In re Hotel Sierra Vista Limited Partnership

Brief Fact Summary. Hotel Sierra Vista Limited Partnership (Respondent), built a hotel financed with two secured loans from Chequers, (Petitioner). Respondent defaulted on its loans and then filed for Chapter 11 Bankruptcy.

Synopsis of Rule of Law. Hotel methods of accounting will permit the identification of the revenues generated by the rooms and those generated by services. Determination of the net revenues will require allocation of direct and indirect expenses in proportion to each category of revenue.

Facts. When Respondent filed for bankruptcy, its principal assets were in the hotel itself together with $625,844 in accumulated pre-petition revenues. Between the initial filing and the plan confirmation, the hotel received an additional $812,425. Petitioner moved to sequester the hotel’s post-petition revenues. Petitioner claims that these revenues are cash collateral within the meaning of 11 U.S.C. Section:363(a). The bankruptcy court confirmed the plan and concluded that the post-petition room revenues were cash collateral. However, the bankruptcy court denied Petitioner a secured interest in the post-petition room revenues stating that Petitioner had failed to meet the burden of proving the “extent of its interest as required by 11 U.S.C. Section:363(o)(2).

Issue. Whether Petitioner met the burden of proving the “extent” of its interest as required by 11 U.S.C. Section:363(o)(2).

Held. No. Petitioner must prove the exact amount of its interest in the post-petition room revenues through application of the formula outlined in Financial Security Assurance, Inc. v. Days California Limited Partnership, 27 F.3d 374, 377.

Discussion. A party seeking to prove the extent of its interest must prove that it holds a perfected security interest in post-petition revenues to which its liens still rightly attach. It must also prove the amount of money to which its liens attach by determining the net revenues resulting from the allocation of direct and indirect expenses in proportion to revenues generated by the rooms and those generated by services. The case is reversed and remanded and a new hearing shall be conducted to determine the net revenue.