Parque Forestal, Inc., In re, No. 90-2174
| Decision Date | 03 April 1991 |
| Docket Number | No. 90-2174 |
| Citation | 949 F.2d 504 |
| Parties | , 60 USLW 2385, 25 Collier Bankr.Cas.2d 1690, Bankr. L. Rep. P 74,352 In re PARQUE FORESTAL, INC., Debtor. Appeal of ORIENTAL FEDERAL SAVINGS BANK. . Heard |
| Court | U.S. Court of Appeals — First Circuit |
Ramon Coto-Ojeda with whom Jose R. Gonzalez-Irizarry, Juan M. Surillo-Pumarada, Manuel Fernandez-Bared and McConnell Valdes Kelley Sifre Griggs & Ruiz-Suria, Hato Rey, P.R., were on brief, for appellant.
W.H. Beckerleg with whom Fernando L. Gallardo, Carlos E. Aguilar-Perez and Woods & Woods, Hato Rey, P.R., were on brief, for appellees Francisco Caceres Burgos, et al.
Before CAMPBELL, Circuit Judge, BOWNES, Senior Circuit Judge, and SELYA, Circuit Judge.
Oriental Federal Savings Bank appeals from a judgment of the district court dismissing Oriental's appeal from an order of the bankruptcy court. The latter had directed Oriental to contribute a proportionate share of the cost of protecting a bankrupt housing development from robberies, vandalism and similar damage. In dismissing the appeal, the district court ruled that requiring Oriental to contribute was mandated both by state law (as the bankruptcy court had found) and by 11 U.S.C. § 506(c), which permits a secured creditor to be charged for the costs incurred by a bankruptcy trustee in preserving or disposing of the secured creditor's collateral. Because part of the development secured Oriental's loan to the bankrupt developer, and because Oriental's share of the costs was proportionate to that part, we hold that the district court correctly upheld the bankruptcy court under § 506(c). In light of this disposition, we do not rule on the correctness of the bankruptcy court's determination under state law, nor the difficult jurisdictional problems arising were state law the sole basis for recovery.
The debtor, Parque Forestal, Inc., was the developer of a housing development which purported to provide homeowners with comprehensive security measures. The development was planned to include 114 units of housing located in Rio Piedras, Puerto Rico. It was financed by Oriental Federal Savings Bank ("Oriental"), which held a security interest in the unsold portions of the development, i.e. the homes, homesites and other developer's property that belonged to the developer. Fifty of the units had been sold when, in April 1987, a landslide destroyed a portion of the development, including some of the sensorized perimeter fence. As a result, the debtor found it necessary to contract for a mobile security patrol, in addition to the fence, armed guards, and video monitors already being provided and maintained by an outside contractor. However, the debtor soon stopped paying for these security arrangements, and, sometime in July 1987, Oriental began to pay for both the original security services and the mobile patrol.
On December 10, 1987, Oriental and other creditors filed an involuntary petition against the developer under chapter 11 of the Bankruptcy Code. The estate's most significant asset was the development, whose value was estimated to be no greater than $2 million. Oriental's claim for approximately $5 million therefore exceeded the value of its security interest in the development by several million dollars.
In February 1988, Oriental stopped paying for the mobile patrol. Then, after completing negotiations, the debtor and Oriental submitted to the court a settlement stipulation, under which the debtor's assets, including the development, would either be transferred to Oriental or sold for $2 million. The court, however, considering the objections of several residents of the development and an unrelated unsecured creditor, rejected the settlement in a May 25, 1988 order. Oriental stopped paying for the rest of the security services the following month.
Several Parque Forestal residents (the "residents") then began to pay for the security themselves and filed an "Urgent Motion in Protection of Assets of Debtor's Estate" in the bankruptcy court. They alleged that "[e]stoppel and equity demand that Oriental continue to provide the protection both the debtor and other creditors have come to rely on" by continuing to pay for the security services. In the motion, the residents asked the bankruptcy court to order Oriental to keep doing so. In the alternative, the motion asked that the services, then being paid for by the residents, be considered a priority administrative expense, under Sections 364(c)(1) and (d)(1) of the Bankruptcy Code. Oriental objected to the motion's first request. It argued that there was a "lack of jurisdiction over the subject matter as to whether the alleged obligation of Oriental to [the residents] exists." Oriental further insisted that the residents' contract with the debtor required the residents themselves to pay for the security services, and that, as the residents knew of their obligation to pay, they lacked the "clean hands" necessary for equitable relief. Oriental also objected to the residents' administrative expense argument, on the grounds that "[p]aying the obligation of third parties [i.e., the residents] ... is not contemplated as an administrative expense" under the bankruptcy code. 1
The bankruptcy court held a hearing on the motion, at which the residents presented three witnesses--the security contractor and two of the residents--and introduced several documents. No evidence was presented by Oriental or the debtor. Without specifically addressing the question of whether or not it had jurisdiction to determine Oriental's alleged equitable and contractual obligation to the residents, the court granted the motion to require Oriental to help shoulder the costs of the security services. The court ruled that Oriental had "assumed the responsibility to finish the project, including to supply the security services." However, in an August 20, 1988 bench ruling not reproduced in its written order, the court stated, "I'm not deciding ultimately the issue" of whether Oriental was obligated to complete the entire project. The bankruptcy court, therefore, ordered that the cost of the security services be divided between the residents and Oriental, with the residents paying the proportion of the cost equal to the proportion of the units which had been sold, and Oriental paying the balance. The order provided that the amount to be paid by Oriental could be decreased proportionately as more units were sold. Furthermore, having determined that the debtor originally represented to the residents that it would only pay for the services until 51% of the units were sold, the court held that Oriental's obligation to pay would cease once the security measures were fully installed and 50% plus one of the homes were sold. 2
On September 19, 1988, Oriental filed a motion for reconsideration in which it elaborated on its earlier contention that the bankruptcy court lacked jurisdiction over the residents' claim against it. Oriental further argued that, even if jurisdiction existed, the district court would have to abstain. 3 Finally, Oriental argued that the bankruptcy court had "overreached in ruling that Oriental assumed responsibility to 'finish the project.' " The residents, in their response to the motion, argued that the bankruptcy court was empowered to hear their claim because its jurisdiction over the assets of the estate "would be meaningless if the bankruptcy court could not entertain a motion alleging that these assets were disappearing." The residents also argued, for the first time, that, in addition to the estoppel theory, recovery was justified under 11 U.S.C. § 506(c), which allows the trustee to "recover from property securing an allowed secured claim the ... [costs of preserving] such property to the extent of any benefit to the holder of such claim." The bankruptcy court denied the motion, holding that it had jurisdiction under 28 U.S.C. § 157(b)(2)(A) because the dispute was a "core proceeding" in bankruptcy. The court also stated that its earlier order was not "res judicata [or] collateral estoppel to a different cause of action regarding Oriental's liability or responsibility to terminate the project." The court did not mention the residents' § 506(c) argument.
Oriental appealed to the district court, filing a brief which reiterated its earlier jurisdictional and abstention arguments, and argued that the residents' estoppel theory lacked merit. Oriental's brief also noted that the district court had not mentioned § 506(c) in its ruling but charged that the residents had no standing to recover under that statute. In addition to responding to these arguments, the residents argued that the bankruptcy court's order was correct under § 506(c), and that the district court lacked appellate jurisdiction because the bankruptcy court order was not final.
The district court held that the bankruptcy court had properly exercised jurisdiction because under 28 U.S.C. § 157(b)(2)(A), the action was a "core proceeding." Because it also found that the action did not involve any state law issues better left to the expertise of state judges, the district court did not abstain. Finally, the court held that the bankruptcy court's order was correct under the estoppel theory, and that, "[u]pon a de novo review of the record as a whole" the order was also justified under § 506(c). The district court therefore dismissed the appeal.
Counsel have since informed us at oral argument of the following events. In June 1989 Oriental bought the debtor's interest in the Parque Forestal development at a judicial sale and began voluntarily to pay for its proportionate share of the security services. The bankruptcy proceeding was dismissed in January 1991, but Oriental has posted an appeal bond in the amount of $48,000, which represents the amount it was required by the...
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