Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 81-C-770 -- Thomas R. McMillen, Judge.
Coffey, Circuit Judge, Swygert, Senior Circuit Judge, and Templar, Senior District Judge.*fn*
SWYGERT, Senior Circuit Judge.
This appeal from the district court's order affirming the bankruptcy court's award of certain expenses to a trustee in bankruptcy presents for review several questions concerning the relation of two provisions of the Bankruptcy Reform Act of 1978: 11 U.S.C. § 554(a), which provides:
After notice and a hearing, [a] trustee may abandon any property of the estate that is burdensome to the estate or that is of inconsequential value to the estate;
and 11 U.S.C. § 506(c), which provides that:
[a] 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.
For the reasons explained below, we vacate the order of the district court and remand the case for further proceedings.
On December 5, 1979, the bankruptcy court entered an order for relief under Chapter 7 of the Bankruptcy Code against the debtor, Trim-X, Inc. In re Trim-X, Inc., No. 79-B-40450 (Bankr. N.D. Ill. Dec. 5, 1979). Therein the court designated the appellant, Maurice Levine, as trustee. At the time this order was entered Trim-X owned certain assets in which the appellee, Commercial Credit Business Loan, Inc. ("CCBL"), had a perfected security interest. These assets were housed in premises leased by Trim-X from the Warrenville Development Company ("WDC").
Following his appointment, the trustee employed a security company to protect the assets. He also had the assets appraised. The appraisal indicated that the assets held no equity for the estate; that their worth was less than the amount of CCBL's secured interest. Thus, on December 20, 1979, the trustee filed a petition to abandon the assets under section 554. At the same time the trustee, relying on section 506(c), requested the bankruptcy court to order CCBL to reimburse him for expenses he had incurred in preserving the assets.
CCBL filed an answer and counterclaim to the trustee's petition on January 21, 1980. It did not object to the proposed abandonment, but did contest the trustee's claim for expenses. On February 1, 1980, the bankruptcy court finally ordered the trustee to abandon the assets. The court, however, reserved ruling on the reimbursement question. Thereafter the trustee abandoned the assets and CCBL sold the same for an amount, as anticipated, that was less than its secured interest.
On September 10 and October 14, 1980, the bankruptcy court held evidentiary hearings on the reimbursement question. The trustee claimed that under section 506(c) he was entitled to recover the reasonable, necessary expenses of preserving the assets from the date of his appointment (12/5/79) until the date of the court's abandonment order (2/1/80); namely: (1) use and occupancy expenses of $15,000; (2) security costs of $2,667.40; and (3) utility charges of $1,367.71. CCBL objected, arguing, first, that the use and occupancy expenses were not necessary because the trustee had been under no legal obligation to the lessor, WDC, due to subrogation agreements and a general release between WDC and CCBL, and second, that none of the claimed expenses yielded a benefit to CCBL.
On December 19, 1980, the bankruptcy court awarded the trustee $1,850 as the "reasonable, necessary costs and expenses of the preserving of these assets for the benefit of Commercial Credit. . . ." Although the court's explanation for that award is somewhat opaque, we glean the following analysis from its order. First, the court rejected CCBL's contention that the trustee had not been obligated to WDC for the use and occupancy of the leased premises, reasoning that the agreements between WDC and CCBL did not affect the relationship between WDC and the trustee. Second, the court found that the expenses of preservation incurred by the trustee during the period of appraisal were not for the benefit of CCBL. The court assigned January 12, 1980 as the cutoff date in making that determination, concluding that the trustee could only recover expenses incurred from January 12 until February 1 (the date of the abandonment order). Third, the court further limited that base period on the ground that "the trustee did not immediately seek the court's authorization to abandon the assets." Although the court did not specify a time period in this regard, we assume it was referring to some part of the period from December 5 (the date of the trustee's appointment) until December 20 (the date of the trustee's abandonment petition). Based on these considerations, the bankruptcy court awarded the trustee $1,000 for use and occupancy, $500 for security costs, and $350 for utility charges.
The trustee appealed the bankruptcy court's order to the district court.*fn1 The district court affirmed the $1,850 award on the ground that it was not "clearly erroneous." In re Trim-X, Inc., No. 81-C-770, slip op. at 4 (N.D. Ill. Sept. 23, 1981). The district court, however, did not review the bankruptcy court's analysis. Rather, the court focused on the fact that CCBL's security interest exceeded the value of the collateral. Referring to language from the legislative history of section 506(c),*fn2 the court suggested that when the value of the secured property is less than the amount of ...