California Bankruptcy Court Finds Implied Consent is Valid Basis to Surcharge Secured Creditors’ CollateralA California bankruptcy court has given a trustee’s expenses priority over the secured creditors’ recovery based on the creditors’ implied consent that the court said was conferred by the creditors’ involvement in the “preservation, liquidation and/or recovery of their collateral through the trustee and the trustee’s professionals.”

In In re Tollenaar Holsteins, the debtors were three dairies based in California and Oklahoma that owed two secured creditors approximately $12.8 million. The creditors held liens on all the debtors’ assets, including cash, and agreed to the debtors’ use of the cash collateral only if a Chapter 11 trustee or other fiduciary was appointed. A trustee was subsequently appointed and began to liquidate the debtors’ assets for the benefit of the secured creditors.

When the trustee moved to surcharge the creditors’ collateral, the creditors opposed the trustee’s motion, arguing that the trustee had not satisfied the requirements under section 506(c) of the Bankruptcy Code. The creditors also maintained they had not consented to the surcharge.

Upon further examination, the U.S. Bankruptcy Court for the Eastern District of California determined that $107,412 of the surcharges satisfied the “reasonable, necessary and quantifiable” requirements of section 506(c), leaving a balance of $161,943.

Next, the court considered two questions as to implied consent: whether consent is still a valid basis to surcharge a creditor’s collateral under section 506(c) and, if so, whether consent could serve as an alternative to the statutory requirements of section 506(c).

The court examined the history of consent as a basis for surcharging collateral under pre-Code statutes — including the Bankruptcy Acts of 1933 and 1938, which were later codified in section 506(c) — as well as the 2000 Ninth Circuit decision in Compton Impressions, Ltd. v. Queen City Bank, N.A. permitting a surcharge under section 506(c). Based on its examination, the court held that consent remains a viable basis to surcharge collateral and that consent and the statutory elements are alternative grounds for surcharging collateral.

As to whether the creditors actually consented, the court found that because the creditors were so involved in the preservation, liquidation and/or recovery of their collateral — an involvement that went beyond mere cooperation — they had furnished implied consent. Noting that the creditors had “milked these estates for what they were worth,” the court gave the balance of the trustee’s expenses priority over the creditors’ recovery.

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