Reversing the bankruptcy court, a Sixth Circuit Bankruptcy Appellate Panel held that a debtor in a single asset real estate case did not provide adequate protection to a creditor by providing replacement liens in the rents where there was no equity cushion.4 The notion that granting the lender a lien on future rents to replace the expenditure of prior months' rents was rejected. Accordingly, the appellate panel held that the debtor could not use rents collected post-petition to pay ordinary administrative expenses, such as fees of its professionals.
The appellate panel followed the ruling of the Sixth Circuit Court of Appeals in a prior case. There, the Sixth Circuit observed that a mortgage lender possess two distinct security interests—a mortgage on the property and a security interest in the rents. Diversion of rents to a party other than the mortgage lender was held to be a diminution of its interests in the rents.
This case may provide additional ammunition to undersecured creditors unwilling to consent to the use of their cash collateral where the debtor lacks unencumbered assets with which it can provide adequate protection.