Opinion
Case No. 22-31700
2023-01-24
IN RE: BURTS CONSTRUCTION, INC., Debtor
Julie Mitchell Koenig, Cooper & Scully, PC, Houston, TX, for Debtor. Jayson B. Ruff, Office of the United States Trustee, Houston, TX, for U.S. Trustee.
Julie Mitchell Koenig, Cooper & Scully, PC, Houston, TX, for Debtor.
Jayson B. Ruff, Office of the United States Trustee, Houston, TX, for U.S. Trustee.
MEMORANDUM ORDER DENYING DEBTOR'S MOTION TO PAY SECURED CLAIM OF ALLEGIANCE BANK
(RE: Docket No. 89)
Christoper Lopez, United States Bankruptcy Judge In August 2022, the Court authorized the Debtor to sell real property. The sale netted over $494,000 in net proceeds. No party held a prepetition mortgage on the property. But Allegiance Bank is a secured creditor holding a prepetition lien on all the Debtor's assets, including "accounts," and the proceeds of such collateral. Allegiance claims it is owed about $152,000. The Debtor wants to pay off Allegiance's secured claim using the sale proceeds. The Debtor believes that the real property sale agreement approved by the Court created a postpetition "account" that makes the sale proceeds subject to Allegiance's lien. The Debtor also argues that Allegiance holds replacement liens and a superpriority administrative claim under cash collateral orders approved by this Court. Ag Pay, LLC, an unsecured creditor, objects. It contends that Article 9 does not apply to the sale of real estate, so Allegiance's security interest does not extend to the sale proceeds.
Agreed Order Approving Sale, Docket No. 67.
Mot. to Pay Secured Claim of Allegiance Bank ¶ 5, Docket No. 89.
Id. ¶ 7.
See id .
See Debtor's Reply to Ag Pay Resp. ¶ 7, Docket No. 108.
See id. ¶ 4.
See Ag Pay Resp. to Debtor's Mot., Docket No. 95.
See id. ¶¶ 4-6.
The Court must decide whether Allegiance's prepetition security interest in accounts extends to the postpetition sale proceeds. For the reasons stated below, Section 552(a) of the Bankruptcy Code prohibits it. Thus, the Debtor's motion is denied.
This decision is limited to the relief requested in the Debtor's motion.
Background
In 2017, Allegiance loaned the Debtor about $1.5 million. At the same time, the parties entered into a security agreement. The collateral listed in the security agreement includes all assets of the Debtor, including all accounts. In May 2020, Allegiance filed a UCC-1 Financing Statement with the Texas Secretary of State, perfecting its lien on the Debtor's assets. The collateral covered in the UCC-1 consists of, among other things, all "Assets including but not limited to all ... Accounts ... whether it is owned now or acquired later."
Allegiance Bank Proof of Claim, Ex. 1, Docket No. 124.
Id.
Id .
The Debtor started this chapter 11 bankruptcy case in June 2022. Very early in the case, the Court entered an agreed cash collateral order providing that, if Allegiance had a valid, perfected security interest in the Debtor's cash, Allegiance was entitled to adequate protection in the form of, among other things, replacement liens and a superpriority administrative claim equal to any diminution in the value of its cash collateral. The Court has entered more cash collateral orders containing the same language.
Agreed Order Granting Emergency Use of Cash Collateral, Docket No. 13.
In August 2022, the Court authorized the Debtor to sell real property free and clear of all liens. The order states that all liens on the property and liens arising on the proceeds of the sale, if any, attach to the proceeds of the sale.
Agreed Order Approving Sale, Docket No. 67.
Id .
The Debtor wants to use part of the sale proceeds to pay off Allegiance's claim. The Debtor believes that the sale proceeds are subject to Allegiance's prepetition lien on accounts. According to the Debtor, the sale contract created an "account" as defined under Texas Business & Commerce Code § 9-102(a)(2) because it created a right to payment from the sale of real property. Allegiance therefore holds a lien on the sale proceeds. And Allegiance holds replacement liens and a superpriority administrative claim under the cash collateral orders.
See Mot. to Pay Secured Claim of Allegiance Bank ¶ 7, Docket No. 89.
Ag Pay, on the other hand, argues that Article 9 applies only to the perfection of a security interest in personal property and not real estate. Ag Pay relies mainly on Section 9-109(d)(11) of the Texas Business and Commerce Code, which excludes from Article 9 the creation or transfer of an interest in, or lien on, real property, and the holding from a Southern District of Florida bankruptcy court decision in the Harbour East Development, Ltd. case
Harbour E. Dev., Ltd. v. 7935 NBV, LLC and Whirlpool Corp. (In re Harbour E. Dev. , Ltd.) , No. 10-03584, 2011 WL 3035287 (Bankr. S.D. Fla. 2011).
The Court first analyzes whether the sale proceeds constitute an "account" subject to Allegiance's liens. If the answer is yes, then the second question is whether the Bankruptcy Code permits Allegiance's lien to extend to the sale proceeds.
Jurisdiction
This is a core proceeding under 28 U.S.C. § 157(b)(2)(K). The Court has jurisdiction under 28 U.S.C. § 1334. The parties’ express and implied consent also provides this Court constitutional authority to enter a final judgment under Wellness Int'l Network, Ltd. v. Sharif , 575 U.S. 665, 678–83, 135 S.Ct. 1932, 191 L.Ed.2d 911 (2015) and Kingdom Fresh Produce, Inc. v. Stokes Law Off., L.L.P. (In re Delta Produce, L.P.) , 845 F.3d 609, 617 (5th Cir. 2016).
Analysis
Section 9-102(a)(2) of the Texas Business and Commerce Code defines "Account" to include: "a right to payment of a monetary obligation, whether or not earned by performance, (i) for property that has been or is to be sold, leased, licensed, assigned, or otherwise disposed of ..." While former Section 9.106 (now Section 9.102) limited the scope of an "account" to "any right to payment for goods sold or leased or for services rendered," revised Article 9 expanded the definition to include any right to payment from the sale of property where that property has been or is to be sold. Section 9-109(d)(11) of the Texas Business and Commerce Code, however, excludes from Article 9 the creation or transfer of an interest in, or lien on, real property.
See former Tex. Bus. & Com. Code § 9.106 (effective to June 30, 2001) (current version § 9.102 ).
Ag Pay is wrong that Section 9-109(d)(11) prohibits Allegiance's Article 9 liens to extend to the sale proceeds. Allegiance's lien on accounts does not create or transfer an interest in, or lien on, the real property itself. Rather, Allegiance holds a right to receive monetary payment for property sales based on its lien on "accounts."
See, e.g. , Frederick H. Miller & Carl S. Bjerre, 8 Hawkland Ucc Series § 9-102:3 (2022) (Stating that "[r]evised Section 9-102(a)(2) ... substitutes the very broad term ‘property’ for the formerly limited term ‘goods’ ").
The Harbour case doesn't change this point. In Harbour , the court considered whether earnest money deposits paid by prospective purchasers of condominium units were (a) proceeds of the condominium units themselves, making them subject to a secured creditor's preexisting mortgage or (b) non-real estate "proceeds" subject to the UCC and not the mortgage. See Harbour, 2011 WL 3035287, at *3. The legal issue addressed in Harbour is different from the one here. In this case, no party held a prepetition mortgage on the property at issue and the focus is not on the nature of earnest money deposits. The issue here is whether Allegiance's lien on accounts includes the right to receive payment from the sale of real estate. And, in this case, the plain language of Section 9-102(a)(2) says yes.
In Harbour , the debtor also argued that the deposits were also "accounts" under Revised Article 9. The court rejected that argument by citing to other sections of Florida law and a decision from the Eleventh Circuit holding that "a potential buyer, in depositing earnest money, ‘in essence, obtain[s] the right to purchase the land’ " and the earnest money creates "[a] valuable right to the property." Id. (citing Church v. Colling (In re Aldersgate Found., Inc. ) 878 F.2d 1326 (11th Cir. 1989) ).
A similar conclusion was reached by the Bankruptcy Court for the Southern District of New York in In re Nittolo Land Dev. Ass'n, Inc ., 333 B.R. 237 (Bankr. S.D.N.Y. 2005). That court addressed whether sales proceeds from the prepetition sale of a debtor's real property created an "account" to which a creditor's security interest attached. See Nittolo , 333 B.R. at 238–40. In Nittolo, real property was sold by a Chapter 7 Trustee in an individual debtor's bankruptcy case. Id. at 238–39. A secured creditor objected to the proposed distribution of the sale proceeds, claiming that the proceeds were actually property of the individual's corporation. Id. at 239. And that the creditor's lien on the corporation's accounts and general intangibles gave the creditor a lien on the proceeds. Id. The Chapter 7 Trustee responded by filing an involuntary Chapter 7 petition on behalf of the corporation. Id. The court held that the revised, expanded definition of "account" under New York's Article 9 (which contains identical language to Texas's revised Article 9), included the right to payment of proceeds from the sale of real property. Id. at 240–41. And, therefore, the sale proceeds were subject to the secured creditor's lien on the corporation's accounts.
Nittolo is like this case except in one major respect. That case involved a prepetition sale and this case involves a postpetition one. So we must analyze if the Bankruptcy Code changes the answer. And it does under 11 U.S.C. § 552(a).
Section 552(a) states that postpetition "property acquired by the estate" after the bankruptcy petition date is "not subject to any lien resulting from any security agreement entered into by the debtor" before the petition date. 11 U.S.C. § 552(a). This limitation applies to after-acquired clauses providing, for example—like in this case—a blanket lien on all accounts, including "whether it is owned now or acquired later."
See Allegiance Bank Proof of Claim, Ex. 1, Docket No. 124.
Interpreting the Bankruptcy Code begins with analyzing the text. Ransom v. FIA Card Servs., N. A. , 562 U.S. 61, 69, 131 S.Ct. 716, 178 L.Ed.2d 603 (2011) (quoting United States v. Ron Pair Enters., Inc. , 489 U.S. 235, 241, 109 S.Ct. 1026, 103 L.Ed.2d 290 (1989) ). "The task of statutory interpretation begins and, if possible, ends with the language of the statute." Trout Point Lodge, Ltd. v. Handshoe , 729 F.3d 481, 486 (5th Cir. 2013) (internal citation omitted); see also BedRoc Ltd. v. United States , 541 U.S. 176, 183, 124 S.Ct. 1587, 158 L.Ed.2d 338 (2004) ("The preeminent canon of statutory interpretation requires [the court] to ‘presume that [the] legislature says in a statute what it means and means in a statute what it says there.’ ") (quoting Conn. Nat'l Bank v. Germain , 503 U.S. 249, 253–54, 112 S.Ct. 1146, 117 L.Ed.2d 391 (1992) ).
Section 552(a) states that "property acquired by the estate" after the commencement of a case is not subject to any lien resulting from any security agreement entered into by the debtor before the commencement of a case. The Bankruptcy Code does not define "property" or "acquired" so we look to their ordinary meaning. See Schindler Elevator Corp. v. United States ex rel. Kirk , 563 U.S. 401, 407, 131 S.Ct. 1885, 179 L.Ed.2d 825 (2011). The definitions of "property" and "acquired" have not changed. Property means "something owned or possessed" and "something to which a person or business has legal title." Property , Merriam-Webster Online Dictionary (https://www.merriam-webster.com/dictionary/property) (last visited January 23, 2023). Acquire means "to get as one's own; to come into possession or control of ...." Acquire , Merriam-Webster Online Dictionary (https://www.merriam webster.com/dictionary/acquire) (last visited January 23, 2023).
Section 552(b)(1) recognizes a limited exception to Section 552(a) for a prepetition security interest covering both property a debtor acquired prepetition and the proceeds generated from that collateral. 11 U.S.C. § 552(b)(1). So, for example, if a creditor held a security interest in inventory acquired by the debtor prepetition and proceeds of the inventory, the security interest in proceeds extends to cash generated by a postpetition sale of the inventory. "[P]roceeds of a postpetition sale may be held to be secured by a pre-petition security interest only if the collateral that produces the proceeds was acquired by the debtor prepetition." Matter of Gross–Feibel Co., Inc., 21 B.R. 648, 649 (Bankr. S.D. Ohio 1982) ; see also 5 COLLIER ON BANKRUPTCY ¶ 552.02[2][a] (16th ed. 2022).
Tex. Bus. & Com. Code § 9.315(a)(2) also provides that a security interest in collateral also attaches to the identifiable proceeds of that collateral.
In this case, the Debtor's estate came into possession of the sale proceeds that it now legally owns. So it constitutes "property acquired by the estate" under Section 552(a), which prevents Allegiance's prepetition lien on accounts to extend to the sale proceeds. The exception under Section 552(b) does not apply because the court-approved real estate deal giving rise to the sale occurred postpetition and the sale proceeds were acquired by the estate postpetition.
Finally, the adequate protection provided under the cash collateral orders doesn't help Allegiance. There is no evidence in the record of a diminution in the value of Allegiance's lien on cash. And the sale proceeds were deposited into a separate debtor in possession account. So the Court doesn't have to consider commingling issues here.
Conclusion
Thus, for the reasons stated above, it is ORDERED that Debtor's motion to pay Allegiance Bank is denied.