UNITED STATES COURT OF APPEALS

For the Fifth Circuit

Nos. 92-3941 c/w 92-3942

IN THE MATTER OF: T-H NEW ORLEANS LIMITED

 PARTNERSHIP,

Debtor.

 T-H NEW ORLEANS LIMITED 

PARTNERSHIP, 

Appellee,

VERSUS

FINANCIAL SECURITY ASSURANCE, INC.,

Appellant.

Nos. 92-3959 c/w 92-3983

IN THE MATTER OF: T-H NEW ORLEANS LIMITED

 PARTNERSHIP,

Debtor.

 T-H NEW ORLEANS LIMITED 

PARTNERSHIP, 

Appellant,

VERSUS

FINANCIAL SECURITY ASSURANCE, INC.,

Appellee.
 

1District Judge of the Northern District of Illinois, sitting

by designation.

2

Appeals from the United States District Court

for the Eastern District of Louisiana

(December 17, 1993)

Before EMILIO M. GARZA, and DeMOSS, Circuit Judges, and ZAGEL,1

District Judge.

DeMOSS, Circuit Judge:

On its on motion, the Court withdraws the opinion issued in

this case dated October 7, 1993, and substitutes the following:

I. FACTS AND PROCEDURAL HISTORY

In 1988, TH-New Orleans Limited Partnership (TH-NOLP), a hotel

partnership, acquired its major asset, the Days Inn Hotel on Canal

Street in New Orleans, Louisiana (the Hotel). In 1989, TH-NOLP

sought to restructure the underlying mortgage debt on the Hotel

through a mortgage bond financing transaction. To achieve that

end, TH-NOLP and six other hotel partnerships, all controlled by

Monty Hundley and Stanley Tollman, obtained separate but crosscollateralized and cross-guaranteed first mortgage loans, which

were secured by the Hotel and other hotels, in the amount of

$87,000,000 from a newly created business trust (the issuer). With

the execution of the Mortgage Note and Loan Agreement, TH-NOLP

executed a Collateral Mortgage Note, a Collateral Real and

Collateral Chattel Mortgage and Assignment of Leases and Rents, a

Pledge of Collateral Mortgage Note (the Pledge), and a General

Assignment of Accounts Receivable. TH-NOLP also executed a
 

2 Similar notices of default and acceleration were sent to

the six other hotel partnerships. Five of the six partnerships

filed for bankruptcy and foreclosure has been completed in those

cases. The other hotel partnership is currently in foreclosure

proceedings in Florida state court.

3

Nonrecourse Guarantee, which guaranteed the payment of the six

other borrowers under the loan transaction. TH-NOLP's maximum

liability under the Guarantee is limited to the greater of THNOLP's net worth on the date of execution of the Guarantee, which

was stipulated to be $18,425,000, or the net worth of TH-NOLP when

the Guarantee is enforced.

To raise the necessary money to make the mortgage loans to THNOLP, the issuer issued $87,000,000 in bonds, the payment of which

was guaranteed by a surety bond issued by Financial Security

Assurance Incorporated (FSA). In return, the issuer of the bonds

assigned to FSA all its rights and interest in the security

agreements, and authorized FSA to be the "controlling party" and

their attorney-in-fact to take whatever actions FSA deemed

necessary to exercise its rights under the mortgage loans and

related collateral. 

By 1990, TH-NOLP and the six other partnerships were in

default on the loans. After the parties were unable to reach a

settlement, FSA accelerated the Mortgage Note and demanded payment

of all amounts due under the Loan Agreement and Guarantee.2 THNOLP filed for bankruptcy soon thereafter.

In the bankruptcy court, FSA filed a motion for relief from

the automatic stay under 11 U.S.C. § 362(d)(1) and (2); and a

motion for adequate protection or that the Hotel revenues be
 

3 FSA's appeals are in case numbers 92-3941 c/w 92-3942,

which has been further consolidated with TH-NOLP's appeals in case

numbers 92-3259 and 92-3983. All of the issues are intertwined.

Case numbers 92-3941 c/w 92-3942 concern the motion for segregation

of hotel revenues or adequate protection. Case number 92-3259

concerns the confirmability of the plan, and case number 92-3983

concerns FSA's motion for relief from stay.

4

segregated. On March 19, 1992, the bankruptcy court granted FSA's

relief from the stay on the grounds that FSA had shown that the

secured property was not necessary to a successful reorganization.

That ruling was based on the bankruptcy court's decision that THNOLP's plan of reorganization was unconfirmable, which was based on

the findings that (1) the plan did not permit FSA to bid the full

amount of its debt on the proposed sale of the Hotel, (2) the plan

made no provision for FSA's unsecured debt, and (3) TH-NOLP had

improperly classified creditors in its plan. The bankruptcy court

also granted FSA's motion for adequate protection or segregation of

Hotel revenues. TH-NOLP appealed to the district court, which

affirmed the bankruptcy court's order granting FSA relief from the

stay, but reversed the bankruptcy court's order granting FSA's

motion for adequate protection or segregation of Hotel revenues

because it held that FSA did not have a security interest in such

revenues. TH-NOLP and FSA now appeal to this court.3 

II. DISCUSSION

The bankruptcy court's findings of fact are reviewed under a

clearly erroneous standard. In re Missionary Baptist Foundation of

America, 818 F.2d 1135, 1142 (5th Cir. 1987). The bankruptcy

court's conclusions of law are "freely reviewable on appeal." Id.

1. Relief from Stay
5

TH-NOLP contends that the bankruptcy court misinterpreted its

plan of reorganization and its disclosure statement, which led the

court to erroneously conclude that TH-NOLP did not have a

reasonable probability of a successful reorganization within a

reasonable period of time. Specifically, TH-NOLP contends that the

bankruptcy court erred when it interpreted the plan to provide that

FSA would be limited to bidding in the secured amount of its claim,

as opposed to the full amount of its claim, when the Hotel was

sold. Because of that alleged erroneous conclusion, TH-NOLP

contends the bankruptcy court improperly determined that FSA was

entitled to relief from the automatic stay to commence foreclosure

proceedings against the Hotel.

The provisions of 11 U.S.C. § 362(a) provide an automatic stay

against foreclosure proceedings when a debtor files a bankruptcy

petition. Relief from the stay is warranted under 11 U.S.C. 

§ 362(d)(2) if:

(A) the debtor does not have an equity in such

property; and

(B) such property is not necessary to an effective

reorganization.

TH-NOLP concedes that it has no equity in the Hotel. The only

disputed issue is whether the Hotel is necessary to an effective

reorganization. The term "necessary to an effective reorganization" has been interpreted to mean that the debtor has a reasonable

probability of a successful reorganization within a reasonable

period of time. United Savings Association of Texas v. Timbers of

Inwood Forest Associates., Ltd., 484 U.S. 365, 375 (1988).

In its memorandum opinion, the bankruptcy court found that THNOLP owed $16,954,983 to FSA, and that the appraised value of the
6

Hotel was $12,200,000, leaving FSA with a under-secured nonrecourse

deficiency claim for approximately $4,754,983.

TH-NOLP's plan proposed to deal with FSA's claim under 11

U.S.C. § 1111(b)(1)(A)(ii), which provides in pertinent part:

(A) A claim secured by a lien on property of

the estate shall be allowed or disallowed

under section 502 of this title the same

as if the holder of such claim had

recourse against the debtor on account of

such claim, whether or not such holder

has such recourse, unless--

...(ii) such holder does not have

such recourse and such property is

sold under section 363 of this title

or is to be sold under the plan.

Section 1111(b)(1)(A) effectively provides under-secured

nonrecourse creditors, such as FSA, an opportunity to elect to have

their claims treated as recourse claims if their debtors retain the

secured property. In re Tampa Bay Associates, Ltd., 864 F.2d 47,

50 (5th Cir. 1989). Under subsection (ii), however, a nonrecourse

deficiency claim is not treated as a recourse obligation when there

is a sale of the collateral at which a creditor may credit bid up

to the full amount of its claim. Id. However, subsection (ii) may

only be utilized when a creditor is entitled to credit bid up to

the full amount of its claim, not just the amount of its secured

claim. Id. In re National Real Estate Ltd. Partnership II, 104

B.R. 968, 974 (Bankr. E.D. Wis. 1989).

FSA's claim against TH-NOLP is a nonrecourse claim; FSA's

recourse on its claim is limited solely to the collateral for the

debt--the Hotel. The bankruptcy court decided that TH-NOLP's plan
7

did not provide for the treatment of FSA's entire debt because it

did not address FSA's nonrecourse deficiency claim of $4,754,983;

therefore it held that application of subsection (ii) was improper.

Accordingly, the bankruptcy court held that the plan was

unconfirmable, in that no reasonable prospect for a successful

reorganization existed within a reasonable time, and lifted the

automatic stay.

We disagree with the bankruptcy court's reading of the plan.

Under the plan, TH-NOLP was to retain the Hotel for up to two

years, during which time it would "actively market the Hotel and

... use its best efforts to procure a purchaser ... for the highest

possible purchase price," and if it could not do so it would deed

the Hotel to FSA. If a purchaser was found, the plan provided that

FSA would be entitled to "credit bid the full allowed amount of its

finally allowed claim." Additionally, TH-NOLP's disclosure

statement provided:

[s]ince the Trustee [FSA] is an under-secured,

nonrecourse creditor and since the Plan

provides for, the abandonment and/or sale of

the Trustee's collateral security, with the

Trustee being permitted to credit bid its

entire nonrecourse claim prior to any sale,

the Trustee will not be permitted to make any

election under § 1111(b) of the Code. 

Disclosure Statement at 13.

Based on the plain language of the plan and the disclosure

statement, we hold that the bankruptcy court erred in holding that

the plan was unconfirmable because it did not permit FSA to bid the
 

4 The plan cannot be confirmed unless it is approved by twothirds in amount and more than one-half in number of each impaired

class, or at least one impaired class approves the plan and the

debtor meets the cramdown requirements of § 1129(b). See

Greystone, at 1277; 11 U.S.C §§ 1126(c), 1129(a)(8), and

1129(a)(10).

8

full amount of its claim, and consequently did not provide for

FSA's nonrecourse deficiency claim. 

As an additional ground for its ruling, the bankruptcy court

held that the plan improperly gerrymandered classes of creditor's

claims so as to manipulate the voting process for the purpose of

facilitating a cramdown under 11 U.S.C § 1129 in violation of this

court's opinion in In re Greystone III Joint Venture, 995 F.2d 1274

(5th Cir. 1991), cert. denied, 113 S. Ct. 72 (1992).4 We address

briefly one aspect of the bankruptcy court's decision.

In Greystone, debtor Greystone, whose only asset was an office

building, filed for bankruptcy after its creditor, Phoenix Mutual,

who had an $8.8 million nonrecourse promissory note, posted the

property for foreclosure. When Greystone filed for bankruptcy, it

owed Phoenix Mutual $9,325,000, its trade creditors $10,000, and

the taxing authorities $145,000. The bankruptcy court valued

Phoenix Mutual's secured claim at $5,825,000, which was the

estimated value of the office building. Phoenix was left with an

unsecured deficiency of $3,500,000, which was the difference

between what the debtor owed Phoenix and its secured claim. The

debtor's proposed plan separately classified the nonrecourse

unsecured claim of Phoenix and the unsecured claim of the trade

creditors. The trade creditors voted to accept the plan, and the
9

bankruptcy court confirmed it, in spite of Phoenix's objections,

under the cramdown provision of 11 U.S.C. § 1129. 

On appeal, this court held the plan was non-confirmable

because it improperly gerrymandered the similar claims of Phoenix

and the trade creditors. In reaching this result, the court

announced in no uncertain terms the one commandment regarding

creditor claim classification:

....thou shalt not classify similar claims

differently in order to gerrymander an affirmative

vote on a reorganization plan.

995 F.2d at 1279 (emphasis added).

In the present case, the bankruptcy court's opinion indicates

that The Tollman-Hundley Management Group is an affiliate of the

TH-NOLP; and it had a general unsecured claim for approximately

$356,000, which was classified separate and apart from other

general trade creditors. The bankruptcy court inferred that THNOLP segregated the Tollman-Hundley Management Group's unsecured

claim so that the Tollman-Hundley Group would be able to cast a

necessary vote to implement cramdown of the plan over FSA's

objections. The bankruptcy court found that TH-NOLP gave no

justification for the separate classification of its affiliate's

claim, even though it was "substantially similar" to the claims of

other general unsecured creditors; therefore it held the plan to be

"unfairly discriminatory and inequitable" and "unconfirmable" as

presented. But 11 U.S.C. § 1129(a)(10) expressly provides that if

a class of claims is impaired under the plan, the plan may be

confirmed only if at least one impaired class has accepted the
10

plan, "determined without including any acceptance of the plan by

any insider." (emphasis added). None of the parties on appeal

addressed the question of whether Tollman-Hundley Management Group

was truly an "affiliate" of TH-NOLP and therefore, by definition,

an "insider" for purposes of § 1129(a)(10). 

Any finding by the bankruptcy court regarding improper

classification could have been cured by amendment; but the

bankruptcy court denied the request of TH-NOLP to file an amended

plan. Consequently, without ruling on the propriety or not of the

rulings on improper classification, we think justice will be better

served by remanding the issues of confirmability of the plan and

relief from the stay to the district court with instructions to

remand these issues to the bankruptcy court so that (1) the

bankruptcy court can make an express finding as to whether TollmanHundley Management Group is an "affiliate" of TH-NOLP; (2) the

bankruptcy court can afford TH-NOLP an opportunity to amend the

plan if it so desires; and (3) the bankruptcy court can conduct

such further hearings as may be necessary to redetermine whether

the amended plan shows "a reasonable prospect for a successful

reorganization within a reasonable time." See Timbers of Inwood

Forest Associates Ltd., supra.

2. Section 552(b)

FSA contends (and the bankruptcy court held) that the postpetition hotel revenues are its cash collateral and it has a right

for such revenues to be segregated for its benefit pursuant to the
11

terms of the Collateral Real and Collateral Chattel Mortgage and

Collateral Assignment of Leases and Rents and 11 U.S.C. § 552(b).

Section 552(a) provides the general rule that property

acquired by the debtor post-bankruptcy is not subject to a lien

created by a security agreement before bankruptcy. Section 552(b),

however, provides a significant exception:
12

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, product,

offspring, rents, or profits of such property,

then such security interest extends to such

proceeds, product, offspring, rents, or

profits acquired by the estate after the

commencement of the case to the extent

provided by such security agreement and by

applicable non-bankruptcy law, except to any

extent that the court, after notice and a

hearing and based on the equities of the case,

orders otherwise.

11 U.S.C. § 552(b).

A creditor must meet two requirements under § 552(b) for a

security agreement to survive post-bankruptcy:

1. The security agreement must extend to after-acquired

property of the designated categories; and 

2. the after-acquired property must fit within the five

enumerated categories of § 552(b).

FSA's security agreements satisfy the first requirement.

Under the terms of the Collateral Assignment of Leases and Rents,

the debtor agreed to:

...transfer, pledge, collaterally assign and

deliver unto Mortgagee as security for the

payment and performance of the Obligations,

and grant a security interest in, all of the

right, title, and interest of the Mortgagor in

and to all of the following:

(a) The Leases;

(b) The Rents;

(c) The Fixtures; and

(d) The Personality.
13

The document defined Rents as:

[a]ll of the rents, revenues, income,

proceeds, profits, security and other types of

deposits, and other benefits paid or payable

and to become due or payable to Mortgagor by

parties to any Leases for using, leasing,

licensing, possessing operating from, residing

in, selling or otherwise enjoying any portion

or portions of the Mortgaged Property,

together with all cash and noncash proceeds of

any or all thereof.

It defined Leases as follows:

[a]ny and all leases, subleases, licenses,

concessions or other agreements written or

verbal, now or hereafter in effect, including

any FF&E Lease(s), Space Leases (as defined

below), Franchise Agreement(s) and license

agreement(s) which grant a possessory interest

in and to, or the right, license or concession

to use, all or any portion of the Mortgaged

Property, and all other agreements, such as

utility contracts, maintenance agreements,

Management Agreement (as defined below) and

Service Agreement(s) (as defined below) which

in any way relate to the use, occupancy,

operation, maintenance, enjoyment, or

ownership of all or any portion of such

Mortgaged Property, together with any renewal

or extension thereof and all leases,

subleases, licenses, concessions or other

agreements in substitution thereof, together

with all cash or noncash proceeds of all or

any thereof. 

From the above language, it is apparent that FSA 's security

interest extends to the revenues of the Hotel; and, therefore,

satisfies the first requirement of § 552(b).

The crux of the dispute between the parties is whether the

revenues fall within the classification of "proceeds, products,

offspring, rents, or profits" in § 552(b). More specifically, the

issue is whether the Hotel revenues are "rent."
14

State law defines "rent" for purposes of § 552(b). See Butner

v. United States, 440 U.S. 48 (1979). Both parties agree that in

the present case Louisiana law controls the issue of whether hotel

revenues fit within the classification of rent. Both parties also

agree that Pioneer Bank and Trust Co. v. Oeschner, 468 So. 2d 1164,

1168 (La. 1985), is the dispositive Louisiana case on this issue;

however, they interpret it differently. 

In Pioneer Bank, Oeschner executed a promissory note and

collateral mortgage to Pioneer Bank in connection with his purchase

of the Superdome Motor Inn. After Oeschner defaulted on the loan,

Pioneer Bank sued him to enforce the collateral mortgage and for a

writ of sequestration. Oschner argued that Pioneer Bank did not

have a right to sequester the Hotel revenues because it had a lien

only on the Hotel property, not the revenue.

The applicable Louisiana Sequestration statute, La. Code Civ.

Proc. art. 327, provided:

[t]he seizure of the property by the sheriff

effects the seizure of the fruits and issues

which it produces while under seizure. The

sheriff shall collect all rents and revenue

produced by property under seizure.

Therefore, the decisive question was whether the Hotel revenues,

which Pioneer was attempting to seize, were "rents or revenues"

within the meaning of the Louisiana sequestration statute. Pioneer

Bank, 468 So. 2d at 1168. The Louisiana Supreme Court concluded

that the statute allowed Pioneer Bank to have the property seized

under a writ of sequestration and to collect the revenues produced

by the Hotel. In reaching its result, the court reasoned:
15

....the revenues paid into Superdome Motor Inn

by its guests are, like rent, paid for the use

of the property. In that sense, they, like

rent, are produced by the property. Second,

the mortgage expressly covers all property,

movable and immovable, "used in connection

with the operation of the .... property." This

combination of facts, i.e., the nature of the

revenues and that the mortgage covers all

property used in the operation of the

property, leads us to conclude that the

revenues at issue are "produced by the

property." 

Pioneer Bank, at 1168 (emphasis added).

In our view, Pioneer Bank supports our conclusion here that hotel

revenues are sufficiently "like rent" under Louisiana law to be

included within the term "rents" in § 552(b). Therefore, we hold

that FSA is entitled to have the Hotel revenues segregated for its

benefit.

We have carefully and exhaustively searched the legislative

history of § 552(b) for any indication that in using the term

"rents" Congress intended to exclude revenues generated by hotels

and motels for the use of their lodging rooms by third parties; but

we have been unable to locate even a scintilla of such intent.

Clearly, in our view, the term "rents" would include revenues

generated by apartments, office buildings, shopping centers, and

warehouses for the use and occupancy of space within such

facilities, and, absent some clear and express indication by the

Congress that the word "rents" was not to include revenues from

hotels and motels, we see no reason to provide such exclusion by

judicial interpretation. To the contrary, given the other broad,

generic terms utilized by Congress in § 552(b), we believe a
16

generic interpretation of "rents" as "payments made for the use of

property" is most consistent with congressional intent.

TH-NOLP contends that hotel revenues are "accounts receivable"

under the Louisiana Accounts Receivable Act. See e.g., In re Texas

Tri-Collar, Inc., 29 B.R. 724 (Bankr. W.D. La. 1983). In that

statute, "accounts receivable" are defined as follows:

"[a]ccounts receivable" or "account" means and

includes all or any part of any indebtedness

owing to the assignor in connection with all

or any part of the assignor's business,

profession, occupation or undertaking,

including but not limited to the sale of goods

or the performance of services or the leasing

of a movable property subject to the Louisiana

Lease of Movables Act. "Accounts receivable"

or "account" shall not mean or include:

(a) Indebtedness due to or arising out of

claims in tort;

(b) Indebtedness evidenced by a promissory

note, other than a lease note, or

negotiable instrument; or

(c) Indebtedness due to or arising out of the

leasing of immovable property.

La. R.S. § 9.3101(1).

According to TH-NOLP, the revenue received by a hotel operator

represents the payment by hotel guests on indebtedness owing to the

hotel operator in connection with hotel business, not "rent" of the

hotel property. TH-NOLP contends that it takes the combined

efforts of its numerous skilled and dedicated employees to generate

revenues from the Hotel, and without the combined efforts of these

individuals the "Hotel could not generate a dime of revenue."

Ultimately, TH-NOLP's premise is that hotel revenues are dependent

upon and generated from the service aspect of the hotel, and, as

such are in the nature of accounts receivable. 
c:\wp51\docs\92-3941p.opn

hrd 17

We disagree. First of all, sub-item (c) of the Louisiana

statutory definition quoted above expressly eliminates

"indebtedness due to or arising out of the leasing of immovable

property"; and in our view, revenues received by hotel and motel

operators for the use of their rooms fall squarely under this

exclusion. Secondly, in our view, the physical condition of the

Hotel and its location are more essential to the Hotel's ability to

generate revenue than the services it provides. Take away the land

and the bricks and mortar, and there is nothing upon which the

collateral services of entertainment, food, recreational

activities, laundry and cleaning could exist. The converse is not

true, for many chains of motels have been successful in providing

"simply a good night's rest at the most economical price."

Therefore, we reject the notion that a hotel's revenues are so

intertwined and dependent on the hotel's service that one cannot

conclude the revenues are rent for purposes of § 552(b).

We recognize that several bankruptcy and district court

decisions have reached a result contrary to that we reach here.

See e.g., In re Punta Gorda Associates, 137 B.R. 535 (Bankr. M.D.

Fla. 1992); In re GGVXX, Ltd., 130 B.R. 322 (Bankr. D. Colo. 1991).

However, those decisions involved the interpretation of other

states' statutory provisions regarding classification of rent, and

thus they are of little significance in the present case where we

are applying Louisiana law. Moreover, we are persuaded by the

clear language of the loan documents that the borrower intended,

and the lender expected, that the Hotel revenues would stand as
c:\wp51\docs\92-3941p.opn

hrd 18

security for the loan. The income flow generated by the Hotel

revenues are an integral part of the value that the lender assigns

to the collateralized property. If, as indicated by Pioneer, a

lender may reach and control revenues from a hotel for purposes of

Louisiana's sequestration remedies, we can see no reason for

depriving that same lender of the benefit of his expressly

bargained-for-security when the question is application of § 552(b)

in bankruptcy. To deprive the lender of what he bargained for at

closing, especially when that expectation matches the intent of the

borrower, is inequitable and ignores widely accepted lending

practices of the business community. 

III. CONCLUSION

We reverse the holding of the bankruptcy court that the plan

was unconfirmable because it did not permit FSA to credit bid the

full amount of its claim. We VACATE the holding and REMAND the

issues of confirmability of the plan and relief from stay for

redetermination by the bankruptcy court. We also hold that the

district court erred in reversing the judgment of the bankruptcy

court which allowed FSA to segregate the Hotel revenues for its

benefit. Accordingly, we VACATE in part and REVERSE in part, and

REMAND this case to the district court with instructions to REMAND

to the bankruptcy court for further proceedings consistent

herewith.