## Facts

- Lunan Family Restaurants Limited Partnership (Lunan) borrowed about $13.5 million from Bank of America Illinois (the Bank) to buy 31 restaurants that Lunan intended to convert into Shoney’s franchise restaurants.
- Some restaurant locations were owned in fee simple; others were leased from Marriott.
- The Bank’s loan was secured by mortgages on the fee-simple properties, leasehold mortgages on the leased properties, and security interests in Lunan’s equipment and accounts receivable.
- The Shoney’s restaurants were not successful, and Lunan defaulted on the Bank loan and on many leases.
- The Bank chose not to foreclose. Instead, it wanted the restaurants sold as going concerns so sale proceeds could be applied to Lunan’s secured debt.
- The Bank met with Lunan concerning a Chapter 11 filing, and Lunan filed Chapter 11 and continued operating as debtor-in-possession.
- Lunan proposed reorganization plans, but the Bank rejected any plan involving a long-term repayment of the debt.
- During the Chapter 11 case, Lunan sold 19 restaurants as going concerns, stopped operating three restaurants, and continued actively marketing all but one of the remaining restaurants for sale.
- The Bank supported Lunan’s continued operations and liquidation efforts and repeatedly permitted Lunan to use the Bank’s cash collateral, but the Bank did not expressly agree to pay specific categories of expenses from its collateral.
- The restaurant sales generated about $11 million, and the Bank received over $8.2 million from those proceeds.
- Lunan incurred postpetition costs including utilities, wage-related expenses (payroll, payroll taxes, health-insurance benefits), accounting fees, and debtor-in-possession expenses (including office expenses and costs related to keeping open one restaurant that Lunan was not trying to sell).
- Lunan moved to surcharge the Bank’s collateral under 11 U.S.C. § 506(c) to recover those costs from the Bank’s distribution.

## Issues

1. Whether Lunan, as debtor-in-possession, proved that the challenged postpetition expenses were reasonable and necessary costs of preserving or disposing of the Bank’s collateral under 11 U.S.C. § 506(c).
2. Whether Lunan proved that the expenses provided a direct and primary (not merely incidental) benefit to the Bank, and the amount of that benefit, as required by § 506(c)’s “to the extent of any benefit” limitation.
3. Whether general debtor-in-possession operating and administrative expenses, including office overhead and costs associated with a location not being marketed for sale, could be shifted to the Bank under § 506(c) absent specific proof tying them to preservation or disposition of collateral.

## Decision

- The court granted the § 506(c) motion in part and denied it in part.
- The court held that § 506(c) permits recovery from a secured creditor’s collateral only for expense categories shown, with specific proof, to be reasonable, necessary, and directly beneficial to the secured creditor in preserving or disposing of the collateral.
- The court allowed a surcharge for those costs the evidence connected to keeping the restaurant assets operating and marketable to accomplish going-concern sales that produced the Bank’s substantial recovery.
- The court denied a surcharge for categories of expenses that were not shown to have a sufficiently direct causal link to preserving or disposing of the Bank’s collateral, including items functioning as general Chapter 11 overhead or benefiting the estate more broadly than the Bank.

## Legal Principles

- Under 11 U.S.C. § 506(c), a trustee or debtor-in-possession may recover from property securing an allowed secured claim only the reasonable and necessary costs and expenses of preserving or disposing of that property, and only to the extent those costs benefited the secured creditor.
- Section 506(c) is construed narrowly, and the party seeking the surcharge bears the burden of proof by a preponderance of the evidence.
- The “benefit” requirement demands a direct, primary, and quantifiable benefit to the secured creditor; an indirect or incidental benefit is not enough.
- A secured creditor’s cooperation—such as permitting use of cash collateral and supporting a going-concern sale strategy—may support a finding that particular expenditures benefited the creditor, but it does not substitute for the required proof for each expense category.
- Courts evaluate surcharge requests category by category; § 506(c) does not authorize shifting all Chapter 11 operating costs or general administrative expenses to a secured creditor without evidence that the specific costs preserved or disposed of the collateral for the creditor’s benefit.

## Conclusion

In re Lunan Family Restaurants Limited Partnership holds that a debtor-in-possession may surcharge a secured lender’s collateral under § 506(c) only for those postpetition expenses proven reasonable and necessary to preserve or dispose of the lender’s collateral and shown to confer a direct, primary, measurable benefit on the lender; the court therefore allowed a surcharge in part for costs tied to going-concern sales that produced the Bank’s recovery while denying recovery for expenses treated as general estate overhead or otherwise not specifically linked to preserving or selling the collateral.


In re Lunan Family Restaurants Limited Partnership, 192 B.R. 173 (1996)