K & L Lakeland, Inc., In re

• Decision Date: 22 October 1997
• Docket Number: 96-1531,Nos. 96-1431,s. 96-1431
• Citation: 128 F.3d 203
• Parties: 38 Collier Bankr.Cas.2d 1490, 31 Bankr.Ct.Dec. 800, Bankr. L. Rep. P 77,540 In re K & L LAKELAND, INCORPORATED, d/b/a JKJ Chevrolet Sterling, Debtor. LOUDOUN LEASING DEVELOPMENT COMPANY, Plaintiff-Appellee, Richard G. Hall, Trustee-Appellee, v. FORD MOTOR CREDIT COMPANY, Defendant-Appellant. In re K & L LAKELAND, INCORPORATED, d/b/a JKJ Chevrolet Sterling, Debtor. LOUDOUN LEASING DEVELOPMENT COMPANY, Plaintiff-Appellant, v. FORD MOTOR CREDIT COMPANY, Defendant-Appellee, Richard G. Hall, Trustee-Appellee.
• Court: U.S. Court of Appeals — Fourth Circuit

Page 203

128 F.3d 203

38 Collier Bankr.Cas.2d 1490, 31 Bankr.Ct.Dec. 800,

Bankr. L. Rep. P 77,540

In re K & L LAKELAND, INCORPORATED, d/b/a JKJ Chevrolet

Sterling, Debtor.

LOUDOUN LEASING DEVELOPMENT COMPANY, Plaintiff-Appellee, Richard G. Hall, Trustee-Appellee, v. FORD MOTOR CREDIT COMPANY, Defendant-Appellant.

In re K & L LAKELAND, INCORPORATED, d/b/a JKJ Chevrolet

Sterling, Debtor.

LOUDOUN LEASING DEVELOPMENT COMPANY, Plaintiff-Appellant, v. FORD MOTOR CREDIT COMPANY, Defendant-Appellee, Richard G. Hall, Trustee-Appellee.

Nos. 96-1431, 96-1531.

United States Court of Appeals Fourth Circuit.

Argued Jan. 28, 1997.

Decided Oct. 22, 1997.

ARGUED: George Richard Pitts, Dickstein, Shapiro & Morin, L.L.P., Washington, DC, for Appellant. Robert Glenn Mayer, Mayer & Scanlan, P.C., Fairfax, VA, for Appellee Loudoun Leasing; Bruce Wayne Henry, Henry & Henry, P.C., Fairfax, VA, for Appellee Hall. ON BRIEF: Guy S. Neal, Dickstein, Shapiro & Morin, L.L.P., Washington, DC, for Appellant. Donna H. Henry, Dominique V. Sinesi, Henry & Henry, P.C., Fairfax, VA, for Appellee Hall.

Before ERVIN and HAMILTON, Circuit Judges, and PHILLIPS, Senior Circuit Judge.

No. 96-1431 reversed and No. 96-1531 affirmed by published opinion. Judge ERVIN wrote the opinion, in which Judge HAMILTON and Senior Judge PHILLIPS joined as to parts I, II, and III. Senior Judge PHILLIPS wrote an opinion concurring as to the result in part IV. Judge HAMILTON wrote a dissenting opinion as to part IV.

OPINION

ERVIN, Circuit Judge.

This matter arises from the underlying bankruptcy of Debtor K & L Lakeland (K & L), an automobile dealership. K & L had a lease agreement for its car lot with Appellee/Cross-Appellant Loudoun Leasing Development Company (Loudoun), an entity controlled by the same persons behind K & L. Appellant/Cross-Appellee Ford Motor Credit (Ford Credit) provided floorplan financing to K & L, and, in exchange, possessed a perfected security interest in virtually all of K & L's assets. No rent was paid on the premises postpetition. In No. 96-1431, Ford Credit appeals the judgment surcharging it for that postpetition rent under 11 U.S.C. § 506(c). In this appeal, we reverse the district court's order affirming the bankruptcy court's opinion and order. In No. 96-1531, Loudoun cross-appeals its dismissal as the claimant upon the substitution of Trustee-Appellee/Cross-Appellee Richard G. Hall. In this cross-appeal, we affirm the district court's order affirming the bankruptcy court's opinion and order.

I.

K & L, the debtor in the underlying bankruptcy proceeding, was one of several automobile dealerships in Northern Virginia controlled by John W. Koons, Jr. K & L's business operated on a six-acre tract in Sterling, Virginia, owned by Loudoun, a partnership comprised of Koons and Ralph G. Louk, the "K" and "L" of K & L. Louk held bare legal title to the land as trustee for Loudoun. In October 1989, K & L and Louk entered into a lease agreement for $50,000/month for the premises at issue here. K & L subleased a portion to another Koons dealership, Saturn of Sterling.

Ford Credit provided K & L with floorplan financing in March 1991, and, in exchange, took back first-priority security interests in virtually all of K & L's assets, including its vehicle inventory, parts inventory, accounts receivable, furniture, fixtures, equipment, contract rights, general intangibles, and proceeds of the foregoing. On October 22, 1991, K & L filed for Chapter 11 bankruptcy. Because Ford Credit's liens encumbered nearly all the debtor's assets, K & L and Ford Credit entered into three consent orders that authorized and regulated K & L's use of cash collateral.

Although K & L continued to operate its business postpetition, it paid no rent to either Loudoun or Louk. In addition, K & L, as debtor-in-possession, took no steps to assume the lease agreement, and ultimately the statutory period fixed for assuming or rejecting the lease expired. As the bankruptcy court noted, the lease was thus rejected by operation of 11 U.S.C. § 365(d)(4). See In re K & L Lakeland, Inc., 185 B.R. 20, 21 (Bankr.E.D.Va.1995). Although § 365(d)(4) instructs a debtor-in-possession to surrender the leasehold premises upon rejection, K & L continued to use Loudoun's property without paying rent. Moreover, neither Loudoun nor Louk initiated any action to regain possession.

In March 1992, Loudoun sought the allowance of an administrative claim for the unpaid postpetition rent. Since Ford Credit's liens encumbered virtually all the assets, Loudoun moved to collect the rent from Ford Credit's collateral pursuant to 11 U.S.C. § 506(c). Shortly thereafter, the debtor's attempted reorganization failed, and on April 7, 1992, K & L ceased all business operations. Ford Credit obtained relief from the stay and began liquidating the assets. In July 1992, the debtor's case was converted to Chapter 7, and Trustee Hall was appointed to administer the estate.

In the meantime, another Koons dealership, JKJ Chevrolet, Inc., had filed for bankruptcy, and a creditor in that case, Reynolds & Reynolds Company (Reynolds), was pursuing its own § 506(c) action against Ford Credit. The bankruptcy court heard the motions of both Loudoun and Reynolds in one consolidated, two-day trial in August 1992. The bankruptcy court determined as an initial matter that these administrative claimants had standing to pursue a § 506(c) cause of action. As a result, the trustee in this case, Hall, withdrew his appearance and took no part in the evidentiary hearing that followed. The bankruptcy court subsequently granted Loudoun's request for an administrative expense claim in the amount of $166,079.23 and permitted Loudoun to surcharge Ford Credit under § 506(c) to recover this amount. Reynolds was also permitted to surcharge Ford Credit to satisfy its claim.

Ford Credit immediately appealed the decision involving Reynolds. Ultimately, we ruled that the plain terms of § 506(c) granted only trustees and debtors-in-possession, not administrative creditors, a right of action against a secured creditor's collateral. See In re JKJ Chevrolet, Inc., 26 F.3d 481 (4th Cir.1994). After JKJ Chevrolet, Loudoun moved to join the trustee as a § 506(c) claimant in Ford Credit's motion to alter or amend the judgment in favor of Loudoun, which had been held in abeyance pending the resolution of the Reynolds litigation. The bankruptcy court granted Loudoun's motion in December 1994 and subsequently issued an opinion on Ford Credit's motion on August 15, 1995.

In its opinion, the bankruptcy court first substituted Hall, the Chapter 7 trustee, for Loudoun and dropped Loudoun as a § 506(c) claimant. K & L Lakeland, 185 B.R. at 23. It then ordered Ford Credit to pay the administrative expense award of $166,079.23 to Trustee Hall, instead of Loudoun. The bankruptcy court rejected Ford Credit's argument that there must be an actual expenditure before the estate may reimburse itself under § 506(c). Id. at 24. Instead, the bankruptcy court determined that "the non-payment of rent represents an unsecured, postpetition loan from the landlord," a" 'loan' [that] is quantifiable insofar as we fixed the amount of Loudoun's claim at $166,079." Id. (emphasis in original). The court was particularly concerned that Ford Credit's argument

would ignore situations in which the estate relies on credit to cover the costs of preserving or disposing of the secured party's collateral. In other words, secured creditors could elude § 506(c) claims, and thus receive a windfall, simply because the estate decided to use credit instead of cash. Such an outcome is absurd and would thwart the statute's obvious purpose. Accordingly, we hold that the unpaid, postpetition rent falls within the realm of "costs and expenses" that are recoverable under § 506(c).

Id.

The district court affirmed both holdings of the bankruptcy court. It found that the trustee was appropriately substituted since, after JKJ Chevrolet, Loudoun could not possess standing itself. J.A. at 181. As for the surcharge of Ford Credit being paid to the trustee, the court stated:

[T]he reasoning as recited by the Bankruptcy Judge's careful and thorough memorandum opinion reveals ample evidence of the reasonableness and necessity of the efforts taken to protect and preserve assets which constituted collateral for the secured claims of Ford Credit. It is clear that there was a benefit to Ford Credit in the continued operation of the bankrupt business. That the continued operation may have incidentally made the property more attractive to subsequent prospective purchasers does not detract from the benefit that accrued to Ford Credit. The court rejects the argument that there must be an actual expenditure by the trustee or debtor-in-possession to recover under 11 U.S.C. § 506(c). The estate is still liable for the unpaid rent, and ought not be penalized because it is too impecunious to pay the amount outstanding.

J.A. at 181-82.

As noted above, in No. 96-1431, Ford Credit appeals the surcharge. In No. 96-1531, Loudoun appeals its dismissal as administrative creditor following the substitution of the trustee as § 506(c) claimant.

II.

In both appeals, the matters essentially arise from Ford Credit being surcharged for administrative rent under § 506(c) of the Bankruptcy Code, 11 U.S.C. The United States Bankruptcy Court for the Eastern District of Virginia exercised jurisdiction pursuant to 28 U.S.C. §§ 151, 157. The district court possessed jurisdiction to hear the initial appeals under 28 U.S.C. § 158(a). We possess appellate jurisdiction under 28 U.S.C. § 158(d).

Because in this case the district court sat as an appellate court in bankruptcy, our review of the district court's decision is plenary. In re Stanley, 66 F.3d 664, 667 (4th Cir.1995); In re Varat Enters., Inc., 81 F.3d 1310, 1314 (4th Cir.1996). We review the bankruptcy court's factual findings for clear error, while we review questions of...