FYI: 6th Cir Upholds Rejection of "Robo-Signing" Challenge to Foreclosure

The U.S. Court of Appeals for the Sixth Circuit recently rejected a borrower's "robo-signing" challenge to his foreclosure.  In so ruling, the Court also held that a Michigan state court's issuance of a preliminary injunction against a mortgagee in a foreclosure action did not bar subsequent removal and entry of summary judgment in favor of the mortgagee by a federal district court.

 

A copy of the opinion is available at:  Link to Opinion

 

The borrower obtained a mortgage loan, and the mortgage was later assigned.  The new mortgagee continued to send the borrower his monthly statements.  After the borrower defaulted, the mortgagee initiated foreclosure proceedings and a sale date was set.

 

The borrower filed suit against the mortgagee in Michigan's Wayne County Circuit Court claiming that the signatures on the assignment of mortgage were forged by "robo-signers", or that the signers had no authority to execute the assignment, and that the deficiencies in the assignment violated Michigan state law regarding nonjudicial foreclosure-by-advertisement.

 

The matter was set for hearing on the borrower's request for a preliminary injunction.  However, the mortgagee did not attend that hearing and a preliminary injunction was issued. The borrower later filed a "Default Request, Affidavit, and Entry" form requesting the entry of a default judgment. The lines titled "Date" and "Court Clerk" on the form were left blank. The state-court docket did not display any entries concerning a default judgment. 

 

The mortgagee removed the case to federal court on the basis of diversity jurisdiction on the same day the borrower filed his request for an entry of default in state court. The district court denied the borrower's motion to remand to state court, and later granted the mortgagee's motion for summary judgment.  The borrower appealed citing supposed procedural errors and a supposed misapplication of state law.

 

On appeal, the Sixth Circuit held that district court did not misapply Michigan substantive law because the borrower was not prejudiced by the alleged "robo-signing" deficiencies in the assignment of mortgage.

 

The Court noted that, under both Kim v. JPMorgan Chase Bank, N.A., 825 N.W.2d 329 (Mich. 2012) and Conlin v. Mortg. Elec. Registration Sys., Inc., 714 F.3d 355 (6th Cir. 2013), Michigan law treats defects in a foreclosure proceeding as voidable not void ab initio, and accordingly, borrowers must show that they were prejudiced by the failure to comply in that they would have been in a better position to preserve their interest in the property absent the mortgagee's noncompliance with Mich. Comp. Laws § 600.3204.

 

The Sixth Circuit held that the allegations of "robo-signing" in Conlin were similar to the borrower's allegations in this case, and that the borrower here also failed to meet the burden of demonstrating he was prejudiced.  The Court noted that the borrower introduced no evidence that he would be subjected to double liability and merely made conclusory statements without supporting facts. Furthermore, the Court also noted that the borrower here failed to show that the assignment deficiencies placed him in a worse position to protect the interest in his home. In addition, the Sixth Circuit held that the assignment deficiencies could not have caused the borrower confusion as to whom he should pay, because he received his monthly mortgage statements from the mortgagee both before and after the assignment.

 

The Sixth Circuit also disagreed with the borrower's assertion that the mortgagee was required to move to set aside the state court's default judgment and preliminary injunction before the district court could issue a summary judgment order.  In so ruling, the Court reasoned that a default judgment was never in fact entered in state court, and therefore there was no requirement to set aside the judgment before the district court could issue a summary-judgment order.

 

The Sixth Circuit further held that the state court's issuance of a preliminary injunction did not preclude the federal district court's summary judgment order.  The Sixth Circuit ruled that Federal Rule of Civil Procedure 81(c) governs the mode of proceedings in federal court after removal, and that the mortgagee was not bound by state court procedures to challenge the entry of the state court's preliminary injunction.  

 

The Court explained that a preliminary injunction maintains the status quo until a case can be deciding on its merits.  Accordingly, the Sixth Circuit held that "a final order on the merits extinguishes a preliminary injunction."  Thus, although the Court found that the state court issued preliminary injunction survived removal, the issuance of the summary judgment order by the district court was a final order that immediately extinguished the injunction.  Therefore, the Court held that the mortgagee was not procedurally obligated to move to set aside the preliminary injunction before the district court could grant summary judgment.

 

The Sixth Circuit also held that the district court did not err in denying the borrower's motion to remand. The Court found that because a default judgment was never in fact entered in state court, it could not render the district court's denial of Borrower's motion to remand erroneous.  Furthermore, the Court found that 28 U.S.C. § 1450 explicitly contemplated instances where an injunction was issued prior to removal.  Under 28 U.S.C. § 1450, the state court's preliminary injunction remained effective and did not bar removal of the case.

 

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

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FYI: SCOTUS Holds Unaccepted Offer of Judgment Does Not Moot Litigation, Does Not Halt Putative Class Action

The Supreme Court of the United States recently held that a class action defendant cannot "pick off" the named plaintiff and thereby render the case moot by simply offering full relief by way of settlement offer or offer of judgment under Federal Rule of Civil Procedure 68. 

 

However, as the majority acknowledges, the Court also left open the question of what happens when a defendant actually tenders full relief to the named plaintiff, thus potentially leaving class action defendants an alternative weapon to cost-effectively defeat class claims.

 

A copy of the opinion is available at: http://www.supremecourt.gov/opinions/15pdf/14-857_8njq.pdf

 

The defendant in this class action case was a nationwide advertising and marketing company.  Beginning in 2000, the defendant contracted with the United States Navy to develop and implement a national marketing campaign.  The defendant proposed sending text messages to "young adults" to encourage them to learn more about the Navy.  The Navy approved the proposal on the condition that the defendant would only send messages "to individuals who opted in to receipt of marketing solicitations on topics that included service in the Navy.

 

The text message read:

 

"Destined for something big?  Do it in the Navy.  Get a career.  An education.  And a chance to serve a greater cause.  For a FREE Navy video call…" and provided a phone number for recipients to call.

 

The defendant also contracted with a third party to generate a list of cell phone numbers geared toward the Navy's 18-24 "target audience" who had also supposedly "consented to receiving solicitations by text message."  The defendant then sent the message to more than 100,000 recipients in 2006.

 

The putative class plaintiff alleged that he never consented to receiving the message he received, and that by sending him the message, the defendant violated the federal Telephone Consumer Protection Act, 47 U.S.C. § 227(b)(1)(A) ("TCPA").  He filed a class action complaint on behalf of a purported nationwide class of consumers who had received the defendant's text message, but had not consented to receipt of the message.

 

As you may recall, the TCPA prohibits any person, absent prior express consent, from making any non-emergency call or text "using any automatic telephone dialing system…to any telephone number assigned to a paging service [or] cellular telephone service."  Id. at § 227(b)(1)(A)(iii).  The Court noted that it is well established that a "text message to a cellular telephone…qualifies as a 'call' within the compass of §227(b)(1)(A)(iii)."  

 

In addition, the TCPA authorizes a private right of action, and a plaintiff in such an action may recover his or her "actual monetary loss" or $500 for each violation, whichever is greater.  Id. at § 227(b)(3).  A plaintiff may also recover treble damages if "the defendant willfully or knowingly" violates the TCPA

 

Prior to an agreed upon deadline for the plaintiff to file a motion for class certification, the defendant proposed a settlement for $1,503 per message for "for the May 2006 text message and any other text message" that the plaintiff could show he received, thus exceeding the plaintiff's treble damages claim.  The settlement offer did not include attorney's fees because as you also may recall, the "TCPA does not provide for an attorney-fee award."  The plaintiff rejected the offer.

 

Pursuant to Federal Rule of Civil Procedure 68, the defendant then filed an offer of judgment reciting the offer terms.  Subsequently, the defendant moved to dismiss the case under Federal Rule of Civil Procedure (12)(b)(1) for lack of subject matter jurisdiction.  The defendant argued that its offer "mooted" the plaintiff's individual claim "by providing him with complete relief."  And, it argued that because he "had not moved for class certification before his claim became moot…the putative class claims also became moot."

 

The District Court for the Central District of California denied the defendant's motion.  However, the defendant later filed a motion for summary judgment essentially asserting that it was entitled to sovereign immunity because it was acting on behalf of the Navy.  The District Court granted that motion. 

 

However, the U.S. Court of Appeals for the Ninth Circuit reversed.  It held that the defendant was not entitled to sovereign immunity because, although it was acting on behalf of the Navy, it had exceeded its authority (as an independent contractor) by sending a text message to someone who had allegedly not consented to receipt and who was also well outside the Navy's "target audience."  The Ninth Circuit also "agreed that…[the plaintiff's] case remained live" despite the Rule 68 offer of judgment.

 

Beginning its analysis with Article III of the Constitution, the Supreme Court noted that it is well established that the "cases" and "controversies" requirement "demand[s] that an actual controversy…be extant at all stages of review, not merely at the time the complaint is filed."  Further, the Court explained that a "case becomes moot, however, only when it is impossible for a court to grant any effectual relief whatever to the prevailing party."  Thus, as "long as the parties have a concrete interest, however small, in the outcome of the litigation, the case is not moot." 

 

Applying this framework to the plaintiff's Rule 68 offer of judgment in this case, the Court held that under "basic principles of contract law" the "Rule 68 offer of judgment, once rejected had no continuing efficacy."  Accordingly, the Court held that "with no settlement offer still operative, the parties remained adverse; both retained the same stake in the litigation they had at the outset."

 

Moreover, the Court held that Rule 68 "hardly supports the argument that an unaccepted settlement offer can moot a complaint."  Turning to Rule 68 itself, the Court held that because the rule provides that an offer "is considered withdrawn if not accepted within 14 days of its service," once the offer expired, the plaintiff "remained emptyhanded" and therefore although the defendant had "offered" to provide him with full and complete relief, not such relief had actually been provided.  Thus, the Court held an actual case and controversy remained live following the rejection and expiration of the Rule 68 Offer.

 

The Supreme Court held that, "[i]n sum, an unaccepted settlement offer or offer of judgment does not moot a plaintiff's case, so the District Court retained jurisdiction to adjudicate…[the] complaint.  That ruling suffices to decide this case." 

 

The Court continued:

 

"We need not, and do not, now decide whether the result would be different if a defendant deposits the full amount of the plaintiff's individual claim in an account payable to the plaintiff, and the court then enters judgment for the plaintiff in that amount.  That question is appropriately reserved for a case in which it is not hypothetical." 

 

Accordingly, a majority of the Court affirmed the judgment of the Ninth Circuit.

 

As Chief Justice Roberts noted in a vigorous dissent criticizing the majority opinion:

 

"The good news is that this case is limited to its facts.  The majority holds that an offer of complete relief is insufficient to moot a case.  The majority does not say that payment of complete relief leads to the same result.  For aught that appears, the majority's analysis may have come out differently if…[the defendant] had deposited the offered funds with the District Court.  This Court leaves that question for another day — assuming there are other plaintiffs out there who, [like this one]…won't take 'yes' for an answer."

 

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

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FYI: ND Ill Holds BK Automatic Stay Does Not Revoke TCPA Consent, Strikes Injunctive Relief TCPA Class Claims

The U.S. District Court for the Northern District of Illinois recently held that the automatic stay in bankruptcy does not, by itself, operate to revoke prior express consent under the federal Telephone Consumer Protection Act, 47 U.S.C. § 227 et seq. ("TCPA"). 

 

However, the Court also held that, in this particular case, the debtor had sufficiently alleged that she had not given consent to the creditor or debt collector defendants in the first place, and thus allowed the debtor's individual and putative class TCPA claims to go forward.

 

In addition, the Court rejected the debtor's attempt to bring TCPA class claims for injunctive and declaratory relief, holding that Fed. R. Civ. P. 23(b)(2) does not apply to the debtor's TCPA claim because every violation of the TCPA creates statutory damages.

 

A copy of the opinion is available at:  Link to Opinion

 

The plaintiff debtor ("Debtor") alleged that a creditor ("Creditor"), and a debt collector allegedly "hired" by the creditor ("Debt Collector") violated the TCPA and the federal Fair Debt Collection Practices Act, 15 U.S.C. § 1692 et seq. ("FDCPA"), when the Debt Collector allegedly contacted the Debtor during her bankruptcy. 

 

The Debtor filed bankruptcy on July 31, 2014.  At some "unspecified time" prior to July 31, 2014, the Debtor incurred a debt with the Creditor.  At some point prior to September 18, 2014, the Creditor purportedly "hired" the Debt Collector to attempt to collect the debt.  The Debt Collector allegedly made nine "non-emergency" calls to the Debtor between September 18, 2014 and May 29, 2015 supposedly using an automatic telephone dialing system. 

 

As you may recall, the TCPA prohibits debt collection calls "other than calls made for emergency purposes" or with the called party's prior express consent, that are "made using an automatic telephone dialing system or artificial or prerecorded voice to a cellular telephone." 

 

The Debtor asserted her TCPA claim as an individual claim and also as class action claim under Federal Rules of Civil Procedure 23(b)(2) and 23(b)(3).  Rule 23(b)(2) permits class actions where "the main relief sought is injunctive or declaratory relief."  Rule 23(b)(3) relates to class claims for monetary damages.

 

For her TCPA claim, the Debtor alleged that the Creditor and Debt Collector violated the TCPA by (1) contacting her to attempt to collect a debt without her consent, and (2) in the alternative, to the extent she gave either defendant consent to contact her, the consent was revoked by the imposition of the automatic stay when she filed for bankruptcy.

 

The Creditor and Debtor (together "Defendants") filed a motion to dismiss the individual claims and a motion to strike the class claims.  After the Defendants filed their motions, the Debtor abandoned her FDCPA claim, leaving only the individual and putative class TCPA claims.

 

Turning first to the individual TCPA claim, the Court held that the Debtor had sufficiently alleged that she never gave the defendants consent to contact her.  In so doing, and because it was ruling on a motion to dismiss, the Court refused to consider a document attached to the Creditor's motion to strike that purportedly showed the Debtor had explicitly provided written consent.  Thus, the Court denied the defendants' motion to dismiss with respect to the Debtor's TCPA claim.

 

However, the Court rejected the Debtor's alternative argument that, to the extent she had provided prior express consent, her consent was revoked by imposition of the automatic stay when she filed for bankruptcy. 

 

The Court noted that the Federal Communications Commission ("FCC") has ruled that "consumers may revoke consent in any manner that clearly expresses a desire not to receive further messages."  See In re Rules Implementing the Tel. Consumer Prot. Act of 1991, 30 FCC Rcd 7961, 7996 ¶ 63 (2015).  Relying on the 2015 FCC order, the Debtor argued that "any manner" includes a "notice sent by a bankruptcy court to a caller that an automatic stay is in place." 

 

The Court rejected this interpretation of the 2015 FCC order.  It held that the FCC's order provides that a "consumer" and "not a third party" may revoke prior consent.  Thus, the Court held, the automatic stay from the bankruptcy court (a third party) could not possibly have revoked any prior express consent from the Debtor.

 

Next, the Court turned to the Debtor's class allegations.

 

It struck the Debtor's Rule 23(b)(2) class claims for injunctive and declaratory relief.  In so ruling, the Court held that Rule 23(b)(2) does not apply to the Debtor's "TCPA claim because every violation of the TCPA creates statutory damages."

 

However, it denied the defendants' motion to strike the Debtor's other remaining TCPA class claim for the same reasons it denied the motion to dismiss her individual claim.  In addition, and in light of the purported consent form attached to the defendants' motion to strike, the Court held that addition discovery was necessary to determine if the Debtor's TCPA class claim could proceed to certification (i.e., it expressed concern over the Debtor's ability to adequately represent the putative class).

 

In sum, the Court granted the defendants' motions in part and denied them in part, leaving only a single count for individual and putative class TCPA claims.

 

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

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FYI: Fla App Ct (3rd DCA) Reverses Dismissal of Foreclosure, Holds Evidence of Lost Note and Prior Servicer's Records Was Sufficient

The Third District Court of Appeal, State of Florida, recently reversed a trial court's dismissal of foreclosure proceedings due to a ruling that a lost note was not properly re-established, holding that the trial court should have entered judgment for the plaintiff mortgagee because the plaintiff mortgagee met the statutory requirements for re-establishing the lost note, and because the trial court admitted business records without objection into evidence showing the note was in default.

 

A copy of the opinion is available at:  Link to Opinion

 

The borrower signed a note and mortgage in 2007 in favor of lender's nominee. The borrower defaulted in May of 2008, and in September of 2008, the nominee assigned the note and mortgage to a loan servicer.  The loan servicer sued to foreclose the mortgage in 2009 and the borrower moved to dismiss for lack of standing, answered and counterclaimed.  The note and mortgage were assigned and the new holder was substituted as plaintiff.

 

The case went to trial in 2013.  At trial, the plaintiff mortgagee called its employee as a witness, who authenticated the business records of the plaintiff mortgagee's predecessor in interest.  The witness also testified that, although he did not know how the note was lost, it was in the original lender's possession when the loss occurred, the loss was not the result of a transfer by the bank or lawful seizure, and no one else tried to enforce the note. A copy of the note with a blank endorsement from the original lender, along with copies of the mortgage, default letter and payment history, were admitted into evidence.

 

As the plaintiff mortgagee's case in chief was coming to a close, a colloquy between the judge and all counsel ensued regarding the 2013 amendment to section 702.015, Florida Statutes, and the Fourth District Court of Appeal's decision in Yang v Sebastian Lakes Condominium Association, Inc., which resulted in the entry of final judgment in the borrower's favor.

 

On appeal by the plaintiff mortgagee, the Third District began its analysis by discussing the requirements for standing and re-establishing a lost note contained in section 674.3091, Florida Statutes.  The Court found that the plaintiff mortgagee had proven that it had standing to foreclose by documentary evidence and its witness' testimony.

 

Specifically, the witness identified copies of the note and mortgage and they were admitted into evidence without objection. The trial court also admitted into evidence the default letter and, although borrower's counsel objected, it was based only on lack of proof the borrower ever received the letter. The payment history was also admitted without objection, which showed the last payment on the account was made in April of 2008.

 

The Third District also pointed out that the plaintiff mortgagee's witness testified that the note was lost while in the possession of the original lender and not because it was transferred or lawfully seized. The Court also pointed out that the borrower's counsel failed to move for involuntary dismissal.

 

The Court held that the trial court incorrectly relied upon the recent amendment to section 702.015, Florida Statutes, which requires that an affidavit be attached to the foreclosure complaint.  The Court also held that the trial court incorrectly relied upon Yang v Sebastian Lakes Condominium Association, Inc., 123 So. 3d 617 (Fla. 4th DCA 2013), in which the Fourth District held that a foreclosing homeowners association failed to prove the authenticity of the assessment account ledgers showing the default and amount due for assessments because the new management company plaintiff simply carried over the balance from a prior management company, and its witness could not testify as to the accuracy of that balance.

 

First, the Third District held, the amendment to section 702.015 only applies to cases filed after July 1, 2013 and the case at bar was filed in 2009.

 

Second, the Yang case was distinguishable because it involved the foreclosure of a homeowners association lien, the homeowners challenged the accuracy of the management company's business records, and the court refused to admit the account ledgers into evidence because the association's new management company could not verify the accuracy of the carried-over balance.  By contrast, in the case at bar, the plaintiff's witness testified that he was familiar with the borrower's account, which had been kept in the ordinary course of business by the predecessor in interest, and, crucially, the account records were admitted without objection as to their accuracy and the borrower voluntarily withdrew her affirmative defenses and counterclaim before trial.

 

Because the plaintiff mortgagee met the statutory requirements for re-establishing a lost note, and because the business records in evidence showed nonpayment of the note, the Third District concluded that the trial court should have entered judgment in plaintiff mortgagee's favor and against the borrower.  Accordingly, the Court reversed the final judgment in favor of the borrower and remanded for further proceedings. 

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

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FYI: 5th Cir Allows Bankruptcy Trustee to Recover Expenses from Secured Creditor

The U.S. Court of Appeals for the Fifth Circuit recently held that section 506(c) of the Bankruptcy Code, 11 U.S.C. § 506(c), permits a trustee to recover from a secured creditor the expenses the trustee incurred while maintaining a property during bankruptcy.

 

A copy of the opinion is available at:  Link to Opinion

 

The debtor in this case was placed into receivership in April 2013.  The receiver initiated Chapter 11 proceedings on the belief that the debtor had enough equity to reorganize.  One of the debtor's most valuable assets was an industrial building situated on seventeen acres of real property.  The primary lienholder on the property held a lien of $3.69 million.  Because recent appraisals had valued the property at approximately $6 million, the receiver believed that equity in the property could pay the primary lienholder as well as junior and unsecured creditors.

 

In early 2014, a plan of liquidation established the receiver as trustee of a liquidating trust.  The plan allowed the liquidating trust until May 1, 2014, to sell the property at a price high enough to cover the value of the mortgage loan owed to the primary lienholder.  The plan also required the liquidating trust to "maintain reasonable insurance" and "own the Real Property as a reasonably prudent owner would own it."

 

The trustee attempted to sell the property before the plan of liquidation was finalized and confirmed.  From approximately August 2013 until May 2014, the trustee marketed the property through the services of a commercial real estate firm.  During this time, the trustee paid for security, repairs, upkeep, utilities and insurance on the property.  However, despite the trustee's best efforts to sell the property, the only offer made on it was for $4 million, and the primary lienholder rejected this offer because the net proceeds from the potential sale would not have fully paid its lien.

 

The sale deadline came and went with the property still not sold.  The trustee continued to pursue a deal with the potential buyer who offered $4 million, but that deal was lost on May 22, 2014.  Soon after, the trustee informed the primary lienholder that it intended to cease paying any expenses on the property.  The primary lienholder objected because the cessation "would virtually destroy any value remaining in the [property]."

 

The trustee moved to abandon the property, which the primary lienholder objected to, and while that motion was pending the trustee moved to surcharge its expenses incurred.  The primary lienholder objected to paying the surcharge.  In August 2014, the parties reached a partial settlement that allowed the liquidating trust to abandon the property as of September 13, 2014, and the primary lienholder would pay the surcharge from June 1, 2014, which was a few days after the trustee expressed an intent to abandon the property, to the present.

 

The bankruptcy court heard testimony and argument as to whether it should grant the trustee the surcharge on the expenses prior to June 1, 2014.  It awarded the trustee the expenses in the form of a priming lien.  The primary lienholder timely appealed, and the Fifth Circuit approved a direct appeal.

 

The Fifth Circuit noted that the general rule in bankruptcy cases is that administrative expenses cannot be satisfied out of collateral property "but must be borne out of the unencumbered assets of the estate." 4 COLLIER ON BANKRUPTCY ¶ 506.05 (16th ed. 2015). 

 

However, the Court also noted that section 506(c), 11 U.S.C. 506(c), provides a "narrow" and "extraordinary" exception that allows for recovery of "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."  To recover under section 506(c), the expenditure must be necessary, the amounts expended must be reasonable, and the creditor must benefit from the expense. 

 

The primary lienholder argued that it should not have to pay the surcharge because it did not benefit from the expense.  The trustee argued that the primary lienholder benefited by receiving the property with its value preserved and avoiding preservation costs while the property was part of the liquidating trust.

 

The primary lienholder's argument contained two components:  First, it argued that the bankruptcy court erred in finding that the expenses were incurred primarily for its benefit because it was the only creditor who received payment on the property.  Second, the primary lienholder argued that even if the expenses were incurred primarily for its benefit, the bankruptcy court had insufficient evidence of the amount of the benefit it received.

    

As to the first component, the primary lienholder argued that recovery under section 506(c) is limited to expenses incurred "with a specific and exclusive intent to benefit the secured creditor."  According to the primary lienholder, that was not present in this matter because the trustee aimed to sell the property so that junior and unsecured creditors could also benefit.  The primary lienholder supported its position by reference to other cases in which the Fifth Circuit previously required that the claimant incur expenses primarily for the benefit of the secured creditor.

 

The Fifth Circuit noted that the "primarily for the benefit" language was not in the text of the statute, and held that section 506(c) did not require "that the money be spent with any particular beneficiary in mind." 

 

Instead, the Court focused on whether the secured creditor benefited from the expenses.  The Fifth Circuit held that the standard for receiving a benefit under section 506(c) is whether the expense preserved or increased the value of the property.  The Court also noted that the objective of section 506(c) is to prevent unjust enrichment whereby the secured creditor shoulders no costs for preserving the property, while the costs, conversely, are borne out from the general estate, encompassing both junior and unsecured creditors.  According to the Court, no such iniquity is present when the trust pays general administrative expenses and the benefit to the secured creditor is merely incidental. 

 

The Fifth Circuit discussed examples in which the trustee attempted to have a secured creditor pay for general administrative expenses and found them inapposite to this case.  Instead, the Court held that that were a direct relationship between the surcharge and the collateral in this case.  According to the Court, all of the claimed expenses related to preserving the property and preparing it for sale.  Accordingly, the Fifth Circuit ruled, the expenses were made primarily for the benefit of the primary lienholder and could be recovered from the primary lienholder under section 506(c).

 

As to the second component, whether the bankruptcy court had sufficient evidence of the amount of the benefit the primary lienholder received, the Court held that it did.  The Fifth Circuit noted that the section 506(c) required a determination as to how much benefit the creditor received.  Previously, the Court characterized this aspect of the benefit analysis as requiring a "direct and quantifiable" benefit.

 

The Fifth Circuit found no clear error by the bankruptcy court in its determination of the amount of the benefit received by the primary lienholder.  The testimony of the trustee's experienced real estate broker was that the value preserved on the property was at least as much as the amount expended by the trustee.  The primary lienholder did not offer a competing expert or contradict the valuation method of the real estate broker other than through cross-examination. 

 

As a result, the Fifth Circuit did not disturb the bankruptcy court's findings as to the amount of the benefit.

  

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
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Mobile:  (312) 493-0874
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