2009 Chapter 11 Recent Developments (Part III)

Holding: The motion to dismiss is denied in full.

Reasoning: (1) Waiver: Paragraph 10 of the Financing Order prohibits any surcharge of the Defendant's collateral "'incurred since November 1, 2005'" for services after that date. But, 10 "expressly reserves 'any rights the Debtor's professionals or the Committee's professionals may have' under § 506(c) for costs and expense incurred 'prior to the appointment of the Chapter 11 Trustee." Thus, the Trustee (and, since the Plaintiff succeeded to the Trustee's rights under the plan, now the Plaintiff) only waived his rights as to services performed after November 1, 2005 and since the complaint is seeking to surcharge the collateral for a time period before November 1, this cause of action has not been waived. (2) Immunization: 9 of the Financing Order gave the Defendant a superpriority administrative expense claim under § 364(c)(1) that had priority over all other claims, including those arising under § 506(c). However, 9 cannot trump 10, "which specifically discusses the potential surcharge of post-petition financing under § 506(c). Paragraph 10 explains exactly what can be surcharged and details the costs and administrative expenses in the chapter 11 case and their priority 'with the Superpriority Claim of the [Defendant] for the Post-Petition Debt.'" Of the two paragraphs at issue, 10 is the more specific provision and thus limits the general language used in 9. Additionally, the Defendant's interpretation would render 10 meaningless. Thus, 10 trumps 9.

(3)

Res judicata: The plan here did not specifically preserve a cause of action under § 506(c), and the Plaintiff may not rely on the general preservation of claims that is contained in the plan. However, the disclosure statement is very clear that a § 506(c) claim was to be filed: "...the Committee anticipates that the Chapter 11 Trustee intends to file an application to surcharge CapSource's collateral pursuant to section 506(c) of the Bankruptcy Code..." The disclosure statement was approved without objection by the Defendant, and "gave all the notice the Defendant was entitled to and adequately preserved the cause of action." Additionally, though, the Court went on to say that it was not going to ignore the "Defendant's active participation on the surcharge issue and its knowledge of a potential surcharge action well before this adversary proceeding started." After the disclosure statement was approved, the Trustee had filed a motion to surcharge the Defendant's collateral and the Defendant objected arguing that it should have been asserted as a complaint. Also, the plan that was confirmed was amended - over the Defendant's objection - to include a definition of the 'Section 506(c) Claim' which is the claim at issue here. The amended plan even had a section titled 'Plan Objectives' which provided that the Plaintiff intended on filing this complaint. Thus, the Defendant surely knew this complaint was in the works and cannot argue that it did not know it was coming down the pipeline. (4) Failure to allege sufficient facts under § 506(c): the court stepped through each prong of a § 506(c) claim and found that the complaint had properly alleged sufficient facts to deny the motion to dismiss

e.

Other Issues

In re North Bay General Hospital, Inc., 2009 WL 689720 (Bankr. S.D. Tex. Mar. 4, 2009)

Facts: In 2005, North Bay General Hospital, Inc. (the "Debtor") filed for chapter 11 relief (the "2005 Case"). The Debtor's plan of reorganization in the 2005 Case (the "2005 Plan") provided for a certain class of unsecured creditors - Class 6 - which was to be represented by an unsecured creditor agent (the "UCA"). In 2008, the reorganized debtor once again declared bankruptcy (the "2008 Case"). The UCA filed a timely proof of claim - Claim 88 - in the 2008 Case, which consisted of "'allowed unsecured claims pursuant to prior confirmed plan' in the aggregate amount of $1,872,448.59." After the bar date had passed, the Debtor then filed an objection to Claim 88 on three bases: (1) the UCA had no authority to file a claim on behalf of the Class 6 creditors, (2) Claim 88 is duplicative of other claims filed by certain unsecured creditors, and (3) the UCA was required to (and failed to) attach a power of attorney to Claim 88. The UCA filed a response and then filed an emergency motion to confirm its authority to file Claim 88. After a number of continuances, the objection and the motion to confirm the authority were heard on February 3, 2009. On February