COMPTON v QUEEN CITY BANK, 9856701
U.S. 9th Circuit Court of Appeals
COMPTON v QUEEN CITY BANK
9856701
In re: COMPTON IMPRESSIONS, LTD.,
a California limited partnership,
Debtor.
No. 98-56701
COMPTON IMPRESSIONS, LTD., a
California limited partnership, D.C. No.
Appellant, CV-97-04986-ER
v.
QUEEN CITY BANK, N.A.; CERRITOS
VALLEY BANK; PACIFIC BUSINESS
BANK,
Appellees.
In re: COMPTON IMPRESSIONS, LTD.,
a California limited partnership,
Debtor.
No. 98-56800
QUEEN CITY BANK, N.A.; CERRITOS
VALLEY BANK; PACIFIC BUSINESS D.C. No.
BANK, CV-97-04986-ER
Appellants,
OPINION
v.
COMPTON IMPRESSIONS, LTD., a
California limited partnership,
Appellee.
Appeal from the United States District Court
for the Central District of California
Edward Rafeedie, District Judge, Presiding
Argued and Submitted
April 5, 2000--Pasadena, California
Filed July 11, 2000
Before: Procter Hug, Jr., Chief Judge, David R. Thompson,
Circuit Judge, and Jane A. Restani, Court of International
Trade Judge.1
Opinion by Judge Thompson
residential units. To this end, Compton hired the law firm of
Rutter, Hobbs and Davidoff (RHandD), and a sales and mar-
keting company, The Kaleson Group (collectively, the profes-
sionals).
The first stipulation earmarked money to be carved out
from the sale of each unit to be used for construction, market-
ing, and sales expenses, and for payments on the construction
loan, and included: (1) a lien and payment priority for the
Banks' postpetition financing; (2) the replacement of Comp-
ton's general partner; (3) a limitation on Kaleson's monthly
payment; (4) procedures for releasing mechanics liens; (5) a
limitation on real estate and sales commissions to no more
than 6%; and (6) a requirement for the Banks' approval
regarding payment of expenses from operating cash.
In the second stipulation Compton agreed that the Banks
could obtain relief from the automatic stay, allowing them to
foreclose, if certain conditions were not met by a specified
date. Although the conditions were not met, Compton contin-
ued to provide the Banks with monthly reports.
When the sales and completion of the project were nearly
complete, Compton moved to surcharge the Banks for ser-
vices rendered and expenses incurred by RHandD and Kale-
son. Compton argued that the Banks recovered more than they
would have if they had controlled the liquidation process.
Since the Banks had received substantial monetary benefits
from the services performed by RHandD and Kaleson, Comp-
ton argued, they should pay for the services that created those
benefits.
The bankruptcy court denied the surcharge motion, except
for $10,000 in attorney fees and costs. Compton appealed the
bankruptcy court's denial, and the Banks cross-appealed to
the district court. The district court affirmed.
Compton appealed.
The Banks argued that Compton did not have standing to
bring a surcharge motion because the surcharge it sought
could only benefit the professionals and not the bankruptcy
estate.
[1] Compton had standing to bring surcharge motion.
Compton owed its professionals the money that it sought
through the surcharge motion. Compton incurred its profes-
sionals' fees and expenses to preserve and dispose of the
property that was the subject of the Chapter 11 reorganization,
and a recovery of those fees and expenses would redound to
the benefit of the estate's administrative creditors.
[2] Payment of administrative expenses from the proceeds
of secured collateral is allowed when incurred primarily for
the benefit of the secured creditor or when the secured credi-
tor caused or consented to the expense.
[3] Compton had to demonstrate that the expenses it sought
to surcharge against the Banks were reasonable, necessary,
and beneficial to the Banks' recovery, or that the Banks
caused or consented to those expenses.
[4] The services for which Compton sought a surcharge
were not necessary to the Banks. Had the Banks foreclosed at
the outset of the Chapter 11 proceedings, all junior liens,
including mechanics liens, would have been eliminated or
paid after the Banks' loan was satisfied. To the extent that the
costs incurred were necessary to completion of the develop-
ment and sale of the units, the Debtor and its professionals
were paid for those services through the carve-outs in the
cash-collateral stipulations. Additional expenses beyond those
covered by the carve-outs were not necessary to the Banks,
nor were they reasonably incurred insofar as the Banks'
recovery was concerned.
[5] The expenses did not benefit the Banks. [6] The Banks
could have fully recovered the unpaid balance of their loan if
they had initially foreclosed on the property because, at that
time, Compton valued the property at $3.6 million, well above
the unpaid balance on the construction loan.
[7] Mere cooperation with the debtor does not make the
secured creditor liable for all expenses of administration. A
secured creditor's consent to the payment of designated
expenses, limited in amount, is not a blanket consent to be
charged with additional expenses not included in the consent
agreement.
[8] All the Banks did by joining in the cash-collateral stipu-
lations was authorize restricted payments for specified items
in the form of carve-outs from the sales of units in the devel-
opment. Neither the Banks' joinder in the cash-collateral stip-
ulations, nor its willingness to defer foreclosure proceedings,
caused Compton to incur the expenses sought by the sur-
charge motion. The Banks did nothing more than cooperate
with Compton in its attempt to salvage some equity from the
development.
_________________________________________________________________
COUNSEL
Brian Davidoff, Rutter, O'Sullivan, Greene & Hobbs, Los
Angeles, California, for Compton Impressions, Ltd., Debtor.
Steven Casselberry, Newport Beach, California, for Queen
City Bank, N.A., Cerritos Valley Bank, and Pacific Business
Bank.
_________________________________________________________________
OPINION
THOMPSON, Circuit Judge:
OVERVIEW
Compton Impressions, Ltd. ("Compton" or "the Debtor")
obtained a $2,375,000 construction loan from Queen City
Bank, N.A., Cerritos Valley Bank, and Pacific Business Bank
(collectively, "the Banks") to develop a residential real estate
project in Compton, California, but defaulted on the loan
when the unpaid balance was $1,723,165. Compton filed for
Chapter 11 reorganization in Bankruptcy. The Banks agreed
to two cash-collateral stipulations to allow Compton to com-
plete the project and attempt to sell the residential units. To
assist in that endeavor, Compton employed the services of
Rutter, Hobbs & Davidoff ("RH&D") as its law firm, and The
Kaleson Group ("Kaleson") as its sales and marketing com-
pany, (collectively, "the Debtor's professionals"). Toward the
end of the completion and sales endeavor, the Debtor brought
a motion to surcharge the Banks for services rendered and
expenses incurred by the RH&D law firm and by Kaleson, the
sales and marketing company. The bankruptcy court denied
the surcharge motion, except to the extent of $10,000 in attor-
ney fees and costs. The Debtor appealed the bankruptcy
court's denial, and the Banks cross-appealed the $10,000
award, to the district court. The district court affirmed, and
this appeal followed. We have jurisdiction pursuant to 28
U.S.C. S 158(d), and we affirm.
BACKGROUND
At the time Compton filed its Chapter 11 petition, the resi-
dential development was 80-90% complete, but only four out
of twenty-four units had been sold. In its Chapter 11 petition,
Compton valued the development at $3,613,800, well-above
the outstanding principal balance of $1,723,165 owed to the
Banks on the defaulted construction loan. Although the Banks
could have sought relief from the automatic stay to begin
foreclosure, Compton and the Banks agreed to a first cash-
collateral stipulation so that Compton could complete, main-
tain, and market the development. This stipulation earmarked
money to be "carved out" from the sale of each unit to be
used for construction, marketing, and sales expenses, and for
payments on the construction loan. The stipulation contained
a number of conditions and restrictions, including: (1) a lien
and payment priority for the Banks' postpetition financing;
(2) the replacement of Compton's general partner; (3) a limi-
tation on Kaleson's monthly payment;2 (4) procedures for
releasing mechanics liens; (5) a limitation on real estate and
sales commissions to no more than 6%; and (6) a requirement
for the Banks' approval regarding payment of expenses from
operating cash.
The next year, the Banks and Compton entered into a sec-
ond cash-collateral stipulation containing further conditions.
In this stipulation, Compton agreed that the Banks could
obtain relief from the automatic stay, allowing them to fore-
close, if certain conditions were not met by a specified date.
Although the conditions in fact were not met, the Banks did
not then begin foreclosure. That came later. In the meantime,
the Debtor continued to provide the Banks with monthly
reports, as it had over the course of more than a year. Finally,
when only two units remained unsold,3 and after the Banks
had received payments totaling $1,652,636 (approximately
96% of the principal balance of the loan),4 the Debtor
informed the Banks of its intention to seek payment from
them, by way of a surcharge, for RH&D and Kaleson's fees
and expenses. The Banks then obtained relief from the auto-
matic stay and foreclosed on the property.
In its surcharge motion, the Debtor alleged that the Banks
recovered between $179,380 and $525,253 more than they
would have recovered if they had controlled the liquidation
process and had used a piecemeal auction or a managed sale.
Thus, according to the Debtor, although the surcharges
requested were $85,107.05 for RH&D, and $168,936.78 for
Kaleson, the Banks had received substantial monetary bene-
fits from the services performed by RH&D and Kaleson, and
it was only right that the Banks should pay for the services
that created those benefits. The bankruptcy court disagreed. It
approved only a $10,000 surcharge for RH&D's attorney fees
and costs. The district court affirmed, and this appeal, and the
Banks'cross-appeal, followed.
ANALYSIS
I. Standing
The Banks argue that the surcharge the Debtor seeks can
benefit only its professionals, with no possible benefit to the
Chapter 11 estate. The Banks contend that in this circum-
stance, 11 U.S.C. S 506(c) does not permit a surcharge motion
to be brought by a Debtor.
[1] Compton, as the debtor-in-possession, has standing to
bring a S 506(c) surcharge motion. 11 U.S.C.S 1107(a).
Compton owes its professionals the money that it seeks
through the surcharge motion. Compton incurred its profes-
sionals' fees and expenses to preserve and dispose of the resi-
dential development that was the subject of the Chapter 11
reorganization, and a recovery of those fees and expenses
would redound to the benefit of the estate's administrative
creditors. We, therefore, consider Compton's S 506(c) claim
on its merits.
II. Compton's S 506(c) Claim
We apply the same standard of review to the bankruptcy
court's decision as the district court did, affording the district
court's decision no added weight. See In re Lazar, 83 F.3d
306, 308 (9th Cir. 1996). We apply a clearly erroneous stan-
dard to the bankruptcy court's findings of fact and review its
conclusions of law de novo. See Id.
The Debtor's request for a surcharge covers the following
services: (1) sales procedures and approvals required by the
cash-collateral stipulation; (2) evaluation and removal of
mechanics' liens; (3) title, sales, escrow, closing costs, and
evaluation efforts; (4) costs associated with the surcharge
motion; and (5) construction, operation, and marketing costs.
[2] "We allow payment of administrative expenses from the
proceeds of secured collateral when incurred primarily for the
benefit of the secured creditor or when the secured creditor
caused or consented to the expense." In re Cascade Hydrau-
lics & Utility Serv., Inc., 815 F.2d 546, 548 (9th Cir. 1987).
The controlling provision of the Bankruptcy Code is 11
U.S.C. S 506(c) which provides:
[3] 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.
Under S 506(c), therefore, Compton must demonstrate that the
expenses it seeks to surcharge against the Banks were reason-
able, necessary, and beneficial to the Banks' recovery, or that
the Banks caused or consented to those expenses. See Cas-
cade Hydraulics, 815 F.2d at 548.
A. Necessity and Reasonableness
[4] We measure the necessity and reasonableness of the
Debtor's incurred expenses against the benefits obtained for
the secured creditor and the amount that the secured creditor
would have necessarily incurred through foreclosure and dis-
posal of the property. See In re Chicago Lutheran Hosp.
Ass'n, 89 B.R. 719, 727 (Bankr. N.D. Ill. 1988). The thresh-
old inquiry is whether the services for which a surcharge is
sought were necessary to the secured creditor, here the Banks.
We conclude they were not. Had the Banks foreclosed at the
outset of the Chapter 11 proceedings, all junior liens, includ-
ing mechanics liens, would have been eliminated or paid after
the Banks' loan was satisfied. Moreover, the Banks could
have internalized many of the post-petition costs incurred by
the Debtor and its professionals simply by using in-house
resources. In any event, many of the costs were incurred pur-
suant to the cash-collateral stipulations, and none of those
costs would have been incurred had the Banks initially fore-
closed on the property. To the extent any of the costs incurred
pursuant to the cash-collateral stipulations were necessary to
completion of the development and sale of the units, the
Debtor and its professionals were paid for those services
through the carve-outs in the cash-collateral stipulations.
Additional expenses beyond those covered by the carve-outs
merely aided the Debtor in its attempt to salvage some equity
from the project; they were not necessary to the Banks, nor
were they reasonably incurred insofar as the Banks' recovery
was concerned.
B. Benefit
[5] Not only were the fees and expenses which were the
subject of the surcharge motion unnecessary and unreasonable
as to the Banks' recovery, the expenses did not benefit the
Banks. "To satisfy the benefit test of section 506(c), [Comp-
ton] must establish in quantifiable terms that it expended
funds directly to protect and preserve the collateral." Cascade
Hydraulics, 815 F.2d at 548. The amount of the Banks' bene-
fit limits Compton's recovery of expenses. See In re Jenson,
980 F.2d 1254, 1260 (9th Cir. 1992). "A debtor does not sat-
isfy her burden of proof by suggesting hypothetical benefits."
Cascade Hydraulics, 815 F.2d at 548.
[6] The Debtor contends that it secured a concrete benefit
for the Banks--namely, the return of their post-petition cash
advances and approximately $1,652,636 from the sale of the
units--and accomplished this for between $179,380 and
$525,253 less than the Banks would have had to pay to dis-
pose of the development. This argument misstates the case.
The Banks could have fully recovered the unpaid balance of
their loan if they had initially foreclosed on the property
because, at that time, the Debtor valued the property at
$3,613,800,5 well-above the unpaid balance of $1,723,165 on
the construction loan.
We conclude that the bankruptcy court did not clearly err
in finding that the Debtor failed to meet its burden of estab-
lishing that the Banks quantifiably benefitted from the ser-
vices of the Debtor's professionals, except to the extent of
$10,000 as found by the bankruptcy court.
C. Consent
[7]The Debtor next argues that even if the services sought
by the surcharge motion were not necessary, reasonable, or
beneficial to the Banks' recovery, the Banks nonetheless con-
sented to or caused the expenses by joining in the cash-
collateral stipulations. This argument fails. "Mere cooperation
with the debtor does not make the secured creditor liable for
all expenses of administration." Id. at 548. "A secured credi-
tor's consent to the payment of designated expenses, limited
in amount, is not a blanket consent to be charged with addi-
tional expenses not included in the consent agreement." Id. at
549.
[8] Here, all the Banks did by joining in the cash-collateral
stipulations was authorize restricted payments for specified
items in the form of carve-outs from the sales of units in the
development. Neither the Banks' joinder in the cash-collateral
stipulations, nor its willingness to defer foreclosure proceed-
ings, caused the Debtor to incur the expenses sought by the
surcharge motion. The Banks did nothing more than cooper-
ate with the Debtor in its attempt to salvage some equity from
the development. The bankruptcy court did not clearly err in
finding that the Banks did not cause or consent to the
expenses the Debtor sought to recover by its surcharge
motion.
III. The Banks' Cross-Appeal
The bankruptcy court granted the Debtor $7000 in attor-
neys fees and $3000 in costs pursuant to its S 506(c) motion.
The Banks contend that the bankruptcy court's findings are
insufficient to support this $10,000 surcharge. We disagree.
The bankruptcy court's findings refer to the $10,000 award as
being based on "the extent that debtor's counsel may have
facilitated the sales of the properties." This is sufficient to sat-
isfy the specificity required by Cascade Hydraulics. See Cas-
cade Hydraulics, 815 F.2d at 549.
CONCLUSION
The district court's order, affirming the bankruptcy court's
order, denying the Debtor's surcharge motion, except to the
extent of a $10,000 surcharge against the Banks, is
AFFIRMED.
_______________________________________________________________
FOOTNOTES
1 Honorable Jane A. Restani, Judge, United States Court of International
Trade, sitting by designation.
2 The agreement limited Kaleson's payment to $5000 per month for the
first two months and $3500 per month for the next ten months.
3 The Debtor estimates that the Banks would have received an additional
$170,000 from the sale of these two remaining units.
4 This amount reflects only the principal balance owed to the Banks and
does not include any post-petition interest.
5 Several months later, the Debtor reduced its estimate of the value of
the property to $3,424,000 for a "rapid sale. " Either amount, however,
would have resulted in the Banks being fully compensated.