## Facts

- Domistyle, Inc., a home-goods manufacturer, owned a candle-factory property in Laredo, Texas, subject to three mortgages.
- A recent appraisal valued the property at about $6 million, while Southwest Securities, FSB (Southwest) held the primary lien of roughly $3.69 million.
- After Domistyle was placed in receivership, receiver Milo H. Segner, Jr. believed there was enough equity to reorganize and commenced a Chapter 11 case.
- Segner hired a commercial real-estate firm to market the property, but offers did not reach a level that would pay Southwest in full.
- The case moved to liquidation. A liquidation plan was confirmed that (1) gave a trust until May 1, 2014, to sell the property for enough to cover Southwest’s mortgage, (2) required the trustee to keep reasonable insurance and treat the property as a reasonably prudent owner would, and (3) authorized a surcharge against the secured creditor’s collateral for actual amounts paid to third parties that directly related to preserving or increasing the value of the property, listing examples such as security, repairs, and electricity.
- While marketing the property, Segner paid for security services, repairs (including roof and electrical work), mowing and landscaping, utilities, and insurance.
- After May 1, Segner told Southwest he would stop paying ongoing expenses. Southwest objected and warned that stopping those payments “would virtually destroy any value remaining” in the property.
- Segner moved to abandon the property and sought to surcharge Southwest’s collateral under 11 U.S.C. § 506(c) for the maintenance and preservation costs incurred during the marketing period.
- A real-estate broker testified that the sums spent preserved at least an equivalent amount of value in the property.
- Southwest agreed to pay only expenses incurred after Segner announced the intent to abandon, but the bankruptcy court approved a surcharge that included expenses incurred before that announcement as well.
- Southwest appealed, and the Fifth Circuit accepted a direct appeal.

## Issues

1. Under 11 U.S.C. § 506(c), may a trustee recover from a secured creditor’s collateral the reasonable and necessary costs of preserving or disposing of the collateral when the expenditures also served the estate’s attempt to realize equity (i.e., without an exclusive intent to benefit the secured creditor)?
2. Did the trustee prove the surcharged expenses were reasonable, necessary, and provided a sufficient benefit to the secured creditor to justify a § 506(c) surcharge, including expenses incurred before the trustee announced abandonment?

## Decision

- The Fifth Circuit held that § 506(c) does not require the trustee to show a specific and exclusive intent to benefit the secured creditor; the focus is on whether the secured creditor in fact benefited from the expenditures.
- The court upheld the bankruptcy court’s finding that the expenses for security, repairs, mowing/landscaping, utilities, and insurance were reasonable and necessary to prevent deterioration and preserve sale value of the industrial property.
- The court concluded the trustee showed a sufficient benefit to Southwest, relying on testimony that the expenditures preserved value and on Southwest’s own statements that stopping the spending would severely reduce the property’s value.
- The Fifth Circuit affirmed the bankruptcy court’s order surcharging Southwest’s collateral under § 506(c), including amounts incurred before Segner stated he would stop paying expenses.

## Legal Principles

- 11 U.S.C. § 506(c) provides a limited exception to the general rule that administrative expenses are paid from the estate, allowing a trustee to recover from secured collateral the reasonable and necessary costs of preserving or disposing of that collateral to the extent the secured creditor benefits.
- To obtain a § 506(c) surcharge, the trustee bears the burden to show the expenses were (1) reasonable, (2) necessary, and (3) incurred with a sufficient causal link to a benefit received by the secured creditor.
- Section 506(c) turns on actual benefit to the secured creditor, not the trustee’s subjective intent; expenditures are not disqualified merely because they were also consistent with the estate’s efforts to obtain value for unsecured creditors.
- On appeal in bankruptcy matters, legal conclusions are reviewed de novo and factual findings (including benefit, necessity, and reasonableness determinations) are reviewed for clear error.

## Conclusion

In In Re Domistyle, Inc., the Fifth Circuit affirmed a bankruptcy court order requiring a secured lender to bear, through a § 506(c) surcharge, the reasonable and necessary costs the liquidating trustee paid to keep the lender’s collateral from losing value while the trustee attempted to sell it. The court rejected the argument that the trustee had to act with an exclusive purpose to benefit the secured creditor and held that the record supported a finding of real, measurable benefit to the lender from the property’s upkeep, even for expenses incurred before the trustee announced abandonment.


In Re Domistyle, Inc., 811 F.3d 691 (2015)