On Appeal from the United States District Court for the Eastern District of Pennsylvania. (D.C. Civ. No. 93-cv-03065).
Before: Cowen and Roth, Circuit Judges, and Ackerman, District Judge.*fn*
In this bankruptcy case, the bankruptcy court granted a motion by the City of Philadelphia ("the City") to recover unsecured post-petition real estate taxes and water/sewer rents from the secured creditor, United Jersey Bank ("UJB"), pursuant to 11 U.S.C. § 506 (c). The district court affirmed the order of the bankruptcy court. Because the City did not demonstrate that the taxes conferred a direct benefit to the creditor whose claim the property secures, we will reverse the order of the district court.
C.S. Associates, d/b/a University Nursing and Rehabilitation Center, the debtor in this case, owned and operated a skilled care nursing home in Philadelphia. UJB is the Indenture Trustee under a Trust Indenture agreement entered into with the Philadelphia Authority for Industrial Development ("PAID") in order to finance the acquisition, construction and equipping of the nursing home facility. C.S. Associates entered into an installment sale agreement with PAID on February 16, 1983. To provide the necessary funds with which to finance the acquisition, construction and completion of the facility, PAID authorized and issued bonds ("1983 Bonds") in the aggregate principal amount of $6,870,000. The 1983 Bonds were issued under and are secured by the Indenture entered into by and between PAID and UJB as Indenture Trustee on February 16, 1983. Pursuant to the terms of the Indenture, PAID assigned all of its rights, its title and its interest under the installment sale agreement and all monies payable thereunder to UJB as Indenture Trustee for the benefit of the holders of the 1983 Bonds.
To secure the repayment of the 1983 Bonds, C.S. Associates granted to PAID a first priority mortgage on the facility and real property constituting the site of the facility. There is currently due and owing from C.S. Associates to UJB as Indenture Trustee the principal amount of $3,367,037.47 plus interest and fees, which amount is secured by the mortgage. Thus, UJB is a secured creditor of C.S Associates.
On August 15, 1988, C.S. Associates filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code. Thereafter, C.S. Associates failed to provide adequate services to its patients and on October 28, 1988, the facility was closed by the Department of Health of the Commonwealth of Pennsylvania. C.S. Associates' unsecured creditors' committee presented a plan of reorganization which called for the sale of the facility; however, this effort failed because, prior to the confirmation of the plan, the facility was repeatedly and severely vandalized from late September through December, 1989. On April 18, 1990, pursuant to a motion filed by the United States Trustee, the bankruptcy court ordered the debtor's case converted to a case under Chapter 7 of the Bankruptcy Code. Thereafter, Mitchell W. Miller was appointed Chapter 7 Trustee for the debtor.
During the pendency of C.S. Associates' Chapter 7 proceeding, the City of Philadelphia filed two proofs of claim for post-petition administrative real estate taxes and water/sewer rents, totalling $548,706.80, which had been assessed against the facility. The City also filed a proof of claim for pre-petition real estate taxes and water/sewer rents, totalling $48,803.46, which under the applicable state law had properly become liens against the facility.
By order dated November 10, 1992, the bankruptcy court approved the sale of the facility for $2,416,000, free and clear of all liens and encumbrances. UJB thereafter filed an action with the bankruptcy court to predetermine the extent, validity, and respective priority of any and all liens on the facility and, accordingly, on the proceeds of the approved sale. The City maintained that both its pre-petition and post-petition real estate taxes and water/sewer rents had priority over UJB's secured claim.
The bankruptcy court, in accordance with our holding in Equibank, N.A. v. Wheeling-Pittsburgh Steel Corp., 884 F.2d 80, 84-85 (3d Cir. 1989), held that the City's pre-petition liens had priority over UJB's secured claim as to the sale proceeds. However, the bankruptcy court held that the City's post-petition real estate taxes and water/sewer rents did not have priority over UJB's secured claim as to the sale proceeds. The bankruptcy court went on to suggest that the City might be able to recover its post-petition real estate taxes and water/sewer rents from the sale proceeds pursuant to either 11 U.S.C. § 503(b)(1)(B)(i) or 11 U.S.C. § 506(c).
Accordingly, on March 12, 1993, the City moved the bankruptcy court, pursuant to 11 U.S.C. § 506(c), to surcharge the sale proceeds and allow the City to recover its post-petition real estate tax claims and its water/sewer rent claims. In the order of the bankruptcy court which is at issue in this appeal, the bankruptcy court granted the City's motion under § 506(c) to obtain compensation for post-petition real estate taxes and water/sewer rents in the stipulated amount of $548,706.80.
UJB appealed the disputed bankruptcy court order to the district court, arguing that the City had not met the requirements of § 506(c) with respect to the post-petition real estate taxes and water/sewer rents. The district court affirmed the bankruptcy court's order. ...