In re Lexington Hospitality Group, LLC

Lexington Hospitality Group (LHG) (debtor) filed a Chapter 11 bankruptcy petition in 2017. A creditor, PCG Credit Partners, LLC (PCG) (creditor), could not reach an agreement with LHG regarding its claims. LHG borrowed $6.15 million from PCG in 2015 to purchase the Lexington Clarion Hotel and Conference Center. LHG operated the hotel and a restaurant on that site. The loan was secured by a mortgage and a security agreement that granted PCG a lien in all collateral, including accounts, general intangibles, and payment intangibles. PCG filed a financing statement to perfect its interest. The financing statement indicated a security interest in tangible personal property and all other property now owned or hereafter acquired but did not include general intangibles or payment intangibles. LHG moved the bankruptcy court for approval to use cash collateral because it could not reach an agreement with PCG. Under the Bankruptcy Code, a debtor cannot use cash collateral unless each entity with a security interest in the collateral consents or the court authorizes such use. PCG had the burden of proof to establish the validity of its security interest and its perfection. Normally, property acquired by the debtor after the filing of a bankruptcy petition is not subject to any lien entered into before the filing unless the security interest is perfected and includes amounts paid as proceeds or rent and hotel revenue. To prevail, PCG needed to establish that it had a perfected security interest in after-acquired property and that the after-acquired property was within the exceptions set by the Bankruptcy Code. The parties agreed that PCG had a security interest on all of LHG’s personal property and that the security-agreement description was sufficient to cover all assets. PCG argued its lien was perfected because (1) the hotel revenue was rents and subject to mortgage as perfection, not personal property requiring listing in the financing statement, and (2) even if not, the financing statement was adequate for perfection. LHG noted that the hotel revenue was a payment intangible and had been omitted from the financing statement and therefore was not perfected.