In re Towne, Inc

Summarized by Terry Hall , Terry Hall Law PC
12 years 6 months ago

Citation:

12-3069 3rd Circuit (August 29, 2013)

Tag(s):

Ruling:

The opinion is marked "Not Precedential". Third Circuit Court of Appeals affirmed the bankruptcy and district courts holdings that law firm hired as special counsel to chapter 11 debtors was not entitled to payment of its fees and expenses from secured creditor's collateral sale proceeds under Section 506(c) following sale conducted by chapter 7 trustee after conversion of case because (a) the law firm's efforts were not necessary to preserve or dispose of the collateral and there was no direct benefit to secured creditor, (b) secured creditor was not estopped from refusing payment from the proceeds, and (c) conduct by the secured creditor, lawful or unlawful, is not relevant to the analysis under 506(c). The Court reiterated the standard that debtor's counsel is paid from the surplus of a debtor's estate and the exception under Section 506(c) that allows a surchage against property securing an allowed claim is granted only under "sharply limited" circumstances. Based on the summary of the facts provided in the District Court opinion, the Appellate Court affirmed the District Court's holding that the Firm's actions were not reasonably necessary to the preservation or disposal of the Lender's collateral nor did the Firm's actions provide a direct benefit to the Lender. The Court rejected the Firm's characterization of the standard to grant relief under 506(c) as being whether the Lender benefitted "or could reasonably" have benefitted from the Firm's actions and stated clearly that the Firm must prove a "direct" benefit to the Lender in order to recover under 506(c). Since no sale was concluded directly due to the Firm's actions and, in fact, the assets were sold to a party that the Firm had no interaction with at all, there was no direct benefit to the Lender. Nor did the Court agree with the Firm's assertion that its actions prevented the termination of the franchise by the franchisor thus preserving the value of Lender's collateral, by noting that the franchisor still did not terminate the franchise after the case was converted and after the Firm had withdrawn. Finally, the Court agreed with the lower courts that if anything, the Firm's legal services primarily benefitted the Debtors and that the Firm had sued the Lender over the stay relief motion and filed an adversary proceeding against Lender to force consent to the propose sale or to reduce Lender's lien to the sale price to avoid needing consent (these actions were part of the fees and expenses the Firm was seeking to surchage against Lender's collateral). The Court also rejected the Firm's assertion that the Lender "consented" to being surcharged by initially agreeing to forbear on its foreclosure action. The Court stated that limited cooperation is not consent and consent cannot be inferred from cooperation. The Firm's last two arguments were creative, but did not prevail and were rejected by the Court on the basis that the Firm cited no cases or law that supported its theories. First, the Firm argued that the Lender should be estopped from contesting the surcharge because the Lender, trustee and buyer collaborated and conducted a "comfortable, concealed relationship" resulting in "favoritism" and causing the Firm to perform services in vain. The second argument asserted that the releases that Lender sought from Debtors were unlawful under New York law. The Court found no form of estoppel that was based on concealed collaboration, nor did it find that a Lender's alleged unlawful conduct would justify granting relief under section 506(c). The Appellate Court

Procedural context:

On appeal from the United States District Court for the District of New Jersey, which affirmed the findings of the United States Bankruptcy Court. Appelant: The Margolis Law Firm LLC; Appellees: Joseph Newman (Chapter 7 Trustee) and BMW Financial Services LLC (secured lender to debtors).

Facts:

Towne, Inc. and DMD Towne, LLC (collectively, "Debtors") operated a BMW dealership (franchisee and real estate holding company) in New York. The Debtors filed separate voluntary chapter 11 cases that were subsequently consolidated. BMW Financial Services, NA, LLC ("Lender") held a security interest in substantially all the assets of the Debtors. Lender filed for relief from the automatic stay in order to foreclose its interests and sell the assets. The Margolis Law Firm LLC ("Firm") was appointed as special counsel to the Debtors and opposed the Lender's stay relief motion on the grounds that it had procured a $ 6 million stalking horse bid for the assets. Lender was owed about $9 million by Debtors. The Bankruptcy Court granted the Lender relief from the stay, but Lender agreed not to pursue the foreclosure provided that the stalking horse/auction sale was completed within the next 45 or so days. The proposed sale/auction fell apart as Lender required certain releases from Debtors in exchange for its consent to the sale and Debtors' refused. The case was converted to a chapter 7 case and a trustee appointed. The Firm withdrew its representation, but its fees and expenses totaling about $88,000 were subsequently approved by the Bankruptcy Court. The Lender and the trustee solicited bids for the assets and the assets were ultimately sold for $5,525,000 less a 10% carve-out for unsecured creditors and a $177,000 payment to the trustee. The trustee executed the releases the Lender wanted on behalf of the Debtors. The Firm sought payment of its approved fees and expenses from the proceeds of the sale under 506(c). The Bankruptcy Court denied the Firm's request and the District Court affirmed.

Judge(s):

Circuit Judges: Jordan, Vanaskie, Rakoff (designation) District Court - Katharine S. Hayden

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