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Fifth Circuit Upholds Surcharge against Secured Creditor Despite Failed Sale Efforts

In Southwest Sec., FSB v. Segner (In re Domistyle, Inc.), 811 F.3d 691, (5th Cir. 2015), the trustee attempted to sell property believed by all parties to be worth more than the secured debt. Once he was unable to sell the property for an amount acceptable to the secured creditor, he abandoned the property to the secured creditor and sought to surcharge the property under 11 U.S.C. 506(c) for expenses incurred during the sale process related to preserving the value of the property. These expenses included security, repairs to the roof and electrical system, mowing, landscaping, utilities, and insurance premiums. The Bankruptcy Court granted the surcharge and the secured creditor appealed. The Fifth Circuit began its analysis by noting the general rule in bankruptcy that administrative expenses cannot be satisfied out of collateral property but must be borne out of the unencumbered assets of the estate. Section 506(c) provides a “narrow” and “extraordinary” exception to this general rule by allowing a trustee to “surcharge” a secured creditor’s collateral to recover the reasonable and necessary expenses preserving and disposing of the collateral “to the extent of any benefit” to the secured creditor. The rationale for surcharge is to prevent a secured creditor being unjustly enriched. The Fifth Circuit rejected the secured creditor’s arguments that the trustee had failed to carry his burden of proving entitlement to surcharge. It held that the bankruptcy court did not clearly err in finding that the secured creditor received a direct and quantifiable benefit from the trustee’s stewardship of the property, based on testimony of the trustee’s real estate broker that the value preserved was at least as much as the amount expended.

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