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In re Wrightwood Guest Ranch, LLC

United States District Court, C.D. California

February 22, 2018

IN RE WRIGHTWOOD GUEST RANCH, LLC

          ORDER AFFIRMING THE BANKRUPTCY COURT'S ORDER

          HON. MICHAEL W. FITZGERALD, United States District Judge.

         Before the Court is a joint appeal from the United States Bankruptcy Court (the Honorable Scott C. Clarkson, United States Bankruptcy Judge). Reid & Hellyer, APC (“R&H”) and Walter Wilhelm Law Group, a Professional Corporation (“WWLG”) (together, the “Appellants”) appeal from the bankruptcy court's Order Granting Trustee's Motion for an Order Authorizing a Surcharge Under 11 U.S.C. § 506(c) in the Amount of $350, 000, which issued on April 4, 2017 (the “Surcharge Order”).

         WWLG submitted Appellants' Joint Opening Brief on November 6, 2017 in Case No. ED CV 17-895 MWF. (Docket No. 20). On December 6, 2017, Appellee Richard J. Laski Lt., Chapter 11 Trustee, submitted an Answering Brief and Request that the Appeals be Dismissed for Lack of Standing. (Docket No. 21). On December 27, 2017, Appellants submitted their Joint Reply Brief. (Docket No. 22). Unless otherwise noted, throughout this Order, all citations are to the docket in Case No. ED CV 17-895 MWF, though identical briefs have been filed in Case No. ED CV 17-947.

         The Court has reviewed the papers filed in this appeal, and determined that it is appropriate for decision without oral argument. See Fed. R. Civ. P. 78(b); Local Rule 7-15. Accordingly, the hearing set for February 26, 2018, was vacated. Appellant WWLG's request for leave to appear telephonically (Docket No. 24) is therefore DENIED as moot.

         The Order is AFFIRMED. The bankruptcy court correctly applied binding Ninth Circuit authority when it granted the requested relief in the Trustee's Motion for an Order Authorizing a Surcharge.

         I. BACKGROUND

         On August 5, 2016, the bankruptcy court issue an Order Granting Chapter 11 Trustee's Motion for Order Approving Settlement Agreement Between the Trustee and Greenlake Real Estate Fund, LLC Pursuant to Bankruptcy Rule 9019 (the “Settlement Order”). (Supplement Excerpt of Record (“SER”) 1 (Docket No. 21-2)). Among other things, the Settlement between the Trustee and secured creditor Greenlake capped any future surcharge at $350, 000. (Answering Br. at 2). Appellants filed notices of appeal regarding the Settlement Order, and the appeals were consolidated before this Court as Case No. EDCV 16-1768-MWF. (Docket No. 10, In re Wrightwood Guest Ranch, LLC, No. EDCV 16-1768-MWF). In this Court's Order re Chapter 11 Trustee and Appellee's Motion to Dismiss Consolidated Bankruptcy Appeals (“Dismissal Order”) dated December 7, 2016, this Court dismissed the appeal of the Settlement Order for lack of standing and mootness. (Docket No. 32, In re Wrightwood Guest Ranch, LLC, No. EDCV 16-1768-MWF). Appellants then appealed this Court's Dismissal Order to the Ninth Circuit. (Docket No. 35, In re Wrightwood Guest Ranch, LLC, No. EDCV 16-1768-MWF). That appeal is currently pending before the Ninth Circuit.

         Meanwhile, on March 14, 2017, the Trustee filed in bankruptcy court a Motion for Order Authorizing a Surcharge Under 11 U.S.C. § 506(c) in the Amount of $350, 000 (the “Surcharge Motion”). (SER 2 (Docket No. 21-3)). The Surcharge Motion documented over $449, 035 in fees and costs incurred by the Trustee's accountant and counsel (the “Trustee Professionals”) in preserving and disposing of the property located in Wrightwood, California (the “Property”) in a manner that benefitted Greenlake. (Id.). However, the Motion sought a § 506(c) surcharge in only the agreed-upon capped amount of $350, 000. (Id.). Appellant R&H filed an Opposition to the Surcharge Motion on behalf of its client, the Official Committee of Unsecured Creditors, as well as itself as a purported administrative creditor. (SER 3 (Docket No. 21-4). Appellant WWLG joined in that Opposition. (Id.). After a hearing, the bankruptcy court granted the Surcharge Motion. (Appellants' Joint Excerpts of Record (“ER”) at 12, 28 (Docket No. 20-1)). Appellants filed these appeals.

         II. STANDARD OF REVIEW

         A bankruptcy court's conclusions of law are reviewed de novo and findings of fact are reviewed for clear error. Zurich Am. Ins. Co. v. Int'l Fibercom, Inc., 503 F.3d 933, 940 (9th Cir. 2007). In the context of this appeal, the bankruptcy court's conclusion regarding whether § 506(c) permits the Trustee and his professionals to surcharge a secured creditor is a question of law subject to de novo review. In re Debbie Reynolds Hotel & Casino, Inc., 255 F.3d 1061, 1065 (9th Cir. 2001); In re Anderson, 66 B.R. 97, 99 (9th Cir. BAP 1986). However, the bankruptcy court's conclusions regarding whether the expenses incurred by the Trustee Professionals were reasonable and necessary costs of preserving or disposing of the Property are reviewed only for abuse of discretion. See, e.g., In re Anderson, 66 B.R. at 99 (holding that bankruptcy court's finding that expenses incurred under § 506(c) were reasonable, necessary, and beneficial to the secured creditor were “reversible only if clearly erroneous”).

         III. DISCUSSION

         The bankruptcy court's reasoning behind the Surcharge Order (as set forth in the hearing on the Surcharge Motion) and the parties' arguments in the briefs rest almost entirely on the Ninth Circuit's interpretation of 11 U.S.C. § 506(c), as set forth in In re Debbie Reynolds, 255 F.3d 1061 (9th Cir. 2001). Both Appellants and the Trustee acknowledge that Debbie Reynolds is currently the law in the Ninth Circuit. (Opening Br. at 2; Answering Br. at 6). Moreover, all parties acknowledge that, in light of the circumstances of this action, Debbie Reynolds controls. (Opening Br. at 3; Answering Br. at 7).

         In Debbie Reynolds, the bankruptcy court entered an order permitting the sale through public auction of the assets of debtor Debbie Reynolds Hotel and Casino. 255 F.3d at 1064. The debtor's counsel sought payment out of a secured creditor's collateral pursuant to § 506(c), which provides 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.” Id. (quoting 11 U.S.C. § 506(c)). The payment of those expenses out of a creditor's secured property is known as a “surcharge”. Id.

         The secured creditor entered into a settlement agreement with the debtor's counsel that provided for a $50, 000 payment from the secured creditor to the debtor's counsel pursuant to § 506(c). Id. Another creditor, Calstar, objected to the settlement agreement for, among other reasons, violating Calstar's rights as a “superpriority” creditor. Id. The bankruptcy court approved the agreement, and the Bankruptcy ...


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