TNB Financial, Inc v. James F Parker Int

                    UNITED STATES COURT OF APPEALS
                         FOR THE FIFTH CIRCUIT



                             No. 00-50301


In The Matter Of:    GRIMLAND, INC.,
                                                                Debtor



TNB FINANCIAL, INC.,
                                                         Appellant,

     v.

JAMES F. PARKER INTERESTS,
                                                          Appellee.



                Appeal from the United States District
               Court for the Western District of Texas

                            March 12, 2001

Before:    JOLLY and DAVIS, Circuit Judges, and RESTANI, Judge.*

RESTANI, Judge:

     This is an appeal of a district court order affirming a

bankruptcy court order of surcharge.    The surcharged lienholder

appeals.    We hold that the bankruptcy court erred in not granting

the lienholder’s objection to the surcharge.    Any technical

failure to meet the deadline for objections should not have been

determinative under the unique facts of this case.

                     FACTS AND PRIOR PROCEEDINGS



     *
          Judge of the United States Court of International
Trade, sitting by designation.
     Grimland, Inc. (“Grimland”) operated an automotive

transmission and engine rebuilding business in Austin, Texas,

before it filed a petition for bankruptcy under Chapter 7 in

January of 1999.   [R2-50-247.]   Grimland had stored over a

hundred barrels of waste oil on its premises, which it leased

from James F. Parker Interests (“Parker”).    [Id.]   The trustee of

Grimland’s estate moved to abandon all of Grimland’s personal

property, including the waste oil.    [Id.]   Parker objected to the

abandonment, and as part of an agreed order settling the

abandonment dispute, Parker was granted an administrative expense

claim of up to $45,000 to cover the costs of removing the waste

oil and as a reasonable rental for storing the estate’s personal

property on its premises pending liquidation. [Id. at 247-248.]

     During these proceedings, the trustee auctioned off all the

personal property of Grimland.    [Id. at 248.]   Appellant TNB

Financial, Inc. (“TNB”), which held a perfected purchase money

security interest in all of Grimland’s personal property securing

a debt of approximately $20,000, did not object to the sale based

on assurances from the trustee that its position would be

protected.   The sale generated proceeds of approximately $70,000,

which left the estate with funds of about $75,000 to distribute

to creditors.   [R2-71-313 to 314.]   Thus, after the sale TNB was




                                  2
substantially oversecured and, except for the surcharge at issue,

would have been repaid in full.1

     As of July of 1999, the actual costs to dispose of the waste

oil were more than $65,000, and the rental for storage of

Grimland’s personal property pending liquidation was almost

$24,000.   [R2-50-249.]   The total costs of the waste oil

remediation and the rental of the premises were thus almost twice

what Parker had previously been allowed as an administrative

expense.   Parker presumably realized by May of 1999 that its

expenses, for rent and for environmental remediation, would

greatly exceed its administrative expense claim.       On May 21,

1999, without specifying the amount of the costs, Parker moved to

have the collateral securing TNB’s lien surcharged for the

remediation and rental costs Parker had incurred pursuant to §

506(c) of the Bankruptcy Code.     [R2-36.]    In accordance with

Local Bankruptcy Rule 9014 of the Western District of Texas,

Parker’s motion notified all the creditors who had been served

with the motion that they had 20 days in which to request a

hearing to object to the motion.       [Id.]   On May 28, 1999 Parker

filed a supplemental surcharge motion to cover additional rental

and remediation expenses and estimated therein a surcharge

“exceed[ing] $70,000.”    [R2-38-209.]


     1
       Travis County, Texas also asserted a security interest in
Grimland’s collateral in the form of an ad valorem tax lien. It
does not appear as a party in this appeal.

                                   3
     TNB was served with Parker’s surcharge motions.         [R2-36-175;

R2-38-223.]     It did not object to Parker’s first motion, however,

within the 20-day window provided by Local Rule 9014.         [R2-78-315

to 316.]   Thus, on June 21, 1999, more than 20 days after the

filing of Parker’s first motion and still with no objection by

TNB, the bankruptcy court granted Parker’s first open-ended

surcharge motion.    [R2-42.]   On June 22, 1999, the very next day,

TNB filed an objection to Parker’s first motion.         [R2-43.]    The

clerk of the bankruptcy court treated the objection as a response

to Parker’s second, supplemental surcharge motion.         A hearing on

the second motion was set for July 20, 1999.2        At the hearing,

the bankruptcy court stated that surcharging TNB’s collateral for

the rental and remediation costs was clearly contrary to Fifth

Circuit precedent.    [R2-78-317.]       The bankruptcy court also

stated, however, that TNB had had ample time to object to

Parker’s first surcharge motion and had not done so.         [Id. at 315

to 316.]   Accordingly, the bankruptcy court granted the second

surcharge motion, which, when combined with the first surcharge

motion, had the effect of completely stripping TNB of its lien.

[Id. at 321.]

     TNB then filed, on July 26, 1999, motions for rehearing on

both of Parker’s surcharge motions.         [R2-47-242; R2-46-245.]    The

     2
        It is unclear when TNB’s counsel, who was hired on June
9, 1999, first learned that the first surcharge order had been
entered. In any case, TNB does not dispute that it neglected to
meet the required deadline and seeks relief under other grounds.

                                     4
bankruptcy court held a hearing on September 7, 1999, at which it

refused to reconsider the two orders it had entered in response

to Parker’s motions.    [R2-79.]    It reasoned that as it had done

nothing more than enter an order in response to an unopposed

motion, and as it was the responsibility of creditors to protect

their own interests, there were no grounds under Fed. R. Civ. P.

60(b) to reconsider the first surcharge motion.     [Id. at 341 to

342.]    With regard to the second motion, the bankruptcy court

concluded that its disposition of the first surcharge motion was

dispositive.    [Id. at 342.]

     TNB appealed the bankruptcy court’s refusal to reconsider

its surcharge order to the district court.     [R1-2.]   The district

court affirmed both the entry of the first surcharge order and

the bankruptcy court’s refusal to reconsider its actions.     [R1-7-

112 to 114.]

                                DISCUSSION3

I.   Equitable Mootness

     Parker argues that this appeal is equitably moot.     Unlike

constitutional mootness, equitable mootness in the context of a

bankruptcy appeal is not rooted in the requirements of Article

III of the Constitution.    Rather, it is a doctrine that courts

have developed in response to the particular problems presented


     3
        The court has jurisdiction pursuant to 28 U.S.C. § 1291
(1994), as this is an appeal of a final decision of a district
court.

                                     5
by the consummation of plans of reorganization under Chapter 11.4

An appeal is equitably moot when a plan of reorganization has

been so substantially consummated that a court can order no

effective relief even when there may still be a live dispute

between parties to the bankruptcy proceeding.    The doctrine rests

on the need for finality, and the need for third parties to rely

on that finality, in bankruptcy proceedings.     See generally

Nationwide Mut. Ins. Co. v. Berryman Prods., Inc. (In re Berryman

Prods., Inc.), 159 F.3d 941 (5th Cir. 1998); Manges v. Seattle-

First Nat’l Bank (In re Manges), 29 F.3d 1034 (5th Cir. 1994),

cert. denied, 513 U.S. 1152 (1995).

     This Circuit has set forth a three-factor test for when a

bankruptcy case is equitably moot.    These factors are, (1)

whether the complaining party has failed to obtain a stay, (2)

whether the plan (here, the liquidation) has been substantially

consummated, and (3) whether the relief requested would affect

the rights of parties not before the court or the success of the

plan.    Berryman, 159 F.3d at 944.   Neither party disputes that

TNB did not seek and has not won a stay of the distribution in

this case, or that all of Grimland’s assets have been sold and

all the proceeds distributed.   The parties disagree as to the



     4
        Equitable mootness normally arises where a Chapter 11
reorganization plan is at issue. Because we find the doctrine
inapplicable on other grounds, we need not resolve whether or not
the doctrine may be applied in a liquidation under Chapter 7.

                                  6
effect of the relief TNB seeks on persons not currently before

this court.

     TNB argues that third parties will not be disturbed if the

surcharge order is reversed.   It argues that reversal would

require simply that Parker repay TNB the value of its secured

claim.   Parker responds that reversing the surcharge order would

require it to demand from the contractors responsible for

cleaning up the Grimland premises the monies it paid for their

services.   Parker further contends that reversing the surcharge

order would require the other administrative claimants in this

case to disgorge some of their recoveries.

     First, reversing the surcharge order would have no effect on

payments to the various parties who cleaned up the waste oil on

the Grimland premises.   Parker’s responsibility to remedy the

property is independent of the administration of the bankruptcy

proceedings, see 42 U.S.C. § 9607(a) (1994); the bankruptcy

proceedings simply provided a mechanism for Parker to reach

agreement with Grimland over its share of the costs.

     Second, assuming arguendo that the administrative claimants

are the types of third parties the equitable mootness doctrine

was meant to protect, reversing the surcharge order would have no

direct effect on the other administrative claimants.5   The other

     5
        Whether Parker’s claim is truly an administrative claim
or arises at least in part from pre-bankruptcy liabilities of
Grimland is not resolved here. See Texas v. Lowe (In re H.L.S.
                                                   (continued...)

                                 7
administrative claimants in this case would be affected if the

surcharge under 11 U.S.C. § 506(c) (1994) acted to strip TNB of

its priority so as to benefit all the parties junior to it.

Though TNB may have been stripped of its lien in effect, it was

not formally stripped of it.    Rather, the § 506(c) surcharge

simply required TNB to pay Parker for certain expenses of Parker

that supposedly benefitted TNB.        Reversing the surcharge order

would simply require Parker to repay TNB.        As the surcharge order

did not formally reorder the priorities of TNB, Parker, and the

other administrative claimants, this appeal presents a simple

dispute between TNB and Parker.6       Accordingly, the appeal is not

equitably moot.

II.   The Surcharge Order

      TNB argues on appeal that the bankruptcy court, and the

district court on appeal, should have granted its motion to

reconsider under Fed. R. Civ. P. 60(b).7       TNB argues that in

      5
      (...continued)
Energy Co., Inc.), 151 F.3d 434, 439 (5th Cir. 1998) (finding
expenses for clean-up of post-petition environmental liabilities
to be administrative expenses; not reaching the issue of whether
post-petition expenses for remediation of pre-petition
environmental liabilities are administrative expenses).
      6
        Of course, the administrative claimants are not strangers
to the bankruptcy case, and as parties intimately connected to
the case administration, their expectations may not be settled,
unlike purchasers at sales of estates. We make no determinations
as to what further actions the bankruptcy court may wish to take
in this matter with regard to administrative claimants.
      7
          TNB also argues that Hartford Underwriters Ins. Co. v.
                                                     (continued...)

                                   8
granting Parker’s motions to surcharge, the bankruptcy court made

a mistake, which is a basis for relief under Rule 60(b).8

     The bankruptcy court opined, at the July 20 hearing, that

the surcharge order was clearly contrary to Fifth Circuit

precedent.   Parker has not rebutted this point.   Indeed, 11

U.S.C. § 506(c) provides that, “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.”   We have interpreted this language to require a

quantifiable and direct benefit to the secured creditor; indirect

or speculative benefits may not be surcharged, nor may expenses

that benefit the debtor or other creditors.   See French Mkt.

Homestead, FSA v. P.C., Ltd. (In re P.C., Ltd.), 929 F.2d 203,

205 (5th Cir. 1991); New Orleans Pub. Serv., Inc. v. First Fed.

Sav. & Loan Ass’n (In re Delta Towers Ltd.), 924 F.2d 74, 76-77


     7
      (...continued)
Union Planters Bank, N.A., 120 S. Ct. 1942 (2000), establishes
that no one but the trustee has statutory standing to seek a
surcharge under 11 U.S.C. § 506(c). TNB did not raise this issue
before the bankruptcy or district courts, as Hartford was decided
during the pendency of the appeal. Because this issue was not
raised below, it is not clear whether the trustee authorized or
ratified Parker’s action in a way that might overcome the
Hartford problem. See id. at 1951 n.5. In view of our denial of
relief to Parker, no purpose would be served by remand to
consider this issue.
     8
        TNB does not argue that its failure to request a hearing
on Parker’s first motion for surcharge constitutes excusable
neglect.

                                 9
(5th Cir.), reh’g denied, 1991 U.S. App. LEXIS 4829 (1991).     The

default rule in bankruptcy is, accordingly, that administrative

expenses are paid out of the estate and not by the secured

creditors of the debtor.     See P.C., Ltd., 929 F.2d at 205; Delta

Towers, 924 F.2d at 76-77.    The remediation of the waste oil did

not benefit TNB, as the waste oil was stored in drums on the

Grimland premises and did not, apparently, contaminate any of

Grimland’s personal property.    Nor did the storage of the

personal property on Grimland’s premises benefit TNB.    As a

secured creditor, TNB was entitled to repossess and auction off

its collateral.   That the auction was conducted by the trustee

afforded TNB no real benefit beyond what it could have recovered

on its own.   Thus, it seems clear that entry of this surcharge

order was contrary to established law.

     Circuit precedent does allow the use of Rule 60(b), made

applicable to bankruptcy proceedings by Fed. R. Bankr. P. 9024,

to correct judicial error.    When a judicial decision contains an

obvious error of law, apparent on the record, then the error may

be corrected as a mistake pursuant to Rule 60(b).    The error of

law must involve a fundamental misconception of the law or a

conflict with a clear statutory mandate.    See Hill v. McDermott,

827 F.2d 1040, 1043 (5th Cir. 1987), cert. denied, 484 U.S. 1075

(1988); Chick Kam Choo v. Exxon Corp., 699 F.2d 693, 695 (5th




                                  10
Cir.), cert. denied sub nom. Chick Kam Choo v. Esso Oil Co., 464

U.S. 826 (1983).

     Granting or denying a motion under Rule 60(b) is within the

discretion of the district court, and we review that decision

only for an abuse of discretion.       See Halicki v. La. Casino

Cruises, Inc., 151 F.3d 465, 470 (5th Cir. 1998), cert. denied,

526 U.S. 1005 (1999).   Parker argues that the bankruptcy court,

and the district court in affirming the bankruptcy court, did not

in fact make any mistakes in this case.      Rather, it argues that

the bankruptcy court simply entered an order in response to an

uncontested motion.   Parker notes, and both the bankruptcy court

and the district court agreed, that Local Rule 9014 of the

Western District of Texas puts the onus on TNB to respond and

contest the motion.

     In this case, however, the local rule is not dispositive and

the bankruptcy court should have ruled on the merits of TNB’s

objection.   First, TNB was entitled under the law to maintain its

entire lien position.   Second, although TNB should have

recognized that the first surcharge motion could put its position

in jeopardy, the motion contained no dollar amounts which would

clearly alert TNB to the issue.    The extent of the lien stripping

was unclear and the finalization of the surcharge amount remained

an open issue which was not resolved until the hearing on the

second surcharge motion.   Third, appellant filed a written



                                  11
objection before the hearing on the second surcharge motion and

participated in that hearing, making its position clear to the

bankruptcy court.   Only after that hearing did the court enter an

order setting the amount of the surcharge and effectively

depriving appellant of its lien position.

     Negative noticing in bankruptcy serves an important

function.   It allows the court to issue orders necessary to the

prompt disposition of property and other matters essential to a

debtor’s efficient reorganization or maximization of creditors’

recoveries.   Under Fed. R. Bankr. P. 9014, contested matter

motions must provide for notice and an opportunity for the

affected party to be heard.   The bankruptcy court relies on the

notice to bring forth interested parties.    See Oppenheim, Appel,

Dixon & Co. v. Bullock (In re Robintech, Inc.), 863 F.2d 393, 398

(5th Cir.), cert. denied, 493 U.S. 811 (1989).   Nonetheless,

there was no particular urgency to the surcharge issue and any

belatedness of the objection to the open-ended request for

surcharge would not have delayed the case.   The second hearing

was necessary to finalize the matter, and, as indicated, TNB

objected before that hearing and appeared at that hearing to make

its case.

     Given the complete loss of the value of plaintiff’s lien in

contravention of the bankruptcy code, the bankruptcy court should

have considered the totality of the circumstances, and not just



                                12
the purported technical delay in responding to the first motion.

On the one hand, the bankruptcy court is a court of equity and it

must undertake an analysis of equitable considerations.   On the

other hand, rarely does a court abuse its discretion in holding

parties to strict time limits found in local rules.    Cf. FDIC v.

Yancey Camp Dev., 889 F.2d 647, 649 (5th Cir. 1989) (setting

aside default judgment issued after party failed to answer motion

timely because “the extraordinary facts of [that] case

command[ed] such a result”).   This, however, is such a rare case.

     In view of the representations made to appellant by the

trustee as to the security of its position, Parker’s choice of

motion language, the lack of time pressure, the lack of equitable

factors in Parker’s favor and the extreme deprivation of TNB’s

legal rights, the bankruptcy court abused its discretion in not

hearing appellant’s claim on the merits at the hearing on the

second motion to finalize the surcharge.   It also abused its

discretion in failing to reconsider its denial of appellant’s

objection to the surcharge.    See Seven Elves, Inc. v. Eskenazi,

635 F.2d 396, 403 (5th Cir. Unit A Jan. 1981) (despite strong

interest in finality, Rule 60(b) construed liberally so as to

hear case on merits).

     Accordingly, the order of the district court is REVERSED and

this matter is REMANDED for proceedings consistent herewith.




                                 13