## United States Court of Appeals FOR THE EIGHTH CIRCUIT

_____________ No. 97-3859

_____________ In re: Hen House Interstate, Inc., * * Debtor. *

------------------------------- * * Hartford Underwriters Insurance * Company, * Appeal from the United States * District Court for the Movant - Appellee, * Eastern District of Missouri. * v. * * Magna Bank, N.A., formerly known as * Magna Bank of Illinois, N.A., * * Respondent - Appellant. *

_____________ Submitted: May 12, 1998 Filed: July 27, 1998

_____________ Before BOWMAN, Chief Judge, HEANEY and HANSEN, Circuit Judges.

_____________ BOWMAN, Chief Judge.Magna Bank is the successor in interest to the rights, claims, and interests o f 1 Landmark Bank of Illinois. We refer to Magna herein notwithstanding that c ertain facts pertain to Landmark Bank prior to its acquisition by Magna. The Honorable David P. McDonald, United States Bankruptcy Judge for th e 2 Eastern District of Missouri. The Honorable Charles A. Shaw, United States District Judge for the Eastern 3 District of Missouri. -2- HartfordUnderwriters Insurance Company brought an action pursuant to th e Bankruptcy Code, see 11 U.S.C. §§ 503 and 506(c) (1994), against Magna Bank, a 1 secured creditor of Hen House I nterstate, Inc. (hereinafter "Debtor"), the debtor in the under lying bankruptcy. Hartford sought the payment of workers' compensatio n insurance premiums that went unpaid by the Debtor during the period in which th e Debtor attempted a Chapter 11 reorganization. The Bankruptcy Court ordered th e 2 surcharge of Magna's collateral pursuant to § 506(c) to secure payment of the insurance premiums, and the District Court affirmed. Magna appeals. 3
Magna contends that Hartford lacked stan ding to bring its claim under § 506(c), tha t Magna's collateral may not be surcharged on the basis that it agreed to th e continuation of the Debtor's business, that the judgment constitutes an impermissible mod ificationof the original financing order, and that the equities favor denying th e surcharge of Magna's collateral. We affirm.

I.
The Debtor owned and operate d a number of businesses located throughout the Midwest, including restaurants, service statio ns, gift stores, and an outdoor advertising firm. On September 5, 1991, the Debtor filed a petition for relief under Chapter 11 of the Bankruptcy Co de. During the course of its Chapter 11 case, the Debtor remained in possession of its assets and continued to operate its businesses. Ultimately, the-3-

De btor's efforts to reorganize were unsuccessful and, while still operating unde r Chapte r 11, the Debtor liquidated its assets through a combination of going-concer n sales and sales of its shut-down properties. Thereafter, in January 1993, the Debtor's Chapter 11 case was converted into a Chapter 7 liquidation proceeding.

At the time the Debtor initially filed for bankruptcy relief, it owed Magn a appro ximately $4.1 million. As security for repayment of the debt, Magna had a security interest in essentially all of the Debtor's real and personal property. The day after the Debtor filed its Chapter 11 petition, Magna agreed to loan the Debto r $3 00,000 to help finance the Debtor's reorganization efforts. The Debtor moved fo r authorization of the post-petition loan. In its financing o rder, to which both Magna and the Debtor agreed, the B ankruptcy Court granted the motion authorizing the loan and, in addition, authorized the Debtor's use of cash collateral that was subject to Magna's security interest to pay expenses set forth in an attached budget. See Final Order para. 24, at 17. The budget provided for workers' compensation expenses in the amount of approximately $8,600 per month. Further, the financing order required that the Debtor "pay or cause to be paid all ordinary and necessary expenses of operation . . . which
are allo wed in the Budget." Final Order para. 25, at 18. The financing order als o contained a provision that

"no expenses of administration of Debtor's Chapter 11 case . . . shall be charge d against [Magna] or [its collateral] . . . pursuant to § 506(c) of the Bankruptc y Code . . . without the prior written consent of [Magna], and no suc h consent shall e ver be implied." Final Order para. 33, at 24-25. After entry of th e financing order, Magna disbursed the entire $300,000 to the Debtor.
During the period in w hich the Debtor attempted its Chapter 11 reorganization, Hartford provided workers' com pensation insurance coverage. Under the terms of the policy, the Debtor was required to make monthly payments to Hartford. Despite the fact that the D ebtor quit paying the monthly premiums, Hartford continued to provide
covera ge. At one point, the Debtor paid a portion of the amount due Hartford, but to date $51,871.40 remains in unpaid premiums for the period i n which Hartford providedAs a m ember of the panel, I dissented from the decision in United States , 4 Internal Revenue Service v. Boatmen's First National Bank of Kansas City , 5 F.3d 1157 (8th Cir. 1993), because the plain language of 11 U.S.C. § 506(c ) gives only the trustee standing to surcha

rge a secured creditor's collateral. See id. at 1161. I remain of that Boatmen's as controlling precedent in this Circuit. the coverage. Hartford filed for relief pursuant to 11 U.S.C. § 503 seeking th allowance of its claim as an adm inistrative expense and 11 U.S.C. § 506(c) seeking to

II.
"As the second reviewing court, our standards are the same as the distr we review the bankruptc y court's findings of fact for clear error and its conclusions of de novo ." , 16 F.3d 234, 23 5 Ci r. 1994). Magna first urges this Court to reconsider and overrule our prio decision, United States, Intern Kansas City , 5 F.3d 1157, 1159 (8th Cir. 1993), wherein we held that t stand ing Section 506(c ) provides, the r h property to the extent of any In Boatmen's preted this provision to allow administrative claimants to assert their aims under § 506(c). As a three judge panel, we lack authority to reconside r

, Smith v. Copeland en banc can

overrule another panel's decision."), and therefore hold that Hartford had g under § 506(c) to assert its administrative claim for unpaid workers compensation insurance premiums.-5-

Magna next contends that the Bankruptcy Court and the District Court erred in allowin g Hartford to surcharge Magna's collateral under § 506(c). Generally , administrative expenses may not be charged against secured collateral but instead share in the distribution of the unsecured collateral pursuant to 11 U.S.C. § 503. Se e Boatmen 's , 5 F.3d at 1159. Section 506(c) creates an exception to this general rule , pr oviding that an expense may be surcharged against a secured creditor's collateral if the expenditure was necessary, reasonable, a nd directly benefited the secured creditor. See Brookfield Prod. Credit Ass'n v. Borron , 738 F.2d 951, 9 52 (8th Cir. 1984). In the alternati ve, a secured party's collateral may be surcharged where the secured part y either directly or impliedly cons ented to the expense. See Daniel v. AMCI, Inc. (In re Ferncrest Court Partners, Ltd.) , 66 F.3d 778, 782 (6th Cir. 1995).
Magna does not dispute that workers' compensation insurance is a necessary and
reaso nable expense. Magna does contend, however, that the expense incurred b y Hartford in providing workers' compensation insurance did not directly benefit Magna beca use the Debtor's reorganization efforts ultimately failed and the assets wer e liquidat ed. For support, Magna relies on the Bankruptcy Court's statement that "th e continued operation of the business failed to improve [Magna's] reco very." Bankruptcy Ct. Mem . Op. at 9. The District Court, however, did not clarify whether it viewe d Magn a as having received a direct benefit. In any event, while we would be inclined to view Magna as having received a direct benefit, see Boatmen's , 5 F.3d at 1160 ("The 'benefit ' . . . lies in the ambitionof the creditor to preserve and improve its secure d collateral and the opportunityto realize that ambition.") (emphasis added), we need not reach that holding today because we conclude that Magna consented to the workers ' compensation insurance expenses.

We believe that the case at bar is in all material aspects similar to Boatmen's

. In Boatmen's , a company tha t owned and operated a string of dry cleaning stores filed for Chapter 11 bankruptcy. A secured creditor, Boatmen's Bank, agreed to exten d post-pet ition credit so that the debtor company could continue its operations. During-6-

the time in which the debtor operated under Chapter 11, its payroll taxes went unpaid. The Internal Revenue Servi ce (IRS) filed an administrative claim pursuant to § 506(c) to recover the unpaid payroll taxes plus interest and penalties. We held that "when a secured creditor agrees to the preservation of the debtor business as a going concern and that preservation requires the payment of payroll taxes, any unpaid post-petitio n taxes may be charged to the secured collateral." Boatmen's , 5 F.3d at 1160.

We have essentially the same set of circumstances here. Magna agreed to the continued operation of the Debtor's businesses in the hopes of receiv ing a greater return th roughreorganization rather than through liquidation. Magna thereby "agreed t o accept the expenses and risks associated with [the] anticipated benefit." Id. One such
ex pense is workers' compensation insurance. Under Missouri law, an operatin g busin ess is obligated to maintain workers' compensation insurance unless it ca n demonstrate that it has the ability to sel f-insure. See Mo. Rev. Stat. § 287.280 (Supp. 1998). Moreover, Magna expressly consented in the financing order to the provision author izing the Debtor's use of its cash collateral for necessary operating expenses , which specifically included workers' compensation insurance premiums, and to th e provision requiring that the Debtor pay or cause to be paid all necessary and ordinary expenses. Magna attempts to distingu ish in two ways the facts in Boatmen's from those in the present case. First, Magna points to th e fact that in Boatmen's the bank had signed an agreement to subordina te its post-petition liens to administrative expenses. Magna thus argues that Boatmen's expressly consented to the surcharge of its collateral fo r administrative expenses. Magna also points out that this Court in Boatmen's found that the bank had received an overall benefit from the debtor's efforts at reorganization

. Mag na therefore contends that there may have been other sufficient grounds upo n whichthis Court could have allowed the IRS to surcharge Boatmen's collateral. The hol ding of Boatmen's , however, turns neither on Boatmen's agreement to subordinate its liens to administrative expenses nor on the receipt of any direct benefit by-7-

Boatmen's. Rather, the holding turns on Boatmen's agreement to the preservation o f the debtor's business as a going concern. We find neither attempt to distinguis h Boatmen's persuasive. Just as i n Boatmen's , Magna agreed to the continued operation of the Debtor's businesses and therefore consented to the payment of workers ' compensation insurance.
In further support of Magna's argu ment that it did not consent to the payment of workers' compensation insurance, Magna directs us to the provision contained in the financing order, which provides that "no expenses of administration of Deb tor's Chapter 11 case . . . shall be charged against [Magna] or [its collater al] . . . pursuant to § 506(c) of the Bankruptcy Code . . . without the prior written consent of [Magna], and no such
consen t shall ever be implied." Final Order para. 33, at 24-25. This provision , however, doe s not affect our conclusion that Magna didconsent to the use of its cash colla teral for expenses associated with keeping the Debtor's businesses operating

. Furthermore, we believe that an agreement by a debtor and a secured creditor t o prohibit the payment of § 506(c) administrative expenses from the secured creditor' s collat eral would operate as a windfall to the secured creditor at the expense o f adminis trative claimants. We therefore conclude that such a provision i s unenforceable. See McAlpine v. Comerica Bank-Detroit (In re Brown Bros., Inc.) , 136 B.R. 470, 474 (W.D. Mich. 1991) ("[A] provision [that attempts to immunize a secured creditor from surcharge payment obligations under § 506(c)] is not enforceable in light of the congressional mandate that a trustee have the authority to use a portion o f secured colla

teral for its preservation or proper disposal."); see also In re Willingham Invs., Inc. , 203 B.R. 75, 79 (Bankr. M.D. Tenn. 1996).
Magna next asserts that the Bankruptcy Court's order constitutes a n impermiss ible modification of the original financing order in violation of 11 U.S.C

. § 364(e), which provides:-8-

reversal or modification on appeal of an authorization under thi s he validity of any debt ncurred, or any priority or lien so granted, to an entity tha t

11 U.S.C. § 364(e). The purpose of § 364(e) is to encourage the to debtors by transaction. See Burchinal v. Central Washington Bank (In re Ada ms Apple, Inc.) , 829 F.2d 1484, 1488 (9th Cir. 1987). Magna argues that, because the financing orde r contained the provision against surcharging Magna's collateral without its consent, the decis ionby the Bankruptcy Court violates § 364(e). This argument fails, however , because we have concluded above that Magna consented to the payment of workers' compensation insurance premiums by agreeing to the continued operation of th e Debtor's businesses. The Bankruptcy Court did not modify or reverse any provision contained in the financing order.
Finally, Magna argues that a surcharge of its collateral in this situation would be gross ly inequitable. For support, Magna asserts that the payments already made t o Hartford by the Debtor will cover any existing or future claims that may be asserte d under the workers' compensation policy and that Hartford could have minimized it s expos ure by canceling the policy when the premiums first went unpaid. We fin d
ne ither of these assertions compelling enough to justify a finding that the Bankruptcy Court abused its discretion.

III.

The order o f the District Court, affirming the order of the Bankruptcy Court, is affirmed.-9-

HANSEN, Circuit Judge, concurring.
I concur in the court's opinion because, like Chief Judge Bowman, I must respect
as controlling circuit precedent the panel decision in United States, Internal Revenue Service v. Boatmen's First National Bank of Kansas City , 5 F.3d 1157 (8th Cir. 1993). I agree with the Chief Judge's view first expressed in his dissent in Boatmen's an d
re iterated today in footnote four of the court's opinion, that the plain language of 1 1 U.S.C. § 506(c) gives only a trustee standing to surcharge a creditor's collateral, but that is not the current law of this circuit, and only an en banc court c an, and in my view, should, change it.
A true copy.

Attest:
CLERK, U.S. COURT OF APPEALS, EIGHTH CIRCUIT.