Foremost Mfg. Co., In re
| Decision Date | 06 March 1998 |
| Docket Number | No. 96-2535,96-2535 |
| Citation | 137 F.3d 919 |
| Parties | Bankr. L. Rep. P 77,646 In re FOREMOST MANUFACTURING COMPANY, Debtor, ARCHITECTURAL BUILDING COMPONENTS, Appellee, v. Homer McCLARTY, Trustee, Appellant. |
| Court | U.S. Court of Appeals — Sixth Circuit |
Robert A. Peurach (argued and briefed), Fitzgerald & Dakmak, Detroit, MI, for Appellee.
Mark H. Shapiro (argued and briefed), Steinberg & Shapiro, Southfield, MI, for Appellant.
Before: MERRITT, KENNEDY, and BOGGS, Circuit Judges.
Bankruptcy trustee Homer McClarty appeals from the decision of the district court, which had reversed the assessment by the bankruptcy court of a surcharge against Architectural Building Components (ABC). We affirm.
In 1989, ABC (a sub-sub-contractor) bid successfully to Walcon Corporation (a sub-contractor) for the manufacture and delivery of louvers for a building project in Philadelphia. The general contractor for the project was H.C. Beck (HCB).
A dispute arose between HCB and Walcon regarding the sufficiency of the louvers after they were delivered and installed by another subcontractor. The proprietor of the project did not pay HCB, HCB did not pay Walcon, and Walcon did not pay ABC.
Walcon filed for Chapter 11 bankruptcy in 1990, and the next year ABC asserted an "unsecured" claim against it for the $54,250 contract price it claimed it was owed. It amended this claim in early 1992 to claim "priority" status. Walcon initially objected to the claim of priority status but withdrew the objection in 1992, and the court allowed the proof of claim, though without defining its status as "unsecured" or "priority." As part of Walcon's Chapter 11 re-organization, Foremost Manufacturing, Walcon's parent company, received a secured interest in Walcon's accounts receivable.
The present case began in November 1993, when an involuntary Chapter 7 petition was filed against Foremost. Foremost did not file an answer to the petition; an Order for Relief was filed against it and Homer McClarty was appointed trustee.
In June 1994, ABC filed a proof of claim in this bankruptcy proceeding, alleging a "secured" claim and referencing the claim accepted in the Walcon bankruptcy proceedings. ABC explained that the secured status was based on Michigan's "Building Contract Fund Act." That law, more commonly known as the Builders' Trust Fund Act, dictates that
In the building construction industry, the building contract fund paid by any person to a contractor, or by such person or contractor to a subcontractor, shall be considered by this act to be a trust fund, for the benefit of the person making the payment, contractors, laborers, subcontractors or materialmen, and the contractor or subcontractor shall be considered the trustee of all funds so paid to him for building construction purposes.
M.C.L.A. § 570.151.
Foremost's main creditor appears to have been Michigan National Bank. At the time of the filing of the involuntary petition, the bank held a secured interest in all of Foremost's real and personal property and most of its assets, including its accounts receivable. After the Order for Relief was entered, the bank struck a deal with McClarty regarding the accounts on which it had been unable to collect, including the HCB account. Under the arrangement, finalized in April 1994, McClarty hired special counsel to collect on the accounts. The proceeds of this collector's efforts would then be split in even thirds between the bank, the collector, and the general fund for Foremost's other creditors.
ABC's counsel asked to be chosen to pursue the HCB account, but McClarty instead decided to hire Gerald Richter, who was already familiar with Foremost and its accounts receivable. Under the arrangement, McClarty agreed to pay a one-third contingent fee to Richter's firm
out of any amount received, recovered or obtained for the [estate] or on behalf of the [estate] for the benefit of one of the [estate's] subcontractors or suppliers for the [Philadelphia] Project, either by final judgment or by any compromise or voluntary settlement.
Richter eventually reached an agreement with HCB. He claimed that the negotiations were complicated by ABC's aggressive actions, which necessitated doing research and convincing HCB it would not have to pay twice, to both Foremost and ABC. Nevertheless, HCB was ready to settle. It had won a partial award in arbitration from the proprietor of the project. With the problem over the louvers resolved, HCB proposed to pay over the appropriate amount to McClarty.
Accordingly, McClarty filed a Motion to Settle and Compromise Foremost's claim against HCB, seeking the bankruptcy court's approval of the $65,000 settlement. McClarty's motion mentioned that he was aware that "a certain supplier of materials to Walcon Corporation [i.e. ABC] ha[d] asserted a lien." ABC objected to the proposed settlement, claiming that the $54,250 it was owed belonged to it, not the bankruptcy estate. Once again, the basis of ABC's claim was that the money was subject to a statutory trust pursuant to the Michigan Builders' Trust Fund Act.
In September 1994, the bankruptcy court approved the HCB settlement, with the condition that the money be placed in escrow pending resolution of ABC's claim. Both ABC and McClarty filed briefs and in October 1995 the court decided in favor of ABC. Significantly, the court said that "the funds are not property of the estate and the Trustee has no power over them pursuant to [11 U.S.C.] § 544." There were no appeals.
McClarty filed a Motion for Surcharge against ABC on October 31, 1995, pursuant to 11 U.S.C. § 506(c). He asked for $18,065.25 (his version of one-third of $54,250) from ABC to compensate Richter for his efforts, since, after all, Richter's efforts had made it possible for ABC to get its money. For his part, Richter filed an application, pursuant to 11 U.S.C. § 330, seeking a $21,667 fee from the estate, which was one-third of the $65,000 collected from HCB. If ABC were to be assessed a pro rata share of this fee, it would have owed $18,083.33.
ABC objected. It argued that the court had given it the money precisely because it did not belong to the estate, and it maintained that its claim was not secured. Since § 506(c) required both of these elements and neither element was present, ABC argued, it should not be subject to a surcharge.
The bankruptcy court determined in January 1996 that the imposition of some surcharge against ABC was appropriate. The question then became how much was appropriate, given ABC's argument that, by any account, Richter would get much more money than he would have at an hourly rate. In March, the court allowed Richter the full $21,667, to be paid by the estate.
Without a contribution by ABC, McClarty would have had to pay out $10,917 more than he had taken in ($21,667 to Richter and $54,250 to ABC, but only $65,000 from HCB). One week later, the court calculated that ABC was liable for $10,833, or just under one half of the total fee to Richter, leaving McClarty only $84 in the red for his efforts.
The bankruptcy court based its determination of ABC's liability on an expansive interpretation of 11 U.S.C. § 506(c). On its face, § 506(c) applies only to secured creditors (which the court held ABC was not) and their claims against property of the estate (which the court held ABC's money was not). But, the court held, the position of ABC was analogous to that of a secured creditor, and so applying § 506(c) was appropriate. The court also rested its decision on the independent statutory basis of § 105(a) of the Bankruptcy Code, noting that ABC would not have gotten any money but for the settlement between HCB and the estate, and using the court's broad powers under § 105 to apply the equitable "common fund" doctrine.
ABC argued that Richter had spent some of his time convincing HCB that ABC's claim would fail, and it would be unfair for ABC to fund those efforts, but the court disagreed, pointing out that Richter was working on a contingency basis, making it irrelevant how he spent any particular hours. The court acknowledged that ABC was not a party to the determination of Richter's contingency fee, and it noted that McClarty and Richter knew going into the HCB negotiations that ABC might have a valid claim, but the court felt that it had to balance these considerations against the "necessity of requiring ABC to pay a reasonable sum."
As to the calculation of this reasonable sum, the court noted that the $10,833 it ordered ABC to pay, plus the $9,765 (18%) ABC owed its own lawyer for his efforts to collect the HCB debt, totaled 38% of its total recovery, which was "not at material variance from ... a reasonable contingent fee."
ABC appealed to the district court, which, ruling on the pleadings, reversed the bankruptcy court. The district court reasoned that § 506(c) is unambiguous and should be construed according to its terms, and that the bankruptcy court had exceeded its equitable powers. ABC thus owed nothing to the estate, which still had to pay Richter in full.
McClarty filed this timely appeal.
The only issue presented on appeal is whether the bankruptcy court was authorized to impose this surcharge. We conclude that it was not.
The bankruptcy court claimed authority to impose this surcharge under 11 U.S.C. § 506(c) () and § 105(a) ().
11 U.S.C. § 506(c) states:
The 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.
Section 506 itself is entitled "Determination of secured status," and its other subsections deal with that question. 11 U.S.C. § 506.
The purpose of the section, which was taken from common law, has been explained as follows:
The...
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