the debtor after the filing of the bankruptcy even if it has an after-acquired property clause in its security documents.  Subsection 552(b) gives an exception to the general rule, namely that if the secured party’s loan documents extend to certain property, and to the “proceeds, products, offspring, or profits of such property,” then the after-acquired property clause will remain operative in bankruptcy to such extent.  In other words, the question of whether the greens fees and driving range fees are cash collateral of the lender depended on whether those fees were “proceeds, products, offspring, or profits” of the lender’s other prepetition collateral.

    The lender argued that the greens fees and driving range fees were rents of the land, or if not, that they constituted proceeds or profits of its personal property collateral, and that the after-acquired property clause therefore attached to such fees collected after the filing of the bankruptcy.  The debtor disagreed, and the bankruptcy court ruled in favor of the debtor.

    On appeal, the bankruptcy appellate panel affirmed the bankruptcy court’s decision.  The appellate panel cited other bankruptcy court cases which held that greens fees and driving range fees were not directly tied to or wholly dependent upon the use of the real estate, but rather were the result of the operation of and services provided by the golf course business, and were therefore not rents.

    The lender also argued that the golfers each held a license to use the golf course, and that it had a security interest in those licenses.  It argued that the fees were proceeds of the licenses in which it had a security interest, and that the fees were therefore within the exception provided in section 552(b)(1).  The appellant panel disagreed, stating that the fees were not generated by the licenses themselves, but rather by the debtor’s labor in maintaining and operating the golf course.  The appellate panel also agreed with a published bankruptcy court opinion holding that there was no general intangible collateral to which the after-acquired property clause might attach because the golfer’s transaction with the golf course was actually a simultaneous transaction, giving rise to no obligation on the part of the golfer.

    The appellate panel therefore concluded that the greens fees and driving range fees were not cash collateral for the lender, and that the debtor could therefore use those funds without obtaining the consent of the lender or bankruptcy court approval.

    One point worth mentioning is that if the greens fees and driving range fees had been received by the debtor from its customers prior to the time the bankruptcy was filed, then at least as to those prepetition fees, the lender would have had a better argument for its position, assuming that its security interest was perfected.  If, for example, the lender had a perfected security interest in the debtor’s accounts receivable, and the fees were paid by credit card, then the lender would have a security interest in the credit card obligations to the debtor that were outstanding as of the filing of the bankruptcy. Credit card payments received after the bankruptcy, however, would not be protected.  The lesson is that the lender may be able to improve its position to some degree if it discusses these issues with an experienced bankruptcy attorney prior to making the loan.

    The Premier Golf decision has particular applicability to lenders who are making golf course loans, but it also has implication for lenders making loans based on the security of anticipated cash flows in general.  If the cash flow revenue is not proceeds, products, offspring, or profits of other collateral existing as of the filing of the bankruptcy, then the lender will have no right to those cash flows after the filing of the bankruptcy.  Each of these types of businesses has its own particular peculiarities, however, so while it may be difficult to avoid the pitfall in one case, it may be possible to do so in another case.  As a result, a financial institution making a loan on cash flow collateral should consult an attorney to maximize its rights in the event that its borrower may subsequently file a bankruptcy.