536 F. App'x 265
3rd Cir.2013Background
- Towne, Inc. and DMD Towne, LLC (Debtors) filed Chapter 11; The Margolis Law Firm was appointed special counsel to market and sell Debtors’ franchise and real property (the Collateral).
- BMW Financial Services (BMW FS) held perfected first-priority liens on most of Towne’s assets and on DMD’s property; Debtors owed BMW FS about $9,006,952.
- Margolis solicited a $6,000,000 offer for the Collateral, but BMW FS refused to consent to the sale without releases from Debtors; Debtors declined and the offer was withdrawn.
- The case was converted to Chapter 7, Margolis withdrew, the Chapter 7 trustee executed releases, and the Collateral later sold to LSI affiliates for $5,525,000.
- Bankruptcy Court allowed Margolis $84,585.11 in fees and $3,626.90 in expenses but denied Margolis’s motion to surcharge sale proceeds under 11 U.S.C. § 506(c); the District Court affirmed; Margolis appealed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Margolis may surcharge secured collateral under 11 U.S.C. § 506(c) for its fees and expenses | Margolis: its services were reasonable and necessary to preserve/dispose of the Collateral and thus directly benefited BMW FS | BMW FS: Margolis’s efforts did not produce the sale and primarily benefited Debtors; no direct benefit to BMW FS | Denied — Margolis failed to show expenditures were necessary or that they directly benefited BMW FS under § 506(c) |
| Whether BMW FS consented or acquiesced to being surcharged for Margolis’s fees | Margolis: BMW FS’s cooperation in initial marketing amounted to consent to be charged | BMW FS: limited cooperation is not consent to surcharge | Denied — cooperation insufficient to show consent to be charged |
| Whether BMW FS is estopped from denying benefit because of alleged secret collaboration favoring LSI | Margolis: BMW FS, the Franchisor, and LSI secretly collaborated, rendering Margolis’s work futile and estopping BMW FS | BMW FS: denies collaboration; no recognized estoppel theory supports surcharge | Denied — court found no authority recognizing such estoppel to create § 506(c) relief |
| Whether unlawful conduct (claimed violation of New York dealer law) by BMW FS justifies surcharge under § 506(c) | Margolis: BMW FS impeded sale seeking releases in violation of NY law, so it should bear costs | BMW FS: legal-violation claim is separate and not a basis for § 506(c) relief | Denied — alleged statutory violation, even if true, does not provide a basis for surcharge under § 506(c) |
Key Cases Cited
- Visual Indus., Inc. v. Lukens, 57 F.3d 321 (3d Cir. 1995) (§ 506(c) permits surcharge only in narrowly limited circumstances requiring direct benefit to secured creditor)
- In re C.S. Assocs., 29 F.3d 903 (3d Cir. 1994) (to recover under § 506(c) claimant must show expenditures were reasonable/necessary and directly benefited secured creditor)
- In re Flagstaff Foodserv. Corp., 739 F.2d 73 (2d Cir. 1984) (secured creditor’s consent may be considered in § 506(c) analysis but is not presumed from mere cooperation)
- IRS v. Boatmen’s First Nat’l Bank of Kan. City, 5 F.3d 1157 (8th Cir. 1993) (§ 506(c) prevents windfall to secured creditor by allowing recovery from collateral where creditor directly benefited)