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In Re: Debbie Reynolds Hotel & Casino, Inc. Debtor. In Re: Debbie Reynolds Management Company, Inc. Debtor. In Re: Debbie Reynolds Resorts, Inc. Debtor. Debbie Reynolds Hotel & Casino, Inc., a Nevada Corporation Debbie Reynolds Management Company, Inc., a Nevada Corporation Debbie Reynolds Resorts, Inc., a Nevada Corporation v. Calstar Corporation, Inc., Resort Funding, Inc. v. Calstar Corporation, Inc.

Citations: 255 F.3d 1061; 2001 Cal. Daily Op. Serv. 5697; 2001 Daily Journal DAR 6997; 2001 U.S. App. LEXIS 15084; 38 Bankr. Ct. Dec. (CRR) 22Docket: 99-17240

Court: Court of Appeals for the Ninth Circuit; July 6, 2001; Federal Appellate Court

Narrative Opinion Summary

In this case, Debbie Reynolds Hotel, Casino, Inc., and its affiliates appealed a Bankruptcy Appellate Panel (BAP) decision that reversed a bankruptcy court's approval of a settlement agreement involving a $50,000 payment to the debtor's counsel under 11 U.S.C. § 506(c). The BAP had ruled that the settlement improperly affected Calstar Corporation's rights and violated priority distribution rules under 11 U.S.C. § 507. However, the Ninth Circuit reversed the BAP's decision, holding that Calstar lacked standing to object to the settlement, as only the trustee or debtor-in-possession can seek surcharges under § 506(c), following the Hartford Underwriters precedent. Additionally, the court determined that the surcharge proceeds should be directly paid to the debtor's counsel, as it reflects the services provided to the estate. The ruling clarified that a § 506(c) surcharge is not an administrative expense subject to the priority rules of the Bankruptcy Code, but rather a claim against the secured collateral. Ultimately, the Ninth Circuit upheld the original settlement agreement, reversing the BAP’s decision and remanding the case, thus affirming the distribution of funds to the debtor's counsel as per the settlement terms.

Legal Issues Addressed

Application of Hartford Underwriters Decision

Application: The court applies the Hartford Underwriters decision retroactively to determine that only the trustee or debtor-in-possession can seek a surcharge under § 506(c).

Reasoning: Hartford Underwriters is applicable retroactively to this appeal, establishing that Calstar lacks the standing to seek a surcharge from RFI.

Direct Payment of Surcharge Proceeds

Application: Surcharge proceeds under 11 U.S.C. § 506(c) should be paid directly to the debtor's counsel as reimbursement for services rendered.

Reasoning: The $50,000 surcharge secured by the debtor-in-possession through a settlement agreement is to be paid directly to Debtor's counsel, as the surcharge originates from the attorneys' work.

Priority Distribution Rules under Bankruptcy Code

Application: The court concludes that a § 506(c) surcharge is not an administrative claim but an obligation against the collateral, thus not subject to the priority scheme of the Bankruptcy Code.

Reasoning: The expenses incurred under § 506(c) are to be paid from sale proceeds before any payments to secured creditors.

Standing to Object to Settlement under Bankruptcy Code

Application: Calstar Corporation lacks standing to object to the settlement agreement between the secured creditor and the debtor-in-possession.

Reasoning: Following the precedent set in Hartford Underwriters, it is established that only the trustee or debtor-in-possession has the right to seek a surcharge under § 506(c), thus rendering Calstar's objection invalid.