In Re Las Vegas Monorail Company

429 B.R. 317

In re LAS VEGAS MONORAIL COMPANY, Debtor.

No. BK-S-10-10464-BAM.

United States Bankruptcy Court D. Nevada.

April 26, 2010.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Gerald M. Gordon, Las Vegas, NV, for Debtor.

OPINION ON CASH COLLATERAL MOTIONS

BRUCE A. MARKELL, Bankruptcy Judge.

-------------------
|Table of Contents|
|-----------------|
|                 |
-------------------

-----------------------
|I. |Introduction |322|
|---|-------------|---|
|   |             |   |
|---|-------------|---|
|II.|Facts        |322|
-----------------------

----------------------------------------------------------
|A.|Background                                       |323|
|--|-------------------------------------------------|---|
|B.|Industrial Revenue Bond Financing                |323|
|--|-------------------------------------------------|---|
|C.|LVMC's Indebtedness Under the Financing Agreement|324|
|--|-------------------------------------------------|---|
|D.|Cash Flow Under the Indenture                    |325|
|--|-------------------------------------------------|---|
|  |                                                 |   |
----------------------------------------------------------

--------------------------------------------
|III.|The Legal Position of the Parties|325|
--------------------------------------------

----------------------------------------------------
|A.|The General Rules Regarding Cash Collateral|325|
----------------------------------------------------

----------------------------------------------------------------
|1.|Adequate Protection                                    |326|
|--|-------------------------------------------------------|---|
|2.|Identification of “Cash Collateral”: The Two Components|327|
|--|-------------------------------------------------------|---|
|3.|Burdens of Establishing What is Cash Collateral and of |328|
|  |Providing Adequate Protection                          |   |
----------------------------------------------------------------

-----------------------------------------------------------------
|B.|Security Interests and Liens in Favor of the Bondholders|329|
-----------------------------------------------------------------

--------------------------------------
|1.|Statutory Lien               |329|
|--|-----------------------------|---|
|2.|Consensual Security Interests|330|
--------------------------------------

------------------------------
|a.|Role of Contract Law |331|
|--|---------------------|---|
|b.|Role of Article 9    |332|
------------------------------

--------------------------------------------------------------
|3.|Interpreting the Financing Agreement Under Nevada Law|332|
--------------------------------------------------------------

--------------------------------------------------
|a.|Contract Rights Under Franchise Agreement|333|
|--|-----------------------------------------|---|
|b.|Deposit Accounts and Funds               |336|
|--|-----------------------------------------|---|
|c.|Net Project Revenues                     |337|
--------------------------------------------------

-------------------------------------------------------------------------
|C.|The Identification and Extent of the Trustee's Interests in Cash|339|
|  |Collateral                                                      |   |
-------------------------------------------------------------------------

---------------------------------------------------------------------------
|   |                                                                 |   |
|---|-----------------------------------------------------------------|---|
|IV.|Adequate Protection of the Trustee's Interests in Cash Collateral|340|
---------------------------------------------------------------------------

-------------------------------------------------------------------------------
|A.|Adequate Protection of Cash and Deposit Accounts Held as of the       |340|
|  |Petition Date                                                         |   |
|--|----------------------------------------------------------------------|---|
|B.|Adequate Protection of Postpetition Cash Flows                        |342|
-------------------------------------------------------------------------------

-------------------------------------------------------------------------------
|1.|What Law Determines the Content of “Proceeds” as Used in Section 552  |342|
|  |(b)?                                                                  |   |
|--|----------------------------------------------------------------------|---|
|2.|Are Ongoing Revenues Proceeds of the Trustee's Prepetition Security   |343|
|  |Interest?                                                             |   |
-------------------------------------------------------------------------------

-----------------------------------------
|a.|Net Project Revenues as Proceeds|343|
|--|--------------------------------|---|
|b.|Deposit Account Proceeds        |344|
-----------------------------------------

-------------------------------------------------------------------------------
|  |Are There Equitable Considerations that Section 552(b) Would Allow the|   |
|3.|Court to Consider That Would Restrict the Trustee's Security Interests|344|
|  |in Proceeds?                                                          |   |
|--|----------------------------------------------------------------------|---|
|  |                                                                      |   |
-------------------------------------------------------------------------------

---------------------
|V. |Summary    |345|
|---|-----------|---|
|   |           |   |
|---|-----------|---|
|VI.|Conclusion |346|
---------------------

I. Introduction

Las Vegas Monorail Company (“LVMC”), the debtor in possession in this case, filed its chapter 11 case on January 13, 2010. Almost immediately, its secured creditor sought adequate protection for its cash collateral; in response, LVMC made an offer of adequate protection that was rejected. This opinion resolves the dispute.

II. Facts

After filing, both LVMC and its secured creditor moved for orders regarding cash collateral. Under Fed. R. Bankr.P. 4001(b)(2), the court held an interim hearing on January 22, 2010, at which time the court approved the parties' provisional stipulation regarding cash collateral use. In addition to outlining LVMC's permissible interim use of cash collateral, this stipulation preserved the parties' rights pending a final hearing, which the court scheduled for February 17, 2010. Both parties then commenced discovery.

At the February 17, 2010 hearing, the court admitted into evidence various declarations and exhibits from all sides, and heard testimony. The court took the matter under submission after the parties agreed to extend their interim stipulation until the court's final ruling.

A. Background ¹

LVMC owns and operates a 3.9 mile long monorail which connects nine hotels along and near the Las Vegas “Strip.” LVMC's ridership has never met projections; it is not overly convenient (it does not connect to the local airport or to the Las Vegas downtown area), and many of its potential patrons use other transportation services.

This is not to say, however, that LVMC cannot cover its operating expenses; to the contrary, its revenues exceed its operating expenses, leaving more than $5 million in annual profits before debt service. LVMC's operating expenses consist mainly of obligations under an operating agreement with Bombardier Transit Corporation (“Bombardier”), which operates and services LVMC's trains. Under this agreement, LVMC pays Bombardier, on average, approximately $900,000 per month.

This positive cash flow, however, is barely enough to cover 10% of LVMC's scheduled debt service. The vast majority of LVMC's debt service arises from a type of financing variously called conduit financing or industrial revenue bond financing or special revenue financing. This type of financing is a common way to finance municipal infrastructures. It allows local government to build and operate beneficial projects with private money and without local government having to increase tax burdens.

B. Industrial Revenue Bond Financing

Conduit financing addresses an essential tension-while local government can issue debt which bears tax-free interest, and thus is sought after by tax-conscious investors, it rarely wants its taxpayers to bear the full risk of construction and operation. In conduit or industrial revenue bond financing such as is present here, a local government issues bonds to the general public under an indenture (the way most public debt is issued). The local government then lends the bond proceeds to a private party willing to build or operate the project. This loan is usually secured by the project or by its revenues. The key aspect of this type of financing, at least for local government, is its nonrecourse nature; the local government's obligation to repay the bonds is limited to the collateral pledged. And that collateral generally consists of all the government's rights under the loan agreement with the private party. ²

All of these transactions happen simultaneously. At the conclusion of the transaction, tax-conscious investors have bonds the interest on which is tax-free. Repayment of the bonds is secured by the project built with the bond proceeds, and nothing else. The private company has the advantage of a lower rate of interest on its construction loan, since municipal bond rates generally are lower than construction loan rates. And the local government has provided its citizens with new projects designed to improve community life.

C. LVMC's Indebtedness Under the Financing Agreement

In this case, the industrial revenue bond financing took the following form. In 2000, the Director (“Director”) of the Nevada Department of Business and Industry (“Dep...