The ability of a single asset real estate debtor in a bankruptcy case to utilize a non-consenting secured creditor's cash collateral has been limited by a recent decision from the Bankruptcy Appellate Panel of the Sixth Circuit in In re Buttermilk Towne Center, LLC, 2010 FED App. 0010P (B.A.P. 6th Cir. 2010).
Under 11 U.S.C. § 552(a)(2), a pre-petition security interest in rents extends to rents generated by a debtor post-petition. Further, 11 U.S.C. § 363 provides that a debtor can only use the cash collateral of a non-consenting secured creditor if the creditor is deemed to be "adequately protected." Prior to Buttermilk, the Sixth Circuit Court of Appeals issued the unpublished decision of Stearns Bldg. v. WHBCF Real Estate (In re Stearns Bldg.), 165 F.3d 28 (6th Cir. 1998), in which the Sixth Circuit held that a secured creditor was not adequately protected when a single asset real estate debtor only offered to provide the creditor with a replacement lien on post-petition rents that were encumbered by the secured creditor's pre-petition lien. Many courts in the Sixth Circuit have failed to follow the unpublished decision of Stearns Building, and rather have held that a pre-petition secured creditor is adequately protected when a single-asset real estate debtor provided a replacement lien on rents that were already encumbered by the creditor's pre-petition lien.
In Buttermilk, the Debtor was the owner and operator of a commercial real estate development. Bank of America was the Debtor's primary pre-petition secured lender and had a pre-petition security interest in all of the rents and profits derived from the property. Upon filing its bankruptcy petition, the Debtor sought to use the rents to pay for the administrative costs of its bankruptcy, including to pay for the post-petition legal fees of the Debtor. While Bank of America argued that the Debtor should not be able to utilize its cash collateral to fund its bankruptcy estate since it was not adequately protected due to a replacement lien on assets that it already had encumbered, the bankruptcy court concluded that Bank of America was adequately protected. In reliance on Stearns, the Bankruptcy Appellate Panel reversed the bankruptcy court and held that a non-consenting secured creditor was not adequately protected when a Debtor provided a security interest in rents that were already encumbered by the secured creditor's pre-petition lien. Therefore, going forward, in a single-asset real estate case, Buttermilk affirms the proposition that a non-consenting secured creditor must receive more than a replacement lien on rents that are already encumbered by the secured creditor's pre-petition lien in order for a debtor to be able to utilize the creditor's cash collateral to pay the administrative expenses of the bankruptcy case.