Court: District Court, D. Colorado; March 28, 2014; Federal District Court
The order affirms the Bankruptcy Court's decision regarding the appeal by Chapter 7 Trustee Jeffrey A. Weinman concerning adversary proceeding No. 09-1481. The City of Pueblo and others oppose this appeal. The Court has jurisdiction under 28 U.S.C. § 158(a)(1). In a previous ruling (In re Adam Aircraft Indus. Inc.), this Court had partially affirmed and partially remanded an order from the Bankruptcy Court regarding issues related to 'the Pueblo Collateral,' which consists of equipment and property securing a loan from Pueblo to the debtor. The Trustee sold this collateral as part of a bulk asset sale valued at $10 million.
The Court previously addressed two main issues: the valuation of the Pueblo Collateral and the application of an eighteen-percent surcharge under § 506(c) of the Bankruptcy Code. The Court upheld the Bankruptcy Court's valuation but found legal error in how the eighteen-percent surcharge was calculated. The Bankruptcy Court had derived this surcharge from a spreadsheet (Exhibit 15) detailing the bankruptcy estate's transaction costs, concluding these costs constituted eighteen percent of the sale's value.
However, the Court determined that the blanket surcharge was inappropriate because it did not establish that all expenditures in Exhibit 15 directly benefited Pueblo, as required by § 506(c). The ruling emphasizes that while the Bankruptcy Court can award specific costs that directly benefit a secured creditor, applying a uniform surcharge without evidence of direct benefits to Pueblo was erroneous. Thus, the Court remanded the surcharge issue for further consideration.
The Court remanded the case to the Bankruptcy Court, directing it to assess whether the Trustee's expenditures were reasonable and necessary for the preservation or disposition of the Pueblo Collateral, and to determine how these expenses concretely benefited Pueblo. Upon review, the Bankruptcy Court found that the only expenses that met the criteria were rent payments totaling $7,534, including specific payments made to the Pueblo Depot and the Pueblo Development Foundation.
In response, the Trustee filed a second appeal with four arguments. The first two, concerning the value of the Pueblo Collateral, were dismissed by the Court as they had been previously rejected. The remaining two arguments focused on the calculation of the § 506(c) surcharge, specifically whether the Bankruptcy Court erred in reducing the surcharge from $161,740.83 to $7,524.00 without considering the secured creditor's benefits from a bulk sale, and whether a hearing was required before this reduction.
The Court acknowledged three legal principles shared with the Trustee regarding § 506(c) surcharge claims: (1) acceptable surcharge items include appraisal fees and marketing costs; (2) expenses incurred for the secured property may be equitably prorated among secured creditors if the benefit is direct; and (3) the preservation of a business's going concern value can benefit secured creditors.
Expenses listed in Exhibit 15, previously overlooked by the Bankruptcy Court, may include costs that directly benefited Pueblo, such as approximately $20,000 incurred by an auctioneer for shipping equipment sold in a bulk auction. Some of this equipment might fall under Pueblo’s security interest, implying that these costs could have been essential to the auction's success, thereby benefiting Pueblo more than an itemized sale would have.
The central issue in the appeal concerns the evidentiary standard required to establish a § 506(c) surcharge. The Bankruptcy Court and Trustee fundamentally disagree on the quality of evidence necessary for such a claim. The Trustee is criticized for not adequately demonstrating that expenses qualify for this surcharge, as he downplays his burden of proof and fails to identify errors in the Bankruptcy Court's review of trial evidence.
The Court affirms that while a valid surcharge under § 506(c) can be calculated from costs associated with the liquidation of secured collateral, the standard for establishing such costs is stringent, with the burden of proof resting on the party seeking the surcharge. Generally, costs are to be paid from unencumbered estate assets, as surcharging secured collateral is an exception. The Court references previous cases emphasizing the difficulty of meeting this standard, noting that recovery is limited to demonstrable benefits.
The Trustee's attempt to demonstrate compliance with the burden under § 506(c) by submitting Exhibit 15 and providing general testimony regarding $1.8 million in expenditures related to a bulk sale was insufficient. Although the evidence might suggest a hypothetical benefit to Pueblo, it fails to establish a "concrete and quantifiable" benefit, particularly as several expenditures contradict the Trustee's vague assertions. The Court highlights significant issues with the evidence, noting a lack of itemization for the large expenditures, which raises doubts about their relation to the bulk sale. Notably, many expenses listed in Exhibit 15 occurred more than a month after the asset sale, undermining their relevance. The Trustee's testimony, describing Exhibit 15 as a general record for the estate, further obscured the specifics of the expenses. He acknowledged that Exhibit 15 included costs related to "post-closing matters," which complicates the determination of what expenses pertained to the sale. Consequently, this evidence is deemed inadequate for meeting the requirements of § 506(c), as it suggests that the identified expenditures encompass more than just those associated with the bulk sale.
The Trustee lacks sufficient evidence to justify the necessity of numerous costs associated with the bulk sale, particularly regarding attorney and trustee fees. A specific exchange between a Lindquist attorney and the Trustee illustrates this issue, where the Trustee affirmatively claims that the fees are "absolutely necessary" without any substantial backing. The court emphasizes that approval for such significant fees, particularly from the assets of a secured creditor, is not easily granted. This interaction exemplifies the broader deficiencies in the Trustee’s evidence concerning § 506(c) surcharges, as it merely suggests a theoretical connection between the expenses and the bulk sale without concrete proof. The court underscores that § 506(c) is intended to protect secured creditors from being unfairly charged for costs that should be borne by others, limiting the Trustee’s capacity to surcharge these creditors.
Furthermore, addressing the Trustee's claim that the Bankruptcy Court mismanaged evidence on remand, the court notes that the Bankruptcy Court reevaluated the evidence and determined that only specific documented expenses, totaling $7,534 for rent, met the necessary criteria. The Trustee's challenge to this finding is deemed unconvincing, as the court will only overturn it for clear error, which was not demonstrated in this instance.
The Trustee's claim that the Bankruptcy Court overlooked evidence of the benefits from the going concern sale is insufficiently detailed, failing to specify what evidence was ignored. The Court will not engage in speculation or attempt to fill in gaps in the Trustee's argument since a mere theoretical possibility does not warrant overturning the Bankruptcy Court's decision. The Trustee's presentation of non-itemized expenses lacked a clear connection to the bulk sale, preventing the Court from concluding that an error occurred. Although the potential surcharge amount may have undervalued the actual amount obtainable under different circumstances, this fault lies with the Trustee for not providing specific evidence.
Regarding the Trustee's argument that a hearing on remand was warranted, the Court clarifies that it did not order such a hearing and finds no legal basis for the Trustee's request for a second opportunity to present evidence. The Trustee's failure to articulate what new evidence he would have presented leaves the Court unconvinced of any resulting prejudice. Ultimately, the analysis indicates that even if a hearing had occurred, it would not have benefited the Trustee's position. Consequently, the Court affirms the judgment of the Bankruptcy Court, emphasizing that the Trustee's documentation and arguments do not substantiate his claims effectively.
The Court's order allows the Trustee to seek compensation for services and reimbursement for expenses related to estate administration from unencumbered estate assets. However, the Trustee's argument that Pueblo's consent to a bulk sale implicitly includes consent to all related expenditures is rejected. The Court finds the Trustee has not adequately demonstrated the extent of Pueblo's consent regarding specific expenditures. While general consent to the bulk sale could suggest approval of necessary actions, a secured creditor's lack of consent to particular expenses means it cannot be bypassed under § 506(c) surcharges without clear evidence of acknowledgment of the expense's desirability. Additionally, because the Trustee presented this argument only in his Reply, there is no record of Pueblo's counter-position, potentially undermining the Trustee's reliance on this argument. The Trustee also claims the Bankruptcy Court erred by ignoring the costs incurred to access Pueblo's collateral, arguing these expenses benefited Pueblo. The Court finds no clear error in the Bankruptcy Court's refusal to consider this evidence due to challenges in substantiating the expenses.
