In re Shree Meldikrupa Inc.

In the matter of: SHREE MELDIKRUPA INC. Debtor.

Number 15-41411-EJC

United States Bankruptcy Court for the Southern District of Georgia Savannah Division

January 15, 2016

Chapter 11 Case

OPINION ON DEBTOR'S AMENDED MOTION FOR ORDER TO USE CASH COLLATERAL

Before the Court is debtor Shree Meldikrupa Incorporated's ("Debtor") Amended Motion For Order to Use Cash Collateral ("Amended Cash Collateral Motion") (dckt. 64)¹. The Debtor is a Georgia corporation which operates a CITGO gas station and convenience store located at 251 W. General Screven Way, Hinesville, Liberty County, Georgia 31313 (the "Property"). The disputed cash collateral is critical to the operation of the Debtor's business and is the only source from which to pay expenses and purchase inventory. Three creditors, Hinesville Loan Pool ("Hinesville"), Georgia Lottery Corporation ("Georgia Lottery"), and Cornerstone Bank ("Cornerstone") objected to the Debtor's proposed use of cash collateral.

The objections of Hinesville and Georgia Lottery have been resolved by consent orders. Hinesville, which holds a first in priority lien in the Debtor's real estate, and possibly other collateral as will be addressed in this opinion, will receive its regular monthlypayments that become due under its security deed and note with the Debtor. (Dckt. 60). Georgia Lottery will be able to continue to collect all proceeds from the Debtor's sale of lottery tickets under the terms of the contract between the Debtor and Georgia Lottery. (Dckt. 61).

Cornerstone, the remaining objecting creditor, holds a second in priority lien in the Debtor's real estate and claims a security interest in other collateral, including cash collateral. While Cornerstone's security agreement includes language granting a security interest in the Debtor's personal property, including inventory and its proceeds, Cornerstone failed to file a UCC-1 financing statement. Accordingly, Cornerstone holds an unperfected security interest in such property. For the reasons set forth below, the Debtor's Amended Cash Collateral Motion is GRANTED.

I. JURISDICTION

This Court has subject-matter jurisdiction pursuant to 28 U.S.C. § 1334(a), 28 U.S.C. § 157(a), and the Standing Order of Reference signed by then Chief Judge Anthony A. Alaimo on July 13, 1984. This is a "core proceeding" within the meaning of 28 U.S.C. § 157(b)(2)(K) and (M). In accordance with Bankruptcy Rule 7052, the Court makes the following findings of fact and conclusions of law.

II. FINDINGS OF FACT

On August 31, 2015, the Debtor filed a Chapter 11 petition for bankruptcy relief. (Dckt. 1). According to its Schedules, the Debtor's two principal creditors are Hinesville and Cornerstone. Hinesville has filed a proof of claim in the amount of $340,669.81, claiming a first priority lien in the Property and a security interest in otherpersonal property of the Debtor. (Claims Register 2-1). Cornerstone has filed a proof of claim in the amount of $220,116.80, claiming a second priority lien in the Property and also claiming a security interest in the Debtor's personal property. (Claims Register 4-2).

A. Hinesville's Lien History

On July 28, 2006, the Debtor executed a note in favor of The Coastal Bank in the amount of $450,000 ("HLP Note") in order to purchase the Property. (Claims Register 2-1, p. 8).To secure the loan, the Debtor executed a Real Estate Deed to Secure Debt ("HLP Security Deed") which gave The Coastal Bank a valid first lien on the Property. Id. at p. 10. The HLP Security Deed was recorded in the real property records of Liberty County, Georgia. The Coastal Bank was further secured by certain personal property described in the HLP Security Deed. Clause 28 of the HLP Security Deed provides in pertinent part:

[The Debtor] grants to [The Coastal Bank] a security interest in all personal property located on or connected with the Property, including all farm products, inventory, equipment, accounts, documents, instruments, chattel paper, general intangibles, and all other items of personal property [Debtor] owns now or in the future and that are used or useful in the construction, ownership, operation, management, or maintenance of the Property . . . .

(Claims Register 2-1 at p. 15). On August 1, 2006, Coastal Bank filed a UCC-1 Financing Statement that listed its collateral as "all furniture, fixtures and equipment now owned or hereafter acquired and located at [the Property.]" Id. at p. 19.

On November 22, 2013, The Coastal Bank assigned its interest in the HLP Security Deed and the HLP Note to Hinesville. Id. at p. 33. On July 21, 2014, Hinesville filed an amended UCC-1 Financing Statement reflecting the assignment. Id. at p. 41. Hinesville's amended UCC-1 did not indicate any changes to the collateral described in Coastal Bank'soriginal UCC-1. Id.

B. Cornerstone's Lien History

On September 5, 2013. Shree Meldishakti, Inc., a company affiliated with the Debtor, executed a promissory note in favor of Cornerstone in the principal amount of $207,000.00 ("Cornerstone Note"). (Dckt. 17). In order to secure payment of the Cornerstone Note, the Debtor executed a Deed to Secure Debt and Security Agreement ("Cornerstone Security Deed") and an Assignment of Leases and Rents ("Assignment of Rents"). (Claims Register 4-2, Exhibits 4 and 5). The Cornerstone Security Deed evidences a second in priority security interest in the Property and other personal property of the Debtor. (Dckt. 17). The description of the collateral in the Cornerstone Security Deed is stated in the broadest terms and includes, "inventory. . . including all . . . proceeds from a permitted sale of [the inventory]." (Dckt. 17. p. 6). With regard to the Debtor's personal property, in addition to the description of collateral in its introductory paragraphs, the Cornerstone Security Deed provides in pertinent part:

1.08 Security Agreement

[The Debtor] hereby grants to [Cornerstone] a security interest in all of the Property which constitutes personal property or fixtures. . . .

With respect to the machinery, apparatus, equipment, fitting, fixtures, building supplies and materials, articles of personal property, chattels, chattel paper, documents, inventory, accounts, farm products, consumer goods and general intangibles referred to or described in this Deed, or in any way connected with the use and enjoyment of the [Property], this Deed is hereby made and declared to be a security agreement as part of the [Property], in compliance with the provisions of the Uniform Commercial Code as enacted in the State of Georgia. . . .

Id. at p. 13. Section 1.09 further provides that all security interests "automatically attach, without further act, to all after-acquired property attached to and/or used in the operation ofthe [Property] or any part thereof." Id. at p. 14. In the separately recorded Assignment of Rents, the Debtor provided as additional security for the loan and assignment of rents as follows: "[the Debtor] assigns, all of [the Debtor's] right, title and interest in, to and under any and all of those leases and rental agreements now existing and hereafter made . . . which cover or shall cover portions of [the Debtor's Property] . . . together with all of [the Debtor's] right, title and interest in and to all rents, issues and profits from the [leases and rental agreements] and from [the Debtor's Property]." Cornerstone recorded the Cornerstone Security Deed and Assignment of Rents in the real property records of Liberty County, Georgia, but did not file a UCC-1 Financing Statement.

C. The Debtor's Original Motion to Use Cash Collateral

On September 17, 2015, Cornerstone filed a motion to prohibit the Debtor's use of cash collateral² or to condition such use on the Debtor providing adequate protection to Cornerstone ("Motion to Prohibit") (dckt. 17). Cornerstone argued that the Debtor was not entitled to use its cash collateral because Cornerstone had not consented to such use, nor had the Debtor obtained an order from this Court authorizing the use of cash collateral. (Dckt. 17). Cornerstone further argued that if the Debtor was permitted to use its cash collateral, it was entitled to adequate protection of its interest. Id.

On October 15, 2015, six weeks after this case was filed, the Debtor filed its Motion for Order to Use Cash Collateral Pursuant to 11 U.S.C. § 363 and ProvidingAdequate Protection ("Original Cash Collateral Motion") (dckt. 27). Two parties, Hinesville and the Georgia Lottery Corporation, filed objections to the proposed use of cash collateral and adequate protection payments. Hinesville's objection³ asserted that Cornerstone was not entitled to adequate protection payments unless the Debtor first made the full ongoing monthly payments to Hinesville under the Hinesville Security Deed and Hinesville Note. (Dckt. 40). Georgia Lottery's objection asserted that "[u]nder O.C.G.A. § 50-27-21(a), all proceeds from the sale of Lottery tickets or shares constitutes a trust fund until paid to the Lottery" and "[t]his code section places a fiduciary duty on the Debtor-in-Possession to preserve and account for lottery proceeds." (Dckt. 43). Accordingly, Georgia Lottery argued that such proceeds were being held in trust by the Debtor and are not a part of the Debtor's purported cash collateral. Id. Georgia Lottery further asserted that O.C.G.A. § 50-27-21(b) requires retailers to place all lottery proceeds in a separate bank account, and that the Debtor was not properly segregating its lottery proceeds. Id.

On October 27, 2015, this Court held a hearing on Cornerstone's Motion to Prohibit, the Debtor's Original Cash Collateral Motion, and the related objections of Hinesville and the Georgia Lottery Corporation⁴. At the hearing, it was stipulated by theparties that Hinesville holds a first priority lien on the Debtor's Property and Cornerstone holds a second priority lien on the Debtor's Property. The parties further represented to the Court that Hinesville held a perfected...