Opinion
NOT FOR PUBLICATION
Argued and Submitted at Phoenix, Arizona: January 18, 2007
Appeal from the United States Bankruptcy Court for the District of Arizona. Bk. Nos. 03-07923, 03-07924 (Jointly Administered). Honorable Sarah Sharer Curley, Bankruptcy Judge, Presiding.
Before: PAPPAS, DUNN and SMITH, Bankruptcy Judges.
MEMORANDUM
Creditor Comerica Bank-California (" Comerica") helped orchestrate the liquidation of the chapter 11 debtors' assets through a court-appointed examiner. When, after the sale, the bankruptcy estates turned out to be administratively insolvent, the bankruptcy court approved a surcharge of Comerica's collateral to pay some of the costs incurred during the cases, including compensation and expenses of the court-appointed examiner, Edward M. McDonough (" Examiner") and his professionals, and certain equipment lessors, in the total amount of $1,399,458.47. Comerica appealed. We AFFIRM.
Unless otherwise indicated, all chapter, section and rule references are to the Bankruptcy Code, 11 U.S.C. § § 101-1330, and to the Federal Rules of Bankruptcy Procedure, Rules 1001-9036, as enacted and promulgated prior to the effective date (October 17, 2005) of most of the provisions of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub. L. 109-8, April 20, 2005, 119 Stat. 23.
FACTS
Debtor G.H. Goodman Investment Companies, LLC (" GHG"), is owned in equal shares by Grant Goodman (" Goodman") and his spouse, Terri Goodman. The Goodmans each own 49.5 percent of the equity in Debtor GTI Capital Holdings, LLC (" GTI"). The remaining equity of GTI is owned by GHG. GHG is the managing member of GTI. Unless otherwise noted, we refer to these entities collectively as GTI.
In September 2001, Imperial Bank extended four loans to GTI totaling about $21,250,000. Comerica is the successor by merger to Imperial Bank. As security for the loans, Comerica held security interests in substantially all of GTI's real and personal property (the " Collateral").
Comerica alleges that GTI defaulted on the loans. On April 3, 2003, Comerica commenced an action against GTI in the Arizona superior court for, among other relief, the appointment of a receiver. At a May 6, 2003 hearing, the state court indicated that it would grant Comerica's request and appoint a receiver. GTI and GHG filed voluntary petitions for relief under chapter 11 of the Bankruptcy Code on May 8, 2003. The bankruptcy court granted their motion for joint administration of the cases.
Internal Comerica documents indicate that the receivership action was taken in response to a lender liability lawsuit filed by Goodman against Comerica on March 27, 2003.
Before GTI filed its bankruptcy petition, Comerica had taken steps in anticipation of GTI's possible insolvency. On March 31, 2003, Comerica placed the GTI loans on non-accrual status and, though the loans were secured by GTI's assets, it established a loss reserve for the loans of $2,553,000 in compliance with applicable accounting standards (Financial Accounting Standards Board (FASB) 114). Shortly after GTI's bankruptcy filing, Comerica increased that loss reserve to $4,600,000. According to a bank document dated July 31, 2003, Comerica had developed a plan of action to " attempt to liquidate all collateral" of GTI by selling GTI as a going concern by the end of 2003.
No trustee was appointed in the bankruptcy cases, nor was a committee of unsecured creditors organized or appointed. From the date of filing of the petitions through at least January 23, 2004, GTI operated its business as a debtor-in-possession.
On January 23, 2004, GTI filed a notice with the bankruptcy court that it would not pursue confirmation of a plan. In that notice, GTI advised the court and creditors that it had ceased operations, laid off almost all employees and would not file a plan of reorganization. This information was e-mailed to counsel for Comerica the same day. Although GTI terminated all business operations on that date, no trustee subsequently displaced GTI, and so it continued in its status as a debtor-inpossession. See § 1101(a)(providing that " debtor in possession" means the debtor in a chapter 11 case unless a trustee is appointed). GTI therefore retained its authority to exercise the powers of a debtor-in-possession under the Bankruptcy Code that were not vested by the bankruptcy court in the examiner, including its power to pursue a surcharge under § 506(c).
On June 18, 2003, GTI's § 341(a) meeting was held. Comerica alleges that, at the meeting, Goodman admitted: (1) that GTI was losing almost $500,000 a month, (2) that GTI was not making monthly payments of $432,000 to secured creditors, (3) that Goodman personally was drawing an exorbitant salary ($25,000 per week), and (4) that Goodman was providing himself and his managers with luxury perks.
On June 19, 2003, Comerica filed a motion for the appointment of an examiner. See § 1104(c)(providing that, on request of a party in interest, the bankruptcy court may appoint an examiner to " conduct . . . an investigation of the debtor as is appropriate . . . ."). The bankruptcy court granted the motion at a July 2, 2003 hearing. After the U.S. Trustee selected McDonough to serve as examiner, with Comerica's support, the bankruptcy court granted him the authority to perform the duties specified in § 1106(a)(3), (a)(4) and (b), and " the power and duty to handle and control all funds, bank accounts and disbursements" of GTI. To assist him in his efforts, again without objection from Comerica, Examiner retained several professionals, including a financial consulting firm, a law firm, and (later) an environmental consulting firm.
GTI was the lessee under a number of equipment and personal property leases. Some of this leased property was necessary for GTI to remain operational. Comerica refused to consent to any payments by Examiner to these lessors from its cash collateral until Examiner had carefully analyzed which leases were essential to GTI's operations. Examiner therefore undertook what was essentially a cash management analysis to determine what funds were available to pay the personal property leases that were determined to be essential to GTI operations.
Comerica claimed a lien in all of GTI's cash.
Examiner filed a report with the bankruptcy court on July 22, 2003, which focused on personal property leases. Supplemental reports were filed on August 28 and September 5 and 12, 2003. Examiner took steps to reduce GTI's operating costs substantially, resulting in savings of approximately $455,000 from August 2003 to January 2004. While reviewing the leases, Examiner also focused on controlling cash and cash collateral. In addition, he provided Comerica with an extensive quantity of financial information regarding cash expenditures and other matters related to cash collateral.
The bankruptcy court would later note in its memorandum decision that:
Examiner then submitted a comprehensive " Preliminary Report" to the bankruptcy court on August 6, 2003. The Preliminary Report contained a review of GTI's books and records and recounted discussions with key personnel. Among the Examiner's findings in the Preliminary Report were the following:
o Debtor had made significant pre- and post-petition payments to insiders. There was a lack of timely and reliable accounting data. There were significant problems with the cash collateral budget. There was no supporting documentation for over $2 million of post-petition expenditures. There were questionable dealings with postpetition related third parties. o Although the business operations had stabilized and the core business was intact, GTI did not have the working capital necessary to increase revenue, GTI could not meet required debt service, and it would require significant infusion of cash to reorganize. o " The Examiner believes that (based on his investigation to date) the business affairs of the Debtors under the direction and control of Mr. Goodman have been mismanaged both pre- and post-bankruptcy."
On August 19, 2003, Comerica requested that the bankruptcy court expand the Examiner's powers to include the authority to sell GTI's assets. After notice and a hearing, on October 30, 2003, the court issued its order expanding the Examiner's powers:
The powers of the Examiner shall be, and hereby are, expanded to include all powers necessary and appropriate to facilitate and accomplish a sale of substantially all of the assets (together with any of the Debtors' executory contracts and unexpired leases) on a going concern basis pursuant to Bankruptcy Code [§ ]363 . . . .
The court's order provided further that, if a private going concern sale of GTI's assets was not arranged by December 31, 2003, Examiner was authorized to sell the assets under § 363 and assume or reject executory contracts and unexpired leases under § 365 in an orderly liquidation process, after notice and a hearing.
Following the bankruptcy court's approval of his expanded powers, Examiner commenced his efforts to market GTI's assets. After soliciting offers, Arizona Materials, LLC (" Arizona Materials") emerged as the leading prospective buyer of the five bids submitted.
Examiner alleges that he kept Comerica closely apprised of, and involved in, the asset marketing and sale process. Indeed, Comerica's counsel provided the lead by which Examiner contacted the successful bidder, Arizona Materials. Counsel for Comerica also previewed the bids and received drafts of the purchase agreement as it was negotiated between Examiner and Arizona Materials.
On December 31, 2003, Arizona Materials executed an Asset Purchase Agreement in which it agreed to purchase substantially all of GTI's assets as a going concern for an all-cash price of $7.8 million. Examiner filed a motion to approve the sale. While Comerica supported the sale, after a hearing, the bankruptcy court declined to approve the sale and sent the parties back to the negotiating table. Ultimately, Examiner and Arizona Materials agreed to an all-cash purchase price of $8 million. On January 23, 2004, Examiner filed an amended motion to approve the sale.
This was also the date GTI ceased business operations. Supra note 4, at 3-4.
On February 19, 2004, the bankruptcy court held a final hearing concerning the proposed sale transaction. Comerica again endorsed the sale. There were no bids submitted in excess of Arizona Materials' bid, and the court approved the sale. The sale transaction closed on February 20, 2004. As noted, it generated $8 million in cash proceeds.
On March 16, 2004, Comerica submitted a Motion for Disbursement of Proceeds of Asset Sale. The primary relief requested in this motion was an order directing Examiner to pay Comerica $7,050,000 plus interest from the date of sale from proceeds of the sale. Comerica allowed in this motion that the disbursement would be without prejudice to any claims asserted against Comerica in any avoidance actions by GTI or Examiner.
Examiner had asserted that Comerica's security interest in some of GTI's vehicles was avoidable (the " Rolling Stock Avoidance Action"), and that Comerica may have received avoidable transfers or payments.
At a hearing on February 24, 2004, the bankruptcy court had directed the Examiner to prepare and file a summary of all administrative expense claims. The Examiner's report, docketed on April 12, 2004, included recommendations regarding a process for resolving outstanding claims and other key issues remaining in the bankruptcy cases, and in particular a suggestion that Examiner " be authorized to meet and confer with all administrative claimants and secured creditors in an effort to negotiate a final resolution of the asserted claims and payment thereon." Before a status hearing on April 15, 2004, Examiner shared this report on administrative expenses with Comerica's counsel. Comerica also filed a Reply in Support of [Comerica's] Motion for Disbursement of Proceeds of Asset Sale on April 15, 2004, in which it objected to disbursement of sale proceeds (other than to Comerica) until a proper allocation of proceeds had been determined. Comerica suggested modifications of Examiner's protocol, but generally supported the concept of expanding the Examiner's authority to engage in " shuttle diplomacy" with the other creditors " to attempt to negotiate settlements with administrative and secured claimants."
GTI, Examiner and Comerica appeared with counsel at an April 15, 2004 hearing. The parties agreed on the record to adopt a protocol to resolve the remaining major issues in the bankruptcy case based on the Examiner's report as modified by suggestions from Comerica. The protocol was a " joint recommendation of Comerica and the Examiner." It established reserves for payment of administrative and other secured claims, pending their resolution by settlement or court order, and provided an interim distribution to Comerica of $1,698,300 from the sale proceeds. As presented to the bankruptcy court at the hearing, the protocol also endorsed the suggestion in Examiner's report that Examiner's power be expanded to include the authority to negotiate settlements with administrative and secured claimants. In addressing the bankruptcy court, Comerica's counsel strongly endorsed this expansion of the Examiner's powers:
I do encourage you to empower the examiner to do whatever arm twisting that he can do between now and the next time we're here to see if he can squeeze down those claims a little bit more through a little bit of cajoling, and thereby save all of us the time and energy, and you importantly the time and energy of having to do the claim objection and estimation process.
Tr. Hr'g 17:14-20 (April 15, 2004).
At this April 15 hearing, the issue of surcharging Comerica's collateral was raised by its counsel:
We can also file - well, I don't know if we've gotten to the point on surcharge. I mean frankly nobody has raised that issue. And if that's something you [the bankruptcy court] think we need to preview with you by then [the next hearing], we're happy to do that and it makes sense.
Tr. Hr'g 18:2-6 (April 15, 2004). In response to Comerica's introduction of the surcharge issue, Examiner proposed to file a statement of his position on surcharge. This discussion ensued:
MILLER [Examiner's counsel]: I do think that the surcharge issue obviously is the elephant in the room. I think we should just take it head on . . . .
THE COURT: [W]e need to get that [Examiner's position on asset allocation, claims estimation and surcharge] out there as quickly as possible. . . .
MILLER: We can do that, judge, and circulate it for everybody, and say what we think a fair surcharge would be.
THE COURT: Okay.
MILLER: Yes, by Monday, end of business Monday.
THE COURT: Understood. . . .
ROTH [counsel for GTI]: I'm assuming that if three days from now, the examiner has a position on surcharge, if somebody has a different position on surcharge, they could file within this objection deadline as well their position on surcharges?
THE COURT: Right. What we're doing is we're basically having the examiner lead off on surcharge, allocation, all of these issues by Monday. . . . It looks like we've got a game plan. . . .
Tr. Hr'g 19:8 - 20:9, 30:17-23 (April 15, 2004).
From mid-April through June 2004, Examiner negotiated with the administrative expense claimants and arranged several claim settlements. Examiner filed notice of these settlements with accompanying memoranda to the bankruptcy court for its consideration at a status hearing to be held on June 25, 2004. At the hearing, Examiner and Comerica informed the court that most of the administrative claims had been resolved, and that the framework of an agreement among Examiner, Comerica and the settling claimants was close to being finalized. The court continued the hearing to July 7, 2004.
On June 9, 2004, the bankruptcy court signed another order, with the consent of Comerica, Examiner and GTI, further expanding the Examiner's powers to collect accounts receivable. In the following two months, Examiner collected $261,000 in cash for the bankruptcy estate.
On July 1, 2004, Examiner and Comerica executed a Term Sheet intended by them to establish the framework for an agreement between Examiner and Comerica regarding the various administrative claim settlements and how they would be paid. Examiner filed a motion to approve the Term Sheet.
The Term Sheet is composed of a two-page outline of eleven issues, with two appendices. The following is a synopsis of its major provisions:
o As of May 18, 2003, GTI owed Comerica at least $18.3 million. o Comerica holds a first priority valid lien on substantially all assets of GTI, except for the Orix lien that is resolved in the Term Sheet. The Orix claim up to $505,520 will be paid out of Comerica collateral. After deducting for settlement payments (Exhibit A), reserve for disputed claims (Exhibit B), and the windup reserve ($200,000), all remaining asset sale proceeds and cash collateral will be turned over immediately to Comerica. o Examiner and Comerica will seek approval of the compromised administrative claims listed on Exhibit A. Any party objecting to compromised amount will be transferred to Exhibit B as a disputed claim. Examiner and Comerica will seek disallowance of all disputed claims (Exhibit B). Examiner will set aside a reserve in full amount of the disputed claims and will turn over to Comerica any funds in reserve not ordered paid by the court to the holders of disputed claims. o Conditions precedent to Comerica's willingness to agree to these terms were: (a) settlement of Rolling Stock Avoidance Action against Comerica; and (b) court approval of the Term Sheet's recommendation of settlement of other claims against Comerica. o Exhibit A lists 17 claims totaling $5,540,266.14, to be settled for a total of $2,420,205.54. Exhibit B lists five disputed claims for $1,317,293.12.
On July 7, 2004, the bankruptcy court conducted its initial hearing on Examiner's motion to approve the Term Sheet. GTI expressed concern about approving a Term Sheet as opposed to a definitive settlement agreement. The court denied approval of the Term Sheet and instructed the parties to prepare and submit a definitive settlement agreement. Comerica agreed at the July 7, 2004 hearing to work with Examiner to develop a formal settlement agreement.
Ironically, Comerica's counsel warned at the hearing that, if the bankruptcy court later failed to approve a settlement agreement based on the Term Sheet, the resulting disputes could last into 2005. Comerica's counsel stated:
Unfortunately, Examiner and Comerica could not negotiate a final settlement agreement. The parties dispute the reasons for the breakdown in the settlement process. However, the three issues most frequently mentioned by the parties concern Examiner's addition of two lessors to the settled claims list (Exhibit A) requiring an approximate $500,000 additional expenditure from Comerica's cash collateral; Comerica's demand that the administrative expense claimants receive only 90 percent of the amount of the settlements previously negotiated by Examiner listed in Exhibit A; and Comerica's assertion that Examiner had " overspent."
Comerica moved to convert the bankruptcy cases to chapter 7 on July 26, 2004. The motion was opposed by GTI, the Examiner and four creditors. The motion to convert was denied by the court in a minute order on August 25, 2004, no appeal was taken by Comerica, and so the cases continue as chapter 11 cases. On July 28, 2004, Comerica also filed an objection to all the claims proposed to be paid by Examiner listed on both Exhibits A and B of the Term Sheet. Comerica ultimately consented to entry of an order on August 25, 2004, approving all the settled administrative claims as priority claims under § 507(a)(1) in the amounts Comerica and Examiner had listed in Exhibit A. The bankruptcy court entered this allowance order shortly after the hearing in which it had praised the " Herculean effort" of Examiner in resolving these administrative claims.
On August 11, 2004, GTI and Examiner jointly filed a motion to surcharge Comerica's collateral for the fees and expenses of Examiner and his various professionals. On August 25, 2004, the bankruptcy court conducted a scheduling hearing concerning this motion. At the hearing, a lessor, Bombardier Capital, Inc., argued that it also may assert a surcharge claim and that it would be appropriate to get all surcharge claims " on the table" including the claims of the equipment lessors. Tr. Hr'g 6:14 (August 25, 2004). Neither Examiner nor Comerica opposed that approach. Indeed, Comerica endorsed it and indicated that Comerica would prefer " surcharge litigation once and not piecemeal." Tr. Hr'g 7:23 - 8:1 (August 25, 2004). The bankruptcy court decided that it would allow a supplemental surcharge motion to be filed, on condition that any party wishing to join in the proposed surcharge litigation did not unduly delay the litigation.
On September 1, 2004, GTI and Examiner filed a joint supplemental surcharge motion. This supplemental surcharge motion added July 2004 professional fees and expenses to the earlier motion. It also sought to surcharge Comerica's collateral for the amounts required to pay claims under nine personal property leases for post-petition rent and taxes under the leases in the approximate amount of $1,500,000.
The bankruptcy court conducted extensive evidentiary hearings concerning the surcharge motions spanning seven days from December 2004 to June 2005. Testimony was provided by Examiner; Diane McDonald, a Comerica officer; and Goodman. Over one hundred documents were admitted into evidence.
The bankruptcy court filed its Memorandum Decision regarding the surcharge on November 22, 2005. In response to Comerica's motion to amend the decision, the court issued a two-page order on March 2, 2006.
The court's decision is an impressive 96-page narrative which contains extensive findings of fact and conclusions of law, and analysis. Summarizing only the most critical points of the bankruptcy court's ruling, it decided that:
o GTI had standing to pursue the surcharge motion. Examiner was also a proper movant given the facts of this case. o Comerica caused the bankruptcy court to appoint an examiner with pervasively broad powers. Because Comerica asked the court to empower Examiner to perform these duties, Comerica consented to or caused Examiner and his professionals to perform these duties. o Comerica refused to consent to any payments to personal property lessors from funds in its cash collateral until the Examiner had analyzed which leases were essential to Debtors' operations. Examiner provided Comerica with extensive financial information regarding cash expenditures and other matters related to Comerica's cash collateral. This was unusual in that the court would ordinarily expect Comerica to undertake this thorough review. o Examiner's Preliminary Report was lengthy, detailed and a significant undertaking in light of time constraints. The Preliminary Report directly and substantially benefitted Comerica and the bankruptcy estate. o Following the Preliminary Report, Comerica moved to expand Examiner's powers even further to sell GTI's assets. Comerica's internal documents establish that Comerica aspired to have its collateral sold by the end of 2003. o " The Examiner became convinced, in September to October 2003, that he would be lucky to sell the debtors' assets above the amount that would be due and owing to Comerica. At trial, [Examiner] testified that he was of the view in October 2003 that he would have been ecstatic if these assets had sold in the $12,000,000 to $14,000,000 range. Since the approximate amount of Comerica's debt was at least $17,000,000 at the time, the Court conclude[d] that Comerica was undersecured as early as October 2003." Comerica had called Examiner as a witness, and it did not object to, nor controvert, this testimony. o Comerica wanted all of GTI's assets to be sold as one package as a going concern because liquidation of those assets would yield less for the bank. o Comerica used the bankruptcy process to accomplish its business goals. Comerica decided early in the proceedings that its best course of action was to seek the appointment of an examiner to force sale of its collateral through the court. Comerica filed, but then failed to follow through on, a stay relief motion, preferring, instead, to grant Examiner the power of sale through the bankruptcy court. o Comerica repeatedly sought the expansion of Examiner's powers with knowledge that the bankruptcy estates did not have the resources to pay the accrued and accruing professional fees and equipment lease payments. o Comerica knew of the likely administrative insolvency of the bankruptcy estates when it consented on the record at the April 14, 2004 hearing that Examiner and his professionals should proceed with at least an initial surcharge analysis. In doing so, Comerica consented to having at least initial costs of Examiner and his law firm surcharged against its collateral. o The court was unable to conclude that all costs on the surcharge issue should be the sole responsibility of Comerica. As a result, the court analyzed the different expenses, deducted certain costs of the professionals, and indicated that they must be addressed at another hearing. o At the time of preparation of the Term Sheet, Comerica and Examiner knew that there were limited funds available to pay the remaining claimants. The Term Sheet was structured such that Comerica waived claims to a portion of its alleged collateral to create funding to pay the administrative claimants. " Comerica was consenting to its collateral being surcharged to resolve all remaining issues in the case." o " The evidence at trial establishes, and the Court so finds, that Comerica breached the letter and spirit of the Term Sheet when the Bank demanded that all administrative expense creditors take less than prompt payment in full on their settled claims and absorb the economic risk associated with the outcome of the Registry Funds dispute. Comerica's actions in this regard were taken in bad faith and resulted in the failure of the Examiner and Comerica to enter into a definitive settlement agreement." o Comerica received a direct, substantial and quantifiable benefit from all of the work of the Examiner and his counsel in connection with: preparation of the Preliminary Report and stabilization of GTI's business; Examiner's efforts in controlling cash, eliminating the possibility of insider defalcations, negotiating and documenting cash collateral budgets, and paring down personal property leases; and in Examiner's quick sale of Comerica's collateral as a going concern when Comerica knew that it would receive less in a liquidation. o Comerica benefitted from Examiner's sale of GTI's assets through the bankruptcy court, thereby avoiding the costs of stay relief litigation, foreclosure of its real estate collateral, and general expenses associated with personal property sales. o The efforts of Examiner and his legal counsel resulted in recovery of approximately $1 million in accounts receivable which were Comerica collateral. o An internal document, Comerica's " Dispute Litigation Settlement Authorization, " dated June 30, 2004, establishes that its senior executives approved the Term Sheet because in return for resolving all the issues involved in the administration of the GTI cases, Comerica could also thereby settle the three pending adversary proceedings for the cost of what it already expected to lose in the Rolling Stock Avoidance Action. o " The court concludes, based on this record, that Comerica consented to have its collateral surcharged to pay a majority of the fees incurred by the Examiner and his professionals in this case."
Comerica did eventually lose $1,010,581 in the Rolling Stock Avoidance Action (approximately $89,000 less than the $1.1 million it would have given up in the Term Sheet). Obviously, however, it was required to pay the costs of litigating that action. See this Panel's unpublished decision in Comerica v. McDonough, et al. (BAP no. AZ-05-1045, September 7, 2006).
Based upon these extensive findings and conclusions, on March 1, 2006, the bankruptcy court eventually entered an amended order approving a surcharge against Comerica's collateral in the total amount of $1,399,458.47. Comerica filed a timely appeal on March 9, 2006.
In October 2006, Examiner filed a Motion to Strike Improper Record References from Appellant's Opening Brief. Comerica filed a response to Examiner's motion and Examiner replied to Comerica's response. We do not find merit in Examiner's motion. Examiner's objections to tabs 146, 211, 212, 215, 114, 131, 145, 153, 163, 110 and 207 concern various de minimis defects in the text or requests that they be replaced with the Examiner's copies. None of these objections are material. Examiner's objections to tabs 148, 151, 166, 279, 180, 186, 188 and 189 on the grounds that they were not admitted in the surcharge trial or only conditionally admitted are overruled on the grounds that they are in the docket of the bankruptcy case or adversary proceeding and this Panel may consult the docket of the underlying bankruptcy proceedings. Examiner's objection to tabs 137, 108 and 208 are not material because the Panel did not find it necessary to examine those documents. For these reasons, Examiner's motion to strike is DENIED.
JURISDICTION
The bankruptcy court had jurisdiction under 28 U.S.C. § § 1334 and 157(b)(2). We have jurisdiction under 28 U.S.C. § 158(b).
ISSUES
1. Whether the bankruptcy court erred in determining that Examiner had standing to assert a surcharge claim.2. Whether the bankruptcy court erred in allowing lessors' claims to be included in the surcharge litigation.3. Whether the bankruptcy court applied the proper legal standard and burden of proof in ordering a surcharge of Comerica's collateral.4. Whether the bankruptcy court abused its discretion when it excluded from evidence the report and testimony of Comerica's expert.
STANDARDS OF REVIEW
Standing is a jurisdictional issue that is subject to de novo review. McClellan Fed. Credit Union v. Parker (In re Parker), 193 B.R. 525, 527 (9th Cir. BAP 1996).
The bankruptcy court's interpretation and application of § 506(c) of the Bankruptcy Code is reviewed de novo. Debbie Reynolds Hotel & Casino, Inc. v. Calstar Corp. (In re Debbie Reynolds Hotel & Casino, Inc.), 255 F.3d 1061, 1065 (9th Cir. 2001). However, " [t]he issue of whether expenses were reasonable, necessary, and benefitted the secured creditor is a question of fact which we review for clear error." Golden v. Chicago Title Ins. Co. (In re Choo), 273 B.R. 608, 611 (9th Cir. BAP 2002) citing Bank of Honolulu v. Anderson (In re Anderson), 66 B.R. 97, 99 (9th Cir. BAP 1986).
A court's decision to exclude expert testimony is reviewed for abuse of discretion. United States v. Rahm, 993 F.2d 1405, 1410 (9th Cir. 1993).
DISCUSSION
1. GTI had standing to pursue a surcharge claim against Comerica, and Examiner could properly join in that motion.
A.
Section 506(c) authorizes a trustee to surcharge the collateral of a secured claimant under certain conditions:
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.
The bankruptcy court granted the joint motions of Examiner and GTI to surcharge the cash collateral of Comerica for a portion of the costs and expenses of Examiner and his professionals, and for certain payments made by Examiner to equipment lessors during the bankruptcy case. Comerica objected to this request, in part because it contends Examiner lacks standing under the Bankruptcy Code to request a surcharge. Comerica's objection lacks merit.
As a preliminary matter, we note that the bankruptcy court never ruled that Examiner had independent standing to initiate the surcharge motions. Instead, the court described its analysis of this question in terms of " the Examiner's right to be heard in connection with the Surcharge Motions." As the bankruptcy court correctly noted, it is Comerica that has attempted to characterize this issue as one of standing.
Had Examiner independently filed the surcharge motions, Comerica's objection might warrant serious consideration. The Supreme Court has ruled that § 506(c) unambiguously provides that only a trustee has standing to bring surcharge actions. Hartford Underwriters Ins. Co. v. Union Planters Bank, 530 U.S. 1, 6, 120 S.Ct. 1942, 147 L.Ed.2d 1 (2000) (" We conclude that 11 U.S.C. § 506(c) does not provide an administrative claimant an independent right to use the section to seek payment of its claim.").
However, in this case, Examiner did not file the surcharge motions " independently." Both surcharge motions were filed jointly by Examiner and by GTI as debtor-in-possession. The Supreme Court in Hartford Underwriters acknowledged that " Debtors-in-possession may also use [§ 506(c)], because they are expressly given the rights and powers of a trustee by 11 U.S.C. § 1107." 530 U.S. at 3 n.3. Regardless of any question as to the standing of Examiner to assert a right to a surcharge independently, the surcharge requests in this case were properly initiated by the entity authorized in the Bankruptcy Code to do so, GTI, the debtor-in-possession.
Moreover, there is nothing in Hartford Underwriters to suggest that an examiner in a chapter 11 case, especially one with the enhanced powers given Examiner here, may not join in a surcharge motion, as opposed to acting independently of the debtor-in-possession. As the bankruptcy court observed, there is no requirement that the court examine the standing of a co-movant once it has established that one of the parties initiating an action has standing to do so. " The general rule applicable to federal court suits with multiple plaintiffs is that once the court determines that one of the plaintiffs has standing, it need not decide the standing of the others." Leonard v. Clark, 12 F.3d 885, 888 (9th Cir. 1994)(citing Carey v. Population Servs. Int'l, 431 U.S. 678, 682, 97 S.Ct. 2010, 52 L.Ed.2d 675 (1977)). Since the bankruptcy court correctly decided that one of the parties pursuing the surcharge claim had standing, as explained in Leonard, that " end[s] the inquiry." 12 F.3d at 888.
Comerica reminds us that in Leonard, the court ultimately held that the co-plaintiffs did not have standing. The principal plaintiff in Leonard was a union and the co-plaintiffs were members of the union. The court determined that the union had waived its right to pursue the action and, therefore, the coplaintiffs, who derived standing from their membership rights in the union, lost that standing. Here GTI did not waive its right to seek a surcharge, and consequently, the co-movant, Examiner, need not assert independent standing.
We agree with the bankruptcy court in its Memorandum Decision that " because the debtors are proper movants on the surcharge motions, the Examiner's technical standing under § 506(c) is largely irrelevant." Memorandum Decision at 64.
Even on appeal, GTI continues to act in concert with Examiner concerning the surcharge claims. GTI filed a joinder in the appellate brief of Examiner, in which it " join[s] in and fully support[s] the Answering Brief of Appellee Edward M. McDonough." GTI Joinder Brief at 2.
B.
We also agree with the bankruptcy court that, under the facts of this case, it was proper that Examiner " take the lead" in prosecuting the surcharge litigation in this case. Indeed, GTI would be greatly hampered in its ability to pursue the surcharge motions without the benefit of Examiner's insight and familiarity with the facts and circumstances of these cases. Clearly, Examiner is the party most familiar with the financial aspects of these cases, having been placed in control of GTI's cash resources, at Comerica's request, from early on.
We are perplexed by Comerica' suggestion that, had GTI solely pursued the surcharge motions, the relief requested would be substantially different and would not include any payments for compensation and expenses for Examiner and his professionals. This notion is apparently premised on a series of letters from Goodman to GTI's attorneys instructing them not to support payments to Examiner or his professionals. But GTI's counsel never implemented these instructions. Instead, GTI joined with Examiner in the original and supplemental surcharge motions filed in the bankruptcy court, both of which provide for recovery of amounts for compensation for Examiner and his professionals. Through counsel, GTI continues its support for the surcharges even now before this Panel. On this record, Comerica's suggestion that GTI's position on the surcharge issue would be, without Examiner's joint status, " different" is at best, speculation.
Even if Examiner lacked standing independent of GTI to pursue surcharge, Examiner had the right to be heard on the surcharge issue in order to perform those duties authorized by the bankruptcy court. Comerica disputes Examiner's status based upon a narrow reading of § 1109(b), which provides that:
A party in interest, including the debtor, the trustee, a creditors' committee, an equity security holders' committee, a creditor, an equity security holder, or any indenture trustee, may raise and may appear and be heard on any issue in a case under this chapter.
But the Code's listing of the parties entitled to be heard in a chapter 11 case is not meant to be exclusive. See § 102(3) (prescribing that the term " including" is not limiting); 7 Collier on Bankruptcy ¶ 1109.03 (15th ed. rev. 2001). Courts have extended party in interest status to examiners under a variety of expanded powers. Williamson v. Roppollo, 114 B.R. 127, 129 (W.D. La. 1990) (examiner given power to recover preferences is party in interest); In re Torrez, 132 B.R. 924, 934 (Bankr. E.D. Cal. 1991); Weld v. Sweeney Agcy., Inc. (In re Patton's Busy Bee Disposal Serv., Inc.), 182 B.R. 681, 686 (Bankr. W.D.N.Y. 1995) (" Where the examiner has assumed certain duties of a trustee, that examiner is a party in interest as to the obligations that are so assumed."); In re Great Barrington Fair & Amusement, Inc., 53 B.R. 241 (Bankr. D.Mass. 1985) (examiner is a party in interest); In re Carnegie Int'l Corp., 51 B.R 252 (Bankr. S.D.Ind. 1984).
In this case, primarily at Comerica's request, the bankruptcy court bestowed broad powers on Examiner to take control of GTI's cash, to liquidate GTI's assets, and to propose the distribution of the proceeds generated in that process. In particular, during that process, at the hearing on April 15, 2004, the bankruptcy court expressly directed Examiner to take the lead on the surcharge question. Comerica participated at that hearing and did not object to the court's suggestion, nor did it oppose Examiner's right to proceed (and be heard) on the surcharge issue. It is clear from the record that, in the unique context of these chapter 11 cases, Examiner was a party in interest with the right to be heard by the bankruptcy court concerning whether Comerica's collateral should be surcharged.
Comerica argues that, because of the provisions of § 1106(b) addressing the statutory duties of an examiner, GTI and Examiner cannot act in concert here. It argues that, under the Code, an examiner may perform only those duties that the bankruptcy court has forbidden the debtor to perform:
Under the plain meaning of 11 U.S.C. § 1106(b), besides investigating and reporting on various issues, an examiner is only permitted to do those things " that the Court orders the debtor-in-possession not to perform."
Comerica's Opening Brief at 10 (which is repeated verbatim in Comerica's Reply Brief at 5). According to Comerica, then, the Code prohibits Examiner from pursuing a surcharge because the bankruptcy court did not prohibit GTI from doing so. We disagree.
The provisions of § 1106(b) include an important exception to the general rule suggested by Comerica. The statute provides:
An examiner appointed under section 1104(d) of this title shall perform the duties specified in paragraphs (3) and (4) of subsection (a) of this section, and, except to the extent that the court orders otherwise, any other duties of the trustee that the court orders the debtor-in-possession not to perform.
§ 1106(b)(emphasis added). Subsections (3) and (4) of § 1106(a) require an examiner in a chapter 11 case to investigate the debtor's affairs and file a report. The statute also provides that an examiner shall perform other duties that the debtor-in-possession is ordered not to perform. But the statute also allows the court to " order otherwise." In other words, even without prohibiting the debtor-in-possession from, for example, pursuing a surcharge, the bankruptcy court may " order otherwise" that the examiner do so. Contrary to Comerica's assertion, the " plain meaning" of this statute is that the bankruptcy court may (and frequently in practice does) assign tasks and powers to a chapter 11 examiner, in addition to investigating and reporting, without first prohibiting the debtor-in-possession from so acting.
The bankruptcy court did not err in determining that Examiner could join in, and be heard in connection with, the surcharge motions, and that GTI would be seriously hampered in its prosecution of the surcharge without the joinder of Examiner. Nothing in the Bankruptcy Code prevents the bankruptcy court from authorizing an examiner to perform such a role.
2. Based on the record presented by Comerica, the Panel is unable to determine if the bankruptcy court erred in allowing lessors to " opt-in" to the surcharge litigation.
Comerica argues that the bankruptcy court erred when it allowed certain personal property lessors to include their administrative claims in the supplemental surcharge motion. We are unable to examine this issue because of the state of the record on appeal provided by Comerica.
Comerica has taken a cavalier approach to helping us review the record. In an attempt to comply with BAP Rule 8009(b)-1(b), it has supplied information in excerpts divided by " tabs" with pages continuously paginated. But in its Opening Brief, Comerica frequently cites to the tabs, rather than to the page numbers of the excerpts. Some of the tabs to which we are referred by Comerica contain over 200 pages of material. When Comerica occasionally does refer in its Opening Brief to a specific page of a document in the record, it cites the internal page number of that document within the tab, not the consecutive numbered pages of the excerpts. This departure from proper procedure is aggravated by the fact that 110 of the 220 tabs in Comerica's excerpts are identified in the table of contents solely by their trial exhibit numbers from the bankruptcy court proceedings, and no conversion table is provided that would allow us to identify the documents to which Comerica refers.
BAP Rule 8009(b)-1(b) Organization of the Appendix.
Comerica's Reply Brief in some places cites to the numbered pages in the excerpts and in other places repeats the errors of the Opening Brief by referring to tab locations, but that is of little assistance in finding the materials cited in the Opening Brief.
For example, Tab 219 is identified in the table of contents only as " Examiner's Surcharge Trial Exhibit 102."
In examining the other issues raised by Comerica, we have made our best efforts to understand its problematic citations to the record, in spite of the notion that opposing parties and the court are not obligated to search the entire record unaided for error. See Dela Rosa v. Scottsdale Mem'l Health Sys., Inc., 136 F.3d 1241 (9th Cir. 1998). But we are unwilling to do so as to this particular " opt-in" issue, since Comerica argues that neither Examiner nor GTI did any analysis to determine whether the equipment lessors or other administrative creditors provided any direct or measurable benefit associated with Comerica's collateral as required by § 506(c). In support of that statement, Comerica generally cites to four of the Examiner's reply documents, including responses to interrogatories, spanning 88 pages of responses. However, Comerica fails to provide the Panel with the text of the interrogatories to which Examiner is responding!
Apparently, Examiner was equally confused by Comerica's brief on this issue. In Examiner's Reply Brief, he charges that the opt-in issue was never raised in the bankruptcy court. In Comerica's Reply Brief, Comerica states that the issue was raised and cites to the record, but at a location that contains no reference to Comerica's position on the opt-in issue.
This inadequate reference in Comerica's Reply Brief exemplifies the problems the Panel faced in considering Comerica's opt-in issue. Like many of its " block" references, Comerica simply refers to seven pages of the court's Memorandum Decision to show that it raised the opt-in issue at the bankruptcy court. We have examined those pages and find no evidence there that Comerica raised the opt-in issue. In fairness to Comerica, we note that the court referred in those seven pages to portions of an earlier hearing on August 25, 2004. We have examined the three pages cited by the bankruptcy court from the earlier hearing and they also do not include Comerica's position on the opt-in issue. Finally, we read the entire transcript of that hearing (52 pages) and discovered that Comerica may have raised the opt-in issue on pages 21-22, locations that were not cited by either Comerica in its briefs or the bankruptcy court in its Memorandum Decision.
Appellant bears the burden of providing an adequate record on appeal. In re Burkhart, 84 B.R. 658, 660 (9th Cir. BAP 1988). Where the inadequacy of the record on appeal is egregious, the Panel may summarily affirm the findings of fact of the bankruptcy court. Massoud v. Ernie Goldberger & Co. (In re Massoud), 248 B.R. 160, 163 (9th Cir. BAP 2000). In this instance, based upon Comerica's flawed approach to citing the record, we are unable to determine what findings of fact are challenged by Comerica. For that reason, the Panel will not examine the issue raised by Comerica, and we will not disturb the ruling of the bankruptcy court.
Although we are unable to do an effective review concerning Comerica's argument, and therefore decline to modify the bankruptcy court's decision on this point, from what we can discern from the record, it appears Comerica acquiesced to adding the lessors' claims to the surcharge litigation. At the August 25, 2004 scheduling hearing, Comerica did not object to Bombardier Capital's attorney's suggestion that all surcharge claims be put " on the table" via a supplemental motion. Tr. Hr'g 6:14 (August 25, 2004). Instead, Comerica endorsed the approach, and indicated its desire that the bankruptcy court consider all surcharge claims at " once, not piecemeal." Id. at 7:23 - 8:1. Comerica cannot now argue that because GTI and Examiner complied by adding lessor claims in the supplemental motion, the bankruptcy court erred in considering those claims.
There is also evidence in the record that, the day before the August 25, 2004 hearing, Comerica had strongly advocated adding the lessor claims to the surcharge motion. As part of its aborted effort to convert the case to chapter 7 and appoint a trustee, Comerica submitted its " Statement of Position With Respect to: (A) the Debtors' Surcharge Motion; and (B) Surcharge Matters, Generally." On page 4 of that statement, Comerica argues:
3. The bankruptcy court applied the proper legal standard and burden of proof in ordering a surcharge of Comerica's collateral.
A.
The bankruptcy court employed a two-pronged legal standard to decide whether it should order a surcharge in this case. Historically, these two approaches have been referred to as the subjective and objective tests. Under these tests, a party seeking to surcharge a secured creditor's collateral must show either: (1) under the subjective test, that the secured creditor " caused or consented to" the expenses to be surcharged; or (2) under the objective test, and consistent with the criteria explicitly stated in § 506(c), that the expenses sought to be surcharged were reasonable, necessary and beneficial to the secured creditor. In re Compton Impressions, Ltd., 217 F.3d 1256, 1260 (9th Cir. 2000).
The subjective test is rooted in pre-1978 Bankruptcy Code practice. It is inherently an equitable standard.
Section 506(c) had its origins in the equitable principle that where a court has custody of property, administration and preservation expenses are a dominant charge against the property. Hartford Underwriters Ins. Co. v. Union Planters Bank, N.A., 530 U.S. 1, 9, 120 S.Ct. 1942, 147 L.Ed.2d 1 (2000).
In re Los Gatos Lodge, Inc., 278 F.3d 890, 893 (9th Cir. 2002).
When a reorganization is unsuccessful and the debtor's estate is administratively insolvent, the Ninth Circuit has long recognized that the bankruptcy judge has the authority to decide the extent to which a secured lender's collateral can be surcharged for administrative costs and expenses. Silver State Sav. & Loan Ass'n v. Young, 252 F.2d 236, 238-39 (9th Cir. 1958) (" Where the free assets involved in an unsuccessful reorganization proceeding are insufficient to cover allowances, the extent to which mortgaged property should be charged therewith rests with the sound discretion of the trial judge.").
Although the subjective test pre-dates the 1978 Bankruptcy Code, according to the Ninth Circuit, it is still an appropriate basis for surcharge where the secured lender expressly or impliedly consents to or causes administrative expenses. See Compton Impressions, 217 F.3d at 1260 (holding that, under § 506(c), a trustee or debtor-in-possession must demonstrate that the expenses sought to be surcharged are reasonable, necessary and beneficial to the secured creditor or " that the [secured creditor] caused or consented to those expenses"), citing In re Cascade Hydraulics & Utility Serv., Inc., 815 F.2d 546, 548 (9th Cir. 1987) (emphasis added).
The objective test arrived with the language of the 1978 Code. As expressed in § 506(c), the trustee or debtor-in-possession may recover " the reasonable, necessary costs and expenses for preserving or disposing of" the secured creditor's collateral, " to the extent of any benefit" to the creditor. In our circuit, the case law makes clear that the objective test is not easily satisfied:
The parties seeking the surcharge must prove that the expenses were reasonable, necessary and provided a quantifiable benefit to the secured creditor. [Citations omitted.] This is not an easy standard to meet. It is the party seeking the surcharge that has the burden of showing a " concrete" and " quantifiable" benefit. . . . The § 506 recovery is limited to the amount of the benefit actually proven. . . . Furthermore, because the amount of a surcharge is limited to the amount of the benefit and must be proven with specificity, the deserving party is easily ascertainable.
In re Debbie Reynolds, 255 F.3d at 1068.
The objective test received particular attention after the Supreme Court's decision in Hartford Underwriters. As discussed earlier, Hartford Underwriters held that only a trustee or debtor-in-possession, and not an administrative claimant, has standing to pursue a surcharge. The Supreme Court in that case emphasized that the language of § 506(c) is plain and unambiguous. Hartford Underwriters, 530 U.S. at 6. Since § 506(c) does not include reference to a " consent" standard, it may well foreshadow the ultimate abandonment of the subjective test. But though the objective test appears to be in the ascendant, we have no clear direction from our Court of Appeals or the Supreme Court whether the subjective test has continuing vitality.
The Ninth Circuit decided Compton Impressions, wherein it reaffirmed that satisfying either the subjective or objective tests could serve as the basis for a surcharge, in July 2000, about six weeks after the Supreme Court decided Hartford Underwriters. The Ninth Circuit's decision does not cite or discuss Hartford Underwriters.
Under these circumstances, therefore, it was understandable that the bankruptcy court in this case applied both tests in its extensive Memorandum Decision. For this reason, we will also review the bankruptcy court's decision under both standards.
B.
Regarding the subjective test, the bankruptcy court recited fourteen pages of fact findings to support its conclusion that Comerica caused and consented to the surcharged expenses. For example, the bankruptcy court found that Comerica alone sought the appointment of an examiner to take control of GTI's cash and to guard against alleged fraudulent activities by GTI's management that could threaten its collateral. It was Comerica that persuaded the bankruptcy court to expand Examiner's authority beyond mere investigation and reporting to analyze equipment leases so as to prevent erosion of Comerica's collateral position. Comerica then succeeded in convincing the bankruptcy court to expand Examiner's powers to enable him to liquidate GTI's assets as a going concern, a goal consistent with Comerica's internal plans concerning these loans. And, after the sale, Comerica supported another grant of authority to Examiner to conduct a course of " shuttle diplomacy" with other creditors, hopefully to settle the amounts to be paid on their claims, and presumably because it appreciated that compromising administrative claims as originally planned in the Term Sheet would likely generate a net saving in its litigation costs.
None of the bankruptcy court's fact findings that Comerica caused or consented to Examiner's authority and actions in administering these estates, and incurring the expenses in question here, are clearly erroneous. Indeed, it appears to us from our review of the record that Comerica, from early on in the bankruptcy case, decided it was beneficial to employ an examiner with expanded powers to divest GTI's management from control of GTI's finances, to sell the assets, and later, to settle administrative claims, including those of the personal property lessors. It is also apparent that Comerica appreciated, from almost the inception of Examiner's service, based upon the extensive financial information being supplied by Examiner and otherwise available to Comerica, that it was possible, if not probable, that the asset liquidation would not net sufficient amounts to pay administrative expenses and Comerica's secured claim in full.
In other words, when it appears that a secured creditor in a reorganization case holding a lien on nearly all of the debtor's assets secures and promotes the services of an examiner, not only to investigate the debtor's financial affairs, but also to sell the debtor's business as a going concern and to settle outstanding claims, while all the time appreciating that the debtor may be administratively insolvent, the bankruptcy court may properly conclude that the secured creditor impliedly consented that the costs of administering that bankruptcy estate be paid from its cash collateral. Here, there is ample competent evidence to support the bankruptcy court's conclusion that Comerica caused and consented to Examiner's professional expenses, and to the payments for certain essential leased personal property, sought to be recovered in the surcharge motions. If the subjective test remains valid, the bankruptcy court properly applied it, and did not err in ordering the surcharge.
Although most attention in this appeal has been placed on the surcharge of expenses for the Examiner and his professionals, there can be little doubt that Comerica also, and consistently, consented to incurring the lessors' expenses. Comerica had early in the case agreed to pay administrative expenses out of its alleged collateral, but opposed payment to lessors unless an Examiner was appointed and pared down the number of lessors and amount of payments. Examiner in fact did recommend rejection of 30 leases, which the court approved on July 28, 2003, and the court later ruled that Comerica would not be surcharged for expenses resulting from those rejections. The Examiner's report on leases identified 26 other leases that were " necessary to operation of the debtor" and these leases continued in effect after July 28, 2003. The court correctly found that Comerica consented, not only to the leases that were in place on August 1, 2003, but to payment of those leases out of its alleged collateral. When several of those leases were subsequently rejected between August 1, 2003, and the sale of the debtors' assets, the court could properly conclude that " Comerica indeed caused the estates to incur the Unpaid Lease Claims by consenting to the lease payments, choosing the remedy of the Examiner with expanded powers, and pursue a going concern sale of the Debtors' Property through the Examiner" and that " Comerica should be surcharged for that portion of the Unpaid Lease Claims relating to those leases rejected by the Debtors for the period from August 1, 2003 through the closing on the sale transaction." Memorandum Decision at 85-86.
C.
Even if the subjective test has been abrogated by adoption of § 506(c), the abrogation is of no consequence in this appeal. This is because the bankruptcy court also correctly analyzed and granted the surcharge requests under the objective test.
The objective test has three components. " The parties seeking surcharge must prove that the expenses were reasonable, necessary and provided a quantifiable benefit to the secured creditor." In re Debbie Reynolds, 255 F.3d at 1068. The bankruptcy court provided extensive findings of fact in this case as to the reasonableness and necessity of the expenses, and as to the quantifiable benefit bestowed upon Comerica.
In regards to reasonableness, the court pointed to the 300 pages of detailed billings and extensive analysis of Examiner's and his professionals' time. The court described these services as " excellent" and the time spent and rates " reasonable." These findings are not clearly erroneous. The court also noted that Comerica has submitted no evidence to show the professional fees and expenses were not reasonable.
The bankruptcy court next addressed the necessity requirement of § 506(c). The court carefully audited the services provided and expenses sought to be surcharged. That it performed a proper necessity analysis is evidenced by its explanation of how certain identified services and expenses were not necessary to preserve or dispose of Comerica's claimed collateral. For example, the court identified $39,761.00 from Examiner's attorneys' First and Second Fee Applications which were not necessary under § 506(c). Based on the record, the bankruptcy court likewise declined to surcharge $142,561.00 in fees and costs requested by Examiner's counsel in its Third Fee Application, and all costs in all three fee applications. The court also excluded $20,816 of fees of Examiner and his environmental consulting firm which it determined were not necessary to preserve or dispose of Comerica's collateral. Finally, it determined that all services of Examiner's environmental consulting firm were necessary within the meaning of § 506(c).
The bankruptcy court provided greatest attention to a detailed analysis of benefits to Comerica resulting from the efforts of Examiner and his professionals, and from the lease payments. In a six page section of its decision, the court explained how Comerica received direct, substantial and quantifiable benefit from all Examiner's and professional services in investigating GTI's dealings, preparing the Preliminary Report, cash management, sales and marketing of the assets, collection of outstanding accounts receivable, and settlement of administrative expense claims.
Much of the factual findings detailing these benefits was derived by the bankruptcy court from the testimony of Examiner and Goodman. The bankruptcy court noted that while Comerica called McDonald, a bank officer, to testify, she knew " little to nothing about what transpired in these cases and knew virtually nothing about Comerica's institutional experiences on key issues related to the benefits that Comerica might have obtained from the efforts of the Examiner and his professionals." Memorandum Decision at 81-82. Comerica has an especially difficult burden in asking us to disregard any testimony because of the deference we give the bankruptcy court's opportunity to weigh the importance of witness testimony and judge the credibility of witnesses. See Rule 8013 (On appeal, " due regard shall be given to the opportunity of the bankruptcy court to judge the credibility of witnesses.").
Summing up its conclusions about the benefit to Comerica, the bankruptcy court noted that:
Comerica was the primary beneficiary, and in many respects, the sole beneficiary of the efforts of the Examiner and his professionals. In a case where general unsecured creditors will almost certainly never receive a distribution and administrative expense claimants are faced with an uphill battle to receive more than a fraction of the amount of their claims, Comerica's argument that the efforts of the Examiner and his professionals benefitted everyone, and not primarily [Comerica], is sophistry.
Memorandum Decision at 83. We agree with the bankruptcy court's analysis.
Before leaving the objective test issues, we must review the objective test as it applies to the amounts Comerica was surcharged for unpaid rent and taxes under the leases. The bankruptcy court noted that the very first task Comerica expected Examiner to complete after his initial appointment was to pare down the personal property leases to those covering essential equipment. He did so. It is undisputed that Examiner reported to Comerica, and promptly and significantly reduced the number of leases and their attendant expenses which could strain Comerica's cash collateral. The leases not rejected as part of this initial review covered only those items that Comerica agreed were essential equipment.
As the bankruptcy court noted, had the leases not been preserved in a pared-down state, Comerica likely would not have obtained the direct, substantial and quantifiable benefit of the going concern sale of GTI's business negotiated by Examiner. Comerica's internal documents acknowledged that a going concern sale was beneficial to its position, and that a liquidation of the assets would likely return less value on its claim. Thus, the bankruptcy court concluded that the amounts due on the unpaid lease claims were reasonable, necessary and beneficial within the meaning of § 506(c). We agree.
Comerica argues that the leases rejected between August 1, 2003, and the sale of the assets provided no benefit to Comerica. Comerica's argument appears to be in several parts. On the one hand, they insist that the leases rejected after August 1 are in exactly the same category as those leases rejected before August 1 which the court acknowledged had provided no benefit to Comerica and that any amounts due on those leases could not be charged against Comerica. But Comerica does not explain how or why the leases rejected before August 1 are similar to those rejected after August 1.
We are also unable to conduct our own examination because we have little or no information in the record on the contents of the leases.
In any case, even if leases on either side of the dateline are identical, the issue is not the substance of the leases but the timing of the leases. The Examiner's lease report identified certain leases that, as of July 28, 2003, should be rejected, and another group of leases that, as of that date, were necessary to the continuing operation of the debtors. Leases rejected before August 1 provided no benefit to Comerica. Leases rejected after August 1 were deemed necessary for the continuing operation of the debtors and, thus, necessary to Comerica's and the Examiner's plan to sell the business as a going concern. That certain of the post-August 1 leases were eventually rejected does not mean that, while they were in effect, Comerica received no benefit from retention of the leased property.
It must be remembered that while some leases were eventually rejected before the assets were sold, Comerica had consented to retention of the leases when Examiner made his original recommendations in July 2003.
Comerica also argues that the benefit to Comerica accruing from these leases was not attributed by the bankruptcy court with sufficient specificity. Apparently, Comerica expected Examiner and the bankruptcy court to examine the benefit to Comerica for each lease.
An evaluation of the benefit of each lease to Comerica is not required. We believe the court correctly found that Comerica received a direct, substantial and quantifiable benefit because GTI's assets could be sold by Examiner as a going concern. Although the court noted that it was difficult to place a precise dollar amount on the benefit to Comerica derived from a going concern sale, it found that Comerica would not have received the benefit of the enhanced sale price without these leases. This finding is consistent with Comerica's own internal analysis and plans for liquidation of its collateral. The bankruptcy court's finding that Comerica benefitted from the leases was not clearly erroneous.
In sum, the bankruptcy court applied the correct legal standard under the objective test, and supported its conclusion that a surcharge was appropriate with ample findings of fact that are not clearly erroneous.
D.
Comerica's arguments suggesting that the bankruptcy court erred in applying the burden of proof also lack merit. We agree with Comerica's assertion that GTI and Examiner bear the burden of proving the facts necessary to establish the right to surcharge its collateral. We disagree with Comerica's argument, however, that the bankruptcy court employed a presumption that all expenses could be surcharged against Comerica's collateral, and then shifted the burden of disproving surcharge to Comerica.
As noted above, the bankruptcy court made extensive findings based on the evidence and testimony to support its conclusions that the expenses in question were reasonable and necessary, and of quantifiable benefit to Comerica. Where in its decision the bankruptcy court indicated that Comerica had not submitted credible evidence that expenses were unnecessary or unreasonable, it was not shifting the burden of proof to Comerica, but simply noting the absence of sufficient evidence in response to the proof provided by GTI and Examiner that those expenses were necessary or reasonable.
The bankruptcy court applied the correct burden of proof in ordering a surcharge of Comerica's collateral.
4. The bankruptcy court did not abuse its discretion when it excluded the expert report and testimony offered by Comerica.
The admission of expert testimony is governed by Federal Rule of Evidence 702:
If scientific, technical, or other specialized knowledge will assist the trier of fact to understand the evidence or to determine a fact in issue, a witness qualified as an expert by knowledge, skill, experience, training or education, may testify thereto in the form of an opinion or otherwise, if (1) the testimony is based upon sufficient facts or data, (2) the testimony is the product of reliable principles and methods, and (3) the witness has applied the principles and methods reliably to the facts of the case.
Comerica offered the testimony and a report of Morris Aaron, CPA, as an expert witness on the subject of surcharge. The bankruptcy court allowed the witness to testify on direct examination, and withheld ruling on objections to his status as an expert witness and to admission of his testimony in evidence. After direct examination, Examiner's counsel questioned the witness and Aaron disclosed the following regarding his qualifications:o He is a certified public accountant.o He had not reviewed any bank records in his analysis.o He had never communicated with Examiner, officers of GTI, Comerica, or any of the administrative creditors.o He had only reviewed limited court filings and related documents provided to him by Comerica's counsel.
The bankruptcy court expressed two principal concerns regarding Aaron's testimony. First, the court did not believe that it required expert testimony on the surcharge issue. Second, the court questioned the methodology Aaron employed in preparing his testimony and report.
Ordinarily, a trial court's determination that it did not require expert testimony regarding a proposed surcharge would be dispositive.
The decision whether to admit expert testimony does not rest upon the existence or strength of an expert's opinion. Rather, the key concern is whether the expert testimony will assist the trier of fact in drawing its own conclusion as to a " fact in issue."
United States v. Rahm, 993 F.2d 1405, 1411 (9th Cir. 1993).
Here, the bankruptcy court observed that it had presided over many cases in which surcharge was an issue and had never needed an expert witness on the subject. " It's just not something that the Court believes is an area where I need expert testimony." Tr. Hr'g 64:11-13 (June 29, 2005).
The bankruptcy court also expressed serious reservations about the methodology used by Aaron.
I have a great deal of concern about your reliance just on the court records. And if I understand your testimony correctly, that really was principally what you looked at. . . . The court normally is looking in expert testimony for the party really to go out and explore the field, and explore the factual information available.
Tr. Hr'g 66:11-20 (June 29, 2005). The court declined to allow Aaron's testimony in evidence. Comerica objects to the court's decision. Comerica is particularly concerned that the court refused Aaron's testimony but accepted, in Comerica's words, the " expert testimony" of Examiner regarding the propriety of a surcharge of his own fees and those of his professionals.
Comerica does not cite any legal authority on the subject of expert witnesses in either of its briefs. Further, Comerica's argument that Aaron's testimony was required to counter the testimony of Examiner misunderstands the function of expert testimony in the federal courts. Examiner was never presented as an expert witness under Rule 702. Examiner was a fact witness, not subject to Rule 702 restrictions.
The decision whether to admit expert witness testimony is committed to the sound discretion of the bankruptcy judge. Tamen v. Alhambra World Inv. (In re Tamen), 22 F.3d 199, 202 (9th Cir. 1994). Under these circumstances, Comerica has not shown it was an abuse of discretion for the bankruptcy court to exclude Aaron's testimony.
CONCLUSION
For all the above reasons, we AFFIRM the decision of the bankruptcy court to surcharge Comerica's collateral.
What is unusual is that the Examiner undertook the tasks of an independent thorough review that the Court would normally expect to be undertaken by Comerica's business people or by professionals retained by the Bank. Memorandum Decision Regarding Surcharge Trial (November 22, 2005)(the " Memorandum Decision") at 11.
And the only last thing I would say is the whole framework of this proposed settlement is designed so that there will be a pot of money for creditors to get . . . including Comerica. But without that settlement, then we'd be fighting probably into 2005.
Tr. Hr'g 13:20 - 14:1 (July 7, 2004).
(1) Documents in the appendix shall be divided by tabs. (2) The pages of the excerpts shall be continuously paginated. (3) The appendix shall contain a complete table of contents listing the documents and identifying both the tab and page number where each document is located. If the appendix has more than one volume, the table of contents shall also identify the volume in which each document is located.
Comerica should not be subjected to multiple surcharge motions filed by different parties, seeking piecemeal determinations from the Court on how much (if any) of Comerica's collateral should be invaded to pay administrative expenses in these cases that continue to grow at alarming rates. . . . [P]iecemeal litigation filed by parties (including parties without standing) is not fair to Comerica, and is not an efficient way to handle an issue (surcharge) that quickly is becoming the central issue in the cases. Accordingly, Comerica requests that the Court direct the Debtors (or preferably, an independent Chapter 7 trustee) to prepare and file a single, comprehensive surcharge motion, and thereafter provide Comerica a fair opportunity for discovery and an evidentiary hearing before ruling on any surcharge motion. Comerica believes that a single surcharge proceeding will conserve judicial resources, and reduce litigation costs by bringing related issues with related arguments and controlling case law before the court in one coordinated proceeding.
(Emphasis added.) The Panel observes that, except for the appointment of a trustee, Comerica received everything that it requested in this passage.