In re Felt Mfg. Co., Inc.

402 B.R. 502

2009 BNH 010

In re FELT MANUFACTURING CO., INC., f/k/a Foss Manufacturing Co, Inc., Debtor Lawrence E. Rifken, Plan Administrator and Trustee of the Felt Manufacturing Co., Inc. Liquidating Trust, Plaintiff, v. CapitalSource Finance, LLC, Defendant.

Bankruptcy No. 05-13724-JMD.

Adversary No. 07-1123-JMD.

United States Bankruptcy Court, D. New Hampshire.

March 17, 2009.

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Robert J. Feinstein, Esq., Beth E. Levine, Esq., Pachulski, Stang, Ziehl & Jones LLP, New York, NY, Joseph A. Foster, Esq., Cheryl C. Deshaies, Esq., McLane, Graf, Raulerson & Middleton, P.A., Manchester, NH, Attorneys for Plaintiff.

John P. Sieger, Esq., Peter A. Siddiqui, Esq., Katten Muchin Rosenman LLP, Chicago, IL, Charles R. Powell III, Esq., Devine, Millimet & Branch, P.A., Manchester, NH, Attorneys for Defendant.

MEMORANDUM OPINION

J. MICHAEL DEASY, Bankruptcy Judge.

I. INTRODUCTION

This adversary proceeding was filed by Lawrence E. Rifken (the "Plaintiff"), the plan administrator and trustee of a liquidating trust created by the confirmed chapter 11 reorganization plan of Felt Manufacturing Co., Inc. (the "Debtor"). The Plaintiff filed a single-count complaint against CapitalSource Finance, LLC (the "Defendant") seeking to surcharge the Defendant's collateral under § 506(c) of the Bankruptcy Code¹ to pay for fees and costs incurred by professionals for the Debtor and the Official Committee of Unsecured Creditors (the "Committee") during the first several weeks of the Debtor's chapter 11 case. In response, the Defendant filed a motion to dismiss for failure to state a claim on which relief could be granted (Doc. No. 6) (the "Motion") and it also raised several affirmative defenses. The Court held a hearing at which both sides presented arguments and the matter was taken under submission.

This Court has jurisdiction of the subject matter and the parties pursuant to 28 U.S.C. §§ 1334 and 157(a) and the "Standing Order of Referral of Title 11 Proceedings to the United States Bankruptcy Court for the District of New Hampshire," dated January 18, 1994 (DiClerico, C.J.). This is a core proceeding in accordance with 28 U.S.C. § 157(b).

II. MOTION TO DISMISS STANDARD

A motion to dismiss asks the court, at the initial pleading stage, to review the sufficiency of a plaintiff's complaint by determining whether the allegations contained in that complaint are sufficient to state a recognizable cause of action under the applicable law. The standard under which federal courts review motions to dismiss is governed by Federal Rule of Civil Procedure 12(b)(6), made applicable to adversary proceedings in bankruptcy by Federal Rule of Bankruptcy Procedure 7012(b).² Under Rule 12(b)(6), the Court must accept the allegations in the complaint as true and make all reasonable inferences in favor of the plaintiff. Ruiz v. Bally Total Fitness Holding Corp., 496 F.3d 1, 5 (1 st Cir.2007). A plaintiff has the task of setting forth factual allegations, either direct or inferential, regarding each material element necessary to recover under an actionable legal theory. Gagliardi v. Sullivan, 513 F.3d 301, 305 (1st Cir. 2008).

The Supreme Court recently altered the applicable pleading standard under Rule 12(b)(6) in Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). This Court has previously discussed at length the recent change in that pleading standard in two opinions, see Notinger v. Costa (In re Robotic Vision Sys., Inc.), 374 B.R. 36 (Bankr.D.N.H.2007), and Official Comm. of Unsecured Creditors v. Foss (In re Felt Mfg. Co., Inc.), 371 B.R. 589 (Bankr.D.N.H.2007), and will not repeat an exhaustive analysis. Suffice it to say that a complaint will now survive a motion to dismiss only if the allegations in the complaint cross the line between mere possibility of relief and allege a plausible entitlement to relief. Twombly, 127 S.Ct. at 1967; Rodriguez-Ortiz v. Margo Caribe, Inc., 490 F.3d 92, 95 (1st Cir.2007). Perfection is not required and there is no probability requirement at the pleading stage; the facts need only raise a reasonable expectation that discovery will reveal evidence to support relief. Twombly, 127 S.Ct. at 1965. Thus, the complaint must contain enough factual allegations "that raise a right to relief above the speculative level." Gray v. Evercore Restructuring, LLC, 544 F.3d 320, 324 (1st Cir.2008). This obligation requires more than labels, conclusory statements, or simply reciting the elements of a cause of action. See Twombly, 127 S.Ct. at 1964-65; Rodriguez-Ortiz, 490 F.3d at 95-96. Dismissal is therefore appropriate if the facts fail to establish a claim to relief that is plausible on its face. Trans-Spec Truck Serv., Inc. v. Caterpillar, Inc., 524 F.3d 315, 320 (1st Cir.2008).

The Defendant also raises affirmative defenses in its motion to dismiss. "While most Rule 12(b)(6) motions are premised on a plaintiff's putative failure to state an actionable claim, such a motion may sometimes be premised on the inevitable success of an affirmative defense. Dismissing a case under Rule 12(b)(6) on the basis of an affirmative defense requires that (i) the facts establishing the defense are definitively ascertainable from the complaint and the other allowable sources of information, and (ii) those facts suffice to establish the affirmative defense with certitude." Nisselson v. Lernout, 469 F.3d 143, 150 (1st Cir.2006) (citations omitted), cert. denied, 550 U.S. 918, 127 S.Ct. 2131, 167 L.Ed.2d 863 (2007);³ Gray, 544 F.3d at 324.

III. DISCUSSION

This matter involves § 506(c) of the Bankruptcy Code. Section 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, including the payment of all ad valorem property taxes with respect to the property.

11 U.S.C. § 506(c). The general rule is that post-petition administrative expenses and the general costs of reorganizing in bankruptcy cannot be charged against secured collateral. Gen. Elec. Credit Corp. v. Levin & Weintraub (In re Flagstaff Foodservice Corp.), 739 F.2d 73, 76 (2d Cir.1984) ("Flagstaff I"). Section 506(c) is an exception to this general rule where the trustee (or debtor-in-possession) expends funds to preserve or dispose of property securing the debt. The statute was designed to prevent a windfall to the secured creditor who benefits from the claimaint's expenses in preserving or disposing of the secured party's collateral. See IRS v. Boatmen's First Nat'l Bank, 5 F.3d 1157, 1159 (8th Cir.1993).

With this background in mind, the Court turns to the Defendant's several bases for dismissal in the Motion. The Court addresses each in succession.

A. Standing and Waiver

The Defendant first maintains that the Plaintiff is an administrative creditor who does not have standing to bring a § 506(c) claim because the United States Supreme Court held in Hartford Underwriters Ins. Co. v. Union Planters Bank, N.A., 530 U.S. 1, 120 S.Ct. 1942, 147 L.Ed.2d 1 (2000), that only a debtor-in-possession or trustee may seek relief under § 506(c). The Defendant believes the Plaintiff is an administrative creditor by virtue of an order of the Court in which the appointed chapter 11 trustee (the "Trustee") purportedly waived any rights under § 506(c).⁴ Thus, the Defendant believes the Plaintiff did not succeed to the former Trustee's standing under § 506(c). Although standing and waiver are generally two separate defenses, they collapse into the same issue under the circumstances in this case.

On January 17, 2006, the Court entered an order in the Debtor's bankruptcy case that authorized the Trustee to obtain post-petition financing from the Defendant. See In re Felt Mfg., Doc. No. 478 (the "Financing Order"). The Financing Order provides in relevant part:

Surcharge. Except for the Carve-Out (as defined below), no costs or administrative expenses that have been or may be incurred in this Chapter 11 Case incurred since November 1, 2005, in any proceedings related hereto . . . and no priority claims are or will be prior to or on a parity with the Superpriority Claim of the [Defendant] for the Post-Petition Debt. In no event shall any costs or expenses of administration incurred since November 1, 2005 be imposed upon the [Defendant] or any of the Collateral pursuant to section . . . 506(c) of the Bankruptcy Code . . . without the prior written consent of the [Defendant], and no such consent shall be implied from any action, inaction or acquiescence by the [Defendant]. Any and all payments or proceeds remitted . . . to the [Defendant] . . . shall be received . . . by the [Defendant] free and clear of any claim, charge, assessment or other liability, including, without limitation, any such claim or charge arising out of or based on section[ ] 506(c) . . . of the Bankruptcy Code . . ., which [is] hereby waived by the Chapter 11 Trustee; provided, however, that the foregoing shall not impact any rights the Debtor's professionals or the Committee's professionals may have pursuant to section 506(c) of the Bankruptcy Code relating to actual, reasonable and necessary costs and expenses incurred prior to the appointment of the Chapter 11 Trustee. In consideration of the [Defendant]'s agreement to fund the Wind Down Budget . . . and the [Defendant]'s agreement to make funds available pursuant to the Budget . . ., counsel for the Chapter 11 Trustee and counsel for and consultants to the Committee, . . . waive and release all rights to request that the Chapter 11 Trustee assert on their behalf a claim for administrative costs and expenses incurred since November 1, 2005 under section 506(c) of the Bankruptcy Code against the Pre-Petition Collateral or...