Whittier Seafood, LLC
11 U.S.C. § 506(c) AGAINST CATHAY BANK’S COLLATERAL
Thе Debtors in this case confirmed a chapter 11 plan of reorganization which proposed to pay all creditors based upon the sale of real property to be liquidated to fund that plan. Reality proved harsh, and insufficient funds were generated from the sale of the Debtors’ аssets to pay off the largest secured creditor. The Debtors terminated their bankruptcy counsel post-confirmation, and counsel has been left with over half a million dollars in unpaid fees and expenses for work performed during the case. Counsel now seeks derivative authority to pursue a surcharge of the secured creditor’s collateral under
Background
On November 21, 2024, the court entered its order authorizing the jointly administered Debtors1 to employ Bush Kornfeld LLP as their general bankruptcy counsel, nunc prо tunc to the petition date. ECF No. 202.
On June 5, 2025, the Debtors confirmed their fourth amended chapter 11 plan of reorganization (Plan). ECF No. 386. Among other things, the Plan addressed compensation for professionals employed by the estate, defined as “Administrative Expense Claims.” ECF No. 386 at 2, § II.A.1. Under the confirmed Plan, Administrative Expense Claims incurred post-petition
Bush Kornfeld served as general counsel to the Debtors until their post-confirmation termination on August 4, 2025. ECF No. 464.
The Debtors were not operating or producing regular income when they filed their bankruptcy petition. From the outset, it was apparent that any plan would depend on either some refinаncing or more likely the liquidation of the Debtors’ assets. The Debtors argued that their assets had value well above the combined total of all debts. This critical assumption was not seriously challenged. Indeed, it formed the cornerstone of the bankruptcy proceeding and ultimately, the confirmed plan of liquidation. Unfortunately, the post-confirmation sales of the Debtors’ assets did not generate sufficient proceeds to pay the Debtors’ largest secured creditor, Cathay Bank, in full. Accordingly, those sales have not generated funds to pay administrative expenses such as Bush Kornfeld’s outstanding professional fees and expenses under the Plan. As such, no payments have been made to administrative claimants under the Plan.
On November 5, 2025, Bush Kornfeld filed the Motion for Order (I) Granting Derivative Standing to Pursue Surcharge; and (II) Approving Surcharge Under
Analysis
Section 506(c) provides, in pertinent part, that the trustee or debtor-in-possession “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….”
Standing to pursue a claim for surcharge under § 506(c) is strictly enforced. The United States Supreme Court in Hartford Underwriters Ins. Co. v. Union Planters Bank, N.A. unequivocally ruled that § 506(c) “does not provide an administrative claimant an independent right to use the section to seek payment of its claim.” 530 U.S. 1, 14 (2000). The Court acknowledged that a debtor-in-possession could also use § 506(c), “as they are expressly given the rights and powers of a trustee by
Although it did not address derivative standing issues, in Debbie Reynolds the Ninth Circuit Cоurt of Appeals discussed the standing of a superpriority creditor to challenge the debtor-in-possession’s agreement with its secured creditor to surcharge that creditor’s collateral under § 506(c) for payment of the debtor’s counsel’s fees. Part of that agreement foreclosed the debtor, administrative claimants and other parties in interest from seeking any further § 506(c) claims against the secured creditor. Debbie Reynolds, 255 F.3d at 1064. The superpriority creditor, Calstar Corporation, objected on the basis that the agreement “impermissibly abrogated” Calstar’s right to surcharge the secured crеditor’s collateral for postpetition financing it had extended to the debtor. Id. at 1063. The Ninth Circuit concluded that after the Supreme Court’s decision in Hartford Underwriters, Calstar had no standing to seek surcharge under § 506(c), and therefore lacked standing to object to the debtor’s agreement. Id. at 1065-66.
However, like the Supreme Court, the Ninth Circuit in Debbie Reynolds did not rule out the possibility thаt a party could obtain derivative standing to pursue a claim under § 506(c): “[I]n order for a party that provided a benefit to a secured creditor to receive payment for that benefit, the party must convince the trustee to seek a § 506(c) surcharge or get leave from the Bankruptсy Court to do so.” Id. at 1068 (citing Hartford Underwriters, 530 U.S. at 13 n. 5) [emphasis added].
Subsequent Ninth Circuit decisions, however, have rejected parties’ requests for derivative standing to pursue § 506(c) claims. The Ninth Circuit Bankruptcy Appellate Panel (BAP) declined to grant derivative standing under
Similarly, in declining to grant derivative standing to a creditor to pursue surcharge under § 506(c), the United States Bankruptcy Court for the Northern District of California observed that “the purpose of § 506(c) is to compensate the estate when it expends funds to protect and preserve the collaterаl of a secured party.” In re Smith Bros. Motors, Inc., 286 B.R. 905, 909 (Bankr. N.D. Cal. 2002). Although short of ruling that it could never grant derivative standing to a party to pursue the trustee’s rights under § 506(c), the Smith Bros. court concluded that even if it could, such ruling was not appropriate in the case before it. Id. at 908. Chiefly, the Smith Bros. court deferred to the chapter 11 trustee’s determination that hе did not have a valid surcharge claim, and thus neither did any claimant standing in his shoes. Id. at 909.
Finally, in In re Suntastic USA, Inc., the United States Bankruptcy Court for the District of Arizona addressed multiple motions filed by administrative claimants, including the debtor’s counsel, seeking court authorization to pursue § 506(c) claims or compel the trustee to pursue those claims on their behalf. 269 B.R. 846, 847 (Bankr. D. Ariz. 2001). Examining both Hartford Underwriters and Debbie Reynolds, the Suntastic court concluded, “at bottom, Debbie Reynolds establishes that, in the Ninth Circuit, even where the trustee has no economic incentive to pursue recovery under [§] 506(c), nobody else may pursue surcharge—period.” Id. at 849. Further, the Suntastic court determined that a trustee could not be compelled to pursue claims under § 506(c) where the only benefit from such pursuit would inure to individual claimants rather than the debtor’s estate as a whole: “This Court concludes that it is not part of a trustee’s mandatory exercise of his fiduciary obligations to take actions the end result of which only benefit an individual creditor or claimant. As a result, his refusal to prosecute the claims is not open to challenge under governing law.” Id. at 850.
The court agrees with the Smith Bros. court in concluding that “the purpose of § 506(c) is to compensate the estate….” Like the other courts to consider this issue, the court finds that even if it had authority to grant derivative standing to pursue a § 506(c) claim (which it does not decide), the circumstances of this case would not warrant it where only Bush Kornfeld, and not the Debtors’ estates, would benefit from that pursuit. Suntastic USA, 269 B.R. at 850. Its request to recover its attorney fees for representing the Debtors is inappropriate. As the Smith Bros. court explained, the
Bush Kornfeld is not a secured party, but finds itself likewise in the same unfortunate position as did the secured creditor in Smith Bros. - the gеnerally accepted valuations of the Debtors’ assets failed to materialize. Bush Kornfeld sought to represent multiple debtors in a non-operating chapter 11, where all parties in interest believed the combined assets of those debtors significantly exceeded those debtors’ сombined debts, including accrued administrative expenses. A host of significant decisions were premised on this assumption and belief. From the court’s perspective, the law firm did a commendable job formulating and confirming a plan of liquidation in a relatively short period of time. If the parties’ valuаtions resulted in anything close in the sales that were expected, all parties would have been paid. But in this regard the court cannot say that Bush Kornfeld’s representation of the Debtors in bankruptcy were reasonable, necessary costs and expenses to preserve or dispоse of Cathay Bank’s collateral. The administration of the bankruptcy was for the benefit of the unsecured creditors and the equity interests as the Debtors first explored the possibility of refinancing their debts then sought to sell the assets on their terms. Again, from the court’s perspective, counsel for the professionals spent a considerable amount of time and effort to move the case towards the sale of the Debtors’ assets which were expected to pay everyone in full and even anticipated a return for equity. To their credit, they were able to overcomе and address obstacles to confirm the plan of liquidation and proceed to the sale of the assets. Bush Kornfeld is certainly entitled to be paid for its representation of the Debtors. However, it cannot surcharge Cathay Bank’s collateral to do so under § 506(c) in these circumstanсes.
Conclusion
For the reasons stated herein, the Motion for Order (I) Granting Derivative Standing to Pursue Surcharge; and (II) Approving Surcharge Under
/s/ Gary Spraker
GARY SPRAKER
United States Bankruptcy Judge
Serve: Debtors
J. Day, Esq.
L. Bohleber, Esq.
G. Fox, Esq.
D. Neu, Esq.
M. Parise, Esq.
L. Thornton, Esq.
J. Torgerson, Esq.
J. Kaplan, Esq.
R. Murphy, Esq.
M. Mills, Esq.
T. Brannon, Esq.
A. Ivanov, Esq.
G. Pitts, Esq.
J.M. Palomares, Esq.
F. Rasch, Esq.
J. Welch, Esq.
J. Zack, Esq.
J. Tracy, Esq.
B. Peterson, Esq.
A. Smith, Esq.
B. Medeiros, Esq.
M. Kotwick, Esq.
R. Gayda, Esq.
S. Andre, Esq.
C. Myerson, Esq.
U.S. Trustee
ECF Participants via NEF