                                                                                                                           Opinions of the United
1994 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit


7-20-1994

C.S. Associates v. Miller
Precedential or Non-Precedential:

Docket 93-1961




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Recommended Citation
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http://digitalcommons.law.villanova.edu/thirdcircuit_1994/86


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                  UNITED STATES COURT OF APPEALS
                      FOR THE THIRD CIRCUIT



                            No. 93-1961



            C.S. ASSOCIATES, d/b/a UNIVERSITY NURSING
                    AND REHABILITATION CENTER

                        UNITED JERSEY BANK,

                                          Appellant,

                                               v.


       MITCHELL W. MILLER, ESQ.; THE CITY OF PHILADELPHIA;
         THE UNITED STATES OF AMERICA; HEALTHCARE SERVICES
          GROUP; PERLOFF BROTHERS, INC.; DIANE VENDETTI;
    THE SCHOOL DISTRICT OF PHILADELPHIA; NICHOLAS CANUSO, DR.;
              RAYMOND SILK, DR. and EUGENE SPITZ, DR.

                                 MITCHELL W. MILLER, ESQ.,
                                                   Trustee

                                 FREDERICK J. BAKER, ESQ.,
                                                   Trustee




         On Appeal from the United States District Court
            for the Eastern District of Pennsylvania
                   (D.C. Civ. No. 93-cv-03065)



                        Argued May 24, 1994

           Before:   COWEN and ROTH, Circuit Judges, and
                     ACKERMAN, District Judge.1

                       (Filed July 20, l994)


1
The Honorable Harold A. Ackerman, United States District Judge
   for the District of New Jersey, sitting by designation.


                                 1
John J. Francis, Jr. (argued)
Shanley & Fisher, P.C.
131 Madison Avenue
Morristown, NJ 07962-1979

          Counsel for Appellant
          United Jersey Bank


Joseph DiGiuseppe (argued)
Assistant City Solicitor
City of Philadelphia Law Department
1101 Market Street, 10th Floor
Philadelphia, PA 19107-2997

          Counsel for Appellee
          City of Philadelphia


Edward J. DiDonato
Ciardi & DiDonato, P.C.
1900 Spruce Street
Philadelphia, PA 19103

          Counsel for Appellee
          Mitchell W. Miller, Esq.,
          Bankruptcy Trustee of the Estate
          C.S. Associates




                         OPINION OF THE COURT


COWEN, Circuit Judge.


          In this bankruptcy case, the bankruptcy court granted a

motion by the City of Philadelphia ("the City") to recover

unsecured post-petition real estate taxes and water/sewer rents

from the secured creditor, United Jersey Bank ("UJB"), pursuant

to 11 U.S.C. § 506(c).    The district court affirmed the order of

the bankruptcy court.    Because the City did not demonstrate that



                                  2
the taxes conferred a direct benefit to the creditor whose claim

the property secures, we will reverse the order of the district

court.



                           I. BACKGROUND

            C.S. Associates, d/b/a University Nursing and

Rehabilitation Center, the debtor in this case, owned and

operated a skilled care nursing home in Philadelphia.      UJB is the

Indenture Trustee under a Trust Indenture agreement entered into

with the Philadelphia Authority for Industrial Development

("PAID") in order to finance the acquisition, construction and

equipping of the nursing home facility.      C.S. Associates entered

into an installment sale agreement with PAID on February 16,

1983.    To provide the necessary funds with which to finance the

acquisition, construction and completion of the facility, PAID

authorized and issued bonds ("1983 Bonds") in the aggregate

principal amount of $6,870,000.       The 1983 Bonds were issued under

and are secured by the Indenture entered into by and between PAID

and UJB as Indenture Trustee on February 16, 1983.      Pursuant to

the terms of the Indenture, PAID assigned all of its rights, its

title and its interest under the installment sale agreement and

all monies payable thereunder to UJB as Indenture Trustee for the

benefit of the holders of the 1983 Bonds.

            To secure the repayment of the 1983 Bonds, C.S.

Associates granted to PAID a first priority mortgage on the

facility and real property constituting the site of the facility.

There is currently due and owing from C.S. Associates to UJB as


                                  3
Indenture Trustee the principal amount of $3,367,037.47 plus

interest and fees, which amount is secured by the mortgage. Thus,

UJB is a secured creditor of C.S Associates.

          On August 15, 1988, C.S. Associates filed a voluntary

petition for relief under Chapter 11 of the Bankruptcy Code.

Thereafter, C.S. Associates failed to provide adequate services

to its patients and on October 28, 1988, the facility was closed

by the Department of Health of the Commonwealth of Pennsylvania.

C.S. Associates' unsecured creditors' committee presented a plan

of reorganization which called for the sale of the facility;

however, this effort failed because, prior to the confirmation of

the plan, the facility was repeatedly and severely vandalized

from late September through December, 1989.    On April 18, 1990,

pursuant to a motion filed by the United States Trustee, the

bankruptcy court ordered the debtor's case converted to a case

under Chapter 7 of the Bankruptcy Code.   Thereafter, Mitchell W.

Miller was appointed Chapter 7 Trustee for the debtor.

          During the pendency of C.S. Associates' Chapter 7

proceeding, the City of Philadelphia filed two proofs of claim

for post-petition administrative real estate taxes and

water/sewer rents, totalling $548,706.80, which had been assessed

against the facility.   The City also filed a proof of claim for

pre-petition real estate taxes and water/sewer rents, totalling

$48,803.46, which under the applicable state law had properly

become liens against the facility.

          By order dated November 10, 1992, the bankruptcy court

approved the sale of the facility for $2,416,000, free and clear


                                4
of all liens and encumbrances.   UJB thereafter filed an action

with the bankruptcy court to predetermine the extent, validity,

and respective priority of any and all liens on the facility and,

accordingly, on the proceeds of the approved sale.   The City

maintained that both its pre-petition and post-petition real

estate taxes and water/sewer rents had priority over UJB's

secured claim.

          The bankruptcy court, in accordance with our holding in

Equibank, N.A. v. Wheeling-Pittsburgh Steel Corp., 884 F.2d 80,

84-85 (3d Cir. 1989), held that the City's pre-petition liens had

priority over UJB's secured claim as to the sale proceeds.

However, the bankruptcy court held that the City's post-petition

real estate taxes and water/sewer rents did not have priority

over UJB's secured claim as to the sale proceeds.    The bankruptcy

court went on to suggest that the City might be able to recover

its post-petition real estate taxes and water/sewer rents from

the sale proceeds pursuant to either 11 U.S.C. § 503(b)(1)(B)(i)

or 11 U.S.C. § 506(c).

          Accordingly, on March 12, 1993, the City moved the

bankruptcy court, pursuant to 11 U.S.C. § 506(c), to surcharge

the sale proceeds and allow the City to recover its post-petition

real estate tax claims and its water/sewer rent claims.   In the

order of the bankruptcy court which is at issue in this appeal,

the bankruptcy court granted the City's motion under § 506(c) to

obtain compensation for post-petition real estate taxes and

water/sewer rents in the stipulated amount of $548,706.80.




                                 5
           UJB appealed the disputed bankruptcy court order to the

district court, arguing that the City had not met the

requirements of § 506(c) with respect to the post-petition real

estate taxes and water/sewer rents.    The district court affirmed

the bankruptcy court's order.   UJB took this appeal.   We have

jurisdiction under 28 U.S.C. § 158(d).



                          II.   DISCUSSION

           UJB argues before us that the district court and

bankruptcy court erred in holding that the City had met the

requirements of 11 U.S.C. § 506(c) and could recover post-

petition real estate taxes and water/sewer rents under that

section.   "Because the district court sits as an appellate court

in bankruptcy cases, our review of the district court's decision

is plenary.   This [c]ourt's standard of review is clearly

erroneous as to findings of fact by the bankruptcy court, and

plenary as to conclusions of law."    In re Stendardo, 991 F.2d

1089, 1094 (3d Cir. 1993) (citation omitted).    The issue in this

appeal is whether the bankruptcy court and district court

correctly interpreted and applied the legal standard contained in

§ 506(c), and we will therefore exercise plenary review.      See
Maritime Elec. Co. v. United Jersey Bank, 959 F.2d 1194, 1203 (3d

Cir. 1992).

           In Equibank, we held that the automatic stay provision

of the Bankruptcy Code, 11 U.S.C. § 362(a)(4), "prevents the

creation of a lien post-petition."    884 F.2d at 84.   The only

amounts in question in this appeal are post-petition real estate


                                 6
taxes and water/sewer rents, and therefore the City's taxes and

rents have not and cannot attain lien status for purposes of the

Bankruptcy Code. Id. at 84-85.
          The code . . . provides two options for payment of
          taxes that have not attained lien status as of the date
          of the entry of the stay. First, they may be payable
          by the trustee, either as first priority administrative
          expenses, see 11 U.S.C. § 503(b)(1)(B)(i), or as
          seventh priority expenses, 11 U.S.C. § 507(a)(1).
          Second, they may be payable by the secured creditor as
          payment for benefit received, see 11 U.S.C. § 506(c).


Equibank, 884 F.2d at 83.

           The parties dispute whether the City could properly

receive payment for the real estate taxes and water/sewer rents

pursuant to the second option.   Section 506(c) of the Bankruptcy

Code 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."   11 U.S.C.

§506(c).   Our decisions have clarified that to recover expenses

under § 506(c), a claimant must demonstrate that (1) the
expenditures are reasonable and necessary to the preservation or

disposal of the property and (2) the expenditures provide a

direct benefit to the secured creditors.   Equibank, 884 F.2d at

84, 86-87; In re McKeesport Steel Castings Co., 799 F.2d 91, 94-

95 (3d Cir. 1986); see also In re Glasply Marine Indus., 971 F.2d

391, 394 (9th Cir. 1992) ("[T]o satisfy the benefits prong [of

§506(c) the claimant] must establish in quantifiable terms that

it expended funds directly to protect and preserve the

collateral." (internal quotation marks omitted)); In re Flagstaff


                                 7
Foodservice Corp., 762 F.2d 10, 12 (2d Cir. 1985) ("[T]o warrant

[§] 506(c) recovery . . .   [the claimant] must show that . . .

funds were expended primarily for the benefit of the creditor and

that the creditor directly benefitted from the expenditure.").

          In considering whether the post-petition real estate

taxes and water/sewer rents assessed by the City qualified for

treatment under § 506(c), the bankruptcy court stated:
               The City's taxes and water and sewer rents are
          costs which necessarily accrued against the Property
          during the period that it was marketed for sale. As a
          result of this marketing, the Property has been sold
          for an amount which will result in payment of certain
          net proceeds to UJB. These facts alone establish that
          UJB was conferred with a benefit by the delays effected
          by the sale process, which also caused the taxes to
          accrue. Hence, UJB received a direct benefit from the
          sale of the Property, which necessarily resulted in the
          accrual of these taxes and water and sewer rents while
          the Property was marketed, and is obliged to compensate
          the City for same out of the net sale proceeds payable
          to it.


In re C.S. Assocs., No. 88-12842S, slip op. at 2 (Bankr. E.D. Pa.
April 22, 1993); app. at 469.

          On appeal from the order of the bankruptcy court, the
district court held:
          [T]he fact of the accrual of the taxes over the period
          during which the property was marketed is not open to
          dispute, nor is the reasonableness of the amount of
          taxes as assessed pursuant to Pennsylvania statute.
          Further, the Bankruptcy Court's determination that the
          fact of the accrual of taxes while the marketing of the
          property took place was a benefit to the secured
          creditor represents a permissible inference for the
          court to have drawn and is supported by the record of
          the proceedings.


United Jersey Bank v. Miller, No. 93-3065, slip op. at 5 (E.D.

Pa. Sept. 9, 1993); app. at 544.


                                8
          As revealed by the language quoted above, the

bankruptcy court and the district court operated under the

assumption that the general and incidental benefits which an

entity receives from municipal services are the type of benefits

which § 506(c) contemplates.    We find that the bankruptcy court

and the district court incorrectly interpreted and applied

§506(c) in allowing recovery of the assessed taxes and rents

without a demonstration by the City that such taxes and rents

caused a direct benefit to UJB, the secured creditor.

          Both the bankruptcy court and the district court

mistakenly relied on our holding in Equibank, 884 F.2d 80, in

reaching their conclusion.     In Equibank, we merely stated that

real property taxes "may . . . arguably be payable as the secured

creditor's liability pursuant to [§] 506(c)."    Id. at 86

(emphasis added).   Because it was not clear to us what benefit

the secured creditor derived from the payment of those taxes, we

remanded the case so that the bankruptcy court could make a

determination as to whether payment of the taxes provided a

direct benefit to the secured creditor.    Id. at 86-87.

          In this case, the City did not meet the requirement

that it demonstrate a direct benefit to the secured creditor.

Section 506(c) does not contemplate recovery for costs and/or

expenses associated with the incidental benefits an entity may

receive by virtue of existing within a municipality which

provides general services funded by taxes.    This point has been

cogently made by a district court:




                                  9
Section 506(c) was not intended to encompass ordinary
administrative expenses that are attributable to the
general operation and dissolution of an estate in
bankruptcy. Rather, it was designed to extract from a
particular asset the cost of preserving or disposing of
that asset. The trustee's payment of real property
taxes might benefit . . . the . . . secured creditors
to the extent that monies raised from the collection of
property taxes are used, in part, to fund the local
fire, police, and road maintenance departments, which
provide protection to the secured property against
vandalism and fire, and ensure that the adjoining road
is kept in good condition. This indirect benefit,
however, is insufficient to bring these post-petition
property taxes within the scope of § 506(c).

      Courts have narrowly construed § 506(c) to
encompass only those expenses that are specifically
incurred for the express purpose of ensuring that the
property is preserved and disposed of in a manner that
provides the secured creditor with a maximum return on
the debt and also apportions those costs to the secured
creditor who, realistically, is assuming the asset.
Although in exchange for the payment of property taxes,
the estate would reap benefits that might aid in
preserving the asset in the advent of fire or from the
threat of vandalism, this incidental benefit is not
what was contemplated by § 506(c). Monies a government
entity derives from the collection of real property
taxes fund many governmental operations and services
which are not directly related to preservation and
disposal of the asset and in no way provide a benefit
to the secured creditor. Real estate tax revenues
support public parks, libraries, schools, and social
services, which do not constitute expenses peculiarly
connected with preserving or disposing of the parcel of
land.

     Moreover, the Bankruptcy Code explicitly sets
forth the level of priority to be afforded unsecured
tax claims. Section 503 . . . indicates that tax
claims are generally afforded the status of ordinary
administrative expenses, thereby receiving first
priority after secured claims, unless they are the type
of taxes specified in § 507(a)(7), in which case they
will receive a seventh ranked priority after secured
claims.




                     10
In re Parr Meadows Racing Ass'n, 92 B.R. 30, 35-36 (E.D.N.Y.

1988) (citations omitted), aff'd in part, rev'd in part on other

grounds, 880 F.2d 1540 (2d Cir. 1989).   This reasoning is

persuasive and we adopt it.   Accord In re Glasply, 971 F.2d at

394 ("Even the small fraction of property taxes supplying fire

protection fails the benefits prong [of § 506(c)] because it does

not 'directly' protect and preserve the collateral.   The

incidental benefits derived by [the secured creditor] from [the

payment of] property taxes do not trigger section 506(c)."

(citation omitted)).   Accordingly, the incidental benefits which

the secured creditor received through general municipal services

to the property do not justify recovery by the City under §506(c)

for the post-petition real estate taxes and water/sewer rents

which accrued as to the subject property.

          The City argues that since the debtor retained no

equity in the subject property, UJB as the secured creditor

received the full benefit from the sale of the property.     The

City argues that having the property on the market benefitted UJB

because it was able to obtain the best available price for the

property, and therefore real estate taxes and water/sewer rents

which necessarily accrued during that time frame should be

recoverable under § 506(c).   We reject this argument.   Simply

because UJB benefitted from the sale of the property does not

automatically mean that payment of real estate taxes and

water/sewer rents which accrued pending the sale of the property




                                11
provided any direct benefit to the property in question.2    As

stated above, incidental benefits which an entity receives from

general municipal services are not the type of benefit

contemplated by § 506(c).

          Had the City put forth evidence that the property had

received some direct or special governmental service which

benefitted the property, our conclusion might be different.       For

instance, if the City had stationed a police officer at the

property to protect it, or if the fire department had provided

some direct service at the location, such services might have

been quantifiable and might have been recoverable under § 506(c).

But in this case, the City, the bankruptcy court and the district

court relied on the mere fact that government real estate taxes

and water/sewer rents accrued as to the property during the post-

petition time frame.   This alone does not meet the requirement of

§ 506(c) that a direct benefit to the secured creditor be

demonstrated.

          The City asserts that trash removal and road, water and

sewer service benefitted the property.   However, the City

apparently never presented proof in the bankruptcy court that any

of these services actually were performed for the direct benefit

of the property.   More importantly, even assuming that such

services were performed for the benefit of the property, the City


2
UJB contends vigorously that it will receive little benefit from
the sale of the property, even if it is completed as approved by
the bankruptcy court, since the net payment UJB will receive will
still leave it, as a secured creditor, with a shortfall of
$2,500,000.

                                12
did not quantify the value of services which were actually

performed.    The City had the opportunity to present such proof in

the bankruptcy court, but failed to do so.     The City therefore

did not meet its burden under § 506(c).

             We will reverse the judgment of the district court. The

case will be remanded to the district court with a direction that

it remand the case to the bankruptcy court with instructions to

enter an order denying the motion of the City seeking payment

under § 506(c) of post-petition real estate taxes and water/sewer

rents from the proceeds of the sale of the subject property.

_________________________________________




                                  13
