Loudoun Leasing Development Co v. Ford Motor Credit Co. (In Re K & L Lakeland, Inc.)

PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
In Re: K & L LAKELAND,
INCORPORATED, d/b/a JKJ Chevrolet
Sterling,
Debtor.
LOUDOUN LEASING DEVELOPMENT
COMPANY,
No. 96-1431
Plaintiff-Appellee,
RICHARD G. HALL,
Trustee-Appellee,
v.
FORD MOTOR CREDIT COMPANY,
Defendant-Appellant.
In Re: K & L LAKELAND,
INCORPORATED, d/b/a JKJ Chevrolet
Sterling,
Debtor.
LOUDOUN LEASING DEVELOPMENT
COMPANY,
No. 96-1531
Plaintiff-Appellant,
v.
FORD MOTOR CREDIT COMPANY,
Defendant-Appellee,
RICHARD G. HALL,
Trustee-Appellee.
Appeals from the United States District Court
for the Eastern District of Virginia, at Alexandria.
Albert V. Bryan, Jr., Senior District Judge.
(CA-95-1265-A, BK-91-14554-AB)
Argued: January 28, 1997
Decided: October 22, 1997
Before ERVIN and HAMILTON, Circuit Judges, and
PHILLIPS, Senior Circuit Judge.
_________________________________________________________________
No. 96-1431 reversed and No. 96-1531 affirmed by published opin-
ion. Judge Ervin wrote the opinion, in which Judge Hamilton and
Senior Judge Phillips joined as to parts I, II, and III. Senior Judge
Phillips wrote an opinion concurring as to the result in part IV. Judge
Hamilton wrote a dissenting opinion as to part IV.
_________________________________________________________________
COUNSEL
ARGUED: George Richard Pitts, DICKSTEIN, SHAPIRO &
MORIN, L.L.P., Washington, D.C., for Appellant. Robert Glenn
Mayer, MAYER & SCANLAN, P.C., Fairfax, Virginia, for Appellee
Loudoun Leasing; Bruce Wayne Henry, HENRY & HENRY, P.C.,
Fairfax, Virginia, for Appellee Hall. ON BRIEF: Guy S. Neal,
DICKSTEIN, SHAPIRO & MORIN, L.L.P., Washington, D.C., for
Appellant. Donna H. Henry, Dominique V. Sinesi, HENRY &
HENRY, P.C., Fairfax, Virginia, for Appellee Hall.
_________________________________________________________________
OPINION
ERVIN, Circuit Judge:
This matter arises from the underlying bankruptcy of Debtor K & L
Lakeland (K & L), an automobile dealership. K & L had a lease
2
agreement for its car lot with Appellee/Cross-Appellant Loudoun
Leasing Development Company (Loudoun), an entity controlled by
the same persons behind K & L. Appellant/Cross-Appellee Ford
Motor Credit (Ford Credit) provided floorplan financing to K & L,
and, in exchange, possessed a perfected security interest in virtually
all of K & L's assets. No rent was paid on the premises postpetition.
In No. 96-1431, Ford Credit appeals the judgment surcharging it for
that postpetition rent under 11 U.S.C. § 506(c). In this appeal, we
reverse the district court's order affirming the bankruptcy court's
opinion and order. In No. 96-1531, Loudoun cross-appeals its dis-
missal as the claimant upon the substitution of Trustee-
Appellee/Cross-Appellee Richard G. Hall. In this cross-appeal, we
affirm the district court's order affirming the bankruptcy court's opin-
ion and order.
I.
K & L, the debtor in the underlying bankruptcy proceeding, was
one of several automobile dealerships in Northern Virginia controlled
by John W. Koons, Jr. K & L's business operated on a six-acre tract
in Sterling, Virginia, owned by Loudoun, a partnership comprised of
Koons and Ralph G. Louk, the "K" and "L" of K & L. Louk held bare
legal title to the land as trustee for Loudoun. In October 1989, K & L
and Louk entered into a lease agreement for $50,000/month for the
premises at issue here. K & L subleased a portion to another Koons
dealership, Saturn of Sterling.
Ford Credit provided K & L with floorplan financing in March
1991, and, in exchange, took back first-priority security interests in
virtually all of K & L's assets, including its vehicle inventory, parts
inventory, accounts receivable, furniture, fixtures, equipment, con-
tract rights, general intangibles, and proceeds of the foregoing. On
October 22, 1991, K & L filed for Chapter 11 bankruptcy. Because
Ford Credit's liens encumbered nearly all the debtor's assets, K & L
and Ford Credit entered into three consent orders that authorized and
regulated K & L's use of cash collateral.
Although K & L continued to operate its business postpetition, it
paid no rent to either Loudoun or Louk. In addition, K & L, as debtor-
in-possession, took no steps to assume the lease agreement, and ulti-
3
mately the statutory period fixed for assuming or rejecting the lease
expired. As the bankruptcy court noted, the lease was thus rejected by
operation of 11 U.S.C. § 365(d)(4). See In re K & L Lakeland, Inc.,
185 B.R. 20, 21 (Bankr. E.D. Va. 1995). Although§ 365(d)(4)
instructs a debtor-in-possession to surrender the leasehold premises
upon rejection, K & L continued to use Loudoun's property without
paying rent. Moreover, neither Loudoun nor Louk initiated any action
to regain possession.
In March 1992, Loudoun sought the allowance of an administrative
claim for the unpaid postpetition rent. Since Ford Credit's liens
encumbered virtually all the assets, Loudoun moved to collect the rent
from Ford Credit's collateral pursuant to 11 U.S.C.§ 506(c). Shortly
thereafter, the debtor's attempted reorganization failed, and on April
7, 1992, K & L ceased all business operations. Ford Credit obtained
relief from the stay and began liquidating the assets. In July 1992, the
debtor's case was converted to Chapter 7, and Trustee Hall was
appointed to administer the estate.
In the meantime, another Koons dealership, JKJ Chevrolet, Inc.,
had filed for bankruptcy, and a creditor in that case, Reynolds &
Reynolds Company (Reynolds), was pursuing its own§ 506(c) action
against Ford Credit. The bankruptcy court heard the motions of both
Loudoun and Reynolds in one consolidated, two-day trial in August
1992. The bankruptcy court determined as an initial matter that these
administrative claimants had standing to pursue a§ 506(c) cause of
action. As a result, the trustee in this case, Hall, withdrew his appear-
ance and took no part in the evidentiary hearing that followed. The
bankruptcy court subsequently granted Loudoun's request for an
administrative expense claim in the amount of $166,079.23 and per-
mitted Loudoun to surcharge Ford Credit under § 506(c) to recover
this amount. Reynolds was also permitted to surcharge Ford Credit to
satisfy its claim.
Ford Credit immediately appealed the decision involving Reynolds.
Ultimately, we ruled that the plain terms of § 506(c) granted only
trustees and debtors-in-possession, not administrative creditors, a
right of action against a secured creditor's collateral. See In re JKJ
Chevrolet, Inc., 26 F.3d 481 (4th Cir. 1994). After JKJ Chevrolet,
Loudoun moved to join the trustee as a § 506(c) claimant in Ford
4
Credit's motion to alter or amend the judgment in favor of Loudoun,
which had been held in abeyance pending the resolution of the Reyn-
olds litigation. The bankruptcy court granted Loudoun's motion in
December 1994 and subsequently issued an opinion on Ford Credit's
motion on August 15, 1995.
In its opinion, the bankruptcy court first substituted Hall, the Chap-
ter 7 trustee, for Loudoun and dropped Loudoun as a§ 506(c) claim-
ant. K & L Lakeland, 185 B.R. at 23. It then ordered Ford Credit to
pay the administrative expense award of $166,079.23 to Trustee Hall,
instead of Loudoun. The bankruptcy court rejected Ford Credit's
argument that there must be an actual expenditure before the estate
may reimburse itself under § 506(c). Id. at 24. Instead, the bankruptcy
court determined that "the non-payment of rent represents an unse-
cured, postpetition loan from the landlord," a"``loan' [that] is
quantifiable insofar as we fixed the amount of Loudoun's claim at
$166,079." Id. (emphasis in original). The court was particularly con-
cerned that Ford Credit's argument
would ignore situations in which the estate relies on credit
to cover the costs of preserving or disposing of the secured
party's collateral. In other words, secured creditors could
elude § 506(c) claims, and thus receive a windfall, simply
because the estate decided to use credit instead of cash.
Such an outcome is absurd and would thwart the statute's
obvious purpose. Accordingly, we hold that the unpaid,
postpetition rent falls within the realm of "costs and
expenses" that are recoverable under § 506(c).
Id.
The district court affirmed both holdings of the bankruptcy court.
It found that the trustee was appropriately substituted since, after JKJ
Chevrolet, Loudoun could not possess standing itself. J.A. at 181. As
for the surcharge of Ford Credit being paid to the trustee, the court
stated:
[T]he reasoning as recited by the Bankruptcy Judge's care-
ful and thorough memorandum opinion reveals ample evi-
dence of the reasonableness and necessity of the efforts
5
taken to protect and preserve assets which constituted collat-
eral for the secured claims of Ford Credit. It is clear that
there was a benefit to Ford Credit in the continued operation
of the bankrupt business. That the continued operation may
have incidentally made the property more attractive to sub-
sequent prospective purchasers does not detract from the
benefit that accrued to Ford Credit. The court rejects the
argument that there must be an actual expenditure by the
trustee or debtor-in-possession to recover under 11 U.S.C.
§ 506(c). The estate is still liable for the unpaid rent, and
ought not be penalized because it is too impecunious to pay
the amount outstanding.
J.A. at 181-82.
As noted above, in No. 96-1431, Ford Credit appeals the surcharge.
In No. 96-1531, Loudoun appeals its dismissal as administrative cred-
itor following the substitution of the trustee as§ 506(c) claimant.
II.
In both appeals, the matters essentially arise from Ford Credit
being surcharged for administrative rent under § 506(c) of the Bank-
ruptcy Code, 11 U.S.C. The United States Bankruptcy Court for the
Eastern District of Virginia exercised jurisdiction pursuant to 28
U.S.C. §§ 151, 157. The district court possessed jurisdiction to hear
the initial appeals under 28 U.S.C. § 158(a). We possess appellate
jurisdiction under 28 U.S.C. § 158(d).
Because in this case the district court sat as an appellate court in
bankruptcy, our review of the district court's decision is plenary. In
re Stanley, 66 F.3d 664, 667 (4th Cir. 1995); In re Varat Enters., Inc.,
81 F.3d 1310, 1314 (4th Cir. 1996). We review the bankruptcy court's
factual findings for clear error, while we review questions of law de
novo. Varat, 81 F.3d at 1314; Fed. R. Bankr. P. 8013. Obviously, the
"clearly erroneous" standard will not insulate findings "made on the
basis of the application of incorrect legal standards." Stanley, 66 F.3d
at 667 (internal quotation marks and citation omitted).
6
III.
Loudoun's appeal of its dismissal in No. 96-1531 is meritless. Lou-
doun simply seeks to have us reverse our decision in In re JKJ Chev-
rolet, Inc., 26 F.3d 481 (4th Cir. 1994), and for essentially the reasons
that we already considered and rejected there.1 While it is true that
other circuits have permitted administrative creditors to bring claims
under 11 U.S.C. § 506(c), see, e.g., IRS v. Boatmen's First Nat'l
Bank, 5 F.3d 1157 (8th Cir. 1993); In re Palomar Truck Corp., 951
F.2d 229 (9th Cir. 1991), cert. denied sub nom. General Elec. Capital
Corp. v. North County Jeep & Renault, Inc., 506 U.S. 821 (1992); In
re Parque Forestal, Inc., 949 F.2d 504 (1st Cir. 1991); In re Delta
Towers, Ltd., 924 F.2d 74 (5th Cir. 1991); In re McKeesport Steel
Castings Co., 799 F.2d 91 (3d Cir. 1986), we addressed their holdings
and disagreed with their analyses. See JKJ Chevrolet, 26 F.3d at 484-
86. In short, we held:
The language of § 506(c) is clear and unambiguous. It
grants only trustees [and debtors-in-possession] the author-
ity to seek recovery of postpetition costs and expenses from
the collateral of a secured creditor. . . .
Allowing a claimant to proceed directly against a secured
creditor would circumvent [the Code's] distribution scheme,
potentially causing an inequitable division of the estate. . . .
We are of the opinion that if Congress had intended to alter
so fundamentally the structure and principles underlying
bankruptcy proceedings, it would have done so expressly.
Id. at 484 (footnotes omitted) (citations omitted).
_________________________________________________________________
1 Even were we inclined to do so, which we are not, it is well-settled
that one panel of this court may not overrule another panel's decision.
See Jones v. Angelone, 94 F.3d 900, 905 (4th Cir. 1996); Norfolk and
Western Ry. Co. v. Director, Office of Workers' Compensation
Programs, 5 F.3d 777, 779 (4th Cir. 1993); Caldwell v. Ogden Sea
Transp., Inc., 618 F.2d 1037, 1041 (4th Cir. 1980); North Carolina Utils.
Comm'n v. FCC, 552 F.2d 1036, 1044 n.8 (4th Cir.), cert. denied, 434
U.S. 874 (1977).
7
We did leave open the possibility that "a bankruptcy court could
grant derivative standing to a claimant, allowing the claimant to pros-
ecute a § 506(c) action on behalf of the estate." Id. at 485 n.7 (citation
omitted). However, that is not what Loudoun is seeking here, nor is
it necessary given the proper substitution of the trustee.
We see no reason to depart from our clearly controlling precedent
in JKJ Chevrolet. Loudoun simply has no standing as an administra-
tive creditor to seek to surcharge a secured creditor under § 506(c) for
its own benefit. The district court's order affirming the bankruptcy
court's dismissal of Loudoun is affirmed.
IV.
The issue of the surcharge of postpetition rent in Ford Credit's
appeal in No. 96-1431 remains. Although Judge Phillips agrees with
me that the bankruptcy court's order in this appeal must be reversed,
we are not in complete agreement as to the means to that end. Judge
Phillips joins in Part IV. B of this opinion (and in the result), but he
does not join in Part IV. A. For the reasons which follow, I believe
that the bankruptcy court was incorrect as a matter of law in its hold-
ing that § 506(c) does not require an actual expenditure in order for
the estate to be reimbursed.
A.
As we noted in JKJ Chevrolet, 26 F.3d at 483, "[g]enerally, admin-
istrative expenses are paid from the unencumbered assets of a bank-
ruptcy estate rather than from secured collateral." Section 506(c)
codifies a common law exception to this general rule. That section
states:
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). In JKJ Chevrolet we construed the statute nar-
rowly only to allow "the trustee to recover administrative expenses
8
from the collateral of a secured creditor to the extent that the expendi-
tures benefit the secured creditor." JKJ Chevrolet, 26 F.3d at 483(emphasis added).
The common law exception permitted a holder of secured collateral
to be surcharged only when "a debtor, debtor in possession or trustee
had expended funds to preserve or dispose of the very property (col-
lateral) securing the debt." In re Visual Indus., Inc., 57 F.3d 321, 324
(3d Cir. 1995). A variety of expenditures were allowed--"appraisal
fees, auctioneer fees, advertising costs, moving expenses, storage
charges, payroll of employees directly and solely involved with the
disposition of the subject property, maintenance and repair costs, and
marketing costs," 3 Lawrence P. King et al., Collier on Bankruptcy
¶ 506.06, at 506-60 (15th ed. 1996)--but there were two keys: (1)
there had to be actual expenditures that (2) directly related to the pres-
ervation or disposal of the secured creditor's collateral. Cf. Visual
Indus., 57 F.3d at 325. Congress's intent in enacting § 506(c) was to
codify both aspects:
Any time the trustee or debtor in possession expends money
to provide for the reasonable and necessary cost and
expenses of preserving or disposing of a secured creditor's
collateral, the trustee or debtor in possession is entitled to
recover such expenses from the secured party or from the
property securing an allowed secured claim held by such
party.
124 Cong. Rec. H11089 (Sept. 28, 1978) (statement of Rep.
Edwards), reprinted in 1978 U.S.C.C.A.N. 6451 (emphases added).2
This legislative intent is fully consonant with the plain meaning of the
statute that we determined in JKJ Chevrolet.
_________________________________________________________________
2 I believe that the phrase "expends money" supports the proposition
that an actual expenditure must be made in order to support a surcharge
under § 506(c). According to Webster's Third New International Dictio-
nary (1993), "expend" as a transitive verb means "to pay out or distrib-
ute: spend" and as an intransitive verb "to spend money." Id. at 799. It
seems plain that both this definition and Congress's intent in § 506(c),
expressed through the history quoted above, requires some affirmative
action on the part of the one who would "expend."
9
The parties in this case agree that Ford Credit may be surcharged
for the postpetition rent only if that rent (1) was incurred primarily to
protect or preserve Ford Credit's collateral, (2) provided a direct and
quantifiable benefit to Ford Credit, and (3) was reasonable and
necessary.3 See Br. of Appellant at 26; Br. of Trustee at 10; In re Bob
Grissett Golf Shoppes, Inc., 50 B.R. 598, 602 (Bankr. E.D. Va. 1985);
In re Lunan Family Restaurants L.P., 192 B.R. 173, 178 (Bankr. N.D.
Ill. 1996); Visual Indus., 57 F.3d at 325-26; In re Hiddleston, 162
B.R. 13, 16 (Bankr. D. Kan. 1993); In re Cascade Hydraulics and
Util. Serv., Inc., 815 F.2d 546, 548 (9th Cir. 1987); In re Flagstaff
Foodservice Corp., 762 F.2d 10, 12 (2d Cir. 1985). The parties obvi-
ously disagree as to whether those criteria are satisfied here.
More particularly, Ford Credit argues that the bankruptcy estate
can only be reimbursed for actual expenditures that satisfy these
criteria. The bankruptcy court acknowledged the appeal of this inter-
pretation but rejected it because the estate had nevertheless incurred
a liability for the rent and ought to be able to rely on credit, instead
of cash, to cover the costs of preserving or disposing of the secured
party's collateral. K & L Lakeland, 185 B.R. at 24. I believe that Ford
Credit's argument is not only appealing but amply supported by the
case law. See, e.g., Flagstaff Foodservice, 762 F.2d at 12 ("The
debtor in possession also must show that its funds were expended pri-
marily for the benefit of the creditor and that the creditor directly ben-
efited from the expenditure." (emphases added)); Visual Indus., 57
F.3d at 324-26 (speaking generally in terms of "expenditures" and
"expended funds"); In re Senior-G & A Operating Co., 957 F.2d
1290, 1298-1300 (5th Cir. 1992) (speaking generally in terms of "ex-
penditures"); In re P.C., Ltd., 929 F.2d 203, 205 (5th Cir. 1991)
(speaking, with regard to satisfying the criteria for a § 506(c) claim,
_________________________________________________________________
3 Ford Credit argues that we must first determine whether § 506(c) even
applies to this case. While it is true that rent is not among the common
law administrative expenses traditionally allowed, see supra, nothing in
the language of the statute expressly, or even implicitly, excludes postpe-
tition rent from being an administrative cost or expense that may be sur-
charged in appropriate circumstances. I agree with the trustee that the
proper application of these three criteria in a§ 506(c) claim forecloses
the possibility that a secured creditor will be forced to fund improper
administrative expenses.
10
in terms of "expenditure" and "amounts expended"); In re Delta Tow-
ers, Ltd., 924 F.2d 74, 76 (5th Cir. 1991) (same); Cascade
Hydraulics, 815 F.2d at 548 (stating that the claimant "must establish
in quantifiable terms that it expended funds directly to protect and
preserve the collateral" (emphasis added)); Brookfield Prod. Credit
Ass'n v. Borron, 738 F.2d 951, 952 (8th Cir. 1984) ("To recover
[under § 506(c)] the debtor in possession must expend the funds pri-
marily to benefit the creditor, who must in fact directly benefit from
the expenditure." (emphasis added) (quoting Brookfield Prod. Credit
Ass'n v. Borron, 36 B.R. 445, 448 (E.D. Mo. 1983) (citing In re
Sonoma V, 24 B.R. 600, 603 (B.A.P. 9th Cir. 1982)))); Hiddleston,
162 B.R. at 16 (same); In re Plaza Family Part. , 95 B.R. 166, 173
(Bankr. E.D. Cal. 1989) (same); In re Air Center, Inc., 48 B.R. 693,
694 (Bankr. W.D. Okla. 1985) (analyzing the legislative history as
"clearly impl[ying] that the trustee may recover when he or she has
spent money for the benefit of the holder of the secured claim"
(emphasis added)).4 These cases are merely illustrative. There are
dozens of lower court cases that use these same terms. While it is true
that these cases use these terms in the context of setting forth the req-
uisite elements of a claim under § 506(c), and not, as I do, to establish
the prerequisite of actual expenditure, it strains belief that so many
courts would have chosen their words so carelessly without awareness
of the common meaning of "expend," especially since many of these
courts (although not all) also cite the relevant passage of legislative
history.
One bankruptcy court that has directly faced the issue has repeat-
edly and consistently held that § 506(c) requires an "actual expendi-
ture of money." See In re Lindsey, 59 B.R. 168, 170-71 (Bankr. C.D.
Ill. 1986) (disallowing a surcharge for the value of labor and for rent
not paid since neither was an actual expenditure of money); In re
Worrell, 59 B.R. 172, 174-75 (Bankr. C.D. Ill. 1986) (same; consoli-
_________________________________________________________________
4 The bankruptcy court distinguished Air Center on the ground that "the
costs and expenses at issue there arose post-confirmation, and thus were
not chargeable to the estate." K & L Lakeland, 185 B.R. at 24 n.2
(emphasis in original). However that may be, the Air Center court was
interpreting the exact same legislative history that supports Ford Credit's
point here that sums must have actually been expended before they are
reimbursable to the estate.
11
dated with Lindsey); In re Kotter, 59 B.R. 266, 269 (Bankr. C.D. Ill.
1986) (disallowing a surcharge for the unpaid wages of the debtor as
well as unpaid "rent" for use of the debtors' pasture and machinery
since not expenditures of money); In re Settles , 75 B.R. 229, 230-31
(Bankr. C.D. Ill. 1987) (disallowing a surcharge for the value of labor
since there was no expenditure of money). None of these cases have
been disavowed, repudiated, or overruled. At least two other courts
have similarly required that there have been an actual expenditure in
order to obtain reimbursement under § 506(c). See In re Mall at One
Assocs., L.P., 185 B.R. 981, 990 (Bankr. E.D. Pa. 1995) (disallowing
a surcharge for the "repayment" of real estate taxes because the taxes
were never paid); In re Stegeman, 1991 WL 541134 at *3 (Bankr.
E.D. Wash. Jan. 25, 1991) (disallowing a surcharge"to the extent the
debtors are seeking compensation for their own efforts for which
money was not expended" (emphasis added)); cf. In re Estate Design
& Forms, Inc., 200 B.R. 138, 142-43 (E.D. Mich. 1996).
As already noted, the legislative history quoted above, see supra;
Air Center, 48 B.R. at 694, also fully supports this interpretation.
Finally, our own plain meaning reading of § 506(c) in JKJ Chevrolet,
26 F.3d at 483 (construing the statute narrowly only to allow "the
trustee to recover administrative expenses from the collateral of a
secured creditor to the extent that the expenditures benefit the secured
creditor" (emphasis added)), logically counsels this approach.5
_________________________________________________________________
5 I do not find the authority of IRS v. Boatmen's First Nat'l Bank, 5
F.3d 1157 (8th Cir. 1993), to be particularly persuasive in this context.
In the first place, the IRS would not even have possessed standing to
assert its claim under our circuit's clear precedent in In re JKJ Chevrolet,
Inc., 26 F.3d 481 (4th Cir. 1994). Second, because Judge Bowman in his
dissent would not have found standing, only two members of the panel
passed on the issue of whether the unpaid taxes were a "loan" and thus
properly reimbursable under § 506(c). Most importantly, however, that
case is entirely predicated on a secured creditor who consented to the
"loan." The court makes that abundantly clear three times in the same
paragraph:
It is important that the creditor[ ] in . .. the instant case agreed
to the post-petition preservation of the debtor business with an
eye toward a better return on the collateral. .. . The dry cleaning
stores were maintained as going concerns in part because the
12
Although the courts below express policy concerns about situations
where the estate needs to rely on credit, perhaps because it is too
impecunious, it must be remembered that this credit would have to be
extended to the estate to benefit primarily and directly the secured
creditor's collateral. In most of these situations I believe that, logi-
cally and typically, the secured creditor would consent to the exten-
sion of credit for the preservation of its collateral, and naturally, then,
there would be no question of surcharging the secured creditor for
that expense.
Moreover, other sound policy principles are fulfilled by this inter-
pretation. I find persuasive and agree with the viewpoint expressed by
Chief Judge Bullock in a well-reasoned opinion that a strong line of
cases
stand[s] for the proposition that the expenses which benefit
the entire estate, such as those for the debtor's business
lease, cannot be shifted from the debtor's estate to the
secured creditors under the rubric of "cost of preservation."
Section 506(c) does not convert ordinary administrative
expenses into preservation costs through a broad definition
of benefit. Such an exception would swallow the rule that
lien creditors are supposed to pass through bankruptcy "un-
_________________________________________________________________
payroll taxes were not paid. It follows then that the eventual pay-
ment of those taxes and the ensuing interest and penalties should
be charged against a secured creditor who agrees to expenses
that will be incurred to preserve the collateral. In this case, not
only did the creditor agree to the preservation of the debtor busi-
ness as a going concern, which by necessity included paying
payroll taxes, but it also received an overall benefit from that
preservation . . . .
Id. at 1160 (emphases added). Had Ford Credit agreed to the nonpay-
ment of rent to keep the dealership afloat, then Boatmen's Bank
would be probative, but then we would have a different case than that
presented to us. Finally, I note that Mall at One, supra, came to the
opposite conclusion with regard to unpaid taxes, albeit real estate
taxes.
13
affected." H.R. Rep. 598, 95th Cong., 2d Sess. 357 (1977),
reprinted in 1978 U.S. Code Cong. & Ad. News 5963, 6313.
C.I.T. Corp. v. A & A Printing, Inc., 70 B.R. 878, 881 (M.D.N.C.
1987) (other citations omitted) (analyzing In re Wyckoff, 52 B.R. 164(Bankr. W.D. Mich. 1985); In re Trim-X, Inc., 695 F.2d 296 (7th Cir.
1982); In re Sonoma V, 24 B.R. 600 (B.A.P. 9th Cir. 1982)). Further-
more, § 506(c) should not be read to "provide a means of wealth
transfer from secured to unsecured creditors." Id. at 883 (citing
Thomas Jackson, The Logic and Limits of Bankruptcy Law 187-89
(1986)). This principle is especially compelling here where Ford
Credit would, in effect, be paying those who defaulted on their obli-
gations to it. I am particularly troubled by the apparent self-dealing
between a debtor and a landlord both essentially controlled by the
same two persons. It certainly flies in the face of common sense, as
well as the canons of statutory interpretation, to believe the Bank-
ruptcy Code intends a secured creditor to have to pay the very people
who defaulted on their obligations, once the corporate veils are
stripped aside.
Finally, as a general matter, no § 506(c)"recovery should be per-
mitted if the expenditure was . . . the independent duty of the debtor,
debtor in possession or trustee to maintain its property (even if the
value of the collateral increased as an incidental result thereof)," 3
Collier on Bankruptcy, supra, ¶ 506.06, at 506-69, as surely the pay-
ment of rent must be.
Based on a de novo review, I would conclude that the bankruptcy
court was incorrect as a matter of law in its holding that § 506(c) does
not require an actual expenditure in order for the estate to be reim-
bursed. K & L did not pay postpetition rent or attempt to do so, even
on "credit." Nor did K & L surrender the leasehold premises upon the
statutory rejection of the lease. Loudoun did not seek to collect rent,
affirmatively offer to extend "credit" or make a "loan," or attempt to
regain possession. In no sense of the term was there an actual expen-
diture by the estate to preserve or dispose of Ford Credit's collateral,
let alone one primarily and directly for Ford Credit's benefit. I would
hold that Ford Credit may not be surcharged for postpetition rent in
these circumstances where case law, legislative intent, our own previ-
14
ous narrow construction of the statute, sound policy principles, and
common sense counsel against it.
B.
As a final matter, we would also note that the bankruptcy court did
not follow its own sound precedent that a bankruptcy court must
"make affirmative findings" concerning the requirements of a
§ 506(c) claim "before authorizing a charge against the collateral." In
re Bob Grissett Golf Shoppes, Inc., 50 B.R. 598, 602 (Bankr. E.D. Va.
1985). In the instant case, notwithstanding the lack of actual expendi-
tures, the bankruptcy court failed to adequately show that the postpe-
tition rent was incurred primarily to protect or preserve Ford Credit's
collateral and that it provided a direct and quantifiable benefit to Ford
Credit.
Although Trustee Hall attempts to construct an elaborate explana-
tion of how the bankruptcy court fulfilled this duty, see Br. of Trustee
at 15-20, the record does not support that conclusion. The opinion
itself states, in a conclusory fashion, only that the "loan" of rent "is
quantifiable insofar as we fixed the amount of Loudoun's claim at
$166,079." K & L Lakeland, 185 B.R. at 24 (emphasis in original). In
open court at the end of the evidentiary hearing, however, all the
bankruptcy court stated was
There is some dispute about whether or not they[Ford
Credit] had--or did exercise control. However, the intention
was--I think it was to exercise control. And that was up to
them as to how they enforced that situation.
I think also, here, it has been proven that there is a benefit
--or there was a benefit to Ford Motor Credit Company in
this company--in the situation continuing, so that they
could liquidate the various and sundry automobiles, new
automobiles, and all the other items involved. Was there a
benefit?
J.A. at 600-01. The court further decided that, on the basis of equity,
it would strike the provision of the cash collateral orders that specifi-
15
cally stated that Ford Credit was not consenting to liability for the
claims of administrative creditors.6 J.A. at 603-04. And finally, the
court declared that $40,000/month was the proper rental value for the
property that Ford Credit could be surcharged with from October 22,
1991, to April 7, 1992, less a credit for rent received from the subles-
see. J.A. at 604-05, 608.
These so-called "affirmative findings" are scattered and not
focused on the § 506(c) criteria. There was no direct finding that the
rent was incurred primarily to protect Ford Credit's collateral. Indeed,
as indicated above, we fail to see how this prong can be satisfied since
Loudoun made no attempt to collect the rent or indicate in any affir-
mative way that it intended to "loan" the rent payments to K & L, the
debtor-in-possession. And the court certainly provided no rationale
linking the $166,079 surcharge to a direct and quantifiable benefit
that Ford Credit received for the preservation of its collateral. The dis-
trict court's equally conclusory assertion that"[i]t is clear that there
was a benefit to Ford Credit in the continued operation of the bank-
rupt business," J.A. at 181, is beside the point."Merely providing
some benefit to the debtor . . . does not satisfy § 506(c)'s require-
ment" that the benefit be direct and inure to the secured creditor for
the preservation or disposition of its collateral. In re Visual Indus.,
Inc., 57 F.3d 321, 327 (3d Cir. 1995) (emphasis in original).
V.
In sum, Loudoun's appeal is meritless. Only a trustee or debtor-in-
possession may properly pursue a claim for administrative expenses
under 11 U.S.C. § 506(c). We affirm the order below in No. 96-1531.
In No. 96-1431, Ford Credit's appeal of the surcharge to it of post-
petition rent, we determine that the bankruptcy court was incorrect as
a matter of law and therefore reverse the order below surcharging
Ford Credit with the postpetition rent.
_________________________________________________________________
6 The bankruptcy court did so despite its previous recognition that
"consent is not to be lightly inferred." Bob Grissett, 50 B.R. at 603 (inter-
nal quotation marks and citation omitted).
16
No. 96-1431 is
REVERSED.
No. 96-1531 is
AFFIRMED.
PHILLIPS, Senior Circuit Judge, concurring in part and concurring in
the judgment:
I concur in Parts I, II, III, and IV.B of Judge Ervin's lead opinion,
and in the court's judgment which affirms the district court's order in
No. 96-1531, and reverses that court's order in No. 96-1431. I write
separately only to say that I would reverse in No. 96-1431 solely on
the grounds spelled out in Part IV.B. of Judge Ervin's opinion, and,
without deciding the issue, not upon the ground relied upon in
Part IV.A--that the surcharged rent had not been paid, but only
incurred as debt.
HAMILTON, Circuit Judge, concurring in part and dissenting in part:
My two-fold disagreement with Judge Ervin's lead opinion con-
cerns only Part IV of his opinion. First, I cannot agree with his con-
clusion in Part IV.A that 11 U.S.C. § 506(c) authorizes the
bankruptcy trustee to surcharge a secured creditor for an administra-
tive expense only if there has been an "actual expenditure" made. Sec-
ond, I cannot agree with Judge Ervin's conclusion in Part IV.B that
the district court failed to make adequate findings that Ford Motor
Credit Company (Ford Credit) incurred a direct and quantifiable ben-
efit through the unpaid rental expenses. Accordingly, I concur in Parts
I, II, and III of Judge Ervin's lead opinion and dissent from Part
IV.B.*
I.
In Part IV.A of his opinion, Judge Ervin concludes that the bank-
ruptcy court erred as a matter of law in holding that § 506(c) does not
_________________________________________________________________
*Because Part IV.A of Judge Ervin's opinion did not garner a major-
ity, there is no need to dissent therefrom, and I merely note my disagree-
ment as set forth below.
17
require an actual expenditure in order for the estate to be reimbursed.
Since it is undisputed that K & L Lakeland (K & L) did not actually
pay the rental expenses the Trustee seeks from Ford Credit under
§ 506(c), Judge Ervin holds that Ford Credit may not be surcharged
for those expenses.
I believe that Judge Ervin's analysis is flawed for several reasons.
First, in concluding that § 506(c) requires an actual expenditure,
Judge Ervin relies primarily on the "expense" or "expenditure" lan-
guage contained in § 506(c) and numerous decisions interpreting
§ 506(c). Judge Ervin's sole focus on the word"expense," however,
ignores the fact that § 506(c) also permits the recovery of "reasonable,
necessary costs." See 11 U.S.C.§ 506(c) ("The trustee may recover
from property securing an allowed secured claim the reasonable, nec-
essary costs and expenses . . . .") (emphasis added). A "cost" is
defined as "the amount or equivalent paid or given or charged or
engaged to be paid or given for anything bought or taken in barter or
for service rendered" and as "an item of outlay incurred in the opera-
tion of a business enterprise." WEBSTER'S THIRD NEW INTERNATIONAL
DICTIONARY 515 (1981) (emphasis added); see also Russello v. United
States, 464 U.S. 16, 21 (1983) (where statutory term is not defined,
"[t]his silence compels us to ``start with the assumption that the legis-
lative purpose is expressed by the ordinary meaning of the words
used.'" (quoting Richards v. United States , 369 U.S. 1, 9 (1962))).
Thus, by its plain language, § 506(c) permits the bankruptcy trustee
to recover costs that have not actually been paid, but rather have
accrued in order to preserve or dispose of secured assets.
Second, Judge Ervin's reliance on the "expenditure" or "expense"
language used by courts in various decisions is misplaced in light of
the fact almost none of these courts actually addressed whether
§ 506(c) requires an actual expenditure or, alternatively, whether the
incurrence of a cost or the extension of credit suffices for recovery
under § 506(c). See, e.g., In re Visual Indus., Inc., 57 F.3d 321, 324-
26 (3d Cir. 1995); In re Senior-G & A Operating Co., Inc., 957 F.2d
1290, 1298-1300 (5th Cir. 1992). Instead, these courts merely refer to
an "expense" or "expenditure" in the context of a general discussion
about the requirements of § 506(c). In addition, the only other circuit
court of appeals to consider the issue, the Eighth Circuit, has rejected
the argument that because a debt was merely incurred, rather than an
18
expenditure paid, § 506(c) does not permit the secured creditor to be
surcharged. See IRS v. Boatmen's First Nat'l Bank, 5 F.3d 1157, 1160
(8th Cir. 1993) (holding that unpaid payroll taxes could be surcharged
to secured creditor even though no funds were advanced to the
debtor-in-possession or to the bankruptcy trustee).
Finally, the most significant problem with Judge Ervin's conclu-
sion in Part IV.A of his opinion is that his analysis and resulting con-
clusion undermine the central purpose of § 506(c), which is to prevent
a secured creditor from gaining a windfall at the expense of the estate.
See In re JKJ Chevrolet, Inc., 26 F.3d 481, 483 (4th Cir. 1994). Under
Judge Ervin's reasoning, even where a secured creditor implicitly
consents to the continued operation of a business by entering into
post-petition cash collateral agreements, as long as no cash changes
hands, the cost incurred cannot be surcharged to the secured creditor,
regardless of the extent of the benefit to the secured creditor. Such a
conclusion not only is based on an artificial distinction between an
expenditure that has actually been paid and a debt that has been
merely incurred, but also permits the very windfall§ 506(c) was
designed to prevent.
For these reasons, I would hold that § 506(c) does not require an
actual cash expenditure, but rather permits the bankrupt estate to
recover administrative expenses where a debt merely has been
incurred, as long as the other requirements of § 506(c) are satisfied.
A contrary interpretation is not supported by either the text of
§ 506(c) or the case law interpreting that text and would defeat the
purpose of § 506(c) by permitting a secured creditor to reap a direct
benefit without reimbursing the bankrupt estate.
II.
In Part IV.B of Judge Ervin's opinion, which is joined by Senior
Judge Phillips, Judge Ervin concludes that the bankruptcy court in
this case also erred when it failed to make affirmative findings con-
cerning the requirements of § 506(c) before permitting the Trustee to
surcharge Ford Credit for the unpaid rental expense. I respectfully
disagree.
In order to invoke § 506(c), the claimant must show: (1) the expen-
diture was necessary; (2) the amounts expended were reasonable; and
19
(3) the expenditure conferred a direct benefit on the secured creditor.
See In re Visual Indus., 57 F.3d at 325; In re P.C., Ltd., 929 F.2d 203,
205 (5th Cir. 1991). In this case, although the bankruptcy court's
articulation of its findings may not be a model of clarity, the bank-
ruptcy court clearly found that Ford Credit directly benefitted from
the continued operation of K & L because it was able to liquidate both
new vehicles and parts that otherwise would have been sold at a
reduced price.
This finding is supported by the record. The evidence before the
bankruptcy court indicated that at the time K & L filed its bankruptcy
petition, it was approximately $170,000 "out of trust" on its floor-plan
financing with Ford Credit. By enabling K & L to continue its opera-
tions as an automobile dealership, Ford Credit was able to recoup all
of those funds, and sixty-five new vehicles were sold by K & L post-
petition. Thus, Ford Credit was able to liquidate some of its collateral
and avoid having to sell that collateral at a lower price because K & L
had gone out of business. With regard to the requirement that the
amounts expended be "reasonable," the bankruptcy court heard evi-
dence as to the reasonable rental rate of the property on which K & L
operated and concluded that a reasonable rate was $40,000 per month
based on that testimony. The amount allowed by the bankruptcy court
was determined by its assessment of what constituted a "reasonable
amount" expended under the circumstances. Finally, regarding the
requirement that the expenditure be necessary, the bankruptcy court
recognized that the amount surcharged to the administrative creditor
had to be both reasonable and necessary, and implicitly found that the
$40,000 monthly rental expense was both reasonable and necessary.
In addition, it would be illogical to suggest that the use of the physical
property on which the business was located was not a necessary
expense to the continued operation of the dealership.
In sum, the bankruptcy court noted each requirement of § 506(c),
considered the relevant evidence, and found that each requirement
was satisfied. Because the record supports the bankruptcy court's
findings, I would affirm the district court's order affirming the bank-
ruptcy court's order surcharging Ford Credit for the unpaid rental
expenses incurred by K & L. Accordingly, I join in Parts I, II, and III
of Judge Ervin's lead opinion and dissent from Part IV.B.
20