In re Westwood Plaza Apartments, Ltd.

Westwood Plaza Apartments, Ltd. (Westwood) (debtor) received a loan from the Department of Housing and Urban Development (HUD) (creditor). The loan was secured by collateral including rents collected by Westwood. Westwood subsequently defaulted on the loan and filed for bankruptcy. Westwood’s counsel, Johnson, Bromberg & Leeds and Baskin & Novakov, P.C. (collectively, counsel), assisted Westwood in formulating a plan to reorganize and maintain ownership of its apartment complex. Westwood sought the bankruptcy court’s approval to pay counsel’s fees and expenses using rents collected by Westwood. HUD opposed Westwood’s application, arguing that the requested fees and expenses should be denied because the rents from which the payment would be made were HUD’s cash collateral. The bankruptcy court approved the requested fees and expenses after finding that they were reasonable and necessary. However, the court reserved decision on whether the rents were HUD’s cash collateral and, if they were, whether Westwood could use the rents to pay counsel’s approved fees and expenses. Westwood argued that even if the rents were HUD’s cash collateral, Westwood could still use the money to pay counsel because HUD would receive a greater distribution under the reorganization plan that counsel had helped create than HUD would have received in a liquidation, so HUD had benefited from counsel’s services. After considering Westwood’s argument, the bankruptcy court concluded that the rents were HUD’s cash collateral and issued a decision regarding whether Westwood could use the rents to pay counsel’s approved fees and expenses.