## Facts

- Lexington Hospitality Group, LLC (LHG) owned and operated the Lexington Clarion Hotel and Conference Center and an on-site restaurant in Lexington, Kentucky.
- In September 2015, LHG borrowed $6.15 million from PCG Credit Partners, LLC (PCG) to acquire the hotel property.
- The loan was secured by (1) a recorded mortgage that included an assignment of leases and rents, and (2) an all-assets security agreement granting PCG a security interest in LHG’s personal property, including accounts, general intangibles, and payment intangibles.
- PCG filed a UCC-1 financing statement with the Kentucky Secretary of State to perfect its security interest.
- The UCC-1 collateral description listed categories of tangible business property and included broad “all other property … for use in Debtor’s business” language, but it did not expressly identify “general intangibles” or “payment intangibles.”
- In 2017, LHG filed a Chapter 11 petition and continued operating the hotel.
- LHG moved for authority to use what the parties were treating as cash collateral because LHG and PCG could not agree on cash-collateral terms under 11 U.S.C. § 363(c)(2).
- PCG objected, asserting that LHG’s postpetition hotel revenue was PCG’s cash collateral because it was either (a) “rents” covered and perfected by the recorded mortgage/assignment of rents, or (b) personal-property collateral perfected by the UCC-1.
- LHG responded that the disputed hotel revenue was personal property (at least in part a payment intangible) and that PCG’s financing statement did not perfect a lien in that category.

## Issues

1. Whether PCG carried its burden to show that LHG’s hotel revenue constituted “cash collateral” under 11 U.S.C. § 363(a) by proving a valid, perfected lien in that revenue.
2. Whether hotel room revenue is “rents” perfected by recording a mortgage and assignment of rents, or instead personal-property collateral governed by UCC Article 9.
3. Whether PCG’s UCC-1 financing statement sufficiently described the relevant collateral class (including general intangibles/payment intangibles) to perfect a security interest in hotel revenue.

## Decision

- The court held that the hotel revenue at issue was not PCG’s cash collateral because PCG did not have a perfected security interest in that revenue.
- The court rejected PCG’s argument that hotel room revenue should be treated as real-property “rents” perfected through the recorded mortgage and assignment of rents.
- The court concluded that, even though the security agreement granted PCG a lien broad enough to cover the revenue as between the parties, perfection required an adequate Article 9 financing statement.
- The court found PCG’s UCC-1 description failed to perfect a lien in general intangibles/payment intangibles, and the broad residual language in the UCC-1 did not cure that omission for the revenue stream being claimed.
- Because the hotel revenue was not cash collateral, LHG did not need PCG’s consent or court authorization under § 363(c)(2) to use it in operations, and LHG’s motion to extend cash-collateral use was granted on that basis.

## Legal Principles

- A debtor in possession may not use “cash collateral” unless the secured party consents or the court authorizes use; the creditor asserting cash-collateral rights bears the burden to prove the existence, validity, and perfection of its interest in the funds. 11 U.S.C. § 363(c)(2), (p); § 363(a).
- A security agreement may grant a lien in broad categories of personal property, but enforceable cash-collateral control in bankruptcy depends on perfection under applicable nonbankruptcy law, including Article 9 where the collateral is personal property.
- Hotel room revenue is generally not treated as “rents” arising from a landlord-tenant lease for real-property recording and assignment-of-rents purposes; it is typically characterized as personal property (such as an account or payment intangible) governed by Article 9.
- To perfect a security interest in Article 9 collateral, the financing statement must reasonably identify the collateral; omission of a relevant collateral class (such as general intangibles/payment intangibles) can prevent perfection in that type of property even if the security agreement uses broader language.
- A prepetition lien’s reach to postpetition receipts under 11 U.S.C. § 552(b) depends on having a perfected security interest in the underlying collateral and on the receipts fitting within the statutory categories (such as proceeds or rents); absent perfection, the asserted postpetition receipts are not cash collateral.

## Conclusion

In re Lexington Hospitality Group, LLC held that PCG could not restrict the debtor’s use of hotel operating revenue as cash collateral because PCG failed to prove a perfected lien in that revenue: the mortgage and assignment-of-rents provisions did not perfect an interest in hotel room charges as “rents,” and the UCC-1 financing statement did not sufficiently identify the Article 9 collateral category (general intangibles/payment intangibles) needed to perfect a security interest in the revenue stream.


In re Lexington Hospitality Group, LLC, 2017 WL 5035081 (2017)