## Facts

- Hari Ram, Inc. owned and operated a hotel in Mechanicsburg, Pennsylvania.
- In 2001, Hari Ram executed a $2,669,000 promissory note to Orrstown Bank to finance construction of the Mechanicsburg hotel.
- The 2001 loan was secured by recorded mortgage documents and an assignment of rents that granted the lender a security interest in “rents,” broadly defined to include hotel “rents, revenues, income, issues, profits and proceeds.”
- Hari Ram also executed a commercial security agreement granting a security interest in personal property connected to the hotel operation (including accounts, general intangibles, rents, and payments), and the lender perfected that interest by filing a UCC financing statement.
- In 2008, Orrstown made separate loans to Gurugovind, LLC (an affiliated entity). As part of that credit arrangement, Hari Ram gave Orrstown additional mortgages and additional assignments of rents on the Mechanicsburg hotel.
- The later mortgages contained broad cross-collateralization language securing all obligations and liabilities of Hari Ram and Gurugovind to Orrstown, whether then existing or later arising, whether related or unrelated to the original loan purpose.
- Magnolia Portfolio, LLC acquired Orrstown’s secured position by assignment.
- By letter dated December 13, 2013, Magnolia notified Hari Ram of default on a loan and stated it had elected to collect “proceeds” generated by the Mechanicsburg hotel.
- Hari Ram filed a Chapter 11 petition on December 24, 2013 and, as an early filing, moved for authority to use hotel room revenues as cash collateral to continue operations.
- Hari Ram argued that the revenues were available for use and that Magnolia’s interest was protected because the hotel would generate sufficient profit within approximately nine months based on projections.
- Magnolia opposed the motion, disputing Hari Ram’s ability to protect Magnolia’s interest and relying on its security interests, including those arising from the cross-collateralized Gurugovind-related mortgage documents.
- At the evidentiary hearing, Hari Ram’s projections included debt service on the 2001 mortgage but did not include payments tied to obligations secured under the Gurugovind mortgage documents; Hari Ram took the position it was not personally obligated on those debts.

## Issues

1. Whether hotel room revenues should be treated as real-property “rents” subject to termination under an enforced assignment of rents, or as personal property that became property of the estate upon filing.
2. Assuming the room revenues were property of the estate and constituted Magnolia’s cash collateral, whether Hari Ram carried its burden to show Magnolia’s interest would be adequately protected as required by 11 U.S.C. § 363.

## Decision

- The court denied Hari Ram’s motion to use cash collateral.
- The court ruled that even if Hari Ram retained an interest in the hotel revenues such that they were estate property, Hari Ram did not show that Magnolia’s interest in the cash collateral would be adequately protected.
- The court did not finally decide the characterization question (real-property rents versus personal property) because the motion failed on adequate-protection grounds under the assumption most favorable to the debtor.

## Legal Principles

- A debtor in possession may not use “cash collateral” unless each entity with an interest consents or the court authorizes the use after notice and a hearing. 11 U.S.C. § 363(c)(2).
- On request of an entity with an interest in cash collateral, the court must condition or prohibit use as necessary to provide adequate protection of that interest. 11 U.S.C. § 363(e).
- Adequate protection focuses on protecting the value of the secured creditor’s interest and may take the form of cash payments, replacement liens, or other relief providing the creditor the equivalent of its interest. 11 U.S.C. § 361.
- The debtor bears the burden to prove adequate protection when seeking to use cash collateral over a secured creditor’s objection.
- Financial projections offered to support adequate protection must be reliable; projections that omit obligations secured by the same collateral can be insufficient to show the creditor will not be harmed by continued use of the cash collateral.
- Where a debtor’s showing fails even under an assumption that the disputed revenues are estate property, the court may deny a cash-collateral motion without resolving the underlying property-characterization dispute.

## Conclusion

The court denied the Chapter 11 hotel debtor’s request to use room-revenue cash collateral because, even assuming the revenues were property of the estate, the debtor’s projections did not account for cross-collateralized secured obligations and therefore did not establish adequate protection for Magnolia’s secured interest.


Hari Ram, Inc. v. Magnolia Portfolio, LLC (In re Hari Ram, Inc.), 507 B.R. 114 (2014)