1994 Decisions

Opinions of the United

States Court of Appeals

for the Third Circuit

7-20-1994

C.S. Associates v. Miller

Precedential or Non-Precedential:

Docket 93-1961

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Recommended Citation

"C.S. Associates v. Miller" (1994). 1994 Decisions. Paper 86.

http://digitalcommons.law.villanova.edu/thirdcircuit_1994/86
1 

UNITED STATES COURT OF APPEALS 

FOR THE THIRD CIRCUIT 

 

No. 93-1961 

 

C.S. ASSOCIATES, d/b/a UNIVERSITY NURSING 

AND REHABILITATION CENTER 

UNITED JERSEY BANK, 

 Appellant, 

 v. 

MITCHELL W. MILLER, ESQ.; THE CITY OF PHILADELPHIA; 

THE UNITED STATES OF AMERICA; HEALTHCARE SERVICES 

GROUP; PERLOFF BROTHERS, INC.; DIANE VENDETTI; 

THE SCHOOL DISTRICT OF PHILADELPHIA; NICHOLAS CANUSO, DR.; 

RAYMOND SILK, DR. and EUGENE SPITZ, DR. 

 MITCHELL W. MILLER, ESQ., 

 Trustee 

 FREDERICK J. BAKER, ESQ., 

 Trustee 

 

 

On Appeal from the United States District Court 

for the Eastern District of Pennsylvania 

(D.C. Civ. No. 93-cv-03065) 

 

Argued May 24, 1994 

Before: COWEN and ROTH, Circuit Judges, and 

ACKERMAN, District Judge.

1

(Filed July 20, l994) 

 

1The Honorable Harold A. Ackerman, United States District Judge 

for the District of New Jersey, sitting by designation. 
2 

John J. Francis, Jr. (argued) 

Shanley & Fisher, P.C. 

131 Madison Avenue 

Morristown, NJ 07962-1979 

 Counsel for Appellant 

 United Jersey Bank 

Joseph DiGiuseppe (argued) 

Assistant City Solicitor 

City of Philadelphia Law Department 

1101 Market Street, 10th Floor 

Philadelphia, PA 19107-2997 

 Counsel for Appellee 

 City of Philadelphia 

Edward J. DiDonato 

Ciardi & DiDonato, P.C. 

1900 Spruce Street 

Philadelphia, PA 19103 

 Counsel for Appellee 

 Mitchell W. Miller, Esq., 

 Bankruptcy Trustee of the Estate 

 C.S. Associates 

 

OPINION OF THE COURT

 

COWEN, Circuit Judge. 

 In this bankruptcy case, the bankruptcy court granted a 

motion by the City of Philadelphia ("the City") to recover 

unsecured post-petition real estate taxes and water/sewer rents 

from the secured creditor, United Jersey Bank ("UJB"), pursuant 

to 11 U.S.C. § 506(c). The district court affirmed the order of 

the bankruptcy court. Because the City did not demonstrate that 
3 

the taxes conferred a direct benefit to the creditor whose claim 

the property secures, we will reverse the order of the district 

court. 

I. BACKGROUND 

 C.S. Associates, d/b/a University Nursing and 

Rehabilitation Center, the debtor in this case, owned and 

operated a skilled care nursing home in Philadelphia. UJB is the 

Indenture Trustee under a Trust Indenture agreement entered into 

with the Philadelphia Authority for Industrial Development 

("PAID") in order to finance the acquisition, construction and 

equipping of the nursing home facility. C.S. Associates entered 

into an installment sale agreement with PAID on February 16, 

1983. To provide the necessary funds with which to finance the 

acquisition, construction and completion of the facility, PAID 

authorized and issued bonds ("1983 Bonds") in the aggregate 

principal amount of $6,870,000. The 1983 Bonds were issued under 

and are secured by the Indenture entered into by and between PAID 

and UJB as Indenture Trustee on February 16, 1983. Pursuant to 

the terms of the Indenture, PAID assigned all of its rights, its 

title and its interest under the installment sale agreement and 

all monies payable thereunder to UJB as Indenture Trustee for the 

benefit of the holders of the 1983 Bonds. 

 To secure the repayment of the 1983 Bonds, C.S. 

Associates granted to PAID a first priority mortgage on the 

facility and real property constituting the site of the facility. 

There is currently due and owing from C.S. Associates to UJB as 
4 

Indenture Trustee the principal amount of $3,367,037.47 plus 

interest and fees, which amount is secured by the mortgage. Thus, 

UJB is a secured creditor of C.S Associates. 

 On August 15, 1988, C.S. Associates filed a voluntary 

petition for relief under Chapter 11 of the Bankruptcy Code. 

Thereafter, C.S. Associates failed to provide adequate services 

to its patients and on October 28, 1988, the facility was closed 

by the Department of Health of the Commonwealth of Pennsylvania. 

C.S. Associates' unsecured creditors' committee presented a plan 

of reorganization which called for the sale of the facility; 

however, this effort failed because, prior to the confirmation of 

the plan, the facility was repeatedly and severely vandalized 

from late September through December, 1989. On April 18, 1990, 

pursuant to a motion filed by the United States Trustee, the 

bankruptcy court ordered the debtor's case converted to a case 

under Chapter 7 of the Bankruptcy Code. Thereafter, Mitchell W. 

Miller was appointed Chapter 7 Trustee for the debtor. 

 During the pendency of C.S. Associates' Chapter 7 

proceeding, the City of Philadelphia filed two proofs of claim 

for post-petition administrative real estate taxes and 

water/sewer rents, totalling $548,706.80, which had been assessed 

against the facility. The City also filed a proof of claim for 

pre-petition real estate taxes and water/sewer rents, totalling 

$48,803.46, which under the applicable state law had properly 

become liens against the facility. 

 By order dated November 10, 1992, the bankruptcy court 

approved the sale of the facility for $2,416,000, free and clear 
5 

of all liens and encumbrances. UJB thereafter filed an action 

with the bankruptcy court to predetermine the extent, validity, 

and respective priority of any and all liens on the facility and, 

accordingly, on the proceeds of the approved sale. The City 

maintained that both its pre-petition and post-petition real 

estate taxes and water/sewer rents had priority over UJB's 

secured claim. 

 The bankruptcy court, in accordance with our holding in 

Equibank, N.A. v. Wheeling-Pittsburgh Steel Corp., 884 F.2d 80, 

84-85 (3d Cir. 1989), held that the City's pre-petition liens had 

priority over UJB's secured claim as to the sale proceeds. 

However, the bankruptcy court held that the City's post-petition

real estate taxes and water/sewer rents did not have priority 

over UJB's secured claim as to the sale proceeds. The bankruptcy 

court went on to suggest that the City might be able to recover 

its post-petition real estate taxes and water/sewer rents from 

the sale proceeds pursuant to either 11 U.S.C. § 503(b)(1)(B)(i) 

or 11 U.S.C. § 506(c). 

 Accordingly, on March 12, 1993, the City moved the 

bankruptcy court, pursuant to 11 U.S.C. § 506(c), to surcharge 

the sale proceeds and allow the City to recover its post-petition 

real estate tax claims and its water/sewer rent claims. In the 

order of the bankruptcy court which is at issue in this appeal, 

the bankruptcy court granted the City's motion under § 506(c) to 

obtain compensation for post-petition real estate taxes and 

water/sewer rents in the stipulated amount of $548,706.80. 
6 

 UJB appealed the disputed bankruptcy court order to the 

district court, arguing that the City had not met the 

requirements of § 506(c) with respect to the post-petition real 

estate taxes and water/sewer rents. The district court affirmed 

the bankruptcy court's order. UJB took this appeal. We have 

jurisdiction under 28 U.S.C. § 158(d). 

II. DISCUSSION 

 UJB argues before us that the district court and 

bankruptcy court erred in holding that the City had met the 

requirements of 11 U.S.C. § 506(c) and could recover postpetition real estate taxes and water/sewer rents under that 

section. "Because the district court sits as an appellate court 

in bankruptcy cases, our review of the district court's decision 

is plenary. This [c]ourt's standard of review is clearly 

erroneous as to findings of fact by the bankruptcy court, and 

plenary as to conclusions of law." In re Stendardo, 991 F.2d 

1089, 1094 (3d Cir. 1993) (citation omitted). The issue in this 

appeal is whether the bankruptcy court and district court 

correctly interpreted and applied the legal standard contained in 

§ 506(c), and we will therefore exercise plenary review. See

Maritime Elec. Co. v. United Jersey Bank, 959 F.2d 1194, 1203 (3d 

Cir. 1992). 

 In Equibank, we held that the automatic stay provision 

of the Bankruptcy Code, 11 U.S.C. § 362(a)(4), "prevents the 

creation of a lien post-petition." 884 F.2d at 84. The only 

amounts in question in this appeal are post-petition real estate 
7 

taxes and water/sewer rents, and therefore the City's taxes and 

rents have not and cannot attain lien status for purposes of the 

Bankruptcy Code. Id. at 84-85. 

The code . . . provides two options for payment of 

taxes that have not attained lien status as of the date 

of the entry of the stay. First, they may be payable 

by the trustee, either as first priority administrative 

expenses, see 11 U.S.C. § 503(b)(1)(B)(i), or as 

seventh priority expenses, 11 U.S.C. § 507(a)(1). 

Second, they may be payable by the secured creditor as 

payment for benefit received, see 11 U.S.C. § 506(c). 

Equibank, 884 F.2d at 83. 

 The parties dispute whether the City could properly 

receive payment for the real estate taxes and water/sewer rents 

pursuant to the second option. Section 506(c) of the Bankruptcy 

Code provides that: "The 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." 11 U.S.C. 

§506(c). Our decisions have clarified that to recover expenses 

under § 506(c), a claimant must demonstrate that (1) the 

expenditures are reasonable and necessary to the preservation or 

disposal of the property and (2) the expenditures provide a 

direct benefit to the secured creditors. Equibank, 884 F.2d at 

84, 86-87; In re McKeesport Steel Castings Co., 799 F.2d 91, 94-

95 (3d Cir. 1986); see also In re Glasply Marine Indus., 971 F.2d 

391, 394 (9th Cir. 1992) ("[T]o satisfy the benefits prong [of 

§506(c) the claimant] must establish in quantifiable terms that 

it expended funds directly to protect and preserve the 

collateral." (internal quotation marks omitted)); In re Flagstaff 
8 

Foodservice Corp., 762 F.2d 10, 12 (2d Cir. 1985) ("[T]o warrant 

[§] 506(c) recovery . . . [the claimant] must show that . . . 

funds were expended primarily for the benefit of the creditor and 

that the creditor directly benefitted from the expenditure."). 

 In considering whether the post-petition real estate 

taxes and water/sewer rents assessed by the City qualified for 

treatment under § 506(c), the bankruptcy court stated: 

 The City's taxes and water and sewer rents are 

costs which necessarily accrued against the Property 

during the period that it was marketed for sale. As a 

result of this marketing, the Property has been sold 

for an amount which will result in payment of certain 

net proceeds to UJB. These facts alone establish that 

UJB was conferred with a benefit by the delays effected 

by the sale process, which also caused the taxes to 

accrue. Hence, UJB received a direct benefit from the 

sale of the Property, which necessarily resulted in the 

accrual of these taxes and water and sewer rents while 

the Property was marketed, and is obliged to compensate 

the City for same out of the net sale proceeds payable 

to it. 

In re C.S. Assocs., No. 88-12842S, slip op. at 2 (Bankr. E.D. Pa. 

April 22, 1993); app. at 469. 

 On appeal from the order of the bankruptcy court, the 

district court held: 

[T]he fact of the accrual of the taxes over the period 

during which the property was marketed is not open to 

dispute, nor is the reasonableness of the amount of 

taxes as assessed pursuant to Pennsylvania statute. 

Further, the Bankruptcy Court's determination that the 

fact of the accrual of taxes while the marketing of the 

property took place was a benefit to the secured 

creditor represents a permissible inference for the 

court to have drawn and is supported by the record of 

the proceedings. 

United Jersey Bank v. Miller, No. 93-3065, slip op. at 5 (E.D. 

Pa. Sept. 9, 1993); app. at 544. 
9 

 As revealed by the language quoted above, the 

bankruptcy court and the district court operated under the 

assumption that the general and incidental benefits which an 

entity receives from municipal services are the type of benefits 

which § 506(c) contemplates. We find that the bankruptcy court 

and the district court incorrectly interpreted and applied 

§506(c) in allowing recovery of the assessed taxes and rents 

without a demonstration by the City that such taxes and rents 

caused a direct benefit to UJB, the secured creditor. 

 Both the bankruptcy court and the district court 

mistakenly relied on our holding in Equibank, 884 F.2d 80, in 

reaching their conclusion. In Equibank, we merely stated that 

real property taxes "may . . . arguably be payable as the secured 

creditor's liability pursuant to [§] 506(c)." Id. at 86 

(emphasis added). Because it was not clear to us what benefit 

the secured creditor derived from the payment of those taxes, we 

remanded the case so that the bankruptcy court could make a 

determination as to whether payment of the taxes provided a 

direct benefit to the secured creditor. Id. at 86-87. 

 In this case, the City did not meet the requirement 

that it demonstrate a direct benefit to the secured creditor. 

Section 506(c) does not contemplate recovery for costs and/or 

expenses associated with the incidental benefits an entity may 

receive by virtue of existing within a municipality which 

provides general services funded by taxes. This point has been 

cogently made by a district court: 
10 

Section 506(c) was not intended to encompass ordinary 

administrative expenses that are attributable to the 

general operation and dissolution of an estate in 

bankruptcy. Rather, it was designed to extract from a 

particular asset the cost of preserving or disposing of 

that asset. The trustee's payment of real property 

taxes might benefit . . . the . . . secured creditors 

to the extent that monies raised from the collection of 

property taxes are used, in part, to fund the local 

fire, police, and road maintenance departments, which 

provide protection to the secured property against 

vandalism and fire, and ensure that the adjoining road 

is kept in good condition. This indirect benefit, 

however, is insufficient to bring these post-petition 

property taxes within the scope of § 506(c). 

 Courts have narrowly construed § 506(c) to 

encompass only those expenses that are specifically 

incurred for the express purpose of ensuring that the 

property is preserved and disposed of in a manner that 

provides the secured creditor with a maximum return on 

the debt and also apportions those costs to the secured 

creditor who, realistically, is assuming the asset. 

Although in exchange for the payment of property taxes, 

the estate would reap benefits that might aid in 

preserving the asset in the advent of fire or from the 

threat of vandalism, this incidental benefit is not 

what was contemplated by § 506(c). Monies a government 

entity derives from the collection of real property 

taxes fund many governmental operations and services 

which are not directly related to preservation and 

disposal of the asset and in no way provide a benefit 

to the secured creditor. Real estate tax revenues 

support public parks, libraries, schools, and social 

services, which do not constitute expenses peculiarly 

connected with preserving or disposing of the parcel of 

land. 

 Moreover, the Bankruptcy Code explicitly sets 

forth the level of priority to be afforded unsecured 

tax claims. Section 503 . . . indicates that tax 

claims are generally afforded the status of ordinary 

administrative expenses, thereby receiving first 

priority after secured claims, unless they are the type 

of taxes specified in § 507(a)(7), in which case they 

will receive a seventh ranked priority after secured 

claims. 
11 

In re Parr Meadows Racing Ass'n, 92 B.R. 30, 35-36 (E.D.N.Y. 

1988) (citations omitted), aff'd in part, rev'd in part on other 

grounds, 880 F.2d 1540 (2d Cir. 1989). This reasoning is 

persuasive and we adopt it. Accord In re Glasply, 971 F.2d at 

394 ("Even the small fraction of property taxes supplying fire 

protection fails the benefits prong [of § 506(c)] because it does 

not 'directly' protect and preserve the collateral. The 

incidental benefits derived by [the secured creditor] from [the 

payment of] property taxes do not trigger section 506(c)." 

(citation omitted)). Accordingly, the incidental benefits which 

the secured creditor received through general municipal services 

to the property do not justify recovery by the City under §506(c) 

for the post-petition real estate taxes and water/sewer rents 

which accrued as to the subject property. 

 The City argues that since the debtor retained no 

equity in the subject property, UJB as the secured creditor 

received the full benefit from the sale of the property. The 

City argues that having the property on the market benefitted UJB 

because it was able to obtain the best available price for the 

property, and therefore real estate taxes and water/sewer rents 

which necessarily accrued during that time frame should be 

recoverable under § 506(c). We reject this argument. Simply 

because UJB benefitted from the sale of the property does not 

automatically mean that payment of real estate taxes and 

water/sewer rents which accrued pending the sale of the property 
12 

provided any direct benefit to the property in question.2 As 

stated above, incidental benefits which an entity receives from 

general municipal services are not the type of benefit 

contemplated by § 506(c). 

 Had the City put forth evidence that the property had 

received some direct or special governmental service which 

benefitted the property, our conclusion might be different. For 

instance, if the City had stationed a police officer at the 

property to protect it, or if the fire department had provided 

some direct service at the location, such services might have 

been quantifiable and might have been recoverable under § 506(c). 

But in this case, the City, the bankruptcy court and the district 

court relied on the mere fact that government real estate taxes 

and water/sewer rents accrued as to the property during the postpetition time frame. This alone does not meet the requirement of 

§ 506(c) that a direct benefit to the secured creditor be 

demonstrated. 

 The City asserts that trash removal and road, water and 

sewer service benefitted the property. However, the City 

apparently never presented proof in the bankruptcy court that any 

of these services actually were performed for the direct benefit 

of the property. More importantly, even assuming that such 

services were performed for the benefit of the property, the City 

 

2UJB contends vigorously that it will receive little benefit from 

the sale of the property, even if it is completed as approved by 

the bankruptcy court, since the net payment UJB will receive will 

still leave it, as a secured creditor, with a shortfall of 

$2,500,000. 
13 

did not quantify the value of services which were actually 

performed. The City had the opportunity to present such proof in 

the bankruptcy court, but failed to do so. The City therefore 

did not meet its burden under § 506(c). 

 We will reverse the judgment of the district court. The 

case will be remanded to the district court with a direction that 

it remand the case to the bankruptcy court with instructions to 

enter an order denying the motion of the City seeking payment 

under § 506(c) of post-petition real estate taxes and water/sewer 

rents from the proceeds of the sale of the subject property. 

_________________________________________