IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit
FILED
March 25, 2009
No. 08-60185 Charles R. Fulbruge III
Clerk
IN THE MATTER OF: SKUNA RIVER LUMBER, LLC,
Debor
BORREGO SPRINGS BANK, N.A.
Appellant
v.
SKUNA RIVER LUMBER, L.L.C.
Appellee
Appeal from the United States District Court
for the Northern District of Mississippi
Before GARWOOD, GARZA, and OWEN, Circuit Judges.
GARWOOD, Circuit Judge:
Borrego Springs Bank, N.A. (Borrego) appeals the district court’s judgment
upholding the bankruptcy court’s order surcharging and imposing a judicial lien
on property that Borrego had previously purchased at a bankruptcy court
ordered auction sale by a credit bid from the bankruptcy estate of its debtor,
appellee Skuna River Lumber, L.L.C. (Skuna). In addition to affirming the
surcharge and the imposition of the lien, the district court expressly authorized
the bankruptcy court sua sponte to enter a personal judgment against Borrego.
We review the district court’s judgment by applying the same standards
of review to the bankruptcy court’s decision as applied by the district court. In
re Kennard, 970 F.2d 1455, 1457 (5th Cir. 1992). We review the bankruptcy
court’s findings of fact for clear error and its conclusions of law de novo. F ED. R.
B ANKR. P. 8013; Kennard, 970 F.2d at 1457–1458.
Skuna obtained a $2.4 million loan from Borrego to operate a lumber mill
in Bruce, Mississippi and later filed for bankruptcy. Unable to acquire capital
to continue its business, Skuna hired Equity Partners, Inc. (EPI) to sell
substantially all of its assets at auction. The bankruptcy court on April 14, 2006
approved this arrangement in an order specifically stating that EPI would have
the right to seek compensation and that “[a]ny commission, fee and/or
reimbursement of EPI on the Debtor’s property sold and/or for the marketing
costs advanced by EPI is reserved for later argument under applicable law,
including 11 U.S.C. § 506(c).” 1 Likewise on April 14, 2006, the bankruptcy court
also issued a separate order establishing the procedures (including the use of
credit bids) to be followed at the auction, which would take place June 15, 2006,
and providing that all of Skuna’s assets would be sold “free and clear of liens,
claims, encumbrances to a p[ro]spective successful bidder at the auction with
any liens, claims and encumbrances attaching to the proceeds.”
Although EPI advertised broadly and was able to attract numerous third-
party bidders, ultimately at the June 15 auction Borrego’s “credit bid” of
$705,000 for all of the bankruptcy estate’s assets prevailed.2 As the amount of
1
11 U.S.C. § 506(c) provides: “(c) 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.”
2
“Credit bidding” is a concept provided for in section 363(k) of the United States
Bankruptcy Code, which states: “At a sale . . . of property that is subject to a lien that
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the outstanding debt to Borrego exceeded the credit bid, the bankruptcy estate
received no cash or tangible proceeds from the sale. The bankruptcy court
approved the June 15 sale in its July 24, 2006 “Order Approving Motion to Sell
Substantially All of the Assets of the Debtor-in-Possession, Free and Clear of
Liens, Claims and Interests, with Proceeds of Sale Attaching to Liens, Outside
the Ordinary Course of Business.” The July 24, 2006 order states “This is a
Final Judgment and Order as contemplated by the applicable Federal Rules of
Bankruptcy Procedure.” On August 28, 2006, Skuna executed and delivered the
Warranty Deed and Bill of Sale conveying substantially all of its assets to
Borrego.
Thereafter, EPI sought reimbursement for its expenses and payment for
its efforts in performing the sale. On September 22, 2006, the bankruptcy court
granted EPI’s application for $28,901.04 compensation over Borrego’s objections.
The bankruptcy court in its September 22, 2006 order surcharged the “assets
of the debtor’s bankruptcy estate” purportedly pursuant to section 506(c) of the
Bankruptcy Code and secured payment thereof by expressly impressing a
judicial lien upon those assets. However, those assets consisted of the property
already conveyed to Borrego free and clear of liens and encumbrances nearly one
month before. Borrego contends that the bankruptcy court had no jurisdiction
over the assets when it surcharged them and impressed the judicial lien thereon.
We agree.
Generally, administrative expenses such as those incurred in the sale here
are satisfied out of unencumbered assets in the bankruptcy estate. See In re
Delta Towers, Ltd., 924 F.2d 74, 76 (5th Cir. 1991). However, section 506(c) of
secures an allowed claim, . . . if the holder of such claim purchases such property, such
holder may offset such claim against the purchase price of such property.” 11 U.S.C.
§ 363(k).
3
the Bankruptcy Code provides an exception to this general rule that allows
administrative expenses to be surcharged against a creditor’s collateral: “The
trustee may recover from property securing an allowed secured claim the
reasonable, necessary costs and expenses of preserving, or disposing of, such
property to the extent of any benefit to the holder of such claim.” 11 U.S.C.
§ 506(c). This procedure, however, only applies to assets held within the
bankruptcy estate.
Although this court has never explicitly addressed the issue, we agree with
the Seventh Circuit that when property is transferred out of a bankruptcy estate
free and clear of all liens, the bankruptcy court ceases to have jurisdiction over
that property. See, e.g., In re Edwards, 962 F.2d 641, 643 (7th Cir. 1992); see
also In re Xonics, Inc., 813 F.2d 127, 131 (7th Cir. 1987). Once the assets are
sold unencumbered from the estate, they are no longer “property securing an
allowed secured claim,” are not property of the estate, and therefore may not be
surcharged under section 506(c).
Skuna acknowledges the general rule that a bankruptcy court loses
jurisdiction over assets once they are transferred from the bankruptcy estate.
Nevertheless, Skuna asserts that the bankruptcy court retained jurisdiction over
the property by virtue of the ongoing adversary proceeding adjudicating the
priority and validity of Borrego’s claims in relation to Skuna’s other creditors.
We disagree. Again, we are persuaded by the reasoning of the Seventh Circuit,
which addressed a similar situation in In re Edwards, a case in which a creditor
sought to rely on an adversary proceeding as a means of reviving the court’s
jurisdiction over property already sold from the estate:
“The adversary complaint could not invoke the jurisdiction of the
bankruptcy court. [The creditor] was seeking a determination of its
right to property that had passed outside that court’s control when
the property was sold free and clear of all liens. Since the property
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was no longer part of the bankrupt estate and since a determination
of rights to it would not affect any dispute by creditors over property
that was part of the bankruptcy estate, the bankruptcy court had no
jurisdiction to determine rights to the property.”
962 F.2d at 643. Similarly, in this case, the bankruptcy court’s jurisdiction over
the adversary proceeding could not serve to revive its jurisdiction over property
that had already been sold and conveyed from and out of the bankruptcy estate.
If the bankruptcy court wished to retain jurisdiction over the property, it
should have withheld approval of the sale pending Borrego’s payment of EPI’s
fees (or perhaps provided that any property acquired by credit bid would be
conveyed subject to lien securing applicable EPI auction fees). Instead, the court
issued an order approving the sale of the assets “Free and Clear of Liens, Claims
and Interests, with Proceeds of Sale Attaching to Liens.” Thus, the bankruptcy
court only retained jurisdiction over the proceeds of the sale, which,
unfortunately for EPI, in this instance only amounted to a reduction in debt. As
such, the bankruptcy court had no authority under section 506(c) to surcharge
the property purchased by Borrego from the bankruptcy estate or to impress a
judicial lien upon that property.
In addition to affirming the bankruptcy court’s surcharge and lien, the
district court sua sponte also purported to authorize the bankruptcy court to
enter a personal judgment against Borrego. Except in limited circumstances not
applicable in this case, this circuit follows the general rule that, in the absence
of a cross-appeal, an appellate court has no jurisdiction to modify a judgment so
as to enlarge the rights of the appellee or diminish the rights of the appellant.3
3
We have recognized a limited exception whereby an appellate court in an in forma
pauperis proceeding (in which the defendant has not been served and was not before the
district court) may modify a district court’s dismissal of a malicious or frivolous claim
without prejudice to a dismissal with prejudice, even in the absence of a cross-appeal.
5
See, e.g., Kelly v. Foti, 77 F.3d 819, 822 (5th Cir. 1996); see also Morley Constr.
Co. v. Md. Cas. Co., 57 S.Ct. 325, 327–28 (1937). The district court was
functioning as an appellate court when it reviewed the decision of the
bankruptcy court. Skuna did not cross-appeal the bankruptcy court’s judgment
in order to request that a personal judgment be entered against Borrego;
therefore, the district court had no jurisdiction to authorize that relief. Upon
remand, Skuna may very well seek a personal judgment, and the bankruptcy
court may see fit to grant that request, and we here make no holding and
express no views on such matters. Nevertheless, the district court exceeded its
power in authorizing that remedy of its own accord.
We hold that the bankruptcy court committed error when it surcharged
and impressed a lien upon property that had previously been transferred from
the bankruptcy estate free and clear of all liens. The bankruptcy court had no
jurisdiction to take such action. Consequently, the district court erred in
affirming the bankruptcy court’s order effecting the surcharge and lien.
Moreover, the district court erred in purporting to authorize the bankruptcy
court to enter a personal judgment against Borrego when Skuna did not file a
cross-appeal requesting that relief.
Therefore, we REVERSE the judgment of the district court in so far as it
affirms the bankruptcy court’s surcharging and impressing a lien upon the
property conveyed to Borrego. Furthermore, we VACATE the district court’s
judgment to the extent that it purports to authorize the bankruptcy court to
enter a personal judgment against Borrego. Finally, we REMAND the case to
the bankruptcy court for further proceedings not inconsistent with this opinion.
REVERSED in part; VACATED in part; and REMANDED
Marts v. Hines, 117 F.3d 1504, 1506 (5th Cir. 1997).
6