## Facts

- The debtor, Gunnison Center Apartments, LP, owned and operated an 87-unit apartment complex in Gunnison, Colorado.
- Lenox Mortgage V Limited Partnership held a promissory note secured by a deed of trust on the property and an assignment of rents covering all rents and related income.
- The loan went into monetary default, and Lenox began enforcing its state-law remedies, including actions aimed at obtaining control of rents.
- The debtor filed a voluntary Chapter 11 petition and continued collecting postpetition rents.
- Lenox asserted the postpetition rents were its cash collateral, demanded an accounting, and refused to consent to the debtor’s use of rents.
- Lenox filed a notice under 11 U.S.C. § 546(b) in the bankruptcy case stating it perfected its interest in rents and would not consent to their use.
- Lenox moved for relief from the automatic stay, while the debtor sought authority to use rents to pay ordinary operating expenses.

## Issues

1. Whether Lenox held a properly perfected and enforceable interest in the property’s rents under Colorado law and 11 U.S.C. § 546(b).
2. Whether postpetition rents constituted “cash collateral” under 11 U.S.C. § 363(a).
3. Whether, and on what conditions, the debtor could use rents over Lenox’s objection under 11 U.S.C. §§ 363(c), 363(e), and 361.
4. Whether Lenox was entitled to relief from stay under 11 U.S.C. § 362(d)(1) or § 362(d)(2).

## Decision

- The court held Lenox had a perfected security interest in the rents, based on its enforcement efforts under Colorado law and its § 546(b) notice.
- The court held the postpetition rents were Lenox’s cash collateral under § 363(a).
- The court authorized the debtor to use rents only subject to strict cash-collateral controls providing adequate protection, including a line-item operating budget, ongoing reporting and accounting, and replacement/continuing liens in postpetition rents.
- The court denied broad stay relief to permit foreclosure and unrestricted control of rents, granting only limited relief consistent with recognizing Lenox’s cash-collateral rights and enforcing the cash-collateral conditions.

## Legal Principles

- Under Colorado law, an assignment of rents is not self-executing; the secured party must take affirmative steps to enforce its right to collect rents.
- A secured creditor may perfect an interest in rents in bankruptcy by filing a notice under 11 U.S.C. § 546(b) when state law would otherwise require actions that the automatic stay prevents; the notice can function as the equivalent of seizure or commencement of enforcement proceedings.
- Postpetition rents subject to a perfected assignment are “cash collateral” under 11 U.S.C. § 363(a), and the debtor may not use them absent creditor consent or a court order conditioning use on adequate protection.  
- Adequate protection under 11 U.S.C. §§ 361 and 363(e) is fact-dependent and may include budgets, reporting, and replacement liens; permitting use of rents for necessary operating expenses can adequately protect a secured creditor when it preserves the value of income-producing collateral.
- Relief from stay under 11 U.S.C. § 362(d) is not warranted where the secured creditor is adequately protected and the property remains necessary to an effective reorganization at the Chapter 11 stage.

## Conclusion

The court recognized the lender’s perfected interest in apartment rents and treated postpetition rents as cash collateral, but permitted the debtor’s continued operation by allowing controlled use of rents under a court-supervised budget, reporting requirements, and replacement liens that provided adequate protection, while denying broad relief from the automatic stay.


In re Gunnison Ctr. Apts., LP, 320 B.R. 391 (Bankr. D. Colo. 2005)