Three Twenty-One Capital Partners, LLC v. U.S.A. Dawgs, Inc.
2:18-cv-01724
| D. Nev. | Sep 27, 2019Background
- Debtor U.S.A. Dawgs, Inc. sold its assets; proceeds were the estate's only asset and constituted collateral securing GemCap Lending I, LLC’s claim.
- Three Twenty-One Capital Partners, LLC provided services to the debtor and sought payment of its fees and expenses from the asset sale proceeds by moving to surcharge GemCap’s collateral under 11 U.S.C. § 506(c).
- The bankruptcy court approved Three Twenty-One’s fee application (allowing the fees as administrative claims) but denied the motion to surcharge GemCap’s collateral.
- The debtor-in-possession and Three Twenty-One jointly moved for the surcharge in bankruptcy, but on appeal only Three Twenty-One prosecuted the challenge to the denial.
- GemCap opposed the surcharge, argued Three Twenty-One lacked standing to appeal (only the trustee/debtor may seek a §506(c) surcharge), and alternatively argued Three Twenty-One failed to show a reasonable, quantifiable benefit to GemCap and used an incorrect surcharge formula.
- The sale price was below the amount GemCap had signaled it could credit-bid; the debtor operated at a loss using GemCap’s cash collateral, and GemCap consistently objected to the debtor’s use of its collateral.
Issues
| Issue | Plaintiff's Argument (Three Twenty-One) | Defendant's Argument (GemCap) | Held |
|---|---|---|---|
| Standing to appeal the bankruptcy court’s denial of surcharge | Three Twenty-One contends it is aggrieved because sale proceeds (GemCap collateral) are the only source to pay its fees | Only the trustee or debtor-in-possession may pursue a §506(c) surcharge; Three Twenty-One is not the trustee/DIP and thus lacks standing | Three Twenty-One failed to show it was directly and adversely affected; court noted DIP moved and was denied; Three Twenty-One did not rebut standing argument and did not meet its burden |
| Who may seek a §506(c) surcharge | Three Twenty-One argued its services were essential and it should be paid from secured collateral | GemCap: statute unambiguously limits surcharge relief to trustee or debtor-in-possession | Court reiterated only trustee/DIP can pursue surcharge under precedent; Three Twenty-One could not independently obtain surcharge |
| Whether Three Twenty-One showed a reasonable, necessary, quantifiable benefit to GemCap | Three Twenty-One argued its services preserved collateral and facilitated the sale, producing a benefit to GemCap | GemCap argued Three Twenty-One failed to prove quantifiable benefit; GemCap was prejudiced because it could have foreclosed or credit-bid earlier | Bankruptcy court’s factual findings that Three Twenty-One did not demonstrate a quantifiable benefit were not clearly erroneous; affirmed |
| Correctness of Three Twenty-One’s surcharge calculation | Three Twenty-One applied a formula to measure benefit and amount recoverable against collateral | GemCap argued the formula was incorrect and recovery is limited to the creditor’s measured benefit | Court affirmed denial on merits (no need to reach detailed formula because benefit not shown); Three Twenty-One did not meet burden to recover against collateral |
Key Cases Cited
- Matter of Point Ctr. Fin., Inc., 890 F.3d 1188 (9th Cir. 2018) (standing to appeal in bankruptcy limited to persons aggrieved)
- In re Thorpe Insulation Co., 677 F.3d 869 (9th Cir. 2012) (definition of person aggrieved and standards for appealability)
- In re Debbie Reynolds Hotel & Casino, Inc., 255 F.3d 1061 (9th Cir. 2001) (surcharge under section 506(c) and who may pursue it)
- Hartford Underwriters Ins. Co. v. Union Planters Bank, N.A., 530 U.S. 1 (2000) (statutory interpretation that surcharge remedy is available to trustee/DIP)
- In re Compton Impressions, Ltd., 217 F.3d 1256 (9th Cir. 2000) (benefit test for §506(c): expenditures must be shown in quantifiable terms and recovery limited to creditor’s benefit)
- Matter of Fondiller, 707 F.2d 441 (9th Cir. 1983) (appellant bears burden to show it was directly and adversely affected to have standing to appeal)