In re Delta Towers, Ltd., Civ. A. No. 89-4089
| Decision Date | 20 March 1990 |
| Docket Number | Adv. No. 87-0300.,Bankruptcy No. 85-01081-B,Civ. A. No. 89-4089 |
| Citation | 112 BR 811 |
| Court | U.S. District Court — Eastern District of Louisiana |
| Parties | In re DELTA TOWERS, LTD. d/b/a Ramada Hotel, New Orleans, La., A Limited Partnership, Debtor. NEW ORLEANS PUBLIC SERVICE INC., Plaintiff, v. DELTA TOWERS, LTD., et al., Defendants. |
Richard W. Bussoff, Gilbert Lee Hamberg, William Malcolm Stevenson, Monroe & Lemann, New Orleans, La., for New Orleans Public Service Inc.
Sidney A. Cotlar, Herman, Herman, Katz & Cotlar, New Orleans, La., for First Fed. Sav. & Loan.
Robert J. Burvant, Nesser, King & LeBlanc, New Orleans, La., for Borg-Warner Acceptance Corp. and David R. Vaughan.
Rudy J. Cerone, McGlinchey, Stafford, Mintz, Cellini & Lang, P.C., New Orleans, La., for David R. Burrus and Darryl D. Berger.
Tod M. Thedy, New Orleans, La., for Paul R. Valteau, Jr.
Philip Kirkpatrick Jones, Jr., Liskow & Lewis, New Orleans, La., for Delta Towers Ltd.
MINUTE ENTRY
Before the Court is the appeal of New Orleans Public Service Inc. ("NOPSI") from the bankruptcy court's order denying NOPSI's application for post-petition utility charges from the secured creditors of the debtor, Delta Towers, Ltd., ("debtor") under 11 U.S.C. § 506(c).
This court has jurisdiction over the appeal pursuant to 28 U.S.C. § 158(a).1 The bankruptcy court's findings of fact are accorded deference from this Court and will be overturned only if clearly erroneous. Bankruptcy Rule 8013. Questions of law are reviewed de novo. In re Daniels Head & Associates, 819 F.2d 914 (9th Cir.1987).
The debtor is a limited partnership which has as its prime asset a multi-story building located at the corner of South Claiborne Avenue and Canal Street in New Orleans, Louisiana. From 1983 until August 1986, the debtor operated a hotel on this property. During this time, the debtor was a utility customer of NOPSI.
Defendants Darryl Berger and David R. Burrus ("Berger and Burrus") were the owners of the building in question until November 1981, when they conveyed it to the debtor. Berger and Burrus received promissory notes, secured by a mortgage on the hotel property and the movable property of the hotel, for part of the purchase price. In August 1982, First Federal of Warner Robins, Georgia ("First Federal") loaned money to the debtor to finance the acquisition and operation of the hotel which was secured by a collateral mortgage on the property. Borg-Warner Acceptance Corp. ("Borg-Warner") also loaned the debtor money to acquire equipment for the hotel and received a mortgage on the hotel property as well as a chattel mortgage on the equipment.
Debtor ultimately defaulted on all of these loans. On September 18, 1984, First Federal filed a Petition for Executory Process in state court to foreclose on its mortgage. Eventually all other secured creditors intervened to obtain ranking of their respective claims. On September 19, 1984 and September 9, 1985, the Civil Sheriff for Orleans Parish executed Writs of Seizure against the property. On May 14, 1985, the debtor filed a Voluntary Petition under Chapter 11 of the Bankruptcy Code. The hotel ceased operating and was closed in November, 1988.
NOPSI provided utility service to the debtor for the hotel property from May 14, 1985 to July 31, 1986. On August 18, 1986, NOPSI filed an Application for Recovery of Administrative Expenses, Determination of Amount of Security Deposit Required and an Order Requiring Prompt Payment in Full for Utility Service ("Order Requiring Payment"). This Application asked for recognition of post-petition expenses as a priority administrative claim under 11 U.S.C. §§ 503 and 507. In addition, NOPSI asked for a security deposit of $150,000.00 as provided for by 11 U.S.C. § 366 ("§ 366") as adequate assurance of payment. By Order of the bankruptcy court on October 6, 1986, this Application was approved. NOPSI subsequently applied for recognition of further charges as priority administrative expenses. On November 4, 1987, the bankruptcy court supplemented its Order Requiring Payment and accorded NOPSI priority payment for service provided for the period from May 14, 1985 until July 31, 1986, after the bankruptcy petition was filed, in the amount of $406,131.51. Until the August 1986 application, NOPSI had taken no steps to obtain or secure payment for the utility services it provided.
This matter came before the bankruptcy court on a complaint filed by NOPSI on September 15, 1987. NOPSI sought recovery of not only fees for services provided post-petition, but also for pre-petition service provided from September 19, 1984 to May 13, 1985. It asserted three claims in its complaint. First, it sought to recover post-petition utility charges from the secured creditors of the debtor or from their collateral, under the authority of 11 U.S.C. § 506(c)2 ("§ 506(c)"). These post-petition utility charges from May 14, 1985 to July 31, 1986 amounted to $406,131.51.
NOPSI also asserted that it was entitled to payment for both pre and post-petition service under an independent federal equity theory.3 It argued that as a matter of equity, the preservation costs for the property in litigation, in this instance utility expenses, should be given priority over other liens.
Finally, NOPSI claimed it was entitled to payment for both pre and post-petition services under an independent state law claim. It argued that pursuant to Louisiana Code of Civil Procedure Articles 326-34 and 2371-81, it was entitled to the recovery of utility expenses from any sale of the property by the Civil Sheriff of Orleans Parish.
A trial was held on this matter on March 16, 1989 in the bankruptcy court. The bankruptcy judge limited the trial solely to evidence regarding whether the secured creditors and/or their collateral benefited from the utility service provided. The bankruptcy court, on July 20, 1989, issued its Findings of Fact, Conclusions of Law, and Order denying recovery under all three theories. That court denied relief under § 506(c) because NOPSI had not proven that its utility services had preserved the going concern value of the property. The court held that expenses producing indirect benefits are not recoverable under § 506(c) and the evidence submitted indicated only indirect, not direct, benefits to the collateral.
The court pointed out that § 366 specifically affords a utility company such as NOPSI the opportunity to obtain adequate assurance of payment by way of a security deposit. Evidence presented to the court indicated that during the time the debtor was not paying its utility bills, NOPSI did not seek a security deposit from the debtor or the general partners of the debtor, did not contact the secured creditors for guarantees of payment and did not seek payment from the secured creditors at that time. Because NOPSI failed to take advantage of the opportunities available to it under § 366, the court would not now allow NOPSI to make up for these failures by recovering from the secured creditors without their consent or cooperation.
The bankruptcy court also denied recovery under a independent federal equity theory, the common fund theory, holding that this theory was not significantly distinguishable from the provisions of § 506(c). The court concluded that the equitable elements embodied in the common fund theory were codified by Congress in § 506(c). Since the court had previously determined that the utility expenses were not necessary for the preservation of the property involved in the litigation, NOPSI could not recover under the independent equity claim any more than it could under § 506(c).
Finally, the bankruptcy court abstained pursuant to 28 U.S.C. § 1334(c)(1)4 from determining NOPSI's independent state law claim. The court noted that at the time of its judgment, an action was still pending in Louisiana state court concerning, inter alia, the ranking of the various liens on the debtor's property. It held that any matter related to the disposition of the proceeds from the potential sale of the property was highly dependant upon the results of the state court proceeding. Therefore, since the theory by which NOPSI sought relief was purely a matter of state law, the court abstained from deciding it in the interest of justice and comity.
11 U.S.C. § 503(b)(1)(A) defines administrative expenses as including "the actual, necessary costs and expenses of preserving the estate, including wages, salaries, or commissions for services rendered after commencement of the case." These expenses are accorded priority of payment under 11 U.S.C. § 507(a).5
Generally, administrative expenses must be charged to the bankruptcy estate and not to equity or assets belonging to secured creditors. This is because the bankruptcy estate's trustee or debtor-in-possession acts for the interests of the general, and not the secured, creditors. In re Trim-X, Inc., 695 F.2d 296, 301 (7th Cir. 1982); In re Combined Crofts Corporation, 54 B.R. 294, 297 (Bankr.W.D.Wis. 1985).
An exception to this rule, codified in § 506(c), provides that a secured creditor will be liable for such expenses if they were incurred to preserve or dispose of the property securing the creditor's interest and if the creditor benefited from the expenditure. Section 506(c) states: "the bankruptcy 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." Courts interpreting this section have held that recovery is not limited to the trustee or debtor-in-possession, but extends to parties who incurred expenses preserving or benefiting the property. In re Kotter, 59 B.R. 266 (Bankr.C. D.Ill.1986); In re McKeesport, 799 F.2d 91 (3d Cir.1986).6
In order for a secured creditor to be charged with expenses under § 506(c), a...
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