## Facts

- Westwood Plaza Apartments, Ltd. (Westwood) owned an apartment complex financed through a loan from the Department of Housing and Urban Development (HUD).
- HUD’s loan was secured by collateral that included the rents generated by the apartment property.
- Westwood defaulted on the HUD loan and later filed a Chapter 11 bankruptcy case.
- Westwood hired Johnson, Bromberg & Leeds and Baskin & Novakov, P.C. (collectively, counsel) to represent it in the bankruptcy case and to help prepare a plan of reorganization aimed at keeping ownership of the apartment complex.
- Westwood applied to the bankruptcy court for approval to pay counsel’s fees and expenses from rents Westwood collected during the bankruptcy case.
- HUD objected, contending that the rents were HUD’s “cash collateral,” so the rents could not be used to pay counsel absent HUD’s consent or court authorization consistent with the cash-collateral restrictions.
- The bankruptcy court approved counsel’s requested fees and expenses as reasonable and necessary, but reserved decision on (i) whether the rents were HUD’s cash collateral and (ii) if so, whether Westwood could use the rents to pay the approved compensation.
- Westwood argued that even if the rents were cash collateral, it should be allowed to use them to pay counsel because counsel’s work on the reorganization plan would result in HUD receiving a greater distribution than HUD would receive in a liquidation, meaning HUD had benefitted from counsel’s services.

## Issues

1. Were the post-petition rents collected from Westwood’s apartment complex HUD’s cash collateral?
2. If the rents were cash collateral, could Westwood use those rents to pay debtor’s counsel’s court-approved fees and expenses based on the claimed benefit to HUD from counsel’s reorganization efforts?

## Decision

- The court concluded that the post-petition rents were HUD’s cash collateral.
- The court determined that, because the rents were cash collateral, Westwood could not use them to pay counsel’s fees and expenses over HUD’s objection absent a legally sufficient basis to do so.
- The court rejected Westwood’s “greater distribution than liquidation” argument as a basis to require HUD’s collateral to fund counsel’s compensation, because the claimed benefit to HUD from reorganization work was not the type of direct, concrete benefit required to shift those costs to the secured creditor’s collateral.

## Legal Principles

- Rents that are subject to a secured creditor’s lien or assignment can constitute “cash collateral” within the meaning of 11 U.S.C. § 363(a).
- A Chapter 11 debtor may not use cash collateral unless (i) the secured creditor consents or (ii) the court authorizes use under § 363(c) on conditions that protect the creditor’s interest (including adequate protection).
- Court approval of professionals’ fees as reasonable and necessary under the Bankruptcy Code does not, by itself, authorize payment from a secured creditor’s cash collateral.
- To charge a secured creditor’s collateral with the cost of debtor’s professionals, the debtor must show more than a general claim that reorganization efforts might improve the creditor’s recovery; the benefit must be direct and not merely incidental to the debtor’s attempt to reorganize.

## Conclusion

The court held that Westwood’s post-petition apartment rents were HUD’s cash collateral and, despite approving counsel’s fees as reasonable and necessary, refused to allow Westwood to pay those fees from the rents over HUD’s objection because the asserted reorganization-related benefit to HUD did not justify using HUD’s collateral for that purpose.


In re Westwood Plaza Apartments, Ltd., 154 B.R. 916 (1993)