UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW HAMPSHIRE
MRMS Property Management
v. Case No. 17-cv-94-PB Opinion No. 2017 DNH 247 Bayview Loan Servicing
MEMORANDUM AND ORDER
This bankruptcy appeal arises from an attempt by a debtor
in possession to recover attorney’s fees incurred during the
bankruptcy proceeding from a secured creditor’s cash collateral.
The bankruptcy court denied the debtor’s request because the
court concluded that the requested fees did not benefit the
secured creditor. I reverse.
I. BACKGROUND
MRMS Property Management, Inc. (“MRMS”), owned a single
piece of commercial real estate that was subject to a mortgage
held by Bayview Loan Servicing, LLC. (“Bayview”). Bayview also
held an assignment of leases and rents that entitled it to
income from the property if MRMS defaulted on its mortgage loan.
MRMS neglected to maintain its property and refused to make
necessary repairs. This prompted MRMS’s sole tenant, Hudson Medical Associates (“HMA”), to file a state court action seeking
permission to pay its monthly rent into an escrow account until
HMRS performed the required maintenance and repairs. The court
granted this request and HMA thereafter paid its rent into an
escrow account. At some point, MRMS also stopped paying its
mortgage, which put the mortgage loan into default.
With the possibility of foreclosure looming, MRMS filed for
Chapter 11 bankruptcy protection in June 2016. Approximately a
month later, MRMS filed a motion seeking an order from the
bankruptcy court requiring HMA to turn over the withheld rent to
MRMS. Both HMA and Bayview opposed the motion, but the issue
was ultimately resolved by a Stipulation and Order that directed
HMA to turn over the withheld rent to MRMS’s counsel. The
Stipulation and Order required counsel to maintain the withheld
rent in his firm’s escrow account, solicit proposals for all
required maintenance and repairs, obtain approval for any work
from both Bayview and HMA, and pay all contractors from the
withheld rent. The Stipulation and Order did not specify how
counsel would be paid for his services.
In September 2016, after all necessary maintenance and
repairs were completed, Bayview filed a motion asking the court
to order MRMS to turn over what remained of the withheld rent.
2 MRMS objected and filed its own motion seeking permission to
deduct approximately $7,000 from the withheld rent for fees that
counsel incurred in complying with the Stipulation and Order.1
The bankruptcy court held a hearing on both motions in
February 2017. After hearing from the parties, the court denied
MRMS’s motion and granted Bayview’s motion. In reaching its
decision, the bankruptcy court explained that MRMS was not
entitled to recover counsel fees from the withheld rent because
I think it’s hard for me to conclude that those fees in and of themselves benefitted the collateral the same way that the funds expended for the services that were expended for the services that were rendered to the property did. And I do believe that the tenant and Bayview were on the cusp of an agreement to fund out of the rents the work that the tenant required in order to not – essentially declare the lease a breach and walk away from the property.
Doc. No. 6-1 at 30. This appeal followed.
II. STANDARD OF REVIEW
I review the bankruptcy court’s findings of fact for clear
error and its legal conclusions de novo. In re Donahue, BAP No.
NH 11-026, 2011 WL 6737074 at *8 (Bankr. App. Panel 1st Cir.
2011).
1 MRMS also sought reimbursement for other costs that are not at issue in this appeal.
3 III. ANALYSIS
The bankruptcy court based its decision on 11 U.S.C. §
506(c), which provides that
[t]he 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 payment of all ad valorem property taxes with respect to the property.
To recover an expenditure from collateral under this provision,
a debtor in possession such as MRMS must demonstrate that “(1)
the expenditure was necessary, (2) the amounts expended were
reasonable, and (3) the creditor benefitted from the expenses.”2
In re Domistyle, Inc., 811 F.3d 691, 695 (5th Cir. 2015)
(quoting In re Delta Towers, Ltd., 924 F.2d 74, 76 (5th Cir.
1991)).
In the present case, the bankruptcy court reasoned that
MRMS was not entitled to recover counsel fees from the withheld
rent because the fees did not benefit Bayview in its capacity as
a secured creditor.3 I am unpersuaded by this analysis, both
2 Although § 506(c) only expressly allows an executor to surcharge collateral, a debtor in possession may also obtain relief under § 506(c) because a debtor in possession is entitled to the rights of an executor pursuant to 11 U.S.C. § 1107. Hartford Underwriters Co. v. Union Planters Bank, N.A., 530 U.S. 1, 6 n.3 (2000).
3 Bayview does not defend the bankruptcy court’s ruling on appeal 4 because there is no evidence in the record to support the
court’s determination and because the court based its ruling on
an incorrect legal standard.4
The bankruptcy court appears to have based its ruling on a
finding that Bayview and HMA would likely have agreed on a
process for completing the maintenance and repairs themselves if
only MRMS had refrained from filing for bankruptcy protection
and allowed HMA and Bayview to resolve the issue in state court.
I cannot sustain the court’s ruling because there is simply no
evidence in the record to support the finding on which the
ruling depends. Because the record contains no evidence on this
issue, the bankruptcy court’s finding that the parties would
have reached an agreement on the maintenance and repairs
themselves if MRMS had not filed for bankruptcy protection is
by claiming that counsel’s fees were either unnecessary or unreasonable. Accordingly, I focus my analysis on whether the bankruptcy court correctly determined that the fees did not benefit Bayview.
4 Bayview also argues that MRMS waived its right to seek fees from the withheld rent because the Stipulation and Order did not specify that counsel’s fees would be paid from Bayview’s collateral. I reject this argument. MRMS’s right to surcharge collateral arises from § 506(c) rather than the Stipulation and Order. Therefore, the parties’ silence on the issue in the Stipulation and Order does not waive MRMS’s right to pursue its statutory remedy.
5 speculative. Moreover, the evidence of the parties’ behavior
after MRMS filed for bankruptcy, if anything, suggests that
counsel’s oversight was needed to ensure that the maintenance
and repairs were completed. Because it is undisputed that the
maintenance and repairs themselves benefitted Bayview, it
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UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW HAMPSHIRE
MRMS Property Management
v. Case No. 17-cv-94-PB Opinion No. 2017 DNH 247 Bayview Loan Servicing
MEMORANDUM AND ORDER
This bankruptcy appeal arises from an attempt by a debtor
in possession to recover attorney’s fees incurred during the
bankruptcy proceeding from a secured creditor’s cash collateral.
The bankruptcy court denied the debtor’s request because the
court concluded that the requested fees did not benefit the
secured creditor. I reverse.
I. BACKGROUND
MRMS Property Management, Inc. (“MRMS”), owned a single
piece of commercial real estate that was subject to a mortgage
held by Bayview Loan Servicing, LLC. (“Bayview”). Bayview also
held an assignment of leases and rents that entitled it to
income from the property if MRMS defaulted on its mortgage loan.
MRMS neglected to maintain its property and refused to make
necessary repairs. This prompted MRMS’s sole tenant, Hudson Medical Associates (“HMA”), to file a state court action seeking
permission to pay its monthly rent into an escrow account until
HMRS performed the required maintenance and repairs. The court
granted this request and HMA thereafter paid its rent into an
escrow account. At some point, MRMS also stopped paying its
mortgage, which put the mortgage loan into default.
With the possibility of foreclosure looming, MRMS filed for
Chapter 11 bankruptcy protection in June 2016. Approximately a
month later, MRMS filed a motion seeking an order from the
bankruptcy court requiring HMA to turn over the withheld rent to
MRMS. Both HMA and Bayview opposed the motion, but the issue
was ultimately resolved by a Stipulation and Order that directed
HMA to turn over the withheld rent to MRMS’s counsel. The
Stipulation and Order required counsel to maintain the withheld
rent in his firm’s escrow account, solicit proposals for all
required maintenance and repairs, obtain approval for any work
from both Bayview and HMA, and pay all contractors from the
withheld rent. The Stipulation and Order did not specify how
counsel would be paid for his services.
In September 2016, after all necessary maintenance and
repairs were completed, Bayview filed a motion asking the court
to order MRMS to turn over what remained of the withheld rent.
2 MRMS objected and filed its own motion seeking permission to
deduct approximately $7,000 from the withheld rent for fees that
counsel incurred in complying with the Stipulation and Order.1
The bankruptcy court held a hearing on both motions in
February 2017. After hearing from the parties, the court denied
MRMS’s motion and granted Bayview’s motion. In reaching its
decision, the bankruptcy court explained that MRMS was not
entitled to recover counsel fees from the withheld rent because
I think it’s hard for me to conclude that those fees in and of themselves benefitted the collateral the same way that the funds expended for the services that were expended for the services that were rendered to the property did. And I do believe that the tenant and Bayview were on the cusp of an agreement to fund out of the rents the work that the tenant required in order to not – essentially declare the lease a breach and walk away from the property.
Doc. No. 6-1 at 30. This appeal followed.
II. STANDARD OF REVIEW
I review the bankruptcy court’s findings of fact for clear
error and its legal conclusions de novo. In re Donahue, BAP No.
NH 11-026, 2011 WL 6737074 at *8 (Bankr. App. Panel 1st Cir.
2011).
1 MRMS also sought reimbursement for other costs that are not at issue in this appeal.
3 III. ANALYSIS
The bankruptcy court based its decision on 11 U.S.C. §
506(c), which provides that
[t]he 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 payment of all ad valorem property taxes with respect to the property.
To recover an expenditure from collateral under this provision,
a debtor in possession such as MRMS must demonstrate that “(1)
the expenditure was necessary, (2) the amounts expended were
reasonable, and (3) the creditor benefitted from the expenses.”2
In re Domistyle, Inc., 811 F.3d 691, 695 (5th Cir. 2015)
(quoting In re Delta Towers, Ltd., 924 F.2d 74, 76 (5th Cir.
1991)).
In the present case, the bankruptcy court reasoned that
MRMS was not entitled to recover counsel fees from the withheld
rent because the fees did not benefit Bayview in its capacity as
a secured creditor.3 I am unpersuaded by this analysis, both
2 Although § 506(c) only expressly allows an executor to surcharge collateral, a debtor in possession may also obtain relief under § 506(c) because a debtor in possession is entitled to the rights of an executor pursuant to 11 U.S.C. § 1107. Hartford Underwriters Co. v. Union Planters Bank, N.A., 530 U.S. 1, 6 n.3 (2000).
3 Bayview does not defend the bankruptcy court’s ruling on appeal 4 because there is no evidence in the record to support the
court’s determination and because the court based its ruling on
an incorrect legal standard.4
The bankruptcy court appears to have based its ruling on a
finding that Bayview and HMA would likely have agreed on a
process for completing the maintenance and repairs themselves if
only MRMS had refrained from filing for bankruptcy protection
and allowed HMA and Bayview to resolve the issue in state court.
I cannot sustain the court’s ruling because there is simply no
evidence in the record to support the finding on which the
ruling depends. Because the record contains no evidence on this
issue, the bankruptcy court’s finding that the parties would
have reached an agreement on the maintenance and repairs
themselves if MRMS had not filed for bankruptcy protection is
by claiming that counsel’s fees were either unnecessary or unreasonable. Accordingly, I focus my analysis on whether the bankruptcy court correctly determined that the fees did not benefit Bayview.
4 Bayview also argues that MRMS waived its right to seek fees from the withheld rent because the Stipulation and Order did not specify that counsel’s fees would be paid from Bayview’s collateral. I reject this argument. MRMS’s right to surcharge collateral arises from § 506(c) rather than the Stipulation and Order. Therefore, the parties’ silence on the issue in the Stipulation and Order does not waive MRMS’s right to pursue its statutory remedy.
5 speculative. Moreover, the evidence of the parties’ behavior
after MRMS filed for bankruptcy, if anything, suggests that
counsel’s oversight was needed to ensure that the maintenance
and repairs were completed. Because it is undisputed that the
maintenance and repairs themselves benefitted Bayview, it
follows that the work by counsel that was required to complete
the maintenance and repairs was also beneficial to Bayview.
More fundamentally, I do not accept the premise underlying
the court’s ruling that an expense does not benefit a secured
creditor if it becomes necessary only because the debtor files
for bankruptcy protection. In my view, the issue as to whether
an expense incurred in bankruptcy benefitted a secured creditor
must be resolved by asking whether the expense benefitted the
creditor when the expense was incurred. Here, the record
demonstrates that both HMA and Bayview agreed that MRMS’s
counsel needed to oversee the maintenance and repair process and
that agreement was embodied in the Stipulation and Order.
Because the maintenance and repair work clearly benefitted
Bayview and circumstances made it necessary for MRMS’s counsel
to oversee that work, the fees counsel incurred in performing
the work also plainly benefitted Bayview.
6 IV. CONCLUSION
For the reasons set forth in this Memorandum and Order,
the bankruptcy court’s order denying MRMS’s request for
permission to surcharge the withheld rent for its counsel’s fees
is reversed. The case is remanded to the bankruptcy court for
further proceedings consistent with this opinion.
SO ORDERED.
/s/Paul Barbadoro Paul Barbadoro United States District Judge
December 6, 2017
cc: Ann Marie Dirsa, Esq. Christopher Fisher, Esq. Peter Tamposi, Esq.