In the United States Bankruptcy Court

for the Northern District of Iowa

Bankruptcy No. L-89-01347C
Debtor(s). Chapter 11

Ruling Re: Attorney Pass of Zelle & Peiffer P.C. and Peiffer Law offices

The matter before the Court is the motion of the debtors, acting through their attorneys, to assess the costs and attorney fees of their counsel Eells & Peiffer, P.C., and Peiffer Law Office against the sale proceeds of real estate which secures the debt the debtors owed to Monticello State Bank. The Court, having heard the evidence and testimony and having considered the arguments of counsel, enters the following order.

The debtors have brought this motion pursuant to 11 U.S.C. § 506(c).(1) The debtors argue that the filing and confirmation of debtors' liquidating plan and the sale of real estate which secures the debt owed to Monticello State Bank was of great benefit to the Bank and, therefore, the fees and expenses incurred in connection with those activities should be assessed against the Bank's collateral. The Bank argues that it received no notice of any intent to assess the fees against its collateral, gave no consent to the assessment of fees, and that any fees incurred by the debtors' attorney should be paid by the debtors out of their own funds.

The evidence shows the debtors did propose and obtain confirmation of a liquidating plan. Under the plan, the bulk of debtors' property would be sold with the proceeds going to the Bank to be applied against its allowed secured claim. The Bank consented to the liquidating plan and, as indicated, the Court entered an order confirming the plan. The plan said nothing about assessing the attorney's fees of debtors' counsel against the property which secured the debt owed to the Bank.

Contemporaneous with and subsequent to confirmation of the plan, the debtors liquidated a number of pieces of real estate. The proceeds from the liquidation of the real estate, after payment of reasonable realtor fees and other expenses of sale, have been paid over to the Bank to apply against its allowed secured claim. The debtors' attorney handled virtually all of the legal work associated with the sale of those pieces of property. That legal work included services related to clearing title, handling and negotiating environmental problems, obtaining surveys and accurate legal descriptions, paying necessary fees and expenses, obtaining abstract continuations, and other normal and reasonable services relating to the sale of real property. None of the applications for authority to sell real estate indicated that the fees and expenses of debtors' attorneys would be assessed against the secured property. The Bank did consent to all of the sales and received the sale proceeds.

The evidence also shows that if the property had not been sold through the bankruptcy proceeding, the Bank would have had to expend monies to foreclose upon the real estate and would have incurred attorney's fees in connection with providing merchantable title to the property being sold. The Bank did receive a tangible benefit from the services rendered by debtors' attorney in the sale of the real estate. The Bank probably would have incurred at least as much in litigation expenses and fees as the debtors' attorneys expended if the Bank would have had to go through a foreclosure and sale of the foreclosed property.

The authorities are clear the burden is upon the movant seeking to recover costs under 11 U.S.C. 506(c) to prove the expenses were (1) reasonable, (2) necessary, and (3) beneficial to the secured creditor. In re Chicago Lutheran Hospital Assn., 89 B.R. 719, 727 (N.D. Ill. 1988); 3 Collier on Bankruptcy, § 506.06, 506-65 (15th Ed. 1992). The cost to be recovered must have been incurred primarily for the benefit of the secured creditor. In re Chicago Lutheran Hospital Assn., 89 B.R. at 729.

The cases are also clear that services which directly benefit the secured creditor, such as direct sale expenses of secured property, are allowable as a surcharge pursuant to 11 U.S.C. 506(c). However,, services such as formulation and confirmation of a plan, which benefit many parties, including unsecured creditors and the debtors themselves, are not properly surcharged against the secured collateral except in those situations where the secured creditor consents to payment of the fees and expenses. In re Manchester Hides, Inc., 32 B.R. 629 (Bankr. N.D. Iowa 1983). In this case, there was no attempt to obtain the consent of the secured lender to surcharge any fees and expenses incurred in connection with formulation and confirmation of a plan. Consequently, the Court concludes that any fees and expenses incurred in connection with those efforts are not allowable against the secured property pursuant to 11 U.S.C. § 506(c).

However, these fees and expenses which directly relate to sale of secured property which directly benefitted the Bank are properly chargeable under § 506(c). It would have been preferable if the Bank would have been put on notice of the intent to surcharge the property, but the failure to give notice does not destroy the debtors' attorney's rights under § 506(c). The right to surcharge is especially compelling in cases such as this where the creditor would have been required to go through a foreclosure proceeding and incur significant legal expenses.

In summary, this Court will allow the debtors' attorneys to surcharge against the secured collateral those attorney fees and expenses on the fee application which directly relate to the sale of property. However, those fees and expenses which relate to other matters including negotiation, formulation, and confirmation of debtors' plan, will not be allowed as a surcharge pursuant to 11 U.S.C. § 506(c). Attached to this order is a copy of the debtors' fee statement. The Court has placed an X next to each item of legal services or reimbursement of expenses which this Court determines to be compensable under 11 U.S.C. § 506(c). The total compensable fees are $4,564.50 and total expenses are $890.60 for total allowance under § 506(c) of $5,455.10.

IT IS THEREFORE ORDERED the motion of the law firm of Eells & Peiffer, P.C., and Peiffer Law Offices for surcharge of fees and expenses pursuant to 11 U.S.C. § 506(c) against the secured property which secures the debt owed to Monticello State Bank is granted to the extent of $5,455.10.

DONE AND ORDERED this 30th day of June, 1992.

Michael J. Melloy
Chief Bankruptcy Judge

1. 11 U.S.C. § 506(c) provides:

"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."