Southwest Securities, FSB v. Milo Segner, Jr.Southwest Securities, FSB v. Milo Segner, Jr.
from $11.8 million in 2006 to $22.5 million in 2012. J.A. 827-40, 4908.
IMP‘s distortion of tying doctrine serves in fact as a potential template for any local business wishing to drive a national competitor out of its regional market. That template would prove particularly useful when, as in this case, the competition is on a local basis and the competitors are a mix of national and local players. If offering products or services across a particular field is tying and if a national network is itself suspect when compared to the resources of a regional contender, then businesses have much less motivation to operate in multiple geographic markets. Why shoulder the costs of expansion when the specter of antitrust liability awaits?
Cornering the local Washington-Baltimore market may not have been far from IMP‘s mind. Seth Hurwitz, IMP‘s principal, has protested that “the scourge of the [live music] industry is too many shows.” J.A. 1566. According to Hurwitz, LN was “paying way too much money just to keep [a] show away from [IMP],” and the bidding process for concerts—the key mechanism for price competition among promoter—made it “prohibitive to actually do a show and make money.” J.A. 1560, 1562. To ease what it considered an excess of competition, Hurwitz sought to eliminate its archrival. He suggested either that LN “sell the Nissan/Jiffy Lube property” or that the two promoters “work together” to stop bidding against each other when bringing artists to the Washington-Baltimore area. J.A. 1560-62, 1570. After failing to collude with LN or expel it from the market, plaintiff turned to the next best option—antitrust law.
This case thus captures the anticompetitive effects and consequences that can ironically arise from antitrust lawsuits. See Matsushita Elec. Indus., 475 U.S. at 594, 106 S.Ct. 1348 (warning against allowing antitrust doctrine to “chill the very conduct the antitrust laws are designed to protect“); William J. Baumol & Janusz A. Ordover, Use of Antitrust to Subvert Competition, 28 J.L. & Econ. 247 (1985). This can be a special hazard in antitrust litigation brought by competitors of the defendant. See Edward A. Snyder & Thomas E. Kauper, Misuse of the Antitrust Laws: The Competitor Plaintiff, 90 Mich. L.Rev. 551 (1991). If abused, such suits can ineluctably lead to an environment of commercial parochialism. By cutting ties among related products and related producers, IMP‘s view of economic activity, if allowed to take hold, would box firms both into their own product markets and into their own geographic locales. That tendency toward isolationism has more in common with the market squares and horse-drawn buggies of the nineteenth century than with the interconnected and technology-driven contemporary world. The loser in all this is of course the consumer, left with a patchwork of localized monopolies and one-product wonders flourishing at the expense of larger and more diverse competitors. To help prevent antitrust law from being hijacked for such anticompetitive ends, we join the district court in sending this tussle between two rivals back to the marketplace from whence it came. The judgment is hereby AFFIRMED.
Davor Rukavina, Esq., Edward Lee Morris (argued), Munsch, Hardt, Kopf & Harr, P.C., Dallas, TX, for Appellee.
Before BENAVIDES, DENNIS, and COSTA, Circuit Judges.
GREGG COSTA, Circuit Judge:
Debtor Domistyle, Inc. owned a candle factory located on several acres in Laredo. At the inception of the bankruptcy, everyone believed the property was worth more than its three outstanding mortgages, which gave the largest security interest to Southwest Securities FSB. The trustee thus spent the better part of a year attempting to sell the property and realize the supposed equity for the estate. When those efforts proved unsuccessful, dispelling any notion that there was equity in the property, the trustee abandoned the property to Southwest. That left one question for the bankruptcy case that we confront in this appeal: Should the estate or the secured creditor pay the property‘s maintenance expenses incurred while the trustee was trying to sell the property?
I.
Domistyle was a manufacturer and purveyor of home goods. It was placed in receivership in April 2013. Shortly thereafter, the receiver, Milo Segner, initiated Chapter 11 proceedings on the belief that Domistyle had sufficient equity to reorganize and emerge from bankruptcy as a going concern.1 This belief turned out to be incorrect, and many secured and unsecured creditors—as well as professionals involved in the bankruptcy—will likely see no or severely diminished recovery.
One of the debtor‘s most valuable assets was an industrial building located on 17 acres of real property in Laredo (“Property“). The primary lien on the Property was held by Southwest in the amount of $3.69 million.2 Recent appraisals had val-ued
In early 2014, a plan of liquidation was confirmed. It established a “Liquidating Trust” with Segner as trustee. The plan gave the Trust until May 1, 2014 to sell the Property at a price sufficiently high to cover the value of the mortgage loan owed to Southwest Securities. It also obligated the Trust to “maintain reasonable insurance” and “own the Real Property as a reasonably prudent owner would own it.”
Segner‘s efforts to sell the Property began before the plan of liquidation was finalized and confirmed. Employing the services of a commercial real estate firm, he marketed the Property from approximately August 2013 until May 2014. Throughout this time, he paid the following expenses related to the Property: security, repairs to the roof and electrical system, mowing, landscaping, utilities, and insurance premiums.
Despite his efforts, Segner never received an offer sufficient to pay Southwest‘s secured claim and any superior tax claims in full. The only offer received, for $4 million, required Southwest‘s approval because the net proceeds from the sale would not provide for full payment of Southwest‘s lien. At that time, Segner asked Southwest to reimburse the Trust for some of the “surcharge“—the ongoing preservation and maintenance expenses being shouldered by the Trust. Southwest did not agree to the proposed terms, and the sale did not go through.
The May 1st deadline arrived but Southwest did not exercise either option available to it under the plan: foreclosure or a deed-in-lieu. Meanwhile, Segner continued to pursue a deal with the party who had offered $4 million. Segner lost the buyer on or around May 22nd. Soon after, he informed Southwest that he intended to cease paying certain expenses, including “insurance, security and utility service.” Southwest objected because “such action would virtually destroy any value remaining in the Laredo Property.” Segner then filed a “motion to abandon” the Property as “burdensome and of inconsequential value to the Liquidating Trust.”3 Southwest objected to the abandonment.
A few weeks later, with the motion to abandon still pending, Segner moved to surcharge the expenses paid in maintaining the Property from the start of the bankruptcy case. The plan had explicitly reserved the Trust‘s right to seek surcharge to the extent allowable under
In August 2014, the bankruptcy court held an evidentiary hearing on the abandonment and surcharge motions. The
II.
The general rule in bankruptcy is that administrative expenses cannot be satisfied out of collateral property “but must be borne out of the unencumbered assets of the estate.” 4 COLLIER ON BANKRUPTCY ¶ 506.05 (16th ed. 2015).
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, including the payment of all ad valorem property taxes with respect to the property.
Southwest contends that Segner‘s request for surcharge fails on the last of these elements: that Southwest did not benefit from the expenses paid by Segner to preserve the Property. In rebuttal, Segner identifies at least two benefits enjoyed by Southwest: (1) receiving the Property with its value preserved and (2) avoiding preservation costs during the nearly 14 months that the Property was part of the Liquidating Trust. The bankruptcy court sided with Segner, concluding that “Southwest benefited, and the property, the collateral benefited from the expenses.”
There are two components to Southwest‘s argument that Segner failed to meet the benefit requirement of
A.
The first question is whether, as Southwest maintains,
Where does Delta Tower‘s “primarily for the benefit of” language come from? Not the Bankruptcy Code.
Consistent with the statute‘s text, the Collier‘s treatise focuses on the backward-looking aspect of the benefit inquiry: did the secured creditor in fact benefit from the expenses? See, e.g., 4 COLLIER ON BANKRUPTCY ¶ 506.05 (“In general, a secured creditor receives a ‘benefit’ within the meaning of section 506(c) if the relevant expense preserved or increased the value of its collateral.“); id. ¶ 506.05[6][c] (“[T]he facts of a particular case may justify charging the holder of a secured claim with certain expenses if a clear benefit to the secured creditor can be demonstrated.“). The rationale for this “hindsight” approach is to prevent unjust enrichment: “a secured creditor should not reap the benefit of actions taken to preserve the secured creditor‘s collateral without shouldering the cost.” Id. ¶ 506.05; see also In re JKJ Chevrolet, Inc., 26 F.3d 481, 483 (4th Cir.1994) (“The purpose of this provision [11 U.S.C. § 506(c)] is to prevent a windfall to a secured creditor at the expense of the estate.“). Similarly, our case law administering
No such inequity results, however, when the estate bears the burden of general administrative costs which only incidentally benefit a secured creditor. Nonetheless, some trustees or administrative claimants have tried to invoke the statute—as they invoked the pre-existing legal rule on which the statute is based7—as a way to recover general administrative costs from fully encumbered assets. See, e.g., In re Sonoma V, 24 B.R. 600, 603-04 (9th Cir. BAP 1982) (application to surcharge legal fees arising from “general bankruptcy matters” and litigation between the debtor and another creditor); Codesco, 18 B.R. at 228 (application to surcharge legal fees incurred by debtor in failed reorganization). There was an arguable statutory basis for doing so. Consider what is probably the most standard and significant general administrative expense: legal fees for debtor‘s counsel. Amounts paid to debtor‘s counsel assisting with a reorganization or liquidation can be reasonable and necessary, and they often benefit a secured creditor. In Codesco, for example, these three requirements may well have been met in a case in which counsel sought to surcharge its fees—including fees related to negotiating the sale of a number of assets and for “day-to-day handling of vast array of problems, including litigation, insurance, financing, employee concerns, and related matters“—against collateral (accounts receivable and certain real property) securing the claim of a creditor. See 18 B.R. at 228. Yet the court denied the surcharge, concluding that the reorganization legal services were “primarily of benefit to the debtor” and any “tertiary benefit bestowed upon the secured property ... is too indefinite and remote” to support surcharge. Id. at 229. Courts thus developed the judicial gloss of the “primarily for the benefit of the secured creditor” requirement to prevent
Reflecting these origins of the “primarily for the benefit of” language, a number of circuit cases applying it over the years have stressed the lack of a direct connection between given expenses and the collateral at issue. These include the two circuit cases cited in Delta Towers as authority for the requirement: In re Cascade Hydraulics and Utility Service, Inc., 815 F.2d 546 (9th Cir.1987), and Brookfield Production Credit Ass‘n v. Borron, 738 F.2d 951 (8th Cir.1984). The expenses in Cascade Hydraulics included telephone expenses, federal withholding taxes, social security taxes, attorney fees, and executive compensation arising from operation of the debtor‘s business before it was liquidated. See 815 F.2d at 547. The Ninth Circuit reversed an order surcharging these expenses because there was no showing that these expenses “helped dispose of or preserve the value of the collateral.” Id. at 549. Notably, costs associated with the sale of the collateral were also surcharged but were not disputed by the secured creditor. See id. at 548 n. 1. Brookfield Production makes the same distinction. That case involved the debtors’ costs in caring for and feeding turkeys and livestock, see Brookfield Production, 738 F.2d at 954 (Bright, J., dissenting), only some of which served as collateral for debt owed to the secured creditor. Id. at 952 (majority opinion). The Eighth Circuit approved the lower court‘s decision to reject surcharge due in part to the debtor‘s failure to “ascribe actual expenses to specific items of collateral.” Id.; see also id. at 954 (Bright, J., dissenting) (“Concededly, [debtors] have not provided the court with a specific accounting of expenditures that went to specific items of collateral. ...“). A number of courts of appeals have made explicit the necessary connection between the expense and the collateral. See, e.g., In re K & L Lakeland, Inc., 128 F.3d 203, 210 (4th Cir.1997) (criticizing lower court for failing to identify how the expenses were “incurred primarily to protect or preserve [the secured creditor‘s] collateral“); Cascade Hydraulics, 815 F.2d at 548 (“To satisfy the benefit test of section 506(c), Cascade must establish in quantifiable terms that it expended funds directly to protect and preserve the collateral.“); see also In re Towne, Inc., 536 Fed.Appx. 265, 269 (3d Cir.2013) (affirming bankruptcy court‘s finding that ” ‘the primary benefit of [the attorney‘s] legal services was to the Debtors ... rather than to preservation of the collateral of [the secured creditor]’ “).
Like these other circuits, we accept that an expense which was not incurred primarily to preserve or dispose of encumbered property cannot meet the requirement of being incurred primarily for the benefit of the secured creditor. But we also accept the inverse: that an expense incurred primarily to preserve or dispose of encumbered property meets the requirement. The necessary direct relationship between the expenses and the collateral is obvious here; all of the surcharged expenses related only to preserving the value of the Property and preparing it for sale. Indeed, only expenses “directly related to preserving or enhancing the Real Property” could be the subject of a surcharge motion pursuant to the plan of liquidation.
Our holding also finds support in one of our few decisions applying Delta Towers‘s “primarily for the benefit of the creditor” language. Senior-G & A held that a secured creditor had “misread[]” our case law in arguing that workover expenses, which were necessary to boost production from a well, could not have been incurred “primarily” for its benefit because it had only a 59.5% interest in the well‘s production. Emphasizing that the “primarily for the creditor‘s benefit” inquiry is “particularly case specific,” we rejected the creditor‘s argument that primarily means solely with a common-sense explanation: the “very fact that PSI received 59.5% of the production rendered the workover expenses ‘primarily for its benefit.’ ” Senior-G & A, 957 F.2d at 1300. Likewise here. Even under the since-discredited view that the Property was worth $6 million, Southwest‘s lien represented almost two-thirds of the collateral‘s value. The possibility at the time the expenses were incurred that they could also benefit other creditors does not render surcharge unavailable.8
We have never applied this holding from Trim-X, which Delta Towers cited as only one of many cases defining the general elements of
This does not mean that the statute fails to account for the Seventh Circuit‘s concern that a trustee should have an incentive to act promptly in determining whether an asset has equity for the estate.
B.
That leaves Southwest‘s argument that Segner failed to quantify the extent to which Southwest actually “benefitted from the expenses” in hindsight. Delta Towers, 924 F.2d at 76. It seems obvious that Southwest obtained some benefit from the expenses. Consider the security, lawn mowing, and roof repairs paid for by Segner, to name just a few of the expenses surcharged. Absent these, Southwest may have been left trying to sell a vacant building damaged by vandalism, filled with overgrown weeds, and saddled with a leaking roof. Southwest recognized as much when it objected to Segner‘s proposal to stop paying the expenses, explaining that “such action would virtually destroy any value remaining in the Laredo Property.” But the statute requires the bankruptcy court to determine how much benefit the secured creditor actually received. See
The bankruptcy court did not clearly err in finding that Southwest received a direct and quantifiable benefit from Segner‘s stewardship of the Property. Although Southwest claims that the court lacked any evidence of the extent to which Southwest benefited from the expenses, the testimony of Segner‘s experienced real estate broker was that the value preserved was at least as much as the amount expended.12 Southwest cross examined the broker but did not offer a competing expert or a contradictory valuation. Based on the testimony of Segner‘s witness, the bankruptcy court found a benefit to Southwest that was, at minimum, equal to the amount of the expenses paid.
Southwest argues that the bankruptcy court “confused the mathematical exercise of adding up the expenditures with the ‘direct quantifiable benefit’ to the secured creditor meant by this Court in analyzing
The bankruptcy court‘s factual findings cannot be reversed absent clear error. Delta Towers, 924 F.2d at 76. Put another way, “a determination of whether expenses meet the requirements of [Section] 506(c) depends upon the facts of the particular case” and this court sitting in review “does not enjoy absolute freedom to make its own findings” after “reweigh[ing] the evidence.” Id. at 77-78.
III.
As the bankruptcy court noted, the outcome of this proceeding was regrettable. Everyone believed that Southwest was oversecured and that the Property, properly preserved, would yield additional recovery to the estate as a whole. Everyone was wrong. But Southwest‘s articulated rule that would preclude surcharge of pre-abandonment expenses stretches
AFFIRMED.
Notes
Although the emphasis under the new statute is on “benefit” to the secured creditor, considerations of “consent” and “causation” [from pre-codification case law] are still relevant. ... The bankruptcy court‘s determination that the expenses incurred prior to the trustee‘s petition for abandonment were not for the benefit of [the secured creditor] is consistent with this rule. Although the secured creditor eventually “benefited” from these expenses in the sense that it received the assets unharmed, it did not in any way consent to or cause these expenses.Trim-X, 695 F.2d at 301 (citations omitted).