Opinion
Bankruptcy Case No. 99-38340-HCA-11, Civil Action No. 3:02-CV-1772-G
January 15, 2003
MEMORANDUM ORDER
This is an appeal by Premier Interval Resorts, Inc. ("Premier") from an order of the bankruptcy court granting the motion of Revanche, LLC ("Revanche") to prohibit the use of cash collateral and for adequate protection. For the reasons stated below, the decision of the bankruptcy court is affirmed.
I. BACKGROUND
This appeal is the latest chapter in a saga which began with Premier's acquisition and attempt to renovate the Maxim Hotel and Casino (the "Maxim") in Las Vegas, Nevada. The first chapter occurred in May 1999, when Meralex, L.P. ("Meralex") loaned Premier, by means of a promissory note secured by a deed of trust, forty-two million dollars to purchase the Maxim. Brief of Appellant Premier Interval Resorts, Inc. ("Appellant's Brief") at 3; Brief of Appellee Revanche LLC ("Appellee's Brief") at 2-3; see also Deed of Trust, Assignment of Rents and Leases, Security Agreement and Fixture Filling ("Deed of Trust"), attached to Appellant's Brief as Exhibit B. Meralex served as Premier's primary source of financing in the acquisition of the Maxim. See Appellant's Brief at 3. However, even with the forty-two million dollar Meralex loan, Premier was still without sufficient capital to get the Maxim up and running. Id. at 3-4. Consequently, on May 16, 1999, Premier signed a stock purchase agreement with Howard Jenkins ("Jenkins"), a wealthy individual with significant ties to Meralex, in which Jenkins agreed to provide twenty-five million dollars to cover the Maxim's initial operating costs in exchange for a fifty percent ownership of Premier's stock. See Appellant's Brief at 3-4; Stock Purchase Agreement, attached to Second Amended Complaint as Exhibit A. Premier closed on the Maxim the following day. Appellant's Brief at 4.
In addition to its financial obligations, Premier had other important issues to resolve prior to opening the Maxim for business — including compliance with the self-insurance requirement of Nevada's workers' compensation laws. Appellant's Brief at 7; Appellee's Brief at 3. In order to meet this self-insurance requirement, Premier obtained two certificates of deposit (the "CDs") through Bank West — one in the amount of 350,000 dollars and another in the amount of 2.5 million dollars — which Premier pledged to the Nevada Insurance Commission (the "NIC") to cover worker compensation claims filed by future Maxim employees. Appellant's Brief at 7-8; Appellee's Brief at 3. Premier disclosed the existence of these CDs in documents filed during the Maxim's closing. See Appellant's Brief at 7-8.
Revanche alleges that Premier used part of the forty-two million dollar Meralex loan to purchase the two CDs. Appellee's Brief at 3. Premier disputes this allegation and claims to have purchased the CDs with funds entirely independent of the Meralex loan. See Reply of Appellant Premier Interval Resorts, Inc. ("Appellant's Reply") at 2.
To the chagrin of Premier executives, the plan to operate the Maxim in the Las Vegas casino circuit was short-lived. Soon after Premier closed on the Maxim, Jenkins decided against providing the twenty-five million dollar investment under the stock purchase agreement. Id. at 4-5. Faced with insufficient funds to operate the Maxim, Premier voluntarily commenced this Chapter 11 proceeding on December 3, 1999. See Appellant's Brief at 5; Appellee's Brief at 3. Following Premier's bankruptcy filing, Meralex formed Revanche — a wholly-owned, single-purpose entity.
See Appellant's Brief at 5; Appellee's Brief at 4. Meralex then assigned its entire interest in the deed of trust to Revanche. Appellee's Brief at 4. In June 2000, Revanche foreclosed on the Maxim and, as the sole bidder, purchased the property at the foreclosure sale for ten million dollars. See Appellant's Brief at 5-6; Appellee's Brief at 4. Revanche subsequently asserted a claim against Premier to obtain the deficiency between the Maxim's sale price and the amount due on the promissory note. Appellant's Brief at 6. Premier responded by commencing an adversary proceeding against Jenkins and Meralex for breach of the stock purchase agreement. See Id.
Meralex transferred all "right, title and interest in its claims" against Premier to Revanche pursuant to Federal Rule of Bankruptcy Procedure 3001. See FED. R. BANKR. P. 3001(e)(2); Notice of Assignment and Transfer of Proof of Claim No. 13 Pursuant to F.R.Bankr.P. 3001(e)(2).
After the Maxim's foreclosure there was little, if any, estate remaining for the bankruptcy court to administer or reorganize. Consequently, on December 3, 2001, Premier filed a motion to dismiss the bankruptcy action. See Docket Sheet. On March 5, 2002, a few days before the hearing on Premier's dismissal motion, Revanche filed a motion to prohibit the use of cash collateral and for adequate protection. See id. Revanche's motion asserted that, in April 2001, the NIC released and returned to Premier approximately $1,923,264 of the 2.5 million dollar CD originally pledged to the NIC and that these funds constituted Revanche's cash collateral pursuant to the deed of trust. See Brief of Revanche, LLC in Support of Motion to Prohibit Use of Cash Collateral and for Adequate Protection ("Cash Collateral Motion") ¶¶ 5-6, 16-21, 23. On May 14, 2002, the bankruptcy court granted Revanche's motion and ordered Premier to cease using any cash derived from the returned CD and to turn over any remaining funds to the bankruptcy court. See Order on Motion to Prohibit Use of Cash Collateral and for Adequate Protection ("Cash Collateral Order") at 8-9, attached to Appellant's Brief as Exhibit A. On July 3, 2002, Premier filed a timely notice of appeal. See Notice of Appeal.
The main issues remaining before the bankruptcy court after sale of the Maxim appear to be Revanche's deficiency claim and Premier's breach of contract claim — issues that, absent Premier's primary asset, would leave nothing of substance for a reorganization plan. See generally In re Trinity Gas Corporation, 242 B.R. 344, 348 (Bankr. N.D. Tex. 1999) (discussing the purpose and scope of a Chapter 11 reorganization); J. MICHAEL McBRIDE, PURCHASE AND SALE OF ASSETS IN BANKRUPTCY § 1.9 (2d ed. 1996) (same).
The NIC apparently used the remaining $576,736 to satisfy outstanding worker compensation claims filed against Premier and related legal fees. See Appellee's Brief at 4.
Premier's second CD in the amount of $350,000 remains in the possession of the NIC. See Appellant's Reply at 2.
II. ISSUES
This appeal poses the following questions: (1) whether the bankruptcy court erred when it concluded that, as a matter of law, the deed of trust granted Revanche a security interest not only in the CDs pledged to the NIC but also to their proceeds, so that the CDs and their proceeds constituted Revanche's cash collateral; (2) whether the bankruptcy court erred when it further concluded that Premier did not have the proper authorization to use Revanche's cash collateral; and (3) whether the bankruptcy court erred in placing the burden on Premier of establishing compliance with the requirements for handling cash collateral. Because this court answers all three questions in the negative, the bankruptcy court's ruling is affirmed.
III. ANALYSIS A. Standard of Review
When reviewing a decision of the bankruptcy court, the district court "functions as an appellate court and applies the standards of review generally applied in federal court appeals." Matter of Webb, 954 F.2d 1102, 1103-04 (5th Cir. 1992); Matter of Coston, 991 F.2d 257, 261 n. 3 (5th Cir. 1993) (citing Matter of Hipp, Inc., 895 F.2d 1503, 1517 (5th Cir. 1990)). Conclusions of law are reviewed de novo. Matter of Herby's Foods, Inc., 2 F.3d 128, 131 (5th Cir. 1993). Findings of fact, on the other hand, "whether based on oral or documentary evidence, shall not be set aside unless clearly erroneous, and due regard shall be given to the opportunity of the Bankruptcy Court to judge the credibility of the witnesses." Webb, 945 F.2d at 1104; FED. R. BANKR. P. 8013. "A finding of fact is clearly erroneous `when although there is evidence to support it, the reviewing court on the entire evidence is left with a firm and definite conviction that a mistake has been committed.'" Matter of Missionary Baptist Foundation of America, Inc., 712 F.2d 206, 209 (5th Cir. 1983) (quoting United States v. United States Gypsum Co., 333 U.S. 364, 395 (1948)). Finally, mixed questions of law and fact are reviewed de novo. Matter of National Gypsum Company, 208 F.3d 498, 504 (5th Cir.), cert. denied, 531 U.S. 871 (2000); see also Matter of Southland Corporation, 160 F.3d 1054, 1057 (5th Cir. 1998).
B. The Bankruptcy Court's Ruling
Section 363 of the United States Bankruptcy Code (the "Code") "defines the rights and powers of the trustee regarding the use, sale, or lease of estate property and the rights of third parties with interests in the subject property." Matter of Village Properties, Ltd., 723 F.2d 441, 444 (5th Cir.), cert. denied, 466 U.S. 974 (1984); In re Casbeer, 793 F.2d 1436, 1442 (5th Cir. 1986); 11 U.S.C. § 363. Importantly, "[slection 363 does not create property interests, instead it protects parties with an interest in cash collateral." Village Properties, 723 F.2d at 444. When a debtor-in-possession attempts to use cash collateral in violation of section 363, a creditor may seek adequate protection from the bankruptcy court. See In re First South Savings Association, 820 F.2d 700, 710 (5th Cir. 1987); Village Properties, 723 F.2d at 444; 11 U.S.C. § 361, 363.
While section 363 only references the use of cash collateral by a "trustee," section 1107 states that "a debtor in possession shall have all the rights, other than the right to compensation under section 330 of this title, and powers, and shall perform all the functions and duties, except the duties specified in sections 1106(a)(2), (3), and (4) of this title, of a trustee serving in a case under this chapter." See 11 U.S.C. § 1107 (a).
In determining whether a debtor-in-possession has properly handled cash collateral under the Code, the district court must review several distinct factors. First, the court must decide whether the property at issue is in fact the cash collateral of a creditor. See 11 U.S.C. § 363 (a). Second, if the court finds that such property is the cash collateral of a creditor, the court must then determine whether the debtor-in-possession properly segregated and accounted for the cash collateral. See 11 U.S.C. § 363 (c)(4). Finally, the court must determine whether the debtor-in-possession used, sold, or leased the cash collateral without either the consent of each party maintaining an interest in the cash collateral or the express authorization of the bankruptcy court following a notice and hearing. See 11 U.S.C. § 363 (c)(2).
On May 14, 2002, the bankruptcy court concluded that the CDs at issue were in fact Revanche's cash collateral, see Cash Collateral Order at 3-6, and that Premier had improperly handled this cash collateral by failing to segregate and account for the funds derived from the returned CD and by subsequently using these funds without either the consent of Revanche or the authorization of the bankruptcy court. Id. at 6-8. The bankruptcy court further held that Premier, not Revanche, had the burden of establishing Premier's compliance with those requirements. Id. at 7-8. Consequently, the bankruptcy court granted Revanche's motion for cash collateral and adequate protection. Id. at 8. For the reasons discussed below, the court agrees with the bankruptcy court's conclusions.
1. The CDs Are Revanche's Cash Collateral
The bankruptcy court began its analysis by determining that the CDs pledged to the NIC, as well as the proceeds derived therefrom, fell within the section 363(a) definition of cash collateral. See Cash Collateral Order at 6. In arriving at this conclusion, the bankruptcy court focused its analysis on the express language of the deed of trust, as well as Nevada contract law. See id. at 3-6. After reviewing both the deed of trust and Nevada law, this court agrees with the bankruptcy court's conclusion.
According to section 363 of the Code, cash collateral means:
cash, negotiable instruments, documents of title, securities, deposit accounts, or other cash equivalents whenever acquired in which the estate and an entity other than the estate have an interest and includes the proceeds, products, offspring, rents, or profits of property subject to a security interest as provided in section 552(b) of this title, whether existing before or after the commencement of a case under this title.11 U.S.C. § 363 (a) (emphasis added).
Section 7.6 of the deed of trust states that the "Deed of Trust shall be governed by the laws of the State of Nevada, without regard to its principles of conflicts of laws, and the exclusive forums for adjudication hereof shall be the federal and state courts located in Clark County, Nevada." See Deed of Trust § 7.6.
Section 3.1 of the deed of trust grants the actual security interest in Premier's property in order to secure the 42 million dollar loan. In pertinent part, section 3.1 provides that:
[Premier] (as Debtor) hereby grants to [Revanche] (as Creditor and Secured Party) as security for the payment of the Note and all other sums secured by this Deed of Trust a security interest in all the following described property presently owned or hereafter acquired wherever the same be situated relating to or arising from the Property: any . . . tangible or intangible property or rights or any other matters listed in any "Financing Statement" (as hereinafter defined) of [Premier], all of which property, rights, or other matters are hereby incorporated herein by this reference.
Deed of Trust § 3.1 (emphasis in original). The explicit language of the deed of trust, therefore, grants Revanche a security interest in any property listed in a financing statement filed by Premier. On May 17, 1999, Premier executed a UCC-1 financing statement which was later filed with the state of Nevada. See UCC-1 Between Premier and Revanche, May 17, 1999 ("Premier's UCC-1"). Schedule I of that UCC-1 provides a detailed list of the property covered by the financing statement, including "all . . . notes" of the debtor. See id. at 1(n). Thus, the deed of trust, by its incorporation of the UCC-1 financing statement, expressly grants a security interest in any "notes" owned by Premier. What remains, then, is for the court to determine whether a "certificate of deposit" is a "note."
According to Nevada law, a certificate of deposit "means an instrument containing an acknowledgment by a bank that a sum of money has been received by the bank and a promise by the bank to repay the sum of money. A certificate of deposit is a note of the bank." Nevada Revised Statutes § 104.3104 (10) (emphasis added); see also Petri v. Sheriff of Washoe County, 491 P.2d 43, 45 (Nev. 1971). Because Nevada law defines a certificate of deposit as a "note," the security interest granted by section 3.1 includes the CDs pledged to the NIC. Moreover, it is well settled Nevada law that a "note" is a "negotiable instrument," see Nevada Revised Statutes § 104.3104; see also Gioigi v. Pioneer Title Insurance Company, 454 P.2d 104, 105 (Nev. 1969); W.M. Barnett Bank v. Chiatovich, 232 P. 206, 210 (Nev. 1925), which consequently places the CDs within the section 363(a) definition of cash collateral. See 11 U.S.C. § 363 (a) (defining "cash collateral" to include "negotiable instruments"). The CDs pledged to the NIC, therefore, are the cash collateral of Revanche.
The bankruptcy court concluded that section 1.1 of the deed of trust provides additional support for the conclusion that the CDs are Revanche's cash collateral. See Cash Collateral Order at 3-4. Because this court concludes that the CDs are in fact Revanche's cash collateral pursuant to section 3.1 of the deed of trust, it is unnecessary to address section 1.1.
In addition to the CDs themselves, the cash proceeds derived from the CDs also constitute Revanche's cash collateral. According to the May 17, 1999 UCC-1, Premier granted a security interest in "all proceeds of any of the above-described property or of the conversion, (voluntary or involuntary), of any of the above-described property into cash . . . ." Premier's UCC-1 at 1(p). Because the UCC-1 lists "notes" within Schedule 1(n) and a certificate of deposit is a note under Nevada law, any cash proceeds derived from the CDs are also included within the security interest granted to Revanche. Moreover, cash proceeds of a certificate of deposit come within the section 363 definition of cash collateral as "cash." See 11 U.S.C. § 363 (a); In re Archer, 34 B.R. 28, 30 (Bankr. N.D. Tex. 1983); see also Village Properties, 723 F.2d at 445. Therefore, any cash proceeds of the CDs also constitute Revanche's cash collateral.
Accordingly, this court concludes that the CDs, as well as the cash proceeds derived therefrom, are Revanche's cash collateral under section 363 of the Code.
Premier argues that the bankruptcy court should have considered extrinsic evidence in its determination of whether the parties actually intended to include the CDs and their proceeds within the security interest granted to Revanche. See Appellant's Brief at 25. Because this court relies — as did the bankruptcy court — upon the plain and unambiguous language of section 3.1 of the deed of trust and the UCC-1 incorporated therein, consideration of extrinsic evidence on this issue is unnecessary. See Geo. B. Smith Chemical Works, Inc. v. Simon, 555 P.2d 216, 216-217 (Nev. 1976) ("Where, as here, a written contract is clear and unambiguous on its face, extraneous evidence cannot be introduced to explain its meaning."); accord Kaldi v. Farmers Insurance Exchange, 21 P.3d 16, 21 (Nev. 2001); see also Cash Collateral Order at 5-6.
2. Premier's Improper Use of the Cash Collateral and the Burden of Proof
Under section 363 of the Code, a debtor-in-possession must "segregate and account for any cash collateral in the [debtor's] possession, custody, or control" and "may not use, sell, or lease [the] cash collateral" unless either "each entity that has an interest in such cash collateral consents; or . . . the court, after notice and hearing, authorizes such use, sale, or lease . . . ." See 11 U.S.C. § 363 (c)(2) and (4); see also In re Quality Beverage Co., Inc., 181 B.R. 887, 896 (Bankr. S.D. Tex. 1995). According to the bankruptcy court, Premier did not comply with these requirements because it failed to "segregate and account" for Revanche's cash collateral and because it used this cash collateral without either Revanche's consent or the express authorization of the bankruptcy court. See Cash Collateral Order at 6-8. The bankruptcy court further concluded that because "[t]he plain language of § 363 requires that the debtor in possession `segregate and account' and obtain `consent' or `authorization,' [which are] activities the debtor must perform through action and not by inaction," section 363 "place[s] the burden of using cash collateral squarely on the debtor in possession." Id. at 7.Premier makes two cursory arguments in response. First, Premier argues that its failure to segregate and account for any cash collateral is because it "reasonably believed that the CDs were not cash collateral and for nearly two years had no indication from any creditor to the contrary." Appellant's Brief at 21 (emphasis in original). Second, Premier argues that the bankruptcy court's construction of sections 363(c)(2) and (4), as placing a burden on Premier to establish compliance with those subsections, "relies not on bankruptcy laws but on its general admonishment . . . `when in doubt, find out'" and "essentially requires a debtor to adjudicate every asset, whether it is contested or not." Id. at 21-22. Premier's arguments are unpersuasive.
It is undisputed that Premier received approximately $1,923,264 of the 2.5 million dollar CD initially pledged to the NIC, see Appellant's Brief at 8; Appellee's Brief at 4, and Premier's monthly operating reports indicate that Premier used a portion of those funds. See Appellee's Brief at 4-5; Monthly Operating Reports, attached to Hearing on the Motion to Dismiss Case by Premier Interval Resorts, Inc. and Motion to Prohibit Use of Cash Collateral and for Adequate Protection by Revanche, LLC ("Cash Collateral Hearing") as Exhibits 44-69. A careful review of the record, however, fails to reveal any evidence of either express consent by Revanche or its predecessor-in-interest, Meralex, or an order of the bankruptcy court — following a notice and hearing — granting a request to use such funds. Moreover, Premier implicitly admits that it failed to segregate and account for the $2.5 million CD returned to it by the NIC — albeit out of ignorance that the CD constituted cash collateral. See Appellant's Brief at 21. This court must conclude, therefore, that Premier violated sections 363(c)(2) and (4) by expending a portion of Revanche's cash collateral without either the consent of Revanche or the approval of the bankruptcy court and by failing to segregate and account for those same funds after receiving them from the NIC. See 11 U.S.C. § 363 (c)(2) and (4).
The court is unable to determine from the briefs the exact amount of cash collateral used by Premier.
Premier also argues that it "did not use [the returned] funds improperly but, in fact, grew the size of the estate." Appellant's Reply at 2 (emphasis in original). It is unclear what Premier means by this rather ambiguous statement. The court notes, however, that it is irrelevant whether Premier doubled the funds on a Las Vegas blackjack table or lost them in a Florida swampland investment. The Code strictly prohibits the use of cash collateral in any manner without first satisfying the required procedures, which includes even beneficial investments of a creditor's cash collateral. See 11 U.S.C. § 363 (c)(2); see also In re Four Seasons Marine Cycle, Inc., 263 B.R. 764, 768-69 (Bankr. E.D. Tex. 2001); In re Goode, 235 B.R. 584, 589 (Bankr. E.D. Tex. 1999); In re Williams, 61 B.R. 567, 572 (Bankr. ND. Tex. 1986).
The bankruptcy court also correctly construed sections 363(c)(2) and (4) to place the burden of establishing compliance with those subsections squarely on the debtor-in-possession. See Cash Collateral Order at 7-9. According to the Supreme Court, interpretation of the Code, as with all statutes, requires the court to begin with the statutory language itself. Barnhart v. Sigmon Coal Company, Inc., 534 U.S. 438, 450 (2002); Landreth Timber Company v. Landreth, 471 U.S. 681, 685 (1985). Where "the statute's language is plain, `the sole function of the courts is to enforce it according to its terms.'" United States v. Ron Pair Enterprises, Inc. 489 U.S. 235, 241 (1989) (quoting Caminetti v. United States, 242 U.S. 470, 485 (1917)); see also Barnhart, 534 U.S. at 450; Matter of Greenway, 71 F.3d 1177, 1179 (5th Cir.), cert. denied, 517 U.S. 1244 (1996); Matter of West Texas Marketing Corporation, 54 F.3d 1194, 1200 (5th Cir.), cert. denied, 516 U.S. 991 (1995). Consequently, "[t]he plain meaning of [the Code] should be conclusive, except in the `rare cases [in which] the literal application of a statute will produce a result demonstrably at odds with the intentions of its drafters.'" Ron Pair, 489 U.S. at 242 (quoting Griffin v. Oceanic Contractors, Inc., 458 U.S. 564, 571 (1982)).
Here, the plain language of sections 363(c)(2) and (4) requires the debtor-in-possession to actively comply with the Code's requirements. In particular, section 363 requires the debtor to "segregate and account for" the cash collateral as well as to obtain "consent" from the creditor or the "authorization" of the bankruptcy court. See 11 U.S.C. § 363 (c)(2) and (4). The language of these subsections clearly places the burden of compliance upon the debtor-in-possession. Thus, because the bankruptcy court relied on the plain and unambiguous language of sections 363(c)(2) and (4), the inquiry regarding statutory meaning is at an end. See Ron Pair, 489 U.S. at 241; Greenway, 71 F.3d at 1179. Any argument regarding the potential repercussions of a debtor's burden under section 363 — such as Premier's concern that debtors could possibly be forced to adjudicate every asset — is better left to Congress rather than the courts. Therefore, the bankruptcy court correctly determined that Premier, as the debtor-in-possession, had the burden of establishing its compliance with sections 363(c)(2) and (4) of the Code.
The court notes that the bankruptcy court's warning of "when in doubt, find out" served not as the legal basis for its conclusion, but rather as well-stated advice for those, such as Premier, which contemplate using funds that may be construed as cash collateral without first meeting their obligations under the Code. See Cash Collateral Order at 8.
In sum, this court agrees with the bankruptcy court's conclusion that, pursuant to 11 U.S.C. § 363 (c)(2) and (4), Premier improperly used — as well as failed to segregate and account for — Revanche's cash collateral. Moreover, the bankruptcy court properly placed the burden on Premier to show the contrary. This court must, therefore, affirm the decision of the bankruptcy court.
IV. CONCLUSION
For the foregoing reasons, the judgment of the bankruptcy court is AFFIRMED.