## Facts

- Flagstaff Foodservice Corporation and affiliates filed Chapter 11 petitions in 1981 and operated as debtors in possession.
- General Electric Credit Corporation (GECC) was Flagstaff’s prepetition lender and secured creditor, owed about $22 million at filing and secured by collateral then valued at about $42 million.
- Postpetition financing orders granted GECC liens in substantially all present and future estate property and a super-priority over administrative expenses.
- Flagstaff’s counsel negotiated an initial short-term order allowing limited use of GECC’s cash collateral to maintain operations, followed by a longer-term financing arrangement under which GECC advanced additional funds and received enhanced priority and lien protections.
- The reorganization failed, leaving GECC undersecured (owed more than the remaining collateral value).
- Debtors’ attorneys and accountants applied for interim compensation, seeking payment from assets subject to GECC’s lien.
- The bankruptcy court approved interim fees payable from GECC’s collateral, reasoning the professionals’ services benefitted GECC; the district court affirmed.

## Issues

1. Whether Chapter 11 attorneys’ and accountants’ interim fees may be paid from a secured creditor’s collateral in a failed reorganization based on an asserted benefit to the secured creditor, despite a financing order giving the creditor super-priority over administrative expenses.
2. Whether the professionals proved the type of direct, primary, and quantifiable benefit to the secured creditor required to surcharge collateral under 11 U.S.C. § 506(c).

## Decision

- The Second Circuit reversed the district court’s order affirming the bankruptcy court.
- The court held the professionals’ fees could not be paid from GECC’s collateral on this record.
- The court concluded the asserted “benefit” to GECC was not shown to be direct, primary, and quantifiable, and the surcharge effectively conflicted with GECC’s super-priority financing protections.

## Legal Principles

- Administrative expenses, including estate professionals’ fees, are presumptively payable by the debtor’s estate, not by secured creditors.
- A secured creditor’s collateral may be surcharged only for expenses that are directly connected to preserving or disposing of the collateral and that primarily benefit the secured creditor, with a measurable benefit shown by the party seeking the surcharge.
- General efforts to operate the business or pursue reorganization, even if they incidentally help a secured creditor, do not satisfy the direct-and-primary benefit standard.
- Financing orders granting a postpetition lender super-priority over administrative expenses must be enforced as written; courts may not shift professional fees onto collateral by recasting reorganization work as primarily for the lender’s benefit absent proof meeting the surcharge standard.

## Conclusion

The Second Circuit barred charging GECC’s collateral for interim professional fees because the services were aimed at the overall reorganization rather than providing a proven direct, primary, quantifiable benefit to GECC, and allowing payment from the collateral would undermine the lender’s super-priority protections and the Bankruptcy Code’s priority structure.


Gen. Elec. Credit Corp. v. Levin & Weintraub, 739 F.2d 73 (2d Cir. 1984)