Trim-X, Inc., Matter of

Decision Date19 April 1983
Docket NumberINC,No. 81-2712,TRIM-,81-2712
Citation695 F.2d 296,9 B.C.D. 1358
Parties7 Collier Bankr.Cas.2d 955, 9 Bankr.Ct.Dec. 1358, Bankr. L. Rep. P 69,003 In the Matter of, Debtor. Appeal of Maurice LEVINE, Trustee in Bankruptcy.
CourtU.S. Court of Appeals — Seventh Circuit

Russell C. Green, Block Levy & Becker, Chicago, Ill., for appellant.

Robert A. Pond, Weissman, Matches & Pond, Chicago, Ill., for appellee.

Before COFFEY, Circuit Judge, SWYGERT, Senior Circuit Judge, and TEMPLAR, * Senior District Judge.

SWYGERT, Senior Circuit Judge.

This appeal from the district court's order affirming the bankruptcy court's award of certain expenses to a trustee in bankruptcy presents for review several questions concerning the relation of two provisions of the Bankruptcy Reform Act of 1978: 11 U.S.C. Sec. 554(a), which provides:

After notice and a hearing, [a] trustee may abandon any property of the estate that is burdensome to the estate or that is of inconsequential value to the estate;

and 11 U.S.C. Sec. 506(c), which provides that:

[a] 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.

For the reasons explained below, we vacate the order of the district court and remand the case for further proceedings.

I

On December 5, 1979, the bankruptcy court entered an order for relief under Chapter 7 of the Bankruptcy Code against the debtor, Trim-X, Inc. In re Trim-X, Inc., No. 79-B-40450 (Bankr. N.D.Ill. Dec. 5, 1979). Therein the court designated the appellant, Maurice Levine, as trustee. At the time this order was entered Trim-X owned certain assets in which the appellee, Commercial Credit Business Loan, Inc. ("CCBL"), had a perfected security interest. These assets were housed in premises leased by Trim-X from the Warrenville Development Company ("WDC").

Following his appointment, the trustee employed a security company to protect the assets. He also had the assets appraised. The appraisal indicated that the assets held no equity for the estate; that their worth was less than the amount of CCBL's secured interest. Thus, on December 20, 1979, the trustee filed a petition to abandon the assets under section 554. At the same time the trustee, relying on section 506(c), requested the bankruptcy court to order CCBL to reimburse him for expenses he had incurred in preserving the assets.

CCBL filed an answer and counterclaim to the trustee's petition on January 21, 1980. It did not object to the proposed abandonment, but did contest the trustee's claim for expenses. On February 1, 1980, the bankruptcy court finally ordered the trustee to abandon the assets. The court, however, reserved ruling on the reimbursement question. Thereafter the trustee abandoned the assets and CCBL sold the same for an amount, as anticipated, that was less than its secured interest.

On September 10 and October 14, 1980, the bankruptcy court held evidentiary hearings on the reimbursement question. The trustee claimed that under section 506(c) he was entitled to recover the reasonable, necessary expenses of preserving the assets from the date of his appointment (12/5/79) until the date of the court's abandonment order (2/1/80); namely: (1) use and occupancy expenses of $15,000; (2) security costs of $2,667.40; and (3) utility charges of $1,367.71. CCBL objected, arguing, first, that the use and occupancy expenses were not necessary because the trustee had been under no legal obligation to the lessor, WDC, due to subrogation agreements and a general release between WDC and CCBL, and second, that none of the claimed expenses yielded a benefit to CCBL.

On December 19, 1980, the bankruptcy court awarded the trustee $1,850 as the "reasonable, necessary costs and expenses of the preserving of these assets for the benefit of Commercial Credit...." Although the court's explanation for that award is somewhat opaque, we glean the following analysis from its order. First, the court rejected CCBL's contention that the trustee had not been obligated to WDC for the use and occupancy of the leased premises, reasoning that the agreements between WDC and CCBL did not affect the relationship between WDC and the trustee. Second, the court found that the expenses of preservation incurred by the trustee during the period of appraisal were not for the benefit of CCBL. The court assigned January 12, 1980 as the cutoff date in making that determination, concluding that the trustee could only recover expenses incurred from January 12 until February 1 (the date of the abandonment order). Third, the court further limited that base period on the ground that "the trustee did not immediately seek the court's authorization to abandon the assets." Although the court did not specify a time period in this regard, we assume it was referring to some part of the period from December 5 (the date of the trustee's appointment) until December 20 (the date of the trustee's abandonment petition). Based on these considerations, the bankruptcy court awarded the trustee $1,000 for use and occupancy, $500 for security costs, and $350 for utility charges.

The trustee appealed the bankruptcy court's order to the district court. 1 The district court affirmed the $1,850 award on the ground that it was not "clearly erroneous." In re Trim-X, Inc., No. 81-C-770, slip op. at 4 (N.D.Ill. Sept. 23, 1981). The district court, however, did not review the bankruptcy court's analysis. Rather, the court focused on the fact that CCBL's security interest exceeded the value of the collateral. Referring to language from the legislative history of section 506(c), 2 the court suggested that when the value of the secured property is less than the amount of the secured claim an award to a trustee under section 506(c) could never be clearly erroneous as being too small. 3 The trustee appeals from that order.

II

We begin our analysis by noting that we cannot agree with the district court's approach to the questions presented in this case. Section 506(c) makes no reference to the relative values of the property securing an allowed claim and the claim itself. In contrast, section 506(b) (which authorizes a trustee to recover certain additional costs) does contain such language. That section limits recovery to the "extent that an allowed secured claim is secured by property the value of which ... is greater than the amount of such claim...." We think that Congress' omission of similar language from section 506(c) suggests that the relative values of the property and the secured claim are not relevant considerations under that section.

Although the language from the House and Senate Reports cited above appears to lend support to the district court's contrary interpretation of section 506(c), that support is undercut by further statements of the legislative leaders of both the House and Senate made upon introduction of amendments subsequent to the initial reports 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. (Emphasis added.)

124 Cong.Rec. H11089 (Sept. 28, 1978), reprinted in 1978 U.S.Code Cong. & Ad.News 6436, 6451 (statement by Rep. Edwards); 124 Cong.Rec. S17406, reprinted in 1978 U.S.Code Cong. & Ad.News 6505, 6520 (statement by Sen. DeConcini). Further, we note that even before the enactment of the Code in certain circumstances expenses of preservation were allowed to a trustee against secured property the value of which was less than the secured claim. See Textile Banking Co. v. Widener, 265 F.2d 446 (4th Cir.1959); First Western Savings and Loan Ass'n v. Anderson, 252 F.2d 544 (9th Cir.1958); Robinson v. Dickey, 36 F.2d 147 (3d Cir.1929), cert. denied, 281 U.S. 750, 50 S.Ct. 354, 74 L.Ed. 1161 (1930); In re Atlantic Boat Builders Co., 5 Bankr.Ct.Dec. 128 (Bankr.M.D.Fla.1979). Such an award has also been allowed in a post-Code Chapter 11 proceeding. In re Hotel Associates, Inc., 6 B.R. 108 (Bkrtcy.E.D.Pa.1980) (relying on section 506(c)).

Based on this background and the language of the statute, we conclude that the relative values of the assets and the secured claim are not determinative factors in the section 506(c) analysis in this case. Rather, the focus must be on the express terms of the statute. The district court's order offers no assistance in that regard. Thus we must look to the underlying bankruptcy court decision.

III

To recover section 506(c) expenses for preserving the debtor's assets during the process of abandonment in this case the trustee had to prove that the expenses (1) were necessary, (2) benefited CCBL, and (3) were reasonable. The bankruptcy court concluded that the trustee met that burden for only $1,850 of his claimed expenditures. In analyzing that award we assess the bankruptcy court's treatment of the three elements of proof separately. 4

A

We turn first to the question of the necessity of the expenses claimed by the trustee. At the outset, the bankruptcy court correctly rejected CCBL's claim that none of the trustee's payments for use and occupancy were necessary because of agreements between CCBL and the lessor. Prior to the abandonment, the assets in question were the property of the estate, not of CCBL. The trustee, in his dealings with the lessor, was acting on behalf of the estate. Agreements between CCBL and the lessor could not have affected the trustee's responsibility at that time.

The bankruptcy court's second finding regarding the necessity of the claimed expenses was that some of the expenses were unnecessary because the trustee failed to...

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