Opinion ID: 769357
Heading Depth: 2
Heading Rank: 2

Heading: Compton's S 506(c) Claim

Text: 7 We apply the same standard of review to the bankruptcy court's decision as the district court did, affording the district court's decision no added weight. See In re Lazar, 83 F.3d 306, 308 (9th Cir. 1996). We apply a clearly erroneous standard to the bankruptcy court's findings of fact and review its conclusions of law de novo. See Id. 8 The Debtor's request for a surcharge covers the following services: (1) sales procedures and approvals required by the cash-collateral stipulation; (2) evaluation and removal of mechanics' liens; (3) title, sales, escrow, closing costs, and evaluation efforts; (4) costs associated with the surcharge motion; and (5) construction, operation, and marketing costs. 9 We allow payment of administrative expenses from the proceeds of secured collateral when incurred primarily for the benefit of the secured creditor or when the secured creditor caused or consented to the expense. In re Cascade Hydraulics & Utility Serv., Inc., 815 F.2d 546, 548 (9th Cir. 1987). The controlling provision of the Bankruptcy Code is 11 U.S.C. S 506(c) which provides: 10 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 Under S 506(c), therefore, Compton must demonstrate that the expenses it seeks to surcharge against the Banks were reasonable, necessary, and beneficial to the Banks' recovery, or that the Banks caused or consented to those expenses. See Cascade Hydraulics, 815 F.2d at 548.
12 We measure the necessity and reasonableness of the Debtor's incurred expenses against the benefits obtained for the secured creditor and the amount that the secured creditor would have necessarily incurred through foreclosure and disposal of the property. See In re Chicago Lutheran Hosp. Ass'n, 89 B.R. 719, 727 (Bankr. N.D. Ill. 1988). The threshold inquiry is whether the services for which asurcharge is sought were necessary to the secured creditor, here the Banks. We conclude they were not. Had the Banks foreclosed at the outset of the Chapter 11 proceedings, all junior liens, including mechanics liens, would have been eliminated or paid after the Banks' loan was satisfied. Moreover, the Banks could have internalized many of the post-petition costs incurred by the Debtor and its professionals simply by using in-house resources. In any event, many of the costs were incurred pursuant to the cash-collateral stipulations, and none of those costs would have been incurred had the Banks initially foreclosed on the property. To the extent any of the costs incurred pursuant to the cash-collateral stipulations were necessary to completion of the development and sale of the units, the Debtor and its professionals were paid for those services through the carve-outs in the cash-collateral stipulations. Additional expenses beyond those covered by the carve-outs merely aided the Debtor in its attempt to salvage some equity from the project; they were not necessary to the Banks, nor were they reasonably incurred insofar as the Banks' recovery was concerned.
13 Not only were the fees and expenses which were the subject of the surcharge motion unnecessary and unreasonable as to the Banks' recovery, the expenses did not benefit the Banks. To satisfy the benefit test of section 506(c), [Compton] must establish in quantifiable terms that it expended funds directly to protect and preserve the collateral. Cascade Hydraulics, 815 F.2d at 548. The amount of the Banks' benefit limits Compton's recovery of expenses. See In re Jenson, 980 F.2d 1254, 1260 (9th Cir. 1992). A debtor does not satisfy her burden of proof by suggesting hypothetical benefits. Cascade Hydraulics, 815 F.2d at 548. 14 The Debtor contends that it secured a concrete benefit for the Banks--namely, the return of their post-petition cash advances and approximately $1,652,636 from the sale of the units--and accomplished this for between $179,380 and $525,253 less than the Banks would have had to pay to dispose of the development. This argument misstates the case. The Banks could have fully recovered the unpaid balance of their loan if they had initially foreclosed on the property because, at that time, the Debtor valued the property at $3,613,800, 5 well-above the unpaid balance of $1,723,165 on the construction loan. 15 We conclude that the bankruptcy court did not clearly err in finding that the Debtor failed to meet its burden of establishing that the Banks quantifiably benefitted from the services of the Debtor's professionals, except to the extent of $10,000 as found by the bankruptcy court.
16 The Debtor next argues that even if the services sought by the surcharge motion were not necessary, reasonable, or beneficial to the Banks' recovery, the Banks nonetheless consented to or caused the expenses by joining in the cash collateral stipulations. This argument fails. Mere cooperation with the debtor does not make the secured creditor liable for all expenses of administration. Id. at 548. A secured creditor's consent to the payment of designated expenses, limited in amount, is not a blanket consent to be charged with additional expenses not included in the consent agreement. Id. at 549. 17 Here, all the Banks did by joining in the cash-collateral stipulations was authorize restricted payments for specified items in the form of carve-outs from the sales of units in the development. Neither the Banks' joinder in the cash-collateral stipulations, nor its willingness to defer foreclosure proceedings, caused the Debtor toincur the expenses sought by the surcharge motion. The Banks did nothing more than cooperate with the Debtor in its attempt to salvage some equity from the development. The bankruptcy court did not clearly err in finding that the Banks did not cause or consent to the expenses the Debtor sought to recover by its surcharge motion.