#S-6         signed 6-1-04

IN THE UNITED STATES BANKRUPTCY COURT

FOR THE DISTRICT OF KANSAS

ORDER DETERMINING THAT FORMER DEBTOR-IN-POSSESSION

HAS STANDING TO SEEK TO SURCHARGE COLLATERAL

UNDER 11 U.S.C.A. § 506(C)

This matter was before the Court on December 19, 2003, on the debtor's motion to

surcharge certain administrative expenses against sale proceeds pursuant to 11 U.S.C.A. §

506(c). Creditors Bank of Belton, Hibernia Capital Corporation, and E.S. Bankest, LC,

through a court-appointed receiver, objected to the motion. At the hearing, the debtor

appeared by counsel Carl R. Clark of Lentz & Clark, P.A. The Bank of Belton appeared by

counsel Eric Johnson of Spencer Fane Britt & Browne LLP. Hibernia appeared by counsel

Gene A. DeLeve of Berman, DeLeve, Kuchan & Chapman, L.C. The receiver for creditor

E.S. Bankest, LC, appeared by counsel Gregory Garno. Case trustee Eric C. Rajala

appeared pro se. During the hearing, the Court announced its decision that the debtor still

had standing to pursue its motion despite the conversion of this case from Chapter 11 to

Chapter 7. The Court is issuing this order now to reduce that ruling to writing and to

provide a more detailed explanation of the Court's reasoning.

FACTS

Conveyor Technology Group, Inc., filed a Chapter 11 bankruptcy case in August

2002. In November 2002, the Court approved the debtor's motion to hire Equity Partners,

Inc. (hereinafter EPI), as a broker to help sell the debtor's assets, or to help with other

reorganization efforts. In January 2003, the debtor applied for permission to sell

substantially all its assets at auction, free and clear of liens and encumbrances, pursuant to §

363 of the Bankruptcy Code, with each lien to attach to the proceeds of the sale of the

assets subject to the lien. The application stated that the debtor would place all sales

proceeds in an account pending further order of the Court, but also said that EPI would be

paid for its services immediately on the conclusion of any sales.

EPI marketed the debtor's assets for sale at auction in March 2003. The assets were

divided into eight groups for the auction, but only five of the groups drew bids that were

accepted. Bank of Belton bought the debtor's real estate (usually referred to as “Parcel A”

in the pleadings) with a credit bid of $625,000. Three groups of office, shop fabrication,

and field installation equipment (usually referred to as “Parcels B, C, and D”) were sold for

$240,000. A group of proprietary products and patents (usually referred to as “Parcel E”)

was sold for $500,000. The groups that were not sold were: (1) one (“Parcel F”) of

patents and other items related to the “Rabbit System,” (2) another (“Parcel G”) of patents

and other items related to the “Tow Bar Shock Absorber,” and (3) a final group (“Parcel H”)

of miscellaneous inventory not included in any of the other groups. The Court has not been

informed whether these last three groups were later sold or otherwise disposed of.

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Two days after the auction, without formally moving for approval of the sales, the

debtor submitted orders approving the sales at the prices mentioned, and Judge Flannagan

(who has since retired) signed them. Each order indicated that the sale it covered would

close some time after entry of the order. One order approved the sale of the three

equipment groups, and a second order approved the sale of the group of proprietary

products and patents for $500,000. A third order approved the sale of the real estate to a

third party if it met certain requirements by the day before the order was signed (which it

did not do), but otherwise to Bank of Belton for its credit bid. This order provided that the

bank would credit its secured claim against the real estate for the amount of its bid minus

real estate taxes to the date of closing, which it was to pay. The first two orders also

authorized the debtor to pay fees to EPI from the sale proceeds.

On August 19, 2003, counsel filed the debtor's motion, pursuant to § 506(c), to

surcharge certain administrative expenses against the proceeds of the March auctions, and

amended it the next day to add another expense. The amended motion seeks $74,193.04 in

employee wages, $2,000 to reimburse a woman who paid for insurance on the debtor's

property pending the sales, $22,849.55 in fees and expenses for the debtor's counsel, and

$3,510.75 in fees and expenses for the Unsecured Creditors Committee's counsel, a total

of $102,553.34. The case was converted to Chapter 7 on August 22. As indicated,

Hibernia, the Bank of Belton, and the receiver for E.S. Bankest, LC, all objected to the

surcharge motion. Among other things, they raised the preliminary question of the debtor's

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standing to seek to surcharge their collateral in light of the termination of the debtor's

status as a debtor-in-possession on conversion of the case.

Disputes also arose about the debtor's plans to pay EPI's fees, and the Court held a

hearing on the surcharge motion and the EPI disputes on November 19. The Court gave the

parties time to submit any additional authorities they might wish to on the question of the

debtor's standing to seek to surcharge the secured creditors' collateral under § 506(c).

Only the debtor and Hibernia submitted further support for their positions on that question.

DISCUSSION AND CONCLUSIONS

Section 506(c) of the Bankruptcy Code 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.” In Hartford Underwriters Inc. Co. v. Union Planters Bank, N.A.,1 the United

States Supreme Court considered whether an insurance company that did not know its

customer was a Chapter 11 debtor and had provided the debtor with workers' compensation

coverage despite the debtor's failure to make all the required payments could apply to

surcharge collateral under this provision after the bankruptcy case was converted to Chapter

7. The Court ruled that the insurance company could not invoke § 506(c).2 Hibernia and

the Bank of Belton contend the Hartford decision bars the debtor's attempt to invoke the

provision here, while the debtor argues that the case is factually distinguishable because the

1530 U.S. 1 (2000).

2530 U.S. at 4-14.

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motion there was filed after the case was converted while the debtor filed the present

motion before conversion.

This Court agrees with the debtor that Hartford is distinguishable from this case but

for a somewhat different reason. The insurance company in Hartford not only was not the

Chapter 7 trustee but had also never been the Chapter 11 debtor-in-possession. The

Supreme Court pointed out in a footnote that § 1107 authorizes debtors-in-possession to

use § 506(c) by giving them the rights and powers of a trustee.3 In this case, the debtor

clearly was authorized to invoke § 506(c) at the time expenses connected with the March

2003 sales were being incurred. The parties have not cited, and the Court has not found,

any case concerning a debtor's attempt as the former debtor-in-possession to surcharge

collateral.

The Court is convinced that the debtor has standing to bring the surcharge motion in

this case. The expenses were all incurred and the collateral sought to be surcharged was

sold while the debtor was the debtor-in-possession. Indeed, given the five months that

passed from the time the auction took place until the case was converted, the debtor's

motion might, if filed quickly, have been resolved before the conversion. While § 348(e)

provides that conversion “terminates the service of any trustee” serving in the case before

conversion, nothing in the section suggests that conversion automatically undoes anything

that the debtor did while it was exercising its debtor-in-possession powers as trustee. Of

3530 U.S. at 6, n. 3.

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course, this provision would preclude the debtor from seeking to surcharge collateral for

activities performed after conversion, but that is not what is happening here. Absent

controlling authority to the contrary, the Court believes it is fair to allow the debtor to

pursue its surcharge motion now.

The parties should recognize that the Court does not mean to suggest that it has

already decided that the claimed expenses are recoverable under § 506(c), only that it has

decided the debtor still has standing to pursue the motion. The creditors' objections to the

debtor's standing to bring the § 506(c) motion are hereby denied.

IT IS SO ORDERED.

Dated at Topeka, Kansas, this _____ day of June, 2004.

__________________________________

DALE L. SOMERS

BANKRUPTCY JUDGE

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CERTIFICATE OF SERVICE

The undersigned hereby certifies that true and correct copies of the above ORDER

DETERMINING THAT FORMER DEBTOR-IN-POSSESSION HAS STANDING TO SEEK SURCHARGE 
COLLATERAL UNDER 11 U.S.C.A. § 506(C) were mailed via regular U.S. mail, postage prepaid, on the _____ day 
of June, 2004, to the following:

Gene A. DeLeve, Esq.

Berman, DeLeve, Kuchan & Chapman, L.C.

2230 Commerce Tower

911 Main St.

Kansas City, MO 64105

Attorney for Hibernia Capital Corporation

Eric Johnson

Spencer Fane Britt & Browne LLP

1000 Walnut Street, Ste. 1400

Kansas City, MO 64106

Attorney for Bank of Belton

Carl R. Clark

Lentz & Clark, P.A.

P. O. Box 12167

Overland Park, KS 66282-2167

Attorney for Debtor

Eric C. Rajala

11900 College Blvd., Ste. 341

Overland Park, KS 66210-3939

Chapter 7 Trustee

Michelle M. Masoner

Bryan Cave, LLP

3500 One Kansas City Place

1200 Main Street

Kansas City, MO 64105

Attorney for Equity Partners, Inc.

Gregory M. Garno

Genovese, Joblove & Batista, P.A.

Bank of America Tower, 36th Floor

100 Southeast Second Street

Miami, FL 33131

Attorney for Receiver for E.S. Bankest, LC

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__________________________________________________

Vicki D. Jacobsen

Judicial Assistant

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