179 B.R. 185

In re COUNTY OF ORANGE, a political subdivision of the State of California; Orange County Investment Pools, an instrumentality of the County of Orange, Debtors. ALLIANCE CAPITAL MANAGEMENT L.P. and Putnam Investment Management, Movants, v. COUNTY OF ORANGE, Orange County Investment Pools, Respondents.

Bankruptcy Nos. SA 94-22272 JR, SA 94r-22273 JR.

United States Bankruptcy Court, C.D. California.

March 8, 1995.

*187Bruce Bennett, Stutman, Treister & Glatt, Los Angeles, CA, Sp. Reorganization Counsel, for debtors.

Robert Darby, Fulbright & Jaworski, and Clarisse W.J. Young, Paul Hastings Janofsky Walker, Los Angeles, CA, for movants.

MEMORANDUM OPINION

JOHN E. RYAN, Bankruptcy Judge.

On June 7, 1994, the County of Orange (the “County”) issued bonds aggregating $169,000,000 pursuant to the “temporary borrowing” provisions of California Government Code §§ 53850-53858. Pursuant to § 58856, the County pledged certain future tax and other general revenues to pay the principal and interest on the notes.

Alliance Capital Management L.P. and Putnam Investment Management (the “Mov-ants”), representing holders of notes totalling about $50 million, brought this motion for relief from stay (the “Motion”) to have the stay terminated to allow the Movants to file a writ of mandate complaint in state court to force the County to set aside certain revenues for payment on the notes. The County objects, arguing that the noteholders have no interest in the County’s revenues because § 552(a) of the Bankruptcy Code cuts off their lien rights as of the filing of the bankruptcy petition.

*188At a hearing on February 23, 1995, I took the matter under submission to determine whether the noteholders retain a post-petition lien on the County’s revenues.

JURISDICTION

This court has jurisdiction over this adversary proceeding pursuant to 28 U.S.C. § 1334(a) (the district courts shall have original and exclusive jurisdiction of all cases under Title 11), 28 U.S.C. § 157(a) (authorizing the district courts to refer all Title 11 eases and proceedings to the bankruptcy judges for the district) and General Order No. 266, dated October 9, 1984 (referring all Title 11 cases and proceedings to the bankruptcy judges for the Central District of California). This matter is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(G).

STATEMENT OF FACTS

On June 7, 1994, the County’s Board of Supervisors (the “Board”) adopted Resolution No. 94-675 (the “Resolution”), whereby the Board authorized the County to borrow up to $200,000,000 pursuant to the temporary borrowing provisions of California Government Code (the “Government Code”) §§ 53850-53858.1

Under the Resolution, the Board authorized the County to issue notes, designated as “County of Orange, 1994-95 Tax Anticipation Notes Series (the “TRANS”). In the Resolution, the Board also pledged certain tax and other unrestricted revenues as security for the TRANS.2

The Board also declared in the Resolution that all pledged monies, when received, must be set aside in a special fund (the “Set-Aside”). Moreover, if during any month the Set>-Aside is insufficient to satisfy the TRANS requirements, the County is required to make up the difference from any generally available funds the County receives during fiscal year 1994-95.

On June 27, 1994, the County and the underwriter, PaineWebber, Inc. (“Paine-Webber”), executed a Contract of Purchase (the “Contract”) providing for the sale of the TRANS to PaineWebber in accordance with the terms set forth in the Resolution. On July 5, 1994, the transaction closed, and the County delivered the TRANS to Paine-Webber.

In September, October and November of 1994, the County made each Set-Aside required under the Contract. The County invested the Set-Asides in the Orange County Investment Pools (the “Pool”) as permitted under Government Code § 27000 et seq.3

On December 6, 1994, prior to making its December Set-Aside; the County and the Pool shocked the nation by filing Chapter 9 petitions in bankruptcy. The filings were caused by substantial losses in the Pool.4

On December 29,1994, the County filed an ex parte motion for an order authorizing *189certain payments on bond obligations. In the motion, the County stated that it would not make its remaining Set-Aside payments. The County argued that its action was necessary and proper because under § 552(a) of the Bankruptcy Code (the “Code”)5, the lien created by the Contract did not attach to post-petition revenues.

On January 4, 1995,1 conducted a hearing on the County’s ex parte motion. At the hearing, the County presented the testimony of Paul Sachs, a partner with Arthur Andersen & Company. Sachs presented projections of the County’s General Fund cash flow for the remainder of the fiscal year ending June 30, 1995. These projections demonstrated that, based on pre-petition expenses, the County would have insufficient cash flow from its General Fund to meet both its operating expenses and its debt service (including the Set-Asides).

On January 10,1995, the Movants filed the Motion to have the stay terminated to enable them to seek a writ of mandate in state court compelling the County to make the Set-Asides. The Movants contended that relief was necessary because (1) Movants’ only recourse is to state court, (2) granting relief from stay will further Congressional policy of providing maximum flexibility to states in solving the debt problems of municipalities in Chapter 9 and (3) irreparable harm will occur to the TRANS holders from the County’s failure to make the required Set-Asides.

As to the last contention, based on Sachs’ projections, the Movants argued that unless the Set-Asides were made, the County would have insufficient revenues to pay the TRANS holders, including the Movants, on the July 1, 1995 maturity date. Moreover, because of certain California constitutional limitations, there was a substantial risk that the County would be unable to use revenues from subsequent years to satisfy the TRANS.6

Based on the evidence and the law, I treated the hearing as a preliminary hearing under Code § 362(e), found that the County would likely prevail at a final hearing, ordered the stay to continue in effect and set the matter for a final hearing.7

DISCUSSION

Under Code § 362(d), this Court may grant relief from the automatic stay “for cause, including the lack of adequate protection of an interest in property of [a] party in interest.” Movants contend that “cause” exists because the state court is the only forum that has the power to adequately protect its interest (i.e., the only forum that can compel the County to make the Set-Asides). Mov-ants point out that Code § 904 limits the power of this court to order the County to make the Set-Asides.8 Movants are wrong for two reasons.

*190First, the County has consented to this court’s jurisdiction to order, if necessary, adequate protection in connection with this proceeding.

Second, §§ 3619 and 362, which respectively define the concept of adequate protection and its application, are specifically incorporated into Chapter 9 through Code § 901.10 Congress obviously incorporated these specific sections into Chapter 9 to have purpose and effect. Because the court has the power to continue the stay in effect, it logically follows that the court must likewise have the power to order adequate protection as a condition for the continuance of the automatic stay. Otherwise, the application of § 362 in Chapter 9 would not make sense. The County has the choice of either complying with the court’s order for adequate protection or having the stay lifted. This does not unduly encroach on the County’s ability to conduct its affairs free from court interference. The County came into this court uninvited to obtain the benefit of the automatic stay. The price for retaining this benefit is the County’s implied consent to this court’s power to apply all of the provisions of § 362.

Moreover, § 904 is a general statute, whereas §§ 361 and 362 specifically address adequate protection. The general rule is that specific statutory provisions control. See, e.g., In re Khan, 172 B.R. 613, 624 (Bankr.D.Minn.1994) (“Where both a specific and general statute address the same subject matter, the specific one takes precedence regardless of the sequence of enactment, and must be applied first.”) (citations omitted); Trustees of Amalgamated Ins. v. Geltman Industries, 784 F.2d 926, 930 (9th Cir.1986) (“Fundamental maxims of statutory construction require that a specific statutory section qualifies a more general section and will govern, even though the general provisions, standing alone, would encompass the same subject.”) (citations omitted).

Accordingly, both from the standpoint of the County’s actual and implied consent to the application of § 362 in Chapter 9, this court has the power to order the County to provide the Movants with adequate protection as a condition for the continuance of the automatic stay. Appropriate relief is, therefore, not limited to the state court.

The next argument presented by the Movants is that granting relief from stay would further the Congressional policy of providing maximum flexibility to states in solving the debt problems of municipalities in Chapter 9. The Movants point out that Code 90311 is intended to maximize flexibility for *191the states in solving the debt problems of their municipalities.12 The Movants conclude from this that § 903 dictates that the state court is the appropriate forum for resolution of the issues relating to the County’s compliance with its contractual obligations to the TRANS holders.

The problem with the Movants’ argument is that if they are correct, no municipality would file Chapter 9 because the benefits of filing would disappear. California specifically authorized its municipalities to seek the protection of Chapter 9.13 The two main benefits of a Chapter 9 filing are (1) the breathing spell provided by the automatic stay, and (2) the ability to adjust debts of claimants through the plan process. If the automatic stay is to be lifted routinely to allow claimants to assert their claims in state court, a municipality will not have the time, opportunity or ability to confirm a plan. This certainly was not the policy or intent of Congress in providing debt relief for municipalities through Chapter 9. It likewise was not the intent of California in authorizing its municipalities to use Chapter 9. Accordingly, § 908 should not be interpreted to undercut the purpose and efficacy of Chapter 9.

Lastly, the Movants raise the question of irreparable injury. In effect, the Movants assert that this court must either lift the automatic stay and allow them to proceed in state court or provide the Movants with some form of adequate protection. The Movants claim that the failure of the County to make the Set-Asides causes them irreparable injury because most of the funds to which their lien attaches will be dissipated and given the County’s abysmal financial condition, it is unlikely that the County will have sufficient funds to pay the TRANS on the July 1, 1995 maturity date.

To answer this question, the court must first decide if the Movants’ lien survives post-petition. Under Code § 552(a), a pre-petition security interest does not reach property acquired by the debtor post-petition. United Sav. Ass’n v. Timbers of Inwood Forest, 484 U.S. 365, 374, 108 S.Ct. 626, 632, 98 L.Ed.2d 740 (1988). Section 552(a) is incorporated into Chapter 9 through § 901. In general, § 552(a) should be viewed broadly, given the goal of facilitating a fresh start for the debtor. See generally Local Loan Co. v. Hunt, 292 U.S. 234, 244, 54 S.Ct. 695, 699, 78 L.Ed. 1230 (1934); In re Transp. Design & Technology Inc., 48 B.R. 635, 640 (Bankr.S.D.Cal.1985). Accordingly, § 552(a) applies to all security agreements in Chapter 9, including those between municipalities and revenue bondholders.14

Prior to 1988, when a municipality filed Chapter 9, a risk existed that § 552(a) could strip revenue bondholders of their liens on post-petition property of the debtor. Code § 92815 was enacted to remedy this problem *192by making § 552(a) inapplicable to revenue bonds.16

Section 928 was narrowly crafted to apply only to special revenue bonds. Congress could have made § 928 applicable to all municipal bonds, but it chose to limit its application. Section 552(a) is, therefore, still applicable to general revenue bonds like the TRANS.17

Because § 552(a) by its terms applies only to a security agreement that creates a security interest, the next question is whether the Movants’ lien is a security interest created by a security agreement. A security agreement is an agreement that creates or provides for a security interest. Code § 101(50). A security interest is a hen created by an agreement. Code § 101(51). Section 552(a), therefore, only applies to hens created by a security agreement and not to other types of hens.18

In general, the three types of hens19 are security interests, judicial hens20 and statutory hens.21 H.R. 595, 95th Cong., 1st Sess. 312 (1977); S.Rep. No. 989, 95th Cong., 2d Sess. 25 (1978). These hens are mutually exclusive and are exhaustive except for certain common law hens.22

The Supreme Court has divided these liens into two categories, voluntary (consensual) and involuntary (non-consensual). United States v. Ron Pair Enterprises, 489 U.S. 235, 240, 109 S.Ct. 1026, 1029-30, 103 L.Ed.2d 290 (1989). Consensual liens are created by an agreement between the debtor and creditor. In contrast, “involuntary liens, such as ... judicial or statutory hens ... are fixed by operation of law and do not require the consent of the debtor.” Id.; see also, Klein v. Civale & Trovato, Inc. (In re Lionel Corp.), 29 F.3d 88, 94 (2d Cir.1994) (stating that hens created without consent are statutory hens). The fundamental difference, therefore, between a security interest and a statutory hen is the consent of the debtor to the granting of the hen.

The County issued the TRANS based on the authority granted to it under Government Code § 53852, which provides that “[A] local agency may borrow money pursuant to this article, such indebtedness to be represented by a note or notes_” The Mov-ants’ hen was granted pursuant to Government Code § 53856. Section 53856 states that “any taxes ... may be pledged to the payment ... of the notes_ The resolution authorizing the issuance of the note or notes shah specify what taxes ... are pledged for the payment thereof.” Taken *193together, these enabling provisions authorized the County to issue the TRANS and secure their payment by pledging certain revenues. The County had the choice to pledge its revenue stream to secure the TRANS. It did not have to pledge anything to borrow. In addition, in deciding to pledge revenues, it had to designate the specific revenues that were being pledged. The grant of the hen here was certainly not automatic. It required the consent of the County.

In contrast, the consent of the debt- or is not necessary for borrowings under other statutory provisions. For example, Government Code §§ 53820-53833 govern temporary borrowings by any school district, county board of education, or community college. Section 53830 provides:

The repayment of money borrowed by any school district, county board of education, or community cohege district constitutes a first hen and charge against the taxes, revenue and other income collected during the fiscal year in which the money was borrowed and shall be repaid from the first money received....

Under this statute, the hen is created automatically. The borrower does not have to agree to pledge revenues or identify the pledged revenues.

Another example of a temporary borrowing statute that creates a statutory hen is Government Code § 53840, which provides:

[ A County] may borrow on July 1st or thereafter such amounts as may be required to meet current obhgations.... Amounts so borrowed shall be evidenced by notes ... and the liabihty created thereby shall be secured by a hen on ah revenue to accrue to the county treasury from any source during the year then in progress.

Again, the hen is automatic, and there is no need for any consent by the borrower or designation of revenues.

The Movants contend that their hen is not a security interest because (1) there is no written, bilateral agreement between the parties to create a hen23 and (2) the hen is a statutory hen because it arises “solely by force of a statute on specified circumstances and conditions.”

The Movants argue that under the statute the only document necessary for the grant of the hen was the Resolution. Of the three primary documents24, the only document that contained language granting a hen was the Resolution and this is not an agreement between a debtor and creditor. As a matter of fact, at the time of the Resolution, the Contract with PaineWebber had not been signed. At best, the Movants argue the Resolution was a promise to issue the TRANS to a yet unidentified underwriter on certain terms and conditions.

The County responds that taken together the Resolution, Contract and TRANS constitute the agreement necessary to create a security interest. The County points out that a security agreement does not have to exist in one document. Komas v. Future Systems, Inc., 71 Cal.App.3d 809, 139 Cal.Rptr. 669, 671 (1977). Rather, it is an accepted legal principle that multiple writings taken together may constitute a security agreement. Id.

The legislative history of the Code indicates that the term “security agreement” should be defined broadly.25 A sepa*194rate formal document entitled “security agreement” is not necessary to create such an agreement. M. Nolden v. Plant Reclamation (In Re Amex-Protein Development Corporation), 504 F.2d 1056, 1058 (9th Cir.1974). Instead, the question is whether the documents, taken as a whole, reflect an agreement to create a security interest. Id. at 1059; Komas, 139 Cal.Rptr. at 671.

In this case, the documents (the Resolution, Contract and TRANS), when viewed together, indicate that the parties intended to create a hen. The Resolution may be viewed as an offer to sell the TRANS, secured by a first Hen and charge against certain revenues. This offer was then accepted by PaineWebber. Although the Contract does not contain any language specifically creating a Hen, it specificaHy incorporates the granting language contained in the Resolution. Hence, an agreement, and not the statute, actuaUy created the Hen. Until acceptance occurred, no Hen came into existence. The Movants’ Hen is a security interest because it depends on an agreement for its existence.

The Hen is not statutory because it does not arise solely by force of the statute. The County had to decide to pledge its revenues and designate the specific revenues that would secure the TRANS.26 Because the Hen is a security interest, the Hen terminates as to the County’s post-petition revenues pursuant to § 552(a).

The last issue raised by the Mov-ants is that the Code § 552(b)(1) exception to the cut off of a security interest appHes here. As already stated, the general rule of § 552(a) is that a pre-petition security interest does not reach property acquired by the debtor post-petition. Section 552(b)(1) provides an exception for some proceeds, product, offspring or profits of encumbered property.27 The Movants argue that even if its Hen is a security interest, it survives post-petition under § 552(b)(1). Specifically, the Movants contend that the County pledged its right to a specific stream of taxes. Since the taxes collected are the proceeds or offspring from that stream, § 552(b)(1) excepts the tax revenues from the appHcation of § 552(a).

The language of the Resolution and Contract beHe this argument. Section 552(b)(1) appHes to proceeds of encumbered property if (1) the parties entered into a pre-petition security agreement and (2) the security interest extends to pre-petition property of the debtor and proceeds of such property. Philip Morris Capital Corporation v. Bering Trader, Inc. (In re Bering Trader, Inc.), 944 F.2d 500, 501 (9th Cir.1991).

In this case, the Resolution clearly states that what was pledged was a first Hen and charge against the first monies received by the County. Moreover, Government Code § 53856 states that the Hen “shaH be payable from the first moneys received by the local agency from, such pledged moneys.” Neither the Resolution nor § 53856 make any reference to pre-petition property of the County. Section 552(b)(1), therefore, does *195not except the pledged revenues on the TRANS from the application of § 552(a).

CONCLUSION

In summary, this court has the power to grant appropriate relief under § 362. Congress did not intend § 903 to preclude this court from taking appropriate action to insure that the benefits of Chapter 9 are preserved for the County. The Movants have a security interest in the pledged revenues, and the lien is cut off on the County’s post-petition revenues. Lastly, § 552(b)(1) does not apply here. Based on these conclusions, the Movants do not have an interest in the County’s post-petition revenues, and no cause exists to lift the automatic stay or provide adequate protection. The Motion is denied.

This memorandum opinion shall supplement my findings of fact and conclusions of law in support of Order Denying Motion of Alliance Capital Management L.P. and Putnam Investment Management, Holders of Approximately $50 Million of County of Orange, California 1994-95 Tax and Revenue Anticipation Notes, Series A, For Relief From the Stays Under 11 U.S.C. §§ 362 and 922 to Seek Appropriate Relief in State Court.

Alliance Capital Management L.P. v. County of Orange (In re County of Orange)
179 B.R. 185

Case Details

Name
Alliance Capital Management L.P. v. County of Orange (In re County of Orange)
Decision Date
Mar 8, 1995
Citations

179 B.R. 185

Jurisdiction
United States

References

Referencing

Nothing yet... Still searching!

Referenced By

Nothing yet... Still searching!