5th Circ. Affirms Secured Lender Surcharge

Law360, New York (January 21, 2016, 9:38 PM EST) -- A secured lender had to "pay the [encumbered] property's maintenance expenses incurred while the [bankruptcy] trustee was trying to sell the property," held the U.S. Court of Appeals for the Fifth Circuit on Dec. 29, 2015. In re Domistyle Inc., 2015 U.S. App. LEXIS 22787, at *1-2 (5th Cir. Dec. 29, 2015). Affirming the bankruptcy court's surcharging the lender's collateral, the Fifth Circuit acknowledged the "general rule … that administrative expenses cannot be satisfied out of collateral property 'but must be borne out of the unencumbered assets of the estate.'" Id. at *6, quoting 4 Collier, Bankruptcy ¶ 506.05, at 506-117 (16th ed. 2015). According to the court, though, Bankruptcy Code Section 506(c) provides a "narrow" and "extraordinary" exception to the general rule, an exception intended by Congress "to prevent a windfall to a secured creditor at the expense of the estate." Id. at 10-11, quoting In re JKJ Chevrolet Inc., 26 F.3d 481, 483 (4th Cir. 1994)....

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