In re AFCO Enterprises, Inc.
| Decision Date | 16 November 1983 |
| Docket Number | Bankruptcy No. 82C-00577 to 82C-00579,82C-01411. |
| Citation | 35 BR 512 |
| Parties | In re AFCO ENTERPRISES, INC., Debtor. In re AFCO DEVELOPMENT CORPORATION, Debtor. In re AFCO INVESTMENT CORPORATION, Debtor. In re AFCO LEASING CORPORATION, Debtor. |
| Court | U.S. Bankruptcy Court — District of Utah |
Randy L. Dryer and Lawrence E. Stevens of Parsons, Behle & Latimer, Salt Lake City, Utah, for the trustee.
Edward M. Garrett and Thomas C. Sturdy of Garrett & Sturdy, Salt Lake City, Utah, for Deseret Federal Sav. and Loan Ass'n.
The trustee in the above-entitled cases requests an award of his costs and expenses incurred in connection with the largest asset of the consolidated estates, a resort complex located in Cache County, Utah known as Sherwood Hills. The trustee seeks payment from the first lienholder on the property, Deseret Federal Savings & Loan, (Deseret Federal) which has previously been permitted to foreclose its lien and sell the property. The trustee relies upon 11 U.S.C. § 506(c) as the statutory authority for his request. Section 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.
Debtors filed Chapter 11 petitions on March 18, 1982. On March 31, 1982, Deseret Federal joined the motion of two other creditors seeking the appointment of a trustee. On April 20, 1982, the court appointed Frank K. Stuart as trustee. He immediately assumed the management of the debtors' estates, including the Sherwood Hills resort. Because there were virtually no liquid assets in the estates, the trustee and Deseret Federal negotiated an agreement whereby Deseret Federal would advance additional funds to the trustee to cover the operating deficits of Sherwood Hills. Deseret Federal was granted a superpriority lien for any such funds expended as provided by § 364(d)(1).
The trustee operated the resort until February 10, 1983, when Deseret Federal, after having obtained relief from the automatic stay, exercised its power of sale under the trust deed and sold the property to itself.
During the trustee's ten month administration of Sherwood Hills, he maintained the resort as an ongoing business. The trustee, his accountants, attorneys, and other agents performed the following activities: operating, repairing and managing the facility, advertising and marketing the property for sale, preparing budgets and financial forecasts, evaluating contracts and leases affecting the property, and negotiating with Deseret Federal and other creditors. Costs and expenses requested by the trustee total $240,736.35. There are no assets in the estate with which to pay administrative expenses.
At the time of the filing of debtors' petitions, the debtors owed Deseret Federal $4,156,847.00. Since the filing, contractual interest has accrued in the amount of $1,364,652.00. In addition, Deseret Federal advanced $140,763.00 to cover operating deficits. There were also numerous junior liens, tax liens and other encumbrances. Deseret Federal's hired appraisal of the value of the property on April 22, 1982 was $5,000,000.00. The parties stipulated that the same appraiser would testify that the fair market value of the property in February of 1983 was $4,125,000.00.1
Deseret Federal contends that because the net equity in the property has decreased, the trustee is not entitled to an award of costs and expenses. As support for this argument, Deseret Federal cites the House and Senate Reports which state:
506(c) codifies current law by permitting the trustee to recover from property whose value is greater than the sum of the claims secured by a lien on that property that reasonable, necessary costs and expenses of preserving, or disposing of, the property. The recovery is limited to the extent of any benefit to the holder of such claim.
House Report No. 95-595, 95th Cong., 1st Sess. 357 (1977); Senate Report No. 95-989, 95th Cong., 2d Session 68 (1978), U.S.Code Cong. & Admin.News 1978, pp. 5787, 5854, 6313.
This statement appears to lend support to Deseret Federal's position that the trustee can recover only where the value of the property exceeds the total amount of the encumbrances against the property. However, other legislative statements indicate a contrary conclusion.
Any time the trustee or debtor in possession expends money to provide for the reasonable and necessary cost and expenses of preserving . . . a secured creditor\'s collateral, the trustee or debtor in possession is entitled to recover such expenses from the secured party or from the property securing an allowed secured claim held by such party.
124 Cong.Rec. H 11,095 (Sept. 28, 1978); 124 Cong.Rec. S 17,411 (Oct. 6, 1978).
Further, the language of the statute imposes no requirement of equity in the secured property. By contrast, § 506(b) specifically limits recovery of contractual costs and expenses to the "extent that an allowed secured claim is secured by property the value of which . . . is greater than the amount of such claim." Congress' omission of similarly restrictive language in § 506(c) strongly suggests that the relationship between the value of the property and the amount of secured claims is not a controlling consideration in awarding the trustee's costs and expenses.2 When legislative statements contradict statutory language, the express terms of the statute must prevail. The court concludes that the relative values of the collateral and the secured claims are not determinative in deciding the applicability of § 506(c). Accord, In re Trim-X, Inc., 695 F.2d 296 (7th Cir.1982).
Having determined that § 506(c) may apply where there is no equity in the property, the court must analyze the three requirements set forth in the statute. First, the costs and expenses must have been reasonable and necessary; second, the costs and expenses must have been incurred for the purposes of preserving or disposing of the secured property; and third, any recovery for costs and expenses is limited to the extent of the benefit to the holder of the secured claim.
Legislative history states that § 506(c) "codifies current law."3 However, the case law concerning assessment of costs and expenses of administration to secured creditors has been less than clear. As stated by one commentator:
Hardly any phase of the bankruptcy law has been plagued with so many inconsistent generalities; irreconcilable rules and principles, disagreements between circuits and even within circuits (apparently without any awareness thereof) and loose, indiscriminate statement of rules and citations of authority.4
The courts have relied upon various theories in determining whether to assess costs and expenses. One theory looks to the proceeds from the sale of secured property. If the proceeds are in excess of the amount of secured indebtedness, the surplus is first applied to pay the trustee's costs and expenses. This approach recognizes that if the trustee elects to sell the collateral to obtain the equity for general creditors, then the general creditors receive the benefit of the trustee's efforts and they should bear the trustee's costs and expenses. The trustee runs the risk, by choosing to sell secured property rather than abandon it, that the purchase price may not exceed the amount of the secured debt. In such a case, the trustee's costs and expenses incurred in disposing of the property would not be paid.
Some courts have applied a "state foreclosure theory" which is based upon the premise that a secured creditor is an unwilling participant in the bankruptcy proceeding. When the trustee sells secured property, the only benefit to the secured creditor is the amount he would have expended in a state court forum pursuing a foreclosure action. Accordingly, the courts limit the recovery from the secured creditor to the actual costs of foreclosing the property.
The consent of the secured creditor has been viewed by many courts as the controlling factor in assessing costs and expenses. Under the consent theory, a secured creditor may be liable for costs of sale, preservation and protection of the collateral, and administrative expenses. The rationale of the theory is that if the creditor willingly seeks the aid of the bankruptcy court, he has agreed to the payment of costs and expenses thereby incurred.
The final theory relied upon by the courts is based upon the benefit realized by the secured creditor as a result of the bankruptcy proceeding. While, as a general rule, secured creditors should not be charged with the expenses of administration, the courts have carved out an exception based upon the equitable doctrine of unjust enrichment. When the secured creditor is the only entity which is benefited by the trustee's work, it should be the one to bear the expense. It would be unfair to require the estate to pay such costs where there is no corresponding benefit to unsecured creditors.5
Congress determined that the trustee's recovery should be based upon the benefit to the secured creditor, incorporating this language into § 506(c). This factor, benefit to the holder of the secured claim, is the linchpin in an award under § 506(c).
A trustee may expend time, money and effort to preserve or dispose of secured property and thereby incur costs and expenses which are reasonable and necessary, but unless there is some demonstrated benefit to the creditor, the trustee will recover nothing.
Deseret Federal argues that because the property's fair market value decreased while the secured indebtedness increased, there was no benefit to Deseret Federal. The trustee, on the other hand, contends that the benefit to Deseret Federal was the preservation of the property's value as a going concern and the resulting opportunity to sell it as a going concern.
The court rejects Deseret...
To continue reading
Request your trial
-
In re Shelton, Bankruptcy No. 83-00310-R.
... ... See, State Highway and Transportation Commissioner v. The Edwards Co., Inc., 220 Va. 90, 255 S.E.2d 500 (1979); Transcontinental Gas P.L. Corp. v. Prince William Co., 210 Va ... ...