C.S. ASSOCIATES, d/b/a UNIVERSITY NURSING AND REHABILITATION CENTER v. MITCHELL W. MILLER, ESQ.; THE CITY OF PHILADELPHIA; THE UNITED STATES OF AMERICA; HEALTHCARE SERVICES GROUP; PERLOFF BROTHERS, INC.; DIANE VENDETTI; THE SCHOOL DISTRICT OF PHILADELPHIA; NICHOLAS CANUSO, DR.; RAYMOND SILK, DR. and EUGENE SPITZ, DR.
No. 93-1961
UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT
July 20, 1994
1994 Decisions, Paper 86
On Appeal from the United States District Court for the Eastern District of Pennsylvania (D.C. Civ. No. 93-cv-03065)
UNITED JERSEY BANK, Appellant, v. MITCHELL W. MILLER, ESQ., Trustee; FREDERICK J. BAKER, ESQ., Trustee
Argued May 24, 1994
Before: COWEN and ROTH, Circuit Judges, and ACKERMAN, District Judge.1
Shanley & Fisher, P.C.
131 Madison Avenue
Morristown, NJ 07962-1979
Counsel for Appellant United Jersey Bank
Joseph DiGiuseppe (argued)
Assistant City Solicitor
City of Philadelphia Law Department
1101 Market Street, 10th Floor
Philadelphia, PA 19107-2997
Counsel for Appellee City of Philadelphia
Edward J. DiDonato
Ciardi & DiDonato, P.C.
1900 Spruce Street
Philadelphia, PA 19103
Counsel for Appellee Mitchell W. Miller, Esq., Bankruptcy Trustee of the Estate C.S. Associates
OPINION OF THE COURT
COWEN, Circuit Judge.
In this bankruptcy case, the bankruptcy court granted a motion by the City of Philadelphia (“the City“) to recover unsecured post-petition real estate taxes and water/sewer rents from the secured creditor, United Jersey Bank (“UJB“), pursuant to
I. BACKGROUND
C.S. Associates, d/b/a University Nursing and Rehabilitation Center, the debtor in this case, owned and operated a skilled care nursing home in Philadelphia. UJB is the Indenture Trustee under a Trust Indenture agreement entered into with the Philadelphia Authority for Industrial Development (“PAID“) in order to finance the acquisition, construction and equipping of the nursing home facility. C.S. Associates entered into an installment sale agreement with PAID on February 16, 1983. To provide the necessary funds with which to finance the acquisition, construction and completion of the facility, PAID authorized and issued bonds (“1983 Bonds“) in the aggregate principal amount of $6,870,000. The 1983 Bonds were issued under and are secured by the Indenture entered into by and between PAID and UJB as Indenture Trustee on February 16, 1983. Pursuant to the terms of the Indenture, PAID assigned all of its rights, its title and its interest under the installment sale agreement and all monies payable thereunder to UJB as Indenture Trustee for the benefit of the holders of the 1983 Bonds.
To secure the repayment of the 1983 Bonds, C.S. Associates granted to PAID a first priority mortgage on the facility and real property constituting the site of the facility. There is currently due and owing from C.S. Associates to UJB as
On August 15, 1988, C.S. Associates filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code. Thereafter, C.S. Associates failed to provide adequate services to its patients and on October 28, 1988, the facility was closed by the Department of Health of the Commonwealth of Pennsylvania. C.S. Associates’ unsecured creditors’ committee presented a plan of reorganization which called for the sale of the facility; however, this effort failed because, prior to the confirmation of the plan, the facility was repeatedly and severely vandalized from late September through December, 1989. On April 18, 1990, pursuant to a motion filed by the United States Trustee, the bankruptcy court ordered the debtor‘s case converted to a case under Chapter 7 of the Bankruptcy Code. Thereafter, Mitchell W. Miller was appointed Chapter 7 Trustee for the debtor.
During the pendency of C.S. Associates’ Chapter 7 proceeding, the City of Philadelphia filed two proofs of claim for post-petition administrative real estate taxes and water/sewer rents, totalling $548,706.80, which had been assessed against the facility. The City also filed a proof of claim for pre-petition real estate taxes and water/sewer rents, totalling $48,803.46, which under the applicable state law had properly become liens against the facility.
By order dated November 10, 1992, the bankruptcy court approved the sale of the facility for $2,416,000, free and clear
The bankruptcy court, in accordance with our holding in Equibank, N.A. v. Wheeling-Pittsburgh Steel Corp., 884 F.2d 80, 84-85 (3d Cir. 1989), held that the City‘s pre-petition liens had priority over UJB‘s secured claim as to the sale proceeds. However, the bankruptcy court held that the City‘s post-petition real estate taxes and water/sewer rents did not have priority over UJB‘s secured claim as to the sale proceeds. The bankruptcy court went on to suggest that the City might be able to recover its post-petition real estate taxes and water/sewer rents from the sale proceeds pursuant to either
Accordingly, on March 12, 1993, the City moved the bankruptcy court, pursuant to
UJB appealed the disputed bankruptcy court order to the district court, arguing that the City had not met the requirements of
II. DISCUSSION
UJB argues before us that the district court and bankruptcy court erred in holding that the City had met the requirements of
In Equibank, we held that the automatic stay provision of the Bankruptcy Code,
The code . . . provides two options for payment of taxes that have not attained lien status as of the date of the entry of the stay. First, they may be payable by the trustee, either as first priority administrative expenses, see
11 U.S.C. § 503(b)(1)(B)(i) , or as seventh priority expenses,11 U.S.C. § 507(a)(1) . Second, they may be payable by the secured creditor as payment for benefit received, see11 U.S.C. § 506(c) .
The parties dispute whether the City could properly receive payment for the real estate taxes and water/sewer rents pursuant to the second option. Section 506(c) of the Bankruptcy Code provides that: “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.”
In considering whether the post-petition real estate taxes and water/sewer rents assessed by the City qualified for treatment under
The City‘s taxes and water and sewer rents are costs which necessarily accrued against the Property during the period that it was marketed for sale. As a result of this marketing, the Property has been sold for an amount which will result in payment of certain net proceeds to UJB. These facts alone establish that UJB was conferred with a benefit by the delays effected by the sale process, which also caused the taxes to accrue. Hence, UJB received a direct benefit from the sale of the Property, which necessarily resulted in the accrual of these taxes and water and sewer rents while the Property was marketed, and is obliged to compensate the City for same out of the net sale proceeds payable to it.
In re C.S. Assocs., No. 88-12842S, slip op. at 2 (Bankr. E.D. Pa. April 22, 1993); app. at 469.
On appeal from the order of the bankruptcy court, the district court held:
[T]he fact of the accrual of the taxes over the period during which the property was marketed is not open to dispute, nor is the reasonableness of the amount of taxes as assessed pursuant to Pennsylvania statute. Further, the Bankruptcy Court‘s determination that the fact of the accrual of taxes while the marketing of the property took place was a benefit to the secured creditor represents a permissible inference for the court to have drawn and is supported by the record of the proceedings.
United Jersey Bank v. Miller, No. 93-3065, slip op. at 5 (E.D. Pa. Sept. 9, 1993); app. at 544.
As revealed by the language quoted above, the bankruptcy court and the district court operated under the assumption that the general and incidental benefits which an entity receives from municipal services are the type of benefits which
Both the bankruptcy court and the district court mistakenly relied on our holding in Equibank, 884 F.2d 80, in reaching their conclusion. In Equibank, we merely stated that real property taxes “may . . . arguably be payable as the secured creditor‘s liability pursuant to [S] 506(c).” Id. at 86 (emphasis added). Because it was not clear to us what benefit the secured creditor derived from the payment of those taxes, we remanded the case so that the bankruptcy court could make a determination as to whether payment of the taxes provided a direct benefit to the secured creditor. Id. at 86-87.
In this case, the City did not meet the requirement that it demonstrate a direct benefit to the secured creditor. Section 506(c) does not contemplate recovery for costs and/or expenses associated with the incidental benefits an entity may receive by virtue of existing within a municipality which provides general services funded by taxes. This point has been cogently made by a district court:
Section 506(c) was not intended to encompass ordinary administrative expenses that are attributable to the general operation and dissolution of an estate in bankruptcy. Rather, it was designed to extract from a particular asset the cost of preserving or disposing of that asset. The trustee‘s payment of real property taxes might benefit . . . the . . . secured creditors to the extent that monies raised from the collection of property taxes are used, in part, to fund the local fire, police, and road maintenance departments, which provide protection to the secured property against vandalism and fire, and ensure that the adjoining road is kept in good condition. This indirect benefit, however, is insufficient to bring these post-petition property taxes within the scope of § 506(c).
Courts have narrowly construed § 506(c) to encompass only those expenses that are specifically incurred for the express purpose of ensuring that the property is preserved and disposed of in a manner that provides the secured creditor with a maximum return on the debt and also apportions those costs to the secured creditor who, realistically, is assuming the asset. Although in exchange for the payment of property taxes, the estate would reap benefits that might aid in preserving the asset in the advent of fire or from the threat of vandalism, this incidental benefit is not what was contemplated by § 506(c). Monies a government entity derives from the collection of real property taxes fund many governmental operations and services which are not directly related to preservation and disposal of the asset and in no way provide a benefit to the secured creditor. Real estate tax revenues support public parks, libraries, schools, and social services, which do not constitute expenses peculiarly connected with preserving or disposing of the parcel of land.
Moreover, the Bankruptcy Code explicitly sets forth the level of priority to be afforded unsecured tax claims. Section 503 . . . indicates that tax claims are generally afforded the status of ordinary administrative expenses, thereby receiving first priority after secured claims, unless they are the type of taxes specified in § 507(a)(7), in which case they will receive a seventh ranked priority after secured claims.
The City argues that since the debtor retained no equity in the subject property, UJB as the secured creditor received the full benefit from the sale of the property. The City argues that having the property on the market benefitted UJB because it was able to obtain the best available price for the property, and therefore real estate taxes and water/sewer rents which necessarily accrued during that time frame should be recoverable under
Had the City put forth evidence that the property had received some direct or special governmental service which benefitted the property, our conclusion might be different. For instance, if the City had stationed a police officer at the property to protect it, or if the fire department had provided some direct service at the location, such services might have been quantifiable and might have been recoverable under
The City asserts that trash removal and road, water and sewer service benefitted the property. However, the City apparently never presented proof in the bankruptcy court that any of these services actually were performed for the direct benefit of the property. More importantly, even assuming that such services were performed for the benefit of the property, the City
We will reverse the judgment of the district court. The case will be remanded to the district court with a direction that it remand the case to the bankruptcy court with instructions to enter an order denying the motion of the City seeking payment under