Opinion
BAP No. CO-15-020 BAP No. CO-15-024 Bankr. No. 05-38302 Adv. No. 10-01189
03-25-2016
IN RE GARY L. BRYAN, also known as Gary L Bryan; officer, director, shareholder of G.L. Bryan Investments, Inc.; also known as Gary Bryan; officer, director, shareholder of Fort Love Aviation Services, Inc.; officer, director, shareholder of Second Story Ventures, Inc.; officer, director, shareholder of Disconnect, Inc.; officer, director, shareholder of Tepgarde, LLC; officer, director, shareholder of Reflex Systems, LLC; officer, director, shareholder of Home Closings, LLC; officer, director, shareholder of Goodrich Bryan Investments, Inc.; officer, director, shareholder of Ft. Collins Tire & Auto Services, Inc.; officer, director, shareholder of Unicomm Power Sources, LLC; officer, director, shareholder of Check Processing Resources, Inc., Debtor. M. STEPHEN PETERS, Trustee, Plaintiff - Counter-Defendant - Appellee, v. ARTHUR CLARK, Defendant-Counter-Claimant - Appellant/Cross-Appellee, and JANEL K. BRYAN, Defendant - Counter-Claimant - Appellee/Cross-Appellant, and AURORA LOAN SERVICES, LLC and SPECIALIZED LOAN SERVICING, LLC, Defendants-Appellees, and VECTRA BANK COLORADO, N.A., Defendant.
NOT FOR PUBLICATION
Chapter 7 OPINION Appeal from the United States Bankruptcy Court for the District of Colorado Before KARLIN, Chief Judge, CORNISH, and MICHAEL, Bankruptcy Judges. MICHAEL, Bankruptcy Judge.
This unpublished opinion may be cited for its persuasive value, but is not precedential, except under the doctrines of law of the case, claim preclusion, and issue preclusion. 10th Cir. BAP L.R. 8026-6.
One of the unwritten rules of bankruptcy practice is this: when you are fighting over a piece of property, convert it into cash. While most property cannot be cut into pieces (how does one dissect a house or a 1957 Chevy?), money is easily divided. Once property has been sold, the parties usually tire of watching their money dwindle as the attorneys' fees mount and reach an agreement as to who gets what. The rule has its exceptions. This case is one of them. Here, the players have been fighting over a parcel of residential real estate for more than ten years. The property was eventually sold, but that failed to move the parties toward a resolution. After much litigation, the bankruptcy court issued orders dividing up the cash. Some of the parties found satisfaction in the bankruptcy court's rulings. The others come to this Court asking us to overrule all or part of the bankruptcy court's decision.
We affirm in part, reverse in part, and remand to the bankruptcy court for further proceedings.
I. Background
A. The Players and the Property
The players in this appeal are Gary Bryan (the "Debtor"), the debtor in the bankruptcy case underlying this appeal, Janel Bryan ("Ms. Bryan"), the Debtor's non-filing spouse (hereafter collectively referred to as the "Bryans"), M. Stephen Peters ("Peters" or the "Trustee"), the trustee in the Debtor's bankruptcy case, and Arthur Clark ("Clark"), a creditor of the Debtor holding a judgment lien. At issue are the net sale proceeds of a residence (the "Residence") sometimes owned and always controlled by the Bryans.
B. How We Got Here
The history of ownership of and encumbrances upon the Residence can best be understood as a game of financial "hot potato." In 2001, the Bryans executed a Deed of Trust on the Residence in favor of Washington Mutual Bank ("WAMU") to secure a $203,000 loan. The Bryans then conveyed the Residence to the Bryan Family Trust (the "Trust"). Over the years, the Bryans transferred the Residence in and out of the Trust on multiple occasions in order to obtain loans using the Residence as collateral. In February 2003, the Trust transferred the Residence back to the Bryans, and the Bryans used the Residence as collateral to refinance the mortgage with WAMU. Once the refinance was completed, the Bryans transferred the Residence back to the Trust. In June 2003, the Trust executed and delivered a Deed of Trust on the Residence to Vectra Bank ("Vectra") as collateral for a $250,000 loan. In January 2005, the Trust transferred the Residence to Ms. Bryan individually, who then obtained a $560,000 loan from Vectra (the "Refinance Loan"). As security for the Refinance Loan, the Bryans executed and delivered to Vectra a joint Deed of Trust on the Residence. Proceeds from the Refinance Loan satisfied the existing loans from WAMU and Vectra. The Refinance Loan was ultimately transferred to Aurora Loan Servicing, LLC ("Aurora"). After obtaining the Refinance Loan, Ms. Bryan transferred the Residence back to the Trust.
In May 2005, the Trust transferred the Residence to the Bryans jointly, who used the Residence to secure a home equity line of credit not to exceed $55,000 (the "HELOC") with Vectra. Vectra later assigned its interest in the HELOC to Specialized Loan Servicing, LLC ("Specialized"). Ms. Bryan drew down $53,969 in cash proceeds from the HELOC. The Bryans then transferred the Residence back to the Trust.
At some time prior to 2002, Clark and the Debtor entered into an agreement whereby Clark was to perform environmental remediation services upon property owned by the Debtor. A dispute arose as to the terms of the agreement. In 2002, Clark sued the Debtor in Colorado state court. On June 1, 2004, Clark was awarded a $211,000 judgment against the Debtor. He recorded his judgment in Jefferson County, Colorado, where the Residence was located. When Clark recorded his judgment, the Residence was titled in the name of the Trust.
C. The Bankruptcy Case and Related Litigation
In October 2005, the Debtor filed a Chapter 13 bankruptcy. His case was converted to a Chapter 7 on November 3, 2006. Peters was appointed to serve as trustee in the case. At the time of the bankruptcy filing, the Trust held legal title to the Residence, subject to the Refinance Loan and the HELOC. The Trustee believed that the bankruptcy estate had an interest in the Residence and that there was substantial equity in the Residence for the benefit of creditors.
After the case was converted to Chapter 7, the Residence was sold and two adversary proceedings were filed that are germane to this appeal. The relevant litigation may be summarized as follows:
Clark also brought an adversary objecting to the Debtor's discharge pursuant to 11 U.S.C. § 727(a)(2), (a)(3), (a)(4)(A), and (a)(7). This adversary proceeding was rendered moot when the Debtor voluntarily waived his discharge. No aspect of that adversary is involved in this appeal.
1. The Sham Trust Adversary
In January 2008, the Trustee filed an adversary proceeding (the "Sham Trust Adversary") against the Bryans and the Trust seeking recovery of assets on behalf of the estate primarily, but not exclusively, from the Trust. The assets sought by the Trustee included the Residence. On June 4, 2009, after a three-day trial, the bankruptcy court issued a memorandum opinion and order concluding that the Trust was an invalid spendthrift trust under Colorado law. The bankruptcy court authorized the Trustee to sell the Residence and to distribute to Ms. Bryan, after payment of debts secured by liens on the Residence, her one-half interest in the proceeds. Ms. Bryan appealed this order to the United States District Court for the District of Colorado (the "District Court"). The District Court affirmed the bankruptcy court's decision. The decision of the bankruptcy court was not further appealed, and the order invalidating the Trust is now final.
2. The Sale of the Residence
In July 2009, the Trustee requested authorization to employ a broker and sell the Residence. In October 2009, the bankruptcy court issued an order authorizing the Trustee to sell the Residence (the "Sale Order"). The Sale Order provided that the Trustee could pay, without further order of the Court, closing costs, the Refinance Loan, the HELOC, and half of the remaining proceeds to Ms. Bryan. In preparing the title work related to the sale of the Residence, the title company discovered Clark's judgment and would not issue title insurance in connection with the closing absent entry of an order by the bankruptcy court resolving Clark's judgment lien.
Order Granting Trustee's Application to Employ Real Estate Broker; Motion to Sell Real Estate Free and Clear of Liens, Claims and Interests Pursuant to 11 U.S.C. § 363(F) and (H); and Motion to Pay Administrative Expenses (Including Broker's Commission), in Appellant Clark's App. at 1094.
Until his lien was discovered by the title company, no one (including Clark) considered Clark a secured creditor. The Debtor scheduled Clark as an unsecured creditor. Clark filed his proof of claim as an unsecured creditor. Prior to the Sale Order, Clark took no action to assert rights as a secured creditor. Once Clark was reminded of his judgment lien, he took the position that he had a first priority lien on the Residence. The Trustee took the position that Clark had a totally unsecured claim.
See Trustee's Motion for Entry of Amended Order Authorizing Sale of Real Estate Free and Clear of Liens, Claims and Interests Pursuant to 11 U.S.C. § 363(f) at 2 ¶ 12, in Appellee Peters's App. at 14 ¶ 12.
In November 2009, the Trustee informed the bankruptcy court of Clark's purported lien in a motion to amend the Sale Order (the "Amended Sale Motion"). The Trustee requested entry of an amended sale order directing him to hold any proceeds pending a determination of the validity, priority, and extent of Clark's lien and whether the Trustee could recover a surcharge against the Residence under 11 U.S.C. § 506(c). The bankruptcy court entered an amended order (the "Amended Sale Order") authorizing the Trustee to proceed with the sale and pay the real estate commission and closing costs out of the proceeds. The remaining proceeds of sale were to be held by the Trustee in escrow pending the resolution of the lien priority and surcharge disputes. If the parties were unable to settle their disputes within sixty days, the Amended Sale Order required the Trustee to commence an adversary proceeding pursuant to Federal Rule of Bankruptcy Procedure 7001(2).
Id., in Appellee Peters's App. at 13.
All future references to "Code," "Section," and "§" are to the Bankruptcy Code, Title 11 of the United States Code, unless otherwise indicated.
Amended Order Authorizing Sale of Real Estate Free and Clear of Liens, Claims and Interests Pursuant to 11 U.S.C. § 363(f), in Appellee Peters's App. at 17.
The Trustee sold the Residence, generating $851,656.18 in sale proceeds (the "Sale Proceeds"). The parties could not agree on how to divide the Sale Proceeds, and the sixty day time frame established by the Amended Sale Order expired. Thereafter, as required by the Amended Sale Order, the Trustee commenced another adversary proceeding.
3. The Lien Priority Adversary
In February 2010, the Trustee initiated an adversary proceeding (the "Lien Priority Adversary") against Clark, Ms. Bryan, Aurora, Specialized, and Vectra to determine the validity, priority, and extent of the various liens against the Residence. He also sought a surcharge against the Sale Proceeds pursuant to § 506(c) for all fees and costs incurred in relation to the Sham Trust Adversary, the sale of the Residence, and the determination of lien priorities. Throughout the litigation, the Trustee took the position that Clark did not hold a valid lien against the Residence.
See Joint PreTrial Statement at 1, 3, in Appellant Clark's App. at 267, 269.
In December 2011, the bankruptcy court conducted a two-day trial in the Lien Priority Adversary. Specialized did not appear. At the commencement of the trial, the Trustee advised the bankruptcy court that Specialized had assigned the HELOC to the Trustee. No one contested this statement, and the case proceeded to trial. The parties stipulated to the validity of the HELOC and the existence of the HELOC Deed of Trust. Ms. Bryan's testimony in the Sham Trust Adversary that the balance owed on the HELOC was $55,000 was admitted into evidence without objection.
In March 2012, the bankruptcy court entered a memorandum opinion and order (the "Lien Priority Opinion"), ruling that Aurora held a first priority lien and the Trustee, by virtue of the assignment of the HELOC from Specialized, held a second priority lien against the Residence. The bankruptcy court concluded that Clark did not hold a valid lien against the Residence and had no interest in the Sale Proceeds. The bankruptcy court ordered the Trustee to distribute $638,195.30 from the Sale Proceeds to Aurora, together with accrued interest through the date of payment and attorney's fees incurred and payable under the Aurora Deed of Trust. After making this payment, the Trustee held $175,066.57 in net Sale Proceeds. Pursuant to the Lien Priority Opinion, Ms. Bryan and the bankruptcy estate were each entitled to $87,533.29, representing fifty percent of the remaining Sale Proceeds.
As a result of its ruling that Clark did not have a valid lien, the bankruptcy court did not reach Clark's marshaling argument.
Clark appealed the Lien Priority Opinion to the District Court, arguing that the bankruptcy court had erred in determining that (1) he did not perfect a valid judgment lien; and (2) the doctrine of marshaling was not applicable. The District Court affirmed the Lien Priority Opinion. Clark further appealed to the United States Court of Appeals for the Tenth Circuit (the "Tenth Circuit"). On December 5, 2013, the Tenth Circuit issued its ruling affirming in part, reversing in part, and remanding the Lien Priority Adversary to the bankruptcy court for further proceedings. The Tenth Circuit agreed with Clark that his judgment was a valid lien against the Residence. Contrary to Clark's position, the Tenth Circuit held that Clark's lien did not attach until the Trust transferred the Residence to the Bryans on May 19, 2005, and was, as a result, junior to the Refinance Loan. The Tenth Circuit remanded the adversary proceeding to the bankruptcy court with instructions to determine lien priority between Clark and the HELOC lien and to consider whether to apply the doctrine of marshaling.
See Clark v. Peters (In re Bryan), 547 F. App'x 892 (10th Cir. 2013).
In March 2015, the bankruptcy court issued its opinion on remand (the "Remand Order"). The bankruptcy court found no basis to apply the doctrine of marshaling, because Clark had offered no evidence to support its application and because the "common debtor" requirement for marshaling was not met. The bankruptcy court concluded that all of the Sale Proceeds were subject to Aurora's lien as a first priority lien. The remaining balance of the Sale Proceeds were split in half, with one half belonging to the bankruptcy estate and the remaining half belonging to Ms. Bryan. With respect to the proceeds belonging to the bankruptcy estate, Clark's lien was found to be in second position, followed by the HELOC. As to Ms. Bryan's portion of the Sale Proceeds, the HELOC was in second position behind Aurora's lien.
Findings of Fact, Conclusions of Law, and Order Re: Validity, Extent and Priority of Lien Claims on Remand from Tenth Circuit Court of Appeals, in Appellant Clark's App. at 717-37.
The Court also ruled that the estate's share of the Sale Proceeds was subject to a surcharge under § 506(c) for the reasonable fees and expenses incurred by the Trustee in the Sham Trust Adversary, the sale of the Residence, and the Lien Priority Adversary. The Trustee provided the following itemization of his fees and costs for the period ending December 11, 2011.
Explanation and Summary of Sender & Wasserman Billing Records, in Appellant Clark's App. at 1097. December 11, 2011, is the date immediately preceding the trial of the Lien Priority Adversary.
| Fees related to the Sham Trust Adversary: | |
| Fees related to the sale of the Residence: | $4,932.50 |
| Fees related to the Lien Priority Adversary: | $12,845.00 |
| Total fees: | $62,861.50 |
| Total costs prior to December 11, 2011: | |
| Total fees and costs prior to December 11, 2011: | $66,038.54 |
|---|
The Sham Trust Adversary fees may be further broken down into $33,624 in fees relating to the trial, and $11,820 in fees incurred with respect to the subsequent appeal.
These costs were not allocated to specific categories.
The cost award was slightly less than the amount requested by the Trustee. No explanation was given for this difference.
Remand Order at 20, in Appellant Clark's App. at 736.
In the Remand Order, the bankruptcy court also allowed the Trustee to submit an affidavit detailing the additional fees and costs incurred during and after December 11, 2011. The Trustee timely submitted his affidavit requesting an additional $30,950 in fees and $126.89 in costs, all of which related to the Lien Priority Adversary and the appeals related thereto. The bankruptcy court provided Clark with an opportunity to object to the additional fees and costs, which he did. In his objection, Clark claimed that all fees and costs related to the Lien Priority Adversary should be disallowed because they conferred no benefit upon him, the hourly rate charged by Trustee was excessive, and their allowance would eliminate any significant distribution on behalf of Clark's claim. After considering the affidavit and the objection, the bankruptcy court issued an oral bench ruling awarding the Trustee an additional $20,250 in fees and $126.89 in costs on May 4, 2015. We have not been provided with a transcript of this ruling, so we are not in a position to explain or review the bankruptcy court's findings or conclusions.
Affidavit of Attorneys Fees and Costs, in Appellant Clark's App. at 740.
Objection to Affidavit of Attorney's Fees and Costs, in Appellant Clark's App. at 747.
Minutes of Electronically Recorded Proceeding, Peters v. Bryan, et. al. (In re Bryan), Ch 7 Case No. 05-38302-SBB, Adv. Proc. No. 10-01189-SBB (Bankr. D. Colo. May 4, 2015) (Adv. ECF No. 206), in Appellant Clark's App. at 1121.
The bankruptcy court then issued its order regarding distribution of Sale Proceeds (the "Final Distribution Order"). The bankruptcy court allowed the Trustee a total surcharge of $86,187.73 (the "Surcharge"). After reducing the estate's share of the Sale Proceeds by the amount of the Surcharge, the Trustee was left with $1,345.56 to distribute to Clark. In the Final Distribution Order, the bankruptcy court calculated the amount due under the HELOC lien to be $74,972.91, and awarded that amount to the bankruptcy estate as the holder of the HELOC. The balance of $12,560.38 in Sale Proceeds attributable to Ms. Bryan's interest in the Residence was awarded to Ms. Bryan.
Final Order Regarding Distribution of Net Sale Proceeds in Appellant Clark's App. at 755.
Id. at 3, in Appellant Clark's App. at 757.
Clark filed a timely appeal, arguing that the bankruptcy court erred when it failed to apply the doctrine of marshaling and granted the Trustee's request for a surcharge of the Sale Proceeds of the Residence pursuant to § 506(c). Ms. Bryan filed a cross-appeal, arguing that the bankruptcy court erred when it determined the amount owed under the HELOC and authorized the Trustee to retain the monies necessary to satisfy the HELOC.
II. Standard of Review
Our review of bankruptcy court decisions is traditionally divided into three categories: (1) questions of law, which we review de novo; (2) questions of fact, which we review for clear error; and, (3) matters of discretion, which are reviewable for abuse of discretion. De novo review requires an independent determination of the issues, giving no special weight to the bankruptcy court's decision. A factual finding is "clearly erroneous" when "it is without factual support in the record, or if the appellate court, after reviewing all the evidence, is left with the definite and firm conviction that a mistake has been made." Under the abuse of discretion standard "a trial court's decision will not be disturbed unless the appellate court has a definite and firm conviction that the lower court made a clear error of judgment or exceeded the bounds of permissible choice in the circumstances."
Pierce v. Underwood, 487 U.S. 552, 558 (1988); Fowler Bros. v. Young (In re Young), 91 F.3d 1367, 1370 (10th Cir. 1996).
Salve Regina Coll. v. Russell, 499 U.S. 225, 238 (1991).
Las Vegas Ice & Cold Storage Co. v. Far W. Bank, 893 F.2d 1182, 1185 (10th Cir. 1990) (quoting LeMaire By and Through LeMaire v. United States, 826 F.2d 949, 953 (10th Cir. 1987)).
McEwen v. City of Norman, 926 F.2d 1539, 1553-54 (10th Cir. 1991 (quoting United States v. Ortiz, 804 F.2d 1161, 1163 (10th Cir. 1986)).
III. Discussion
A. The bankruptcy court correctly refused to apply the doctrine of marshaling.
Marshaling of assets is an equitable doctrine resting "upon the principle that a creditor having two funds to satisfy his debt may not, by his application of them to his demand, defeat another creditor, who may resort to only one of the funds." Under Colorado law, in order to invoke the doctrine of marshaling, three elements must be established: (1) two creditors of the same debtor (i.e., the common debtor requirement); (2) two funds or properties belonging to that debtor; and (3) one creditor has a claim or lien on both funds while the other creditor has a claim or lien on only one of the funds. The "application of equitable doctrines rests in the sound discretion of the [trial] court; absent a showing of abuse of discretion, the [trial] court's exercise thereof will not be disturbed[.]"
Meyer v. United States, 375 U.S. 233, 236 (1963) (quoting Sowell v. Fed. Reserve Bank of Dallas, Tex., 268 U.S. 449, 454-57 (1925)).
Legge v. Peterson, 277 P. 786, 788 (Colo. 1929) (hereafter "Legge").
McKinney v. Gannett Co., 817 F.2d 659, 670 (10th Cir. 1987). See also In re Carson, 374 B.R. 247, 249 (10th Cir. BAP 2007) (citing In re Laufenberg, No. KS-05-053, 2004 WL 2731670, at *4 (10th Cir. BAP Nov. 30, 2004)) (failure to apply doctrine of marshaling was not error). Clark argues that, because the bankruptcy court determined that the doctrine of marshaling did not apply as a matter of law to the facts of this case, we should review the decision de novo. As explained infra, we conclude that the bankruptcy court was correct in its application of Colorado law to the facts of this case. Were we to accept Clark's argument and apply a de novo standard of review, the result would be the same.
Clark argues that the doctrine of marshaling should have been applied to require Aurora to first look to Ms. Bryan's share of the Sale Proceeds before recovering from the estate's share. Clark describes this as a mere "accounting exercise" that would result in a significant increase in Clark's recovery. As to that point, Clark is correct. What Clark fails to mention is that his proposed "accounting exercise" would result in no distribution to the holder of the HELOC.
The bankruptcy court correctly concluded that the three elements required for application of the doctrine of marshaling are not present in this case. In the Remand Order, the bankruptcy court found that the common debtor requirement for marshaling was not met because only Ms. Bryan was personally liable on the Refinance Loan. In his brief, Clark states that "[b]oth Aurora and Mr. Clark share a common debtor, the Debtor Mr. Bryan." The statement is incorrect. The Debtor is not a common debtor of Aurora and Clark.
Appellant Clark's Br. 14.
Clark contends that Colorado law supports application of the doctrine of marshaling in this case. He relies upon Legge v. Peterson, a 1929 decision of the Colorado Supreme Court. Clark cites to the following portion of Legge:
Legge, 277 P. 786.
"It has been held that, where one creditor holds a claim against two joint debtors, and another creditor holds a claim against one of those two, equity will not, for the sake of the creditor who has the single claim, compel the other creditor to proceed against that one of his joint debtors against whom he has no claim; but that it may do so when it is equitable as between the two debtors that it should be done." . . . The law, as above quoted from Corpus Juris, finds support and approval in Story's Equity Jurisprudence (14th Ed.) vol. 2, p. 246, § 867, and 18 R. C. L. 460, par. 9.While the quote is accurate, it must be taken in context. The quote is not reflective of the ruling in Legge. It is a mere recital of authority contained in a treatise. In Legge, the trial court refused to apply the doctrine of marshaling. On appeal, the Colorado Supreme Court affirmed because two of the elements of marshaling were not present:
The evidence in this case does not disclose that the bank and the plaintiff are creditors of the same debtor, but it does disclose that the plaintiff is the creditor of the judgment debtor alone, and that the bank is the creditor of both the judgment debtor and the lessee. The evidence in this case does not disclose two funds belonging to the common debtor, but it does disclose that there are two debtors jointly interested in one fund, and a separate fund, i.e., the cattle, farm animals, and equipment, in which only one of the debtors, the lessee, is interested. It will thus be readily seen that at least two of the necessary requisites to marshaling are lacking, and therefore marshaling by subrogation was properly denied.Legge does not stand for the principle that the elements of marshaling need not be present in order to apply the doctrine. To the contrary, the court in Legge refused to apply the doctrine because all necessary elements were not present. The Colorado Court of Appeals reached the same conclusion some fifty years after Legge. When a bankruptcy court applies Colorado state law on an issue governed by Colorado state law, it does not commit error.
Appellant Clark's Reply Br. 8 (quoting Legge, 277 P. at 788-89 (emphasis added by Appellant Clark)).
Legge, 277 P. at 789.
W. Nat'l Bank of Casper v. ABC Drilling Co., 599 P.2d 942, 946 (Colo. App. 1979) ("Before the doctrine of marshaling assets is applicable there must be a common debtor of the two creditors." (reversing decision of trial court that applied marshaling in the absence of a common debtor)).
Clark argues that the bankruptcy court should have ignored the ruling in Legge and, instead, followed a decision of the United States Bankruptcy Court for the District of Minnesota, In re Bame ("Bame"). We disagree. Bame is not controlling law in the Tenth Circuit or in the District of Colorado. It did not seek to apply Colorado law to its facts. Moreover, in the fourteen years since Bame was decided, only one court chose to rely upon its analysis, and then only to support denial of a motion to dismiss a complaint based upon marshaling at the pleading stage. The bankruptcy court acted within its discretion in following Legge and ignoring Bame.
Ramette v. United States (In re Bame), 271 B.R. 354 (Bankr. D. Minn. 2001), aff'd, 279 B.R. 833 (8th Cir. BAP 2002).
Houghton v. United States (In re Szwyd), 394 B.R. 230, 241 (Bankr. D. Mass. 2008), aff'd, 408 B.R. 547 (D. Mass. 2009).
B. The bankruptcy court erred in allowing part of the Surcharge.
As a general rule, the expenses of administration in a Chapter 7 case may not be surcharged against secured collateral. "This 'traditional' rule is based on the fact that the trustee acts on the authority of the court and for the interest of the general creditors, not on the authority of the secured creditors and for their particular interests." Section 506(c) provides an exception to the general rule. It states that:
In re Domistyle, Inc., 811 F.3d 691, 695 (5th Cir. 2015); In re Visual Indus., Inc., 57 F.3d 321, 324 (3d Cir. 1995) (hereafter "Visual Industries"); Weinman v. City of Pueblo (In re Adam Aircraft Indus., Inc.), 527 B.R. 709, 715 (D. Colo. 2014) ("Ordinarily, the costs and expenses detailed in Section 506(c) are paid from the unencumbered assets of a bankruptcy estate rather than from secured collateral.") (quoting In re Smith Int'l Enters. Inc., 325 B.R. 450, 453 (Bankr. M.D. Fla. 2005)).
In re Swann, 149 B.R. 137, 143 (Bankr. D.S.D. 1993) (citing In re Saybrook MFG. Co., 130 B.R. 1013, 1021 (Bankr. M.D. Ga. 1991)).
Domistyle, 811 F.3d at 695 ("Section 506(c) provides a 'narrow' and 'extraordinary' exception to this general rule."); In re Trim-X, Inc., 695 F.2d 296, 301 (7th Cir. 1982) (hereafter "Trim-X"); Adam Aircraft Indus., Inc., 527 B.R. at 715; Swann, 149 B.R. at 143.
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.A surcharge pursuant to § 506(c) "is an assessment against a secured party's collateral as reimbursement for a particular benefit to such a secured creditor." The Trustee bears the burden of proving "(1) the expenditure was necessary, (2) the amounts expended were reasonable, and (3) the creditor benefited from the expenses." The benefit to the secured creditor must be "concrete" and "quantifiable." We review a bankruptcy court's factual findings as to the necessary, reasonable, and benefit requirements of § 506(c) under the clearly erroneous standard. We review the bankruptcy court's application of the correct legal standard contained in § 506(c) de novo.
In re InteliQuest Media Corp., 326 B.R. 825, 832 (10th Cir. BAP 2005).
Domistyle, 811 F.3d at 695 (quoting In re Delta Towers, Ltd., 924 F.2d. 74, 76 (5th Cir. 1991)). See also Trim-X, 695 F.2d at 299; Visual Industries, 57 F.3d at 325 (expenditures must "provide a direct benefit to the secured creditors"); Swann, 149 B.R. at 143.
In re Debbie Reynolds Hotel & Casino, Inc., 255 F.3d 1061, 1068 (9th Cir. 2001) ("a party seeking a surcharge faces an onerous burden of proof") (emphasis added); Adam Aircraft Indus., Inc., 527 B.R. at 715 (same).
Domistyle, 811 F.3d at 695; Trim-X,, 695 F.2d at 299 n.4. See also In re Miniscribe Corp., 309 F.3d 1234, 1240 (10th Cir. 2002).
Domistyle, 811 F.3d at 695; Visual Industries, 57 F.3d at 324. See also Miniscribe Corp., 309 F.3d at 1240.
Clark argues that the bankruptcy court erred in awarding the Surcharge. Clark contends that the fees and costs that constitute the Surcharge were largely unnecessary and failed to benefit Clark in his status as a secured creditor. The Trustee responds that all of the fees and costs encompassed in the Surcharge represent reasonable and necessary efforts to liquidate the Residence and determine who was properly entitled to the Sale Proceeds.
The fees and costs that comprise the Surcharge fall into three separate categories: those relating to the Sham Trust Adversary, those relating to the sale of the Residence, and those relating to the Lien Priority Adversary. Clark has focused upon the fees and costs relating to the Lien Priority Adversary. In order to assist the parties and any other court called upon to review the bankruptcy court's decision, we will examine all aspects of the Surcharge.
i. Fees and Costs Relating to the Sham Trust Adversary
In his brief and at oral argument, counsel for Clark conceded that the portion of the Surcharge relating to the Sham Trust Adversary was beneficial and at least "arguably necessary." The bankruptcy court found that the fees and costs were necessary, noting the Trustee's duty under § 704 to investigate claims and locate assets. Had the Trustee not litigated the Sham Trust Adversary, the estate would have neither recovered nor sold the Residence. The bankruptcy court concluded that "the Trustee's efforts here were necessary because the Trustee acted to preserve and liquidate an estate asset that appeared to all, including Mr. Clark, to possess significant equity." In addition, as the bankruptcy court noted, at the time the Trustee commenced the Sham Trust Adversary, Clark took the position that he was an unsecured creditor. Clark benefited from the Trustee's actions because success in the Sham Trust Adversary was the primary if not exclusive means for Clark to obtain any recovery from the Residence. The bankruptcy court also found that these fees and costs were reasonable, noting that no one (including Clark) presented any evidence at trial to the contrary. We find no error in these conclusions.
Appellant Clark's Br. 22.
Remand Order at 19, in Appellant Clark's App. at 735.
ii. Fees and Costs Relating to the Sale of the Residence
Clark takes the position that all fees and costs incurred by Trustee after the conclusion of the Sham Trust Adversary were unnecessary and of no benefit to him. This includes the $4,932.50 in attorney's fees related to the sale of the Residence. Clark ignores the fact that, at the time the Trustee undertook his sales efforts, all parties were unaware of Clark's lien and there appeared to be significant equity in the Residence. The Trustee took a presumably valuable but illiquid asset and converted it into cash, conferring a direct benefit to all parties claiming an interest in the Residence. The Trustee's actions were both sound and necessary. There is no dispute regarding the reasonableness of the fees or costs incurred. The bankruptcy court correctly applied § 506(c) and did not abuse its discretion in awarding that portion of the Surcharge relating to the sale of the Residence.
Appellant Clark's Br. 13, 19, 20.
Visual Industries, 57 F.3d at 325 ("The rule understandably shifts to the secured party, who has benefited from the claimant's expenditure, the costs of preserving or disposing of the secured party's collateral, which costs might otherwise be paid from the unencumbered assets of the bankruptcy estate, providing that such unencumbered assets exist.") (emphasis added).
Although Clark raised the issue of the hourly rate charged by the Trustee's counsel before the bankruptcy court, he did not brief the issue on appeal. As a result, we deem the issue abandoned. See Headrick v. Rockwell Int'l Corp., 24 F.3d 1272, 1277-78 (10th Cir. 1994) (issue not briefed in opening brief is deemed abandoned on appeal).
iii. Fees and Costs Relating to the Lien Priority Adversary
Clark contends that the bankruptcy court erred in determining that the portion of the Surcharge related to the Lien Priority Adversary was necessary. He argues that any actions by the Trustee following the Sham Trust Adversary were unjustified, as the Trustee's obligations to recover property of the estate had been fulfilled. Clark posits that the parties claiming an interest in the Residence were free to dispute the validity and priority of their liens, and it was not necessary for the Trustee to initiate the Lien Priority Adversary. We do not agree.
The Amended Sale Order ordered the Trustee to initiate the Lien Priority Adversary if the parties were unable to voluntarily resolve the lien priority dispute. Clark did not appeal the Amended Sale Order. Both Clark and Trustee were bound by its terms. Clark cannot now be heard to argue that the Trustee's compliance with that order was "unnecessary." In addition, the bankruptcy court made several findings regarding the necessity of the Trustee's actions to preserve and liquidate a valuable estate asset, which included the filing of the Lien Priority Adversary to determine, among other things, whether Clark had a valid lien on the Residence. We cannot say that these findings are clearly erroneous.
For the reasons discussed supra, the Court considers the issue of the reasonableness of the Trustee's attorney's fees waived. We also find the bankruptcy court's finding regarding the reasonableness of the Trustee's fees and costs in the Lien Priority Adversary was not clearly erroneous. The real question is not whether these fees and costs are reasonable. It is whether they should be borne by the bankruptcy estate or surcharged against the Sale Proceeds to Clark's detriment.
See id.
The remaining issue under § 506(c) is whether the Trustee's efforts in conducting the Lien Priority Adversary benefited Clark. Clark argues that throughout the Lien Priority Adversary the Trustee maintained an adverse position to Clark, insisting that he did not have a valid lien against the Residence. He is correct. The Trustee's role in the Lien Priority Adversary was not limited to the ministerial task of sorting out priorities among the various secured creditors. Instead, the Trustee actively objected to Clark's status as a secured creditor, in the hopes of acquiring the remaining equity in the Residence for all general unsecured creditors. Indeed, had the Trustee chosen to concede the existence of Clark's lien, the bankruptcy estate could not have benefited from the Lien Priority Adversary. While this litigation provided a potential benefit to the class of general unsecured creditors, we are unable to see how the Trustee's actions in contesting the validity of Clark's lien provided any benefit to the secured collateral or to Clark.
Appellant Clark's Br. 10 ¶ 14.
The Trustee argues that because the Lien Priority Adversary was necessary, i.e., the parties refused to settle their priority dispute, it benefited Clark by bringing resolution to the matter. This ignores the fact that throughout the Lien Priority Adversary and its appeal, the Trustee actively sought to deny Clark's status as a secured creditor. Far from being incurred "primarily to preserve or dispose of encumbered property," the Lien Priority Adversary expenses were incurred in large part to contest the validity of Clark's lien, with the sorting of priority among Clark, Aurora, and Ms. Bryan an incidental by-product. The fact that Clark was eventually found to have a valid lien by the Tenth Circuit does not suggest that the Trustee's time spent fighting that position provided a quantifiable benefit to Clark or to the secured collateral.
Although the Trustee stipulated to the validity of Clark's lien on the eve of the trial of the Lien Priority Adversary before the bankruptcy court, he acknowledges that he "defended" that court's ruling in the appeals before the District Court and Tenth Circuit. See Proposed Findings of Fact and Conclusions of Law at 11, in Appellant Clark's App. at 705; Appellee Peters's Br. 6.
In re Domistyle, 811 F.3d 691, 698 (5th Cir. 2015).
Some courts have suggested an alternative to the "benefit" element of § 506(c) exists where a secured creditor caused or consented to the incurred expenses. The Trustee argues that Clark impliedly consented to the expenses incurred in the Lien Priority Adversary because he did not resolve his priority dispute with the other secured parties, or object to the filing of the complaint as contemplated by the Amended Sale Order. The Court is not persuaded. The fact that Clark understood that the Lien Priority Adversary was a necessary part of the Trustee's administrative duties, and did not object to its filing, does not equate to consent to fund such litigation. Nor should § 506(c) be used to saddle a party that refuses to compromise in litigation with general administrative expenses otherwise paid by the estate.
Trim-X, 695 F.2d at 301; In re Debbie Reynolds Hotel & Casino, Inc., 255 F.3d 1061, 1068 (9th Cir. 2001) ("Debtor's counsel should receive the payment to the extent of the benefit provided or, in this case, to the extent agreed to by the secured creditor."); In re Swann, 149 B.R. 137, 143 (Bankr. D.S.D. 1993).
The Trustee suggests that Clark caused all of the expenses incurred in the Lien Priority Adversary, pointing to: (1) the eleventh hour assertion of Clark's lien interest; and (2) Clark's insistence that his lien was in first position. This argument does not withstand scrutiny. Clark's lien was discovered prior to the initiation of the Lien Priority Adversary. Although the Trustee argues that he would have made different choices regarding administration of the estate had he known about Clark's lien sooner, he does not explain why the "lateness" of the discovery affected his litigation choices going forward.
In support of his arguments regarding consent and causation, the Trustee relies on In re Trim-X, Inc., a 1982 decision of the United States Court of Appeals for the Seventh Circuit. We do not read Trim-X as broadly as the Trustee. The facts in Trim-X are quite narrow. The expenses at issue in that case related to the direct preservation of collateral (namely, storage and security charges) from the date of a trustee's appointment until the date the collateral was abandoned. Ultimately, the only expenses surcharged were those related to the time period between the date the trustee sought to abandon the collateral and the date the order of abandonment was entered. The court in Trim-X found that the expenses incurred in that interim period were caused by the creditor's failure to respond to the request for abandonment, and surcharged the collateral for those expenses. The bankruptcy estate was forced to bear the expense of preserving the collateral prior to the decision to abandon. The surcharge of collateral for the costs of its preservation is a far cry from charging a lien holder with the expense of attacking the validity and priority of its lien.
Trim-X, 695 F.2d 296.
Id. at 301.
The cases cited in Trim-X are equally narrow. See In re Tyne, 257 F.2d 310 (7th Cir. 1958) (storage charges); Equitable Loan & Sec. Co. v. R.L. Moss & Co., 125 F. 609 (5th Cir. 1903) (taxes and insurance premiums); In re Hotel Assocs., Inc., 6 B.R. 108, 112 (Bankr. E.D. Pa. 1980) (creditor held to have consented to payment of expenses incurred by Chapter 11 trustee appointed upon motion of the creditor). None of the facts of these cases even remotely resemble the facts of this case.
The Trustee also states that Clark's insistence on a first priority position for his lien caused the expenses related to the Lien Priority Adversary. The Trustee's argument suggests that a party who takes a position adverse to a trustee can be said to "cause" the corresponding legal expenses incurred by the estate, even when that party prevails. Were that the case, any creditor who had the temerity to take issue with a bankruptcy trustee's assessment of the validity of the creditor's lien status would be at risk of funding the litigation against itself, even if it won the argument.
See Appellee Peter's Br. 47 ("The Lien Priority Adversary was required as a result of Mr. Clark's decision to assert this position.").
Both the Trustee and the bankruptcy court suggest that the Surcharge is required to prevent Clark from "obtain[ing] a windfall at the expense of the bankruptcy estate." The bankruptcy court cites In re Visual Industries, Inc., a decision of the Court of Appeals for the Third Circuit, as support for this position. The court in Visual Industries focused specifically on the expenses of preserving and disposing of a secured party's collateral, and whether those expenses provided a direct benefit, as opposed to merely some benefit, to the surcharged collateral. While that case may provide support for the bankruptcy court's decision to surcharge the Sale Proceeds for fees and costs related to the Sham Trust Adversary and the sale of the Residence, it does not speak to issues of cause or consent where there is no direct benefit to the secured creditor.
Remand Order at 20, in Appellant Clark's App. at 736 ("Given Mr. Clark's efforts of the past four years to obtain a windfall at the expense of the bankruptcy estate, Aurora, and Ms. Bryan, . . . the Court finds sufficient grounds exist to allow the Trustee to recover the full amount of the proceeds subject to the Clark Lien pursuant to § 506(c).").
See id. at 19, in Appellant Clark's App. at 735 (citing Visual Industries, 57 F.3d 321 (3d Cir. 1995)). The court in Visual Industries addressed the question of whether § 506(c) authorized payment to trade creditors whose provision of materials helped sustain a debtor's operations, but did not directly benefit a secured creditor's property. The court held that direct benefit to a secured creditor must be shown.
Visual Industries, 57 F.3d at 325, 327 ("Merely providing some benefit to the debtor . . . does not satisfy § 506(c)'s requirement that the claimant in order to prevail must provide a direct benefit inuring to the secured lender for the preservation or disposition of the secured property.").
This Court concludes that the portion of the Surcharge related to the Lien Priority Adversary does not fulfill the requirements of § 506(c). Although the fees and costs related to the Lien Priority Adversary were necessary and reasonable expenses for the Trustee to incur on behalf of the estate, there was no evidence or facts presented to show a concrete and quantifiable benefit to the secured collateral or to Clark as a secured creditor. Therefore, to the extent the bankruptcy court based the Surcharge upon a finding that the Lien Priority Adversary benefited Clark for purposes of § 506(c), it was error to do so.
The bankruptcy court's decision with respect to the Surcharge is affirmed in part and reversed in part. To the extent the Surcharge represents fees incurred in the Sham Trust Adversary and the sale of the Residence, the decision is affirmed. Those fees total $50,016.50. To the extent the Surcharge represents fees incurred with respect to the Lien Priority Adversary, the decision of the bankruptcy court is reversed. Those fees, which total $43,795, may not be surcharged against the Sale Proceeds.
Clark asks us to remand the decision to the bankruptcy court for a determination as to what fees benefited him and are thus the proper subject of surcharge. With the exception of costs, we decline to do so. The record before us supports our decision to reverse the bankruptcy court's decision to include the fees incurred in the Lien Priority Adversary as part of the Surcharge. There is no need for remand of that issue.
On the issue of costs, the record before us does not establish which specific costs related to the Sham Trust Adversary, the sale of the Residence, or the Lien Priority Adversary. We therefore remand this case to the bankruptcy court for the limited purpose of determining which costs awarded by the bankruptcy court and incurred prior to December 11, 2011, related to each of these three categories. To the extent the expenses relate to the Sham Trust Adversary and the sale of the Residence, they are the proper subject of surcharge. To the extent the expenses relate to the Lien Priority Adversary, they may not be surcharged against the Sale Proceeds.
These costs were $2,949.34. See Final Distribution Order at 3 ¶ 7, in Appellant Clark's App. at 757. On the record before us, the only costs clearly attributable to the Lien Priority Adversary are the $126.89 in costs incurred after December 11, 2011, awarded in the Final Distribution Order. Id. The latter may not be surcharged against the Sale Proceeds.
We are not suggesting that the Trustee should not be paid the fees and costs incurred in the Lien Priority Adversary. Those administrative expenses may be eligible to be paid in the same fashion as any other Chapter 7 administrative expense. Whether these expenses are allowable as an administrative expense is not before us. Our holding is limited to the decision that fees and expenses incurred by the Trustee in the Lien Priority Adversary do not meet the criteria for a surcharge under § 506(c).
C. The bankruptcy court did not err in determining that the bankruptcy estate was entitled to retain the Sale Proceeds subject to the HELOC lien.
Ms. Bryan contends the bankruptcy court's finding that the estate was the holder of the HELOC was clearly erroneous. She argues that, because of Specialized's failure to participate in the trial of the Lien Priority Adversary and an insufficient factual basis to support the bankruptcy court's finding that Specialized assigned the HELOC to the Trustee, the HELOC no longer constitutes a valid lien against the Sale Proceeds. The Trustee argues Ms. Bryan lacks standing to challenge the bankruptcy court's determination regarding entitlement to the Sale Proceeds subject to the HELOC. He further argues that, regardless of standing, the bankruptcy court had before it a sufficient factual basis to determine that the estate was the holder of the HELOC.
With respect to the issue of standing, we have held only a "person aggrieved" by a bankruptcy court order may appeal. A person aggrieved is "one 'whose rights or interests are directly and adversely affected pecuniarily by the decree or order of the bankruptcy court.'" A party has standing when a bankruptcy court order "'diminishes their property, increases their burdens, or impairs their rights.'" Ms. Bryan is not a "person aggrieved" with respect to the Final Distribution Order. The issue of entitlement to the HELOC's share of the Sale Proceeds is between Specialized and the Trustee. The bankruptcy court's determination that the estate is the holder of the HELOC neither diminishes Ms. Bryan's property nor impairs her rights. It was uncontested at trial of the Lien Priority Adversary that the HELOC constituted a valid lien against the Sale Proceeds. The HELOC lien is superior to Ms. Bryan's interest in the Sale Proceeds, regardless of who holds it. Whether the recipient is the bankruptcy estate, Specialized, or another assignee, the distribution will have no economic impact on Ms. Bryan. Accordingly, Ms. Bryan does not have standing to appeal this issue.
In re Petroleum Prod. Mgmt., Inc., 282 B.R. 9, 13-14 (10th Cir. BAP 2002).
Id. at 14 (quoting Lopez v. Behles (In re Am. Ready Mix, Inc.), 14 F.3d 1497, 1500 (10th Cir.), cert. denied, 513 U.S. 818 (1994)).
Id. (citing In re Am. Ready Mix, Inc., 14 F.3d 1497, 1500 (10th Cir. 1994) quoting GMAC v. Dykes (In re Dykes), 10 F.3d 184, 187 (3d Cir. 1993)).
Even if Ms. Bryan had standing to contest the estate's interest in the HELOC, there was a factual basis for the bankruptcy court's determination that the HELOC was valid and the estate was the proper holder of the HELOC. Until this cross-appeal, Ms. Bryan stipulated to and never challenged the validity of the HELOC. The Trustee represented to the bankruptcy court he had reached an agreement with Specialized in which the HELOC was assigned to the bankruptcy estate. No party, including Specialized and Ms. Bryan, challenged this representation at trial. Specialized was served with the complaint and summons in the Lien Priority Adversary. Specialized filed its answer and submitted its list of witnesses and exhibits. Specialized participated in the proceedings and had an opportunity to challenge any inaccurate representations. Accordingly, the bankruptcy court's findings regarding the assignment from Specialized to the bankruptcy estate are not clearly erroneous.
In reviewing whether the bankruptcy court made erroneous factual findings as to the validity, priority, and extent of the HELOC lien, we examine whether there is sufficient factual support in the record for the bankruptcy court's findings. With respect to the validity of the HELOC lien, the parties stipulated to the existence of the HELOC lien before the trial. On remand, the bankruptcy court found that "[t]he parties all concede the validity of the lien interests asserted by Aurora, Specialized and Mr. Clark." No party, including Ms. Bryan, disputed the validity of the HELOC lien prior to the filing of this appeal.
Remand Order at 6 n.37, in Appellant Clark's App. at 722.
Id. at 13, in Appellant Clark's App. at 729.
D. The bankruptcy court did not err in determining the amount due under the HELOC.
Ms. Bryan next contends the bankruptcy court made erroneous factual findings regarding the amount due under the HELOC. The Trustee argues there was ample evidence in the record to support the bankruptcy court's findings. We agree with the Trustee.
The record contains ample evidence to support the bankruptcy court's factual determination of the amount owed on the HELOC. First, the bankruptcy court previously determined the outstanding balance on the HELOC as of the date of the Sham Trust Adversary. This finding was not contested or appealed. Second, the HELOC Deed of Trust, which stated the interest rate of the HELOC, was offered and admitted into evidence at trial of the Lien Priority Adversary. Finally, all parties to the Lien Priority Adversary, including Ms. Bryan, stipulated to the admittance of Ms. Bryan's testimony from the trial of the Sham Trust Adversary that established the amount owed on the Deed of Trust. As there was no evidence that any payments had been made on the HELOC after the commencement of the Sham Trust Adversary, calculating the balance due on the HELOC was a matter of simple arithmetic. The bankruptcy court's factual findings regarding the validity and priority of the HELOC lien, and the amount outstanding under the HELOC, were not clearly erroneous.
The Residence was sold in December 2009. The bankruptcy court calculated two years of interest from 2009-2011 equaling $7,425. The bankruptcy court then determined that as of December 2011 the amount due under the HELOC was $62,425, with interest continuing to accrue at the per diem rate of $10.17. The bankruptcy court then calculated interest from December 15, 2011, through April 30, 2015 totaling $12,547.91 and concluded, as of April 30, 2015, the total amount due on the HELOC was is $74,972.91. Final Distribution Order at 3, in Appellant Clark's App. at 757.
IV. Conclusion
The bankruptcy court decision is affirmed in part and reversed in part. We reverse the decision of the bankruptcy court to the extent it determined that the Trustee's fees and costs incurred in the Lien Priority Adversary are the proper subject of a surcharge under § 506(c). We remand this case to the bankruptcy court for the limited purpose of determining which costs incurred by the Trustee prior to December 11, 2011, related to the Sham Trust Adversary, the sale of the Residence, and the Lien Priority Adversary, with instructions that to the extent the costs relate to the Sham Trust Adversary and the sale of the Residence, they are the proper subject of a surcharge, and, to the extent the costs relate to the Lien Priority Adversary, they may not be surcharged against the Sale Proceeds. In all other respects, the decision of the bankruptcy court is affirmed.