Bryan v. Clark , 857 F.3d 1078 ( 2017 )

FILED
United States Court of Appeals
Tenth Circuit
May 24, 2017
PUBLISH Elisabeth A. Shumaker
Clerk of Court
UNITED STATES COURT OF APPEALS
TENTH CIRCUIT
In re: GARY L. BRYAN, a/k/a Gary
L. Bryan, officer, director, shareholder
of G.L. Bryan Investments, Inc., a/k/a
Gary Bryan, officer, director,
shareholder of Fort Love Aviation
Services, Inc., officer, director,
shareholder of Second Story Ventures,
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, Nos. 16-1172, 16-1213, 16-1214
Plaintiff Counter Defendant -
Appellee/Cross-Appellee/
Cross-Appellant,
v.
ARTHUR CLARK,
Defendant Counterclaimant -
Appellant/Cross-Appellee/
Cross-Appellee.
JANEL K. BRYAN,
Defendant Counterclaimant -
Appellee/Cross-Appellant/
Cross-Appellee.
AURORA LOAN SERVICES, LLC.
Defendant - Appellee
and
SPECIALIZED LOAN SERVICING,
LLC. and VECTRA BANK
COLORADO, N.A.,
Defendants.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLORADO
BANKRUPTCY APPELLATE PANEL
(NOS. 15-020-CO and 15-024-CO)
David von Gunten, von Gunten Law LLC, Denver, Colorado, for Appellant Clark.
Aaron J. Conrady (David V. Wadsworth with him on the briefs) Sender
Wasserman Wadsworth, Denver, Colorado, for Appellee Peters.
John G. Nelson, Law Office of John G. Nelson, Denver, Colorado, for Appellee
Bryan.
-2-
Before TYMKOVICH, Chief Judge, BRISCOE, and MURPHY, Circuit Judges.
TYMKOVICH, Chief Judge.
This appeal arises out of an adversary proceeding brought by the trustee of
a Chapter 7 bankruptcy estate to determine how to divide the proceeds from the
sale of the debtor’s real property. Previous litigation has already established,
among other things, the validity, priority, and extent of the various liens on the
property. Bryan v. Peters (In re Bryan), 547 F. App’x 892 (10th Cir. 2013)
(unpublished); Peters v. Bryan (In re Bryan), 495 F. App’x 884 (10th Cir. 2012)
(unpublished). On remand from this court, the bankruptcy court divided the sale
proceeds among the various parties. The bankruptcy court’s ruling left two of the
parties dissatisfied, and they appealed to the Bankruptcy Appellate Panel (BAP).
In a thorough opinion, the BAP affirmed the bankruptcy court order in all
respects but one. Peters v. Clark (In re Bryan), Nos. CO-15-020 & CO-15-024,
2016 WL 1170810 (B.A.P. 10th Cir. Mar. 25, 2016). In particular, the BAP
concluded the bankruptcy court correctly declined to apply the doctrine of
marshaling in favor of a secured creditor, because the common debtor
requirement imposed by Colorado law was not satisfied. The BAP also concluded
the bankruptcy court did not err in determining the bankruptcy estate was entitled
to retain the proceeds from the sale of the property subject to a home equity line
of credit lien, or in determining the amount due under that lien. But the BAP
-3-
found the bankruptcy court erred under 11 U.S.C. § 506(c) by surcharging the
secured collateral—and thereby reducing a secured creditor’s share—for expenses
incurred contesting the validity of that secured creditor’s lien. This decision led
to a three-party cross-appeal to this court, and we exercise jurisdiction pursuant to
28 U.S.C. § 158(d)(1).
“Although this is an appeal from a BAP decision, ‘[this court] review[s]
only the [b]ankruptcy [c]ourt’s decision.’” Rebein v. Cornerstone Creek Partners,
LLC (In re Expert South Tulsa, LLC), 842 F.3d 1293, 1296 (10th Cir. 2016)
(quoting Alderete v. Educ. Credit Mgmt. Corp. (In re Alderete), 412 F.3d 1200,
1204 (10th Cir. 2005)). “[This court] treat[s] the BAP as a subordinate appellate
tribunal whose rulings may be persuasive but are not entitled to deference.” Id.
Furthermore, “[m]atters of law are reviewed de novo, and factual findings (which
are made only by the bankruptcy court, not by the BAP) are reviewed for clear
error.” Id. (citing Gullickson v. Brown (In re Brown), 108 F.3d 1290, 1292 (10th
Cir. 1997)).
We have conducted a complete and independent review, and with several
caveats discussed below, affirm the BAP’s judgment and formally adopt its
opinion for the court. The BAP opinion is attached as an appendix.
First, we find we have jurisdiction over this appeal. Under 28 U.S.C.
§ 158(d), this court only has jurisdiction over final orders from the BAP. “The
BAP’s final decision is appealable when the BAP does not remand for ‘significant
-4-
further proceedings.’” Clark v. Zwanziger (In re Zwanziger), 741 F.3d 74, 75 n.1
(10th Cir. 2014) (quoting Farmers Home Admin. v. Buckner (In re Buckner), 66
F.3d 263, 265 (10th Cir. 1995)). “‘[M]ere ministerial computations involving
little judicial discretion’—like simple arithmetic—are not ‘significant further
proceedings.’” Id. (quoting In re Buckner, 66 F.3d at 265). Here, the BAP
remanded to the bankruptcy court to allocate costs into three conceptually and
chronologically distinct categories, a task requiring little judicial discretion. This
being the case, we conclude the BAP decision was a final order in the meaning of
§ 158(d), and that we therefore have jurisdiction to hear this appeal.
Second, we address specifically several arguments involving the BAP’s
methodology and interpretation:
(1) The trustee argues the BAP based its 11 U.S.C. § 506(c) holding on its
own unsupported findings, which were contrary to the findings of the bankruptcy
court. We disagree. The BAP properly reviewed de novo the bankruptcy court’s
application of the legal standard in § 506(c). BAP Op. at 16. The BAP’s
holding—expenses incurred contesting the validity of a secured creditor’s lien
cannot be said to provide a “benefit” to that secured creditor in the meaning of
§ 506(c)—is not based on a set of contrary factual conclusions. Rather, relying
on the bankruptcy court’s factual findings, the BAP conducted a careful legal
analysis of the meaning of “benefit” in § 506(c). BAP Op. at 19–23. This
-5-
statutory interpretation—analyzing the text of the statute and the relevant case
law—was nothing other than proper de novo review of a legal question.
(2) The trustee also argues the secured creditor failed to preserve the
§ 506(c) issue. This argument is belied by the trustee’s own submissions to this
court. The secured creditor filed a written objection before the bankruptcy court
objecting to the surcharge because the expenses did not benefit him. Peters App.,
Vol. I at 153–56. The trustee even mentions that objection elsewhere in his brief.
Peters Br. at 42 (“[The secured creditor] objected to the Affidavit of Attorneys
Fees submitted by the Trustee . . . and the [c]ourt sustained the objection in part,
reducing the fee request by approximately $10,000.”).
(3) Next, the trustee argues the BAP erred by disregarding the bankruptcy
court’s finding that the trustee’s statutory commission could have been included
in the § 506(c) surcharge, even though it was not. The trustee opted not to
include the commission in the surcharge to allow the secured creditor some
recovery. Because the commission would have been more money than the costs
incurred contesting the validity of the secured creditor’s lien, argues the trustee,
any error in the § 506(c) “benefit” analysis was harmless.
But this argument is unpersuasive. The trustee chose not to include his
statutory commission in the surcharge. That choice was a litigation strategy that
might have allowed the secured creditor some recovery. But that fact does not
create a benefit where none exists. And the harmless-error doctrine, which the
-6-
trustee cites, does not apply here. It applies only where “preserved trial
errors . . . do not affect the substantial rights of a complaining party.” Harry T.
Edwards & Linda A. Elliott, Federal Standards of Review 79 (2007); see also 28
U.S.C. § 2111 (“[T]he court shall give judgment . . . without regard to errors or
defects which do not affect the substantial rights of the parties.”). Here, a
substantial right is at issue: the amount of money the secured creditor will
receive.
(4) Finally, the BAP opinion resolves issues that have not been raised by
the parties on appeal to this court. We therefore adopt the BAP’s opinion on the
surcharge issue only to the extent that it addresses the costs incurred contesting
the validity of the secured creditor’s lien, which the parties and the BAP refer to
as the Lien Priority Adversary.
-7-
APPENDIX
[See attached PDF]
-8-
Nos. 16-1172, 16-1213, 16-1214, In re Bryan
BRISCOE, Circuit Judge, concurring in part and dissenting in part.
I join the majority opinion, except for its rejection of one issue raised by the trustee
in his cross appeal. The trustee argues, and I agree, that the Bankruptcy Appellate Panel
(BAP) erred by disregarding the bankruptcy court’s acceptance of a proposal by the
trustee to take the commission he earned pursuant to 11 U.S.C. § 326 from the estate,
rather than including it as part of the 11 U.S.C. § 506(c) surcharge against the portion of
the net sale proceeds subject to Arthur Clark’s lien. In my view, the BAP overlooked this
important fact in rendering its initial decision, and subsequently failed to give adequate
consideration to it in denying the trustee’s motion for rehearing. Taking this fact into
account in light of the bankruptcy court’s other findings and conclusions, and in light of
the BAP’s remand regarding the trustee’s costs, I believe the only appropriate remedy is
to authorize the bankruptcy court on remand to consider anew whether or not to include
the trustee’s statutory commission as part of the § 506(c) surcharge.
I
When the trustee commenced the lien priority adversary proceeding that is the
subject of this appeal, he sought
(a) a declaration as to the interests of all the parties in the Net Sale Proceeds
and (b) in the event the [bankruptcy court] determined that . . . Clark held a
valid lien against the bankruptcy estate’s share of the Net Sale Proceeds,
recovery of the estate’s expenses and his statutory commission from the
amounts subject to . . . Clark’s lien pursuant to 11 U.S.C. § 506(c).
Bankruptcy Ct. Doc. 190 at 11 (Adversary Proceeding # 10-01189-JGR).
After conducting a trial on the matter, the bankruptcy court issued written findings
of fact, conclusions of law, and an order regarding the validity, extent and priority of lien
claims on the net sale proceeds. The bankruptcy court concluded that Clark possessed a
“second priority lien against the bankruptcy estate’s share of the Net Sale Proceeds.” Id.
at 13. The bankruptcy court also concluded, however, that the trustee was entitled under
§ 506(c) to recover against the bankruptcy estate’s share of the net sale proceeds his
undisputed “statutory commission in the amount of $45,850.00 pursuant to 11 U.S.C.
§ 326 and attorney’s fees and costs in the approximate amount of $65,000.” Id. at 17. In
doing so, the bankruptcy court acknowledged that the trustee’s “statutory commission and
the fees and costs” would “exceed the bankruptcy estate’s share of the Net Sale
Proceeds,” leaving nothing for Clark. Id. at 20. But the bankruptcy court concluded that
the equities of the case justified that result. More specifically, the bankruptcy court cited
Clark’s years-long efforts “to obtain a windfall at the expense of the bankruptcy estate,”
and the resulting and “needless accrual of some $70,000 of interest” on the first priority
lien against all of the net sale proceeds (the Aurora Deed of Trust). Id.
To Clark’s good fortune and because of the trustee’s proposal, however, Clark was
not left with nothing. The trustee, who prior to trial had received on behalf of the
bankruptcy estate a second priority lien (a home equity line of credit deed of trust) against
Ms. Bryan’s share of the net sale proceeds, “proposed relief that w[ould] ensure [that]
Clark receive[d] some distribution on account of [his] Lien.” Id. at 20. Specifically, the
trustee “propose[d] that only the bankruptcy estate’s attorney’s fees and expenses be
2
recovered from the proceeds subject to . . . Clark[’s lien] pursuant to . . . § 506(c),” and
that his statutory commission be paid from the estate’s recovery on the second priority
lien. Id. The bankruptcy court accepted the trustee’s proposal, but “note[d] that because .
. . Clark in all likelihood would have incurred the same or greater fees had he come
forward much earlier and sought to enforce his lien interest, any contrary result would
amount to a windfall to . . . Clark at the direct expenses of the estate.” Id.
II
In his appeal to the BAP, Clark brazenly challenged the entire § 506(c) surcharge.
The BAP agreed with the bankruptcy court that all of the fees and costs incurred by the
trustee were necessary and reasonable, and that Clark benefitted from the fees and costs
incurred by the trustee in challenging the validity of the trust and in selling the property.
As for the lien priority adversary proceedings, the BAP concluded that while they
“provided a potential benefit to the class of general unsecured creditors,” they did not
“provide[] any benefit to the secured collateral or to Clark,” whose lien the trustee
contested. Aplt. App. at 170. Thus, the BAP concluded that the fees and costs incurred
by the trustee in connection with the lien priority adversary proceeding “d[id] not fulfill
the requirements of § 506(c).” Id. at 173. Ultimately, the BAP affirmed part of the
§ 506(c) surcharge, but reversed the bankruptcy court’s decision awarding the trustee fees
associated with the lien priority adversary proceeding totaling $43,795. Id. at 174 (BAP
Opinion at 24). The BAP also “remand[ed] th[e] case to the bankruptcy court for the
limited purpose of determining which [of $2,949.34 in] costs awarded by the bankruptcy
3
court” related to the lien priority adversary proceeding. Id. Any such costs, the BAP
admonished, were not to be surcharged against the bankruptcy estate’s share of the net
sale proceeds. Id.
Notably, the BAP made no mention in its decision of the trustee’s entitlement to a
statutory commission or of the trustee’s proposal, and the bankruptcy court’s acceptance
of that proposal, to take the commission from the estate rather than include it, as the
bankruptcy court had originally intended, in the § 506(c) surcharge. This despite the fact
that the trustee specifically pointed out this important case history in the brief he
submitted to the BAP.
The trustee filed with the BAP a motion for rehearing, noting that the BAP’s
original decision “made no mention of the Trustee’s proposal” and its impact on the case.
Aple. Supp. App. at 192. The BAP summarily denied the trustee’s motion, noting only
that “[t]he Trustee did not challenge the bankruptcy court’s treatment of the statutory
[commission].” Id. at 196.
III
I agree with the BAP and the majority that the fees and costs incurred by the
trustee in the lien priority adversary proceeding did not benefit Clark and thus the trustee
was not entitled to recover those fees and costs under § 506(c). But I disagree with the
BAP and the majority that the trustee’s proposal to take his statutory commission from
the estate rather than include it in the § 506(c) surcharge, which was accepted and
adopted by the bankruptcy court, was simply a “litigation strategy” that has no bearing on
4
the outcome of this case. Maj. Op. at 6.
Bankruptcy courts are of course bound by “what the Bankruptcy Code itself
provides.” Raleigh v. Illinois Dep’t of Revenue, 530 U.S. 15, 24 (2000). But within
those statutory limitations, they are courts of equity. Id.; see Young v. United States, 535
U.S. 43, 50 (2002). And the bankruptcy court in this case made quite clear, having
overseen the case for years, that the equities strongly disfavored Clark. Indeed, as noted,
the bankruptcy court expressly stated in its order that an equitable solution would have
been for Clark to receive nothing from the net sale proceeds. The only reason it did not
order that result was because of the trustee’s proposal to take his commission from the
estate, rather than including it in the § 506(c) surcharge. And even in accepting the
trustee’s proposal, the bankruptcy court continued to express concern about Clark
receiving a windfall at the expense of the estate.
All of which leads me to conclude that the proper resolution of this case is to
remand to the bankruptcy court so that, along with completing the task assigned to it by
the BAP (determining which of the trustee’s costs were associated with the lien priority
adversary proceeding), it may consider anew whether the trustee’s statutory commission
should be taken from the estate or included in the § 506(c) surcharge.
5
APPENDIX
FILED
U.S. Bankruptcy Appellate Panel
of the Tenth Circuit
March 25, 2016
Blaine F. Bates
NOT FOR PUBLICATION Clerk
UNITED STATES BANKRUPTCY APPELLATE PANEL
OF THE TENTH CIRCUIT
IN RE GARY L. BRYAN, also known BAP Nos. CO-15-020 & CO-15-024
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, Bankr. No. 05-38302
Adv. No. 10-01189
Plaintiff - Chapter 7
Counter-Defendant -
Appellee,
v. OPINION *
ARTHUR CLARK,
Defendant-
Counter-Claimant -
Appellant/Cross-Appellee,
*
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.
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.
Appeal from the United States Bankruptcy Court
for the District of Colorado
Before KARLIN, Chief Judge, CORNISH, and MICHAEL, Bankruptcy Judges.
MICHAEL, Bankruptcy Judge.
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
-2-
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
-3-
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. 1 The relevant
1
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
(continued...)
-4-
litigation may be summarized as follows:
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”). 2 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
1
(...continued)
proceeding was rendered moot when the Debtor voluntarily waived his discharge.
No aspect of that adversary is involved in this appeal.
2
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.
-5-
the closing absent entry of an order by the bankruptcy court resolving Clark’s
judgment lien.
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. 3
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”). 4
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). 5 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. 6 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
3
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.
4
Id., in Appellee Peters’s App. at 13.
5
All future references to “Code,” “Section,” and “§” are to the Bankruptcy
Code, Title 11 of the United States Code, unless otherwise indicated.
6
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.
-6-
commence an adversary proceeding pursuant to Federal Rule of Bankruptcy
Procedure 7001(2).
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. 7
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
7
See Joint PreTrial Statement at 1, 3, in Appellant Clark’s App. at 267, 269.
-7-
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. 8 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.
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. 9 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.
8
As a result of its ruling that Clark did not have a valid lien, the bankruptcy
court did not reach Clark’s marshaling argument.
9
See Clark v. Peters (In re Bryan), 547 F. App’x 892 (10th Cir. 2013).
-8-
In March 2015, the bankruptcy court issued its opinion on remand (the
“Remand Order”). 10 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.
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. 11
Fees related to the Sham Trust Adversary: $45,084.00 12
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
10
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.
11
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.
12
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.
-9-
Total costs prior to December 11, 2011: $3,177.04 13
Total fees and costs prior to December 11, 2011: $66,038.54
The Remand Order awarded the Trustee $62,861.50 in fees and $2,949.34 in costs
pursuant to § 506(c). 14 Although the bankruptcy court referred to the award as “the
bankruptcy estate’s fees and expenses attributable to the recovery and liquidation
of the [Residence],” it addressed all of the fees and costs requested by the
Trustee. 15
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. 16 The bankruptcy court
provided Clark with an opportunity to object to the additional fees and costs, which
he did. 17 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
13
These costs were not allocated to specific categories.
14
The cost award was slightly less than the amount requested by the Trustee.
No explanation was given for this difference.
15
Remand Order at 20, in Appellant Clark’s App. at 736.
16
Affidavit of Attorneys Fees and Costs, in Appellant Clark’s App. at 740.
17
Objection to Affidavit of Attorney’s Fees and Costs, in Appellant Clark’s
App. at 747.
-10-
May 4, 2015. 18 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.
The bankruptcy court then issued its order regarding distribution of Sale
Proceeds (the “Final Distribution Order”). 19 The bankruptcy court allowed the
Trustee a total surcharge of $86,187.73 (the “Surcharge”). 20 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.
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
18
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.
19
Final Order Regarding Distribution of Net Sale Proceeds in Appellant
Clark’s App. at 755.
20
Id. at 3, in Appellant Clark’s App. at 757.
-11-
reviewable for abuse of discretion. 21 De novo review requires an independent
determination of the issues, giving no special weight to the bankruptcy court’s
decision. 22 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.” 23 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.” 24
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.” 25
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
21
Pierce v. Underwood, 487 U.S. 552, 558 (1988); Fowler Bros. v. Young (In
re Young), 91 F.3d 1367, 1370 (10th Cir. 1996).
22
Salve Regina Coll. v. Russell, 499 U.S. 225, 238 (1991).
23
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)).
24
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)).
25
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)).
-12-
lien on only one of the funds. 26 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[.]”27
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.” 28 The statement is incorrect. The
Debtor is not a common debtor of Aurora and Clark.
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
26
Legge v. Peterson, 277 P. 786, 788 (Colo. 1929) (hereafter “Legge”).
27
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.
28
Appellant Clark’s Br. 14.
-13-
Colorado Supreme Court. 29 Clark cites to the following portion of Legge:
“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 Rawle C. L. 460, par. 9. 30
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. 31
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. 32 When a bankruptcy court applies Colorado state law on an issue governed
29
Legge, 277 P. 786.
30
Appellant Clark’s Reply Br. 8 (quoting Legge, 277 P. at 788-89 (emphasis
added by Appellant Clark)).
31
Legge, 277 P. at 789.
32
W. Nat’l Bank of Casper v. ABC Drilling Co., 599 P.2d 942, 946 (Colo.
(continued...)
-14-
by Colorado state law, it does not commit error.
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”). 33 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. 34 The bankruptcy court acted within its discretion in following Legge and
ignoring Bame.
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. 35 “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.” 36 Section 506(c) provides an exception to the general rule. 37
(...continued)
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)).
33
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).
34
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).
35
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)).
36
In re Swann, 149 B.R. 137, 143 (Bankr. D.S.D. 1993) (citing In re
(continued...)
-15-
It states that:
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. 38
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.” 39
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.” 40 The benefit to the secured creditor must be “concrete” and
“quantifiable.” 41 We review a bankruptcy court’s factual findings as to the
necessary, reasonable, and benefit requirements of § 506(c) under the clearly
erroneous standard. 42 We review the bankruptcy court’s application of the correct
legal standard contained in § 506(c) de novo. 43
36
(...continued)
Saybrook MFG. Co., 130 B.R. 1013, 1021 (Bankr. M.D. Ga. 1991)).
37
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.
38
§ 506(c).
39
In re InteliQuest Media Corp., 326 B.R. 825, 832 (10th Cir. BAP 2005).
40
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.
41
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).
42
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).
43
Domistyle, 811 F.3d at 695; Visual Industries, 57 F.3d at 324. See also
(continued...)
-16-
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.” 44 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.” 45 In addition, as the bankruptcy court noted, at the
time the Trustee commenced the Sham Trust Adversary, Clark took the position
(...continued)
Miniscribe Corp., 309 F.3d at 1240.
44
Appellant Clark’s Br. 22.
45
Remand Order at 19, in Appellant Clark’s App. at 735.
-17-
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.
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. 46 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. 47 The Trustee’s actions were both sound and
necessary. There is no dispute regarding the reasonableness of the fees or costs
incurred. 48 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.
46
Appellant Clark’s Br. 13, 19, 20.
47
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).
48
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).
-18-
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. 49 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.
The remaining issue under § 506(c) is whether the Trustee’s efforts in
conducting the Lien Priority Adversary benefited Clark. Clark argues that
49
See id.
-19-
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. 50 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.
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. 51 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. 52 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.
50
Appellant Clark’s Br. 10 ¶ 14.
51
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.
52
In re Domistyle, 811 F.3d 691, 698 (5th Cir. 2015).
-20-
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. 53 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.
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. 54 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
53
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).
54
Trim-X, 695 F.2d 296.
-21-
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. 55 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. 56
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. 57 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.
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
55
Id. at 301.
56
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.
57
See Appellee Peter’s Br. 47 (“The Lien Priority Adversary was required as
a result of Mr. Clark’s decision to assert this position.”).
-22-
bankruptcy estate.” 58 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. 59 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. 60 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.
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
58
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).”).
59
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.
60
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.”).
-23-
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. 61
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. 62 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. 63
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.
61
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.
62
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.
63
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).
-24-
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. 64 A person aggrieved is “one
‘whose rights or interests are directly and adversely affected pecuniarily by the
decree or order of the bankruptcy court.’” 65 A party has standing when a
bankruptcy court order “‘diminishes their property, increases their burdens, or
impairs their rights.’” 66 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
64
In re Petroleum Prod. Mgmt., Inc., 282 B.R. 9, 13–14 (10th Cir. BAP
2002).
65
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)).
66
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)).
-25-
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.
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. 67 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.” 68 No party, including Ms. Bryan, disputed the
validity of the HELOC lien prior to the filing of this appeal.
67
Remand Order at 6 n.37, in Appellant Clark’s App. at 722.
68
Id. at 13, in Appellant Clark’s App. at 729.
-26-
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. 69 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.
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
69
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.
-27-
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.
-28-