Delta Towers, Ltd., Matter of, 90-3341

• Citation: 924 F.2d 74
• Decision Date: 15 February 1991
• Docket Number: No. 90-3341,90-3341
• Parties: , 24 Collier Bankr.Cas.2d 1431, 21 Bankr.Ct.Dec. 581, Bankr. L. Rep. P 73,831 In the Matter of DELTA TOWERS, LTD., d/b/a Ramada Hotel Orleans, La., a Limited Partnership, Debtor. NEW ORLEANS PUBLIC SERVICE, INC., Appellee, Cross-Appellant, v. FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF WARNER ROBINS, GEORGIA, Appellant, Cross-Appellee.
• Court: United States Courts of Appeals. United States Court of Appeals (5th Circuit)

Page 74

924 F.2d 74

59 USLW 2574, 24 Collier Bankr.Cas.2d 1431,

21 Bankr.Ct.Dec. 581, Bankr. L. Rep. P 73,831

In the Matter of DELTA TOWERS, LTD., d/b/a Ramada Hotel

Orleans, La., a Limited Partnership, Debtor.

NEW ORLEANS PUBLIC SERVICE, INC., Appellee, Cross-Appellant, v. FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF WARNER ROBINS, GEORGIA, Appellant, Cross-Appellee.

No. 90-3341.

United States Court of Appeals, Fifth Circuit.

Feb. 15, 1991.

Sidney A. Cotlar, Herman, Herman, Katz & Cotlar, New Orleans, La., for appellant, cross-appellee.

Linton Carney, Gilbert L. Hamberg, Richard W. Bussoff, Monroe & Lemann, New Orleans, La., for appellee, cross-appellant.

Appeals from the United States District Court for the Eastern District of Louisiana.

Before JOHNSON, WILLIAMS and HIGGINBOTHAM, Circuit Judges.

JOHNSON, Circuit Judge:

New Orleans Public Service, Inc. ("NOPSI") instituted this adversary proceeding in the bankruptcy court to recover utility fees from a secured creditor of the debtor, Delta Towers, Ltd. ("Delta"). The bankruptcy court denied NOPSI the relief requested. On appeal, the district court reversed on the ground that 11 U.S.C. Sec. 506(c) permitted NOPSI to recover the fees as administrative expenses. For the reasons set forth below, this Court affirms in part and reverses in part the district court's judgment.

I. FACTS AND PROCEDURAL HISTORY

Delta was a limited partnership whose primary asset was a multi-story building located in New Orleans, Louisiana. Delta purchased the building in 1982, financing the purchase in part with a loan provided by First Federal Savings and Loan Association of Warner Robins, Georgia ("First Federal"). To secure the loan, First Federal received a collateral mortgage on the building. Delta eventually defaulted on the loan, and First Federal filed a petition to foreclose. Subsequently, Delta filed a Voluntary Petition under Chapter 11 of the Bankruptcy Code.

From 1983 until 1986, Delta used the building to operate a hotel. Throughout the years of Delta's operation, NOPSI provided gas and electric service to the hotel. Although the account was past due, NOPSI continued to provide utilities to the hotel after Delta filed for bankruptcy. The hotel ceased operations in November 1988, and NOPSI terminated services immediately thereafter.

Upon application by NOPSI, the bankruptcy court issued the following orders: (1) NOPSI would recover the amount of $406,131.51, representing utility services provided to the hotel from May 14, 1985, the day Delta filed bankruptcy, until July 31, 1986; (2) these post-petition expenses would be recognized as a priority administrative claim under 11 U.S.C. Secs. 503 and 507; and (3) NOPSI could obtain adequate assurance of payment in the form of a $150,000.00 security deposit pursuant to 11 U.S.C. Sec. 366. Despite the bankruptcy court's approval of NOPSI's application, NOPSI filed a complaint in the bankruptcy court on September 15, 1987. This complaint forms the basis of the instant appeal.

In the complaint, NOPSI asserted three claims in order to recover pre- and post-petition utility fees: (1) NOPSI requested that the bankruptcy court designate the post-petition utility charges as "administrative expenses" under 11 U.S.C. Sec. 506(c) to allow NOPSI to recover the charges from secured creditors or the collateral itself; (2) NOPSI sought to recover pre- and post-petition charges under the common fund doctrine; and (3) NOPSI sought to recover pre- and post-petition charges under certain provisions of the Louisiana Code of Civil Procedure. After an evidentiary trial, the bankruptcy court denied relief on all three claims. The bankruptcy court explained that the post-petition charges could not be construed as an administrative expense under Sec. 506(c) where NOPSI failed to prove that the services resulted in a quantifiable direct benefit to First Federal and NOPSI failed to obtain a security deposit as permitted under Sec. 366. NOPSI did not prevail under the common fund doctrine because the bankruptcy court determined that the theory was not significantly distinguishable from Sec. 506(c). Finally, the bankruptcy court abstained from deciding the state law claim, noting that a state court proceeding on the matter was still pending.

NOPSI appealed to the district court. The district court agreed with the bankruptcy court's decision denying recovery under the common fund doctrine and the Louisiana Code of Civil Procedure. However, the district court reversed on the denial of NOPSI's Sec. 506(c) claim, concluding that First Federal had benefitted from NOPSI's provision of utility services to the hotel and that the failure to obtain a security deposit did not preclude recovery under Sec. 506(c). 112 B.R. 811. Thus, the district court ordered that the case be remanded to the bankruptcy court for a determination of the amount of administrative expenses.

Both First Federal and NOPSI appealed the district court's judgment.

II. DISCUSSION

Findings of fact made by a bankruptcy court will not be set aside unless clearly erroneous. In other words, this Court will reverse only "when[,] although there is evidence to support it, the reviewing court on the entire evidence is left with a firm and definite conviction that a mistake has been committed." In re Missionary Baptist Foundation, Inc., 712 F.2d 206, 209 (5th Cir.1983) (quoting United States v. United States Gypsum Co., 333 U.S. 364, 395, 68 S.Ct. 525, 541, 92 L.Ed. 746 (1948)). Conclusions of law, conversely, are subject to plenary review on appeal. Id.

A. Section 506(c)

Generally, administrative expenses, such as the utility fees here, are satisfied out of the bankruptcy estate. In re Trim-X, Inc., 695 F.2d 296, 301 (7th Cir.1982). The Bankruptcy Code furnishes an exception to the general rule in Sec. 506(c), which provides that a "trustee may recover from property securing an allowed secured claim the reasonable, necessary costs and expenses of preserving, or disposing of, such property to the extent of any benefit to the holder of such claim." In order to charge a secured creditor with administrative expenses under Sec. 506(c), three elements must be shown: (1) the expenditure was necessary, (2) the amounts expended were reasonable, and (3) the creditor benefitted from the expenses. In re Trim-X, Inc., 695 F.2d at 299. The burden of demonstrating these elements is on the party seeking recovery. See In re Flagstaff Foodservice Corp., 739 F.2d 73, 77 (2d Cir.1984) ("Flagstaff I" ); Brookfield Production Credit Ass'n v. Borron, 738 F.2d 951, 952 (8th Cir.1984).

1. Standing

First Federal argues that NOPSI lacks standing to invoke Sec. 506(c) as that section provides that "the trustee" may recover from the collateral. Despite the seemingly unambiguous language, courts have allowed a claimant to use Sec. 506(c) if the trustee or debtor-in-possession refuses to pursue a claim of administrative expenses. See, e.g., In re McKeesport Steel Castings Co., 799 F.2d 91, 94 (3d Cir.1986); In re International Club Enterprises, Inc., 105 B.R. 190, 193 (Bkrtcy.D.R.I.1989); In re World Wines, Ltd., 77 B.R. 653, 658 n. 4 (Bkrtcy.N.D.Ill.1987); see also 3 Collier on Bankruptcy, p 506.06, at 506-58 n. 7a (15th ed. 1990) (asserting that the better position is to allow a claimant to recover the costs for its services under Sec. 506(c)). Contra In re Ramaker, 117 B.R. 959, 967 (Bkrtcy.N.D.Iowa 1990); In re Interstate Motor Freight System IMFS, Inc., 71 B.R. 741, 745 (Bkrtcy.W.D.Mich.1987). "A contrary position may result in a windfall benefit to the secured creditor to the detriment of a third party." In re So Good South Potato Chip Co., 116 B.R. 144, 146 (Bkrtcy.E.D.Mo.1990). This Court agrees with the position that the advantages of Sec. 506(c) are not limited to trustees. Thus, NOPSI has standing to use Sec. 506(c), considering that the bankruptcy court noted the debtor-in-possession's refusal to seek recovery of NOPSI's utility fees.

2. Direct Benefit

First Federal has stipulated that the utility expenses were necessary and reasonable. The only relevant issue, then, is the last element of the test regarding a benefit to the creditor. Courts have construed the benefit element as requiring that the claimant incur the expenses primarily for the benefit of the secured creditor and that the expenses resulted in a quantifiable direct benefit to the secured creditor. In re Cascade Hydraulics & Utility Service, Inc., 815 F.2d 546, 548 (9th Cir.1987); Brookfield Production, 738 F.2d at 952; In re Beker Industries Corp., 89 B.R. 336, 342 (S.D.N.Y.1988). Indirect or speculative benefits are insufficient. In re Flagstaff Foodservice Corp., 762 F.2d 10, 12 (2d Cir.1985) ("Flagstaff II" ). At the same time, expenses which benefit the debtor or other creditors rather than the secured creditor himself are immaterial. Flagstaff I, 739 F.2d at 76.

The bankruptcy court found that NOPSI had not shown a quantifiable direct benefit to First Federal. While the utilities served to benefit the operation of the hotel, there was no separate preservation of the building or the movables within. Significantly, First Federal was simply the holder of a security interest in the building and the movables, but had no interest in the operation. The bankruptcy court asserted that any incidental effect that the utilities had on maintaining the building and movables amounted merely to an indirect benefit to First Federal.

On appeal, the district court reversed the bankruptcy court's finding of no direct benefit to First Federal. The district court explained that "the bankruptcy court's interpretation of benefit was too strict in light of analogous case law." The district court cited two cases to support its construction of analogous case law--In re Kotter, 59 B.R. 266 (Bkrtcy.C.D.Ill.1986), and In re McKeesport, 799 F.2d 91 (3d Cir.1986). Despite the district court's assertion, the bankruptcy court's analysis is not erroneous in...