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In re Adam Aircraft Industries, Inc.

United States District Court, D. Colorado

March 28, 2014

IN RE: ADAM AIRCRAFT INDUSTRIES, INC., JEFFREY A. WEINMAN, as Chapter 7 Trustee, Appellant,
v.
CITY OF PUEBLO, COLORADO, and GEORGE F. ADAM, JR., Appellees.

ORDER AFFIRMING BANKRUPTCY COURT'S ORDER

CHRISTINE M. ARGUELLO, District Judge.

This matter is before the Court on Chapter 7 Trustee Jeffrey A. Weinman's (the "Trustee's") appeal of the Bankruptcy Court's order, entered on June 28, 2013, in adversary proceeding No. 09-1481. The City of Pueblo ("Pueblo") and George F. Adam, Jr. ("Adam") jointly oppose the Trustee's appeal. The Court has jurisdiction under 28 U.S.C. § 158(a)(1). For the following reasons, this Court affirms the judgment of the Bankruptcy Court.

I. BACKGROUND

In a prior opinion, this Court affirmed in part and remanded in part an order of the Bankruptcy Court on many of the same matters the Trustee raises in this appeal. See In re Adam Aircraft Indus., Inc., No. 12-CV-01573-CMA, 2013 WL 773044 (D. Colo. Feb. 28, 2013) (hereinafter Adam Aircraft ). In particular, that order addressed two issues regarding "the Pueblo Collateral, " a term the parties use to describe all equipment and after-acquired property located at a facility of the debtor in Pueblo, Colorado. The Pueblo Collateral secured a loan from Pueblo to the debtor. The Trustee sold the Pueblo Collateral with a number of the debtor's other assets in a bulk sale to a third party. The total value of the bulk sale was $10 million. See Adam Aircraft, 2013 WL 773044, at *7.

As relevant here, in the prior order, this Court resolved: (1) whether the Bankruptcy Court incorrectly assessed the value of the Pueblo Collateral, and (2) whether, under § 506(c) of the Bankruptcy Code, the Bankruptcy Court improperly applied an eighteen-percent surcharge to Pueblo related to the disposal of the Pueblo Collateral. Id. at *4.

As to the first issue, this Court affirmed the decision of the Bankruptcy Court. As to the second issue, however, this Court determined that the Bankruptcy Court committed legal error in the manner in which it calculated the § 506(c) surcharge. This Court therefore remanded the case to the Bankruptcy Court for further consideration of this issue alone. Id. at *10.

As this Court detailed in the prior order, the Bankruptcy Court arrived at the eighteen-percent surcharge figure by relying on a spreadsheet that was introduced into evidence as Exhibit 15 ("Exhibit 15") in proceedings before that court. As alleged by the Trustee, Exhibit 15 is a record of all the deposits and disbursements made by the bankruptcy estate related to the sale of all the assets in the bulk sale. (Doc. # 10-12, at 38-50.). Reviewing the costs detailed in Exhibit 15, the Bankruptcy Court calculated that they added up to $1.8 million or effectively eighteen percent of the $10 million dollar sale of all the property of the estate. The Bankruptcy Court therefore concluded that it was reasonable to apply a blanket pro rata surcharge of eighteen percent to Pueblo for the value of Pueblo's portion of the proceeds from the bulk sale. Id. at *9-10 (citing the Bankruptcy Court's order).

As this Court explained in greater detail in the prior order, the Bankruptcy Court's application of this eighteen-percent blanket surcharge was in tension with another principle of bankruptcy law which dictates that general administrative expenses are to be paid by the estate -not the secured creditor. In short, the problem with the Bankruptcy Court's eighteen-percent blanket surcharge was that it was not apparent from Exhibit 15 and/or the Trustee's testimony that all of the expenditures identified in Exhibit 15 were expenditures that directly benefited Pueblo, as required by § 506(c). In other words, as this Court reasoned:

It is entirely proper for the Bankruptcy Court to award a surcharge to the Trustee for costs that were proven to be proper § 506(c) expenditures related to the preservation and disposition of the Pueblo Collateral. However, it was error for the Bankruptcy Court to assess against the Pueblo Collateral a blanket 18% pro rata surcharge without considering whether specific costs and expenses directly and primarily benefitted Pueblo, or whether they were... administrative expenses or expenses that primarily benefitted the non-Pueblo Collateral.

Id. at *10.

Therefore, this Court remanded the case to the Bankruptcy Court with instructions that it "analyze whether and to what extent the evidence showed that particular expenditures incurred by the Trustee (1) were reasonable and necessary specifically for the preservation or disposition of the Pueblo Collateral, and (2) how each of these expenditures primarily benefitted Pueblo in a concrete and quantifiable way." Id. (internal quotation marks and citations omitted).

In answering these questions on remand, the Bankruptcy Court reviewed both Exhibit 15 again and the related trial testimony concerning the expenditures identified on Exhibit 15. ( Id. at 457.) The Bankruptcy Court concluded that the only expenses documented by the Trustee that met the standard announced by this Court in its prior order "are rent costs paid to the Pueblo Depot Activity Development Authority and the Pueblo Development Foundation totaling $7, 534. Those payments are as follows: $600 paid to Pueblo Depot on April 9, 2008, $6, 334 paid to Pueblo Development on May 6, 2008, and $600 paid to Pueblo Depot on May 6, 2008." ( Id. )

In response to the Bankruptcy Court's order on remand, the Trustee filed this second appeal, in which he advances four arguments. The first two arguments address the first issue this Court considered in its last appeal: whether the Bankruptcy Court properly assessed the value of the Pueblo Collateral. The next two arguments address the second issue considered in the last appeal and reconsidered by the Bankruptcy Court on remand: namely, the validity of the Bankruptcy Court's method of recalculating the § 506(c) surcharge. The Court addresses these four arguments in turn.

II. ANALYSIS

A. VALUATION OF THE PUEBLO COLLATERAL

As an initial matter, this Court will not consider the first two arguments raised by the Trustee in briefing on his second appeal. (Doc. # 7, at 1-26.) As the Trustee also concedes (Doc. # 8, at 1 n.1), these arguments were raised and rejected by this Court in its prior order. The Court declines to address them again. To the extent these ...


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