In Re Los Gatos Lodge Inc., Debtor. Mohamed Poonja v. Alleghany Properties

In this appeal, we consider whether a bankruptcy trustee may surcharge a creditor for necessary expenses in preserving property pursuant to 11 U.S.C. § 506 (c) after the creditor’s secured claim has been disallowed. We conclude that such a surcharge is improper and affirm the judgment of the district court.

I

Dr. Norman E. and Jean P. McFate owned and operated the Los Gatos Lodge and the real property on which it was located. The McFates borrowed $6.25 million from Sacramento Savings Bank (“Sacramento Savings”). The loan was secured by: (1) a deed of trust against the real property on which the Los Gatos Lodge was located; (2) an assignment of the rents, issues, and profits of the real property; and (3) a security agreement that granted Sacramento Savings “a security interest in certain furniture, fixtures, equipment, appliances and replacement parts located at the Los Gatos Lodge.”

The McFates subsequently transferred ownership of the real property to a family trust of which they were the trustees. They also transferred ownership of the Los Gatos Lodge building and business, including related personal property, to Los Gatos Lodge, Inc., a corporation owned by them or…