Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—3^d Cir.: Law firm not entitled to fees under bankruptcy law, (Sep 3, 2013)

By Peter Reap, J.D., LL.M.

The Margolis Law Firm LLC was not entitled to an award of attorney fees and expenses from the proceeds of the sale of a franchised motor vehicle dealership and the underlying property pursuant to section 506(c) of the Bankruptcy Code because Margolis failed to demonstrate that the fees and expenses were “reasonable, necessary costs and expenses of preserving, or disposing of, [the collateral],” or that its expenditures provided a direct benefit to the secured creditor, BMW Financial Services, NA, LLC, the U.S. Court of Appeals in Philadelphia has decided (In re: Towne, Inc., August 29, 2013, Vanaskie, T.).

Background. Towne, Inc. owned a franchised BMW motor vehicle dealership in Oyster Bay, New York, and DMD Towne, LLC owned the real property upon which Towne’s dealership was located. Towne and DMD (collectively, the “Debtors”) each filed voluntary petitions for bankruptcy under Chapter 11 of the Bankruptcy Code. The Bankruptcy Court consolidated the cases and appointed Margolis as special counsel.

BMW FS held a perfected first priority security interest in the franchise, and also held a perfected first priority lien on the property. Together, the Debtors owed BMW FS $9,006,951.

On April 1, 2009, Margolis notified the Bankruptcy Court that it had received an offer to purchase the franchise and property (collectively, “the Collateral”) for six million dollars. Because the offer was for less money than the amount of BMW FS’s lien, however, BMW FS refused to consent to the sale unless the Debtors signed certain releases. When the Debtors refused to sign the releases, BMW FS, in turn, refused to consent to the sale, and the offer was withdrawn.

Several months passed without a successful sale of the Collateral. Thus, the Bankruptcy Court converted the case to Chapter 7 and appointed a trustee. Margolis then withdrew from the case. The Chapter 7 trustee executed releases on the Debtors’ behalf, and the Collateral was subsequently sold to affiliates of Len Stoler, Inc. (LSI) for $5,525,000.00.

The Bankruptcy Court later approved $84,585 in fees and $3,626 in expenses for Margolis’ services as special counsel. Margolis filed a motion arguing it was entitled under 11 U.S.C. § 506(c) to collect these fees out of the proceeds of the sale of the Collateral. The Bankruptcy Court denied the motion, finding that Margolis did not meet the requirements of § 506(c). The district court affirmed, and Margolis filed this appeal.

Analysis. In general, attorney fees and expenses were not chargeable against secured collateral, the court noted. Instead, they ordinarily could be charged only against the surplus of the debtor’s estate. However, section 506(c) of the Bankruptcy Code provided a limited exception to this rule, which allowed a claimant to “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.…”

Section 506(c) required a direct benefit to the secured creditors, according to the court. Applying this standard, Margolis failed to meet the requirements of section 506(c) because it could not demonstrate either that its expenditures were necessary to preserve or dispose of the Collateral, or that its efforts directly benefitted BMW FS, the court held.

Although Margolis pointed to several services it undertook, including “exposing the Franchise and the Debtors’ single purpose Facilities for sale,” “soliciting prospective bids” for the Collateral, and “consummating purchase agreements,” these efforts did not result in an actual sale. Instead, BMW FS, along with the Chapter 7 trustee, sold the Collateral to LSI after the case had been converted from Chapter 11 to Chapter 7 and Margolis had already withdrawn. Thus, Margolis’ efforts were not necessary to the preservation or disposition of the Collateral.

Margolis also failed to demonstrate that it provided a direct benefit to BMW FS, the court ruled. The Bankruptcy Court concluded that “the primary benefit of [Margolis’s] legal services was to the Debtors … rather than to preservation of the collateral of BMW FS.” In making this finding, the Bankruptcy Court observed that Margolis sought reimbursement for numerous services that were actually contrary to BMW FS’s interests, including efforts to reduce the value of BMW FS’s lien and conducting research that led to an administrative proceeding against BMW FS in state court. These findings were amply supported in the record and were not clearly erroneous, according to the appellate court.

Margolis’s alternative argument that BMW FS consented to be surcharged for Margolis’s efforts was also rejected. BMW FS’s limited cooperation did not demonstrate consent to be charged for all of Margolis’s efforts.

Margolis next argued that BMW FS was estopped from denying that it benefitted from Margolis’s services because BMW FS “secretly collaborated with [BMW of North America, LLC, the franchisor] and Debtor’s trustee for the purpose of achieving various unlawful objectives.” Specifically, Margolis contends that BMW FS, the franchisor, and LSI conducted a “comfortable, concealed relationship,” which resulted in “favoritism” that led to the sale of the Collateral to LSI. Margolis asserted that this concealed collaboration led it to perform extensive work in vain.

The appellate court declined to address the merits of these claims because, as the district court explained, Margolis “cites no case, statute, or other authority to indicate that such a form of estoppel has ever been recognized.”

Finally, Margolis argued that BMW FS “impeded the sale of the franchise and facilities in order to secure releases … in direct contravention of the New York Franchised Motor Vehicle Dealer Act.” Whether or not BMW FS sought releases from the Debtors in violation of New York law was not relevant to the analysis under section 506(c), the court reasoned. Margolis failed to identify language in section 506(c) or prior cases of the Third Circuit supporting its theory that a secured creditor’s allegedly unlawful conduct justified relief to a claimant under section 506(c). Thus, Margolis’s argument that BMW FS violated New York law, even if true, would not provide a ground for relief under section 506(c).

The case is No. 12-3069.

Attorneys: Seth L. Dobbs (The Margolis Law Firm LLC) for The Margolis Law Firm. Joann Sternheimer (Deily, Mooney & Glastetter, LLP) for BMW Financial Services LLC.

Companies: The Margolis Law Firm LLC; BMW Financial Services LLC.

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