NOT PRECEDENTIAL

                      UNITED STATES COURT OF APPEALS
                           FOR THE THIRD CIRCUIT
                                _____________

                                     No. 12-3069
                                    _____________

                    In re: TOWNE, INC and DMD TOWNE, LLC,
                                        Debtors


                          THE MARGOLIS LAW FIRM LLC,
                                       Appellant
                                _____________

                    On Appeal from the United States District Court
                              for the District of New Jersey
                            (D.C. Civil No. 2-11-cv-05435)
                    District Judge: Honorable Katharine S. Hayden
                                      ___________

                                 Argued May 31, 2013

                  Before: JORDAN, VANASKIE, Circuit Judges, and
                           RAKOFF *, Senior District Judge.

                           (Opinion Filed: August 29, 2013)

Seth L. Dobbs, Esq. (Argued)
Martin G. Margolis, Esq.
The Margolis Law Firm LLC
5 Becker Farm Road, 4th Floor
Roseland, NJ 07068
       Counsel for Appellant

Anthony Sodono, III, Esq. (Argued)
Trenk, DiPasquale, Della Fera & Sodono, P.C.

      *
        The Honorable Jed. S. Rakoff, United States Senior District Judge for the United
States District Court for the Southern District of New York, sitting by designation.
347 Mt. Pleasant Avenue
Suite 300
West Orange, NJ 07052
       Counsel for Appellee Joseph Newman

Joann Sternheimer, Esq. (Argued)
Deily, Mooney & Glastetter, LLP
8 Thurlow Terrace
Albany, NY 12203
       Counsel for Appellee BMW Financial Services LLC
                                   ___________

                                        OPINION
                                       ___________

VANASKIE, Circuit Judge.

       The Margolis Law Firm LLC (“Margolis” or “The Margolis Law Firm”) appeals

from the District Court’s denial of its motion to collect fees and expenses for its service

as special counsel in the underlying bankruptcy case. Although such fees and expenses

are ordinarily chargeable only against the surplus of a debtor’s estate, Margolis seeks to

collect them from proceeds of the sale of a secured creditor’s collateral pursuant to

section 506(c) of the Bankruptcy Code. Because we agree with the District Court that

Margolis does not meet the requirements of section 506(c), we will affirm.

                                              I.

       We write primarily for the parties to this action. Moreover, the District Court has

ably provided the relevant background. See In re Towne, Inc., Civ. No. 11-5435 (KSH),

(D.N.J. June 25, 2012). Accordingly, we set forth only those facts

necessary to our analysis.




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       This appeal arises out of bankruptcy proceedings instituted by two related debtors:

Towne, Inc. (“Towne”), which owned a franchised BMW motor vehicle dealership in

Oyster Bay, New York, and DMD Towne, LLC (“DMD”), which owned the real

property upon which Towne’s dealership was located. Towne and DMD (collectively,

“Debtors”) each filed voluntary petitions for bankruptcy under Chapter 11 of the

Bankruptcy Code. The Bankruptcy Court consolidated the cases and appointed The

Margolis Law Firm as special counsel.

       BMW Financial Services, NA, LLC (“BMW FS”) held a perfected first priority

security interest in most of Towne’s assets (“the Franchise”), and also held a perfected

first priority lien on DMD’s property (“the Property”). Together, Debtors owed BMW

FS $9,006,951.67.

       On April 1, 2009, Margolis notified the Bankruptcy Court that it had received an

offer to purchase the Franchise and Property (collectively, “the Collateral”) for six

million dollars. Given that offer, BMW FS – which in the meantime had successfully

obtained relief in the Bankruptcy Court from the bankruptcy stay so that it could take

possession of the Collateral – agreed not to pursue immediate liquidation to give Debtors

the opportunity to complete the sale. Because the offer was for less money than the

amount of BMW FS’s lien, however, BMW FS refused to consent to the sale unless

Debtors signed certain releases. When Debtors refused to sign the releases, BMW FS, in

turn, refused to consent to the sale, and the offer was withdrawn.

       Several months passed without a successful sale of the Collateral. Thus, the

Bankruptcy Court converted the case to Chapter 7 and appointed a trustee. Margolis then

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withdrew from the case. The Chapter 7 trustee executed releases on the Debtor’s behalf,

and the Collateral was subsequently sold to affiliates of Len Stoler, Inc. (“LSI”) for

$5,525,000.00.

       The Bankruptcy Court later approved fees in the amount of $84,585.11 in fees and

$3,626.90 in expenses for Margolis’ services as special counsel. Margolis filed a motion

arguing it was entitled under 11 U.S.C. § 506(c) to collect these fees out of the proceeds

of the sale of the Collateral. The Bankruptcy Court denied the motion, finding that

Margolis did not meet the requirements of § 506(c). The District Court affirmed, and

Margolis filed this appeal.

                                              II.

       The Bankruptcy Court had jurisdiction under 28 U.S.C. § 157. The District Court

had jurisdiction under 28 U.S.C. §§ 158(a) and 1334, and we have jurisdiction under 28

U.S.C. §§ 158(d) and 1291. We review the Bankruptcy Court’s factual findings for clear

error, but apply plenary review to its legal conclusions. In re Visual Indus., Inc., 

, 324 (3d Cir. 1995). Our review of the District Court’s decision is plenary “because

[it] sits as an appellate court in bankruptcy cases.” 

collect fees and expenses out of the proceeds of the sale of the

Collateral. In general, such fees and expenses are not chargeable against secured

collateral. Visual 

. Instead, they ordinarily may be charged only

against the surplus of the debtor’s estate. 

of the Bankruptcy

Code provides a limited exception to this rule, which allows a claimant to “recover from

property securing an allowed secured claim the reasonable, necessary costs and expenses

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of preserving, or disposing of, such property to the extent of any benefit to the holder of

such claim . . . .” 11 U.S.C. § 506(c).

         Section 506(c) is designed to allow a claimant who has expended funds to

preserve or dispose of secured collateral to recover those funds from the secured creditor

who directly benefitted from them, thus “prevent[ing] a windfall to the secured creditor at

the expense of the claimant.” Visual 

(citing IRS v. Boatmen’s First

Nat’l Bank of Kan. City, 

, 1159 (8th Cir. 1993)). As we have explained,

however, section 506(c) permits a claimant to recover expenses from the secured

collateral only under “sharply limited” circumstances. 

under

§ 506(c), a claimant must demonstrate that (1) the expenditures are reasonable and

necessary to the preservation or disposal of the property and (2) the expenditures provide

a direct benefit to the secured creditors.” In re C.S. Assocs., 

, 906 (3d Cir.

1994).

         Margolis asserts three theories for relief under section 506(c). First Margolis

argues that the costs and expenses of its legal services “were reasonable and necessary to

the preservation and disposition” of the Collateral (Appellant’s Br. 12); second, Margolis

asserts that BMW FS is estopped from denying that it benefitted from Margolis’s

services; and finally, Margolis argues that it should be able to recover its fees and

expenses under section 506(c) because its efforts to sell the Collateral were thwarted only

when BMW FS sought releases from Debtors in violation of New York law. We will

discuss each theory in turn.



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                                             A.

       At the outset, we reject Margolis’s argument that the proper inquiry under section

506(c) is “whether [a secured creditor] benefited or could reasonably have been expected

to benefit from Special Counsel’s efforts.” (Appellant’s Br. 18.) In support of this

standard, Margolis cites to a 1980 decision from the Eastern District of Pennsylvania

Bankruptcy Court. See In re Hotel Assocs., 

, 112 (Bankr. E.D. Pa. 1980). We

have not adopted the standard articulated in Hotel Associates. Rather, we have read

section 506(c) as requiring “a direct benefit to the secured creditors.” C.S. 

.

       Applying this standard, Margolis fails to meet the requirements of section 506(c)

because it cannot demonstrate either that its expenditures were necessary to preserve or

dispose of the Collateral, or that its efforts directly benefitted BMW FS. Although

Margolis points to several services it undertook, including “exposing the Franchise and

the Debtors’ single purpose Facilities for sale,” “soliciting prospective bids” for the

Collateral, and “consummating purchase agreements,” (Appellant’s Br. 18), these efforts

did not result in an actual sale. Instead, BMW FS, along with the Chapter 7 trustee, sold

the Collateral to LSI after the case had been converted from Chapter 11 to Chapter 7 and

Margolis had already withdrawn. As the District Court noted, an affidavit submitted by

Eliot Wagonheim, an attorney who represented LSI in negotiations for the purchase of

the Collateral, supports the Bankruptcy Court’s conclusion that Margolis was not

responsible for LSI’s interest in, or eventual purchase of, the Collateral. See Towne, 2012



                                              

at *7. We therefore agree that Margolis fails to prove that its efforts were

necessary to the preservation or disposition of the Collateral.

       Margolis also fails to demonstrate that it provided a direct benefit to BMW FS.

Margolis argues its efforts prevented termination of the Franchise, and that this benefitted

BMW FS by preserving the value of the Collateral. The Bankruptcy Court dismissed this

assertion as “purely speculative,” noting that BMW of North America, LLC (“the

Franchisor”) did not terminate the franchise after the case was converted to Chapter 7 and

Margolis had withdrawn. (A. 7.) The District Court agreed, concluding that Margolis

failed to prove that the franchise would have been terminated without its efforts. Towne,

, at *7.

       Furthermore, the Bankruptcy Court concluded that “the primary benefit of

[Margolis’s] legal services was to the Debtors . . . rather than to preservation of the

collateral of BMW FS.” (A. 8.) In making this finding, the Bankruptcy Court observed

that Margolis seeks reimbursement for numerous services that were actually contrary to

BMW FS’s interests, including efforts to reduce the value of BMW FS’s lien and

conducting research that led to an administrative proceeding against BMW FS in state

court. These findings are amply supported in the record and are not clearly erroneous.

       We also reject Margolis’s alternative argument that BMW FS consented to be

surcharged for Margolis’s efforts. Although some courts have considered a secured

creditor’s consent in analyzing a claim under section 506(c), see, e.g., In re Flagstaff

Foodserv. Corp., 

, 77 (2d Cir. 1984), Margolis has shown no more than

BMW FS’s limited cooperation with its initial efforts to effectuate a sale of the

                                              7
Collateral. BMW FS’s limited cooperation does not demonstrate consent to be charged

for all of Margolis’s efforts. 

to be inferred merely because a

secured creditor cooperates with the debtor.’”) (quoting In re S & S Indus., Inc., 

, 398 (Bankr. E.D. Mich. 1983)).

       Accordingly, and for substantially the same reasons as the District Court, we

conclude that Margolis did not demonstrate that the fees and expenses for which it seeks

compensation were “reasonable, necessary costs and expenses of preserving, or disposing

of, [the collateral],” 11 U.S.C. § 506(c), or that its expenditures provided a direct benefit

to BMW FS.

                                              B.

       Margolis next asserts that BMW FS is estopped from denying that it benefitted

from Margolis’s services because BMW FS “secretly collaborated with [Franchisor] and

Debtor’s trustee for the purpose of achieving various unlawful objectives.” (Appellant’s

Br. 23.) Specifically, Margolis contends that BMW FS, Franchisor, and LSI conducted a

“comfortable, concealed relationship,” which resulted in “favoritism” that led to the sale

of the Collateral to LSI. (Id. 23, 24.) Margolis asserts that this concealed collaboration

led it to perform extensive work in vain.

       We need not address the merit of these claims because, as the District Court

explained, Margolis “cites no case, statute, or other authority to indicate that such a form

of estoppel has ever been recognized.” 

, at *9. We therefore reject

Margolis’s contention that BMW FS is estopped from denying that it benefitted from the

efforts of the Margolis Law Firm.

                                              8
                                              C.

       Finally, Margolis argues that BMW FS “impeded the sale of the franchise and

facilities in order to secure releases . . . in direct contravention of the New York

Franchised Motor Vehicle Dealer Act.” (Appellant’s Br. 28.) Like the District Court, we

express no view on the merits of this argument because the question of whether or not

BMW FS sought releases from Debtors in violation of New York law is not relevant to

our analysis under section 506(c). Margolis cannot identify language in section 506(c) or

prior cases of ours supporting its theory that a secured creditor’s allegedly unlawful

conduct justifies relief to a claimant under section 506(c). Thus, we conclude that

Margolis’s argument that BMW FS violated New York law, even if true, would not

provide a ground for relief under section 506(c).

                                             III.

       For the foregoing reasons, we will affirm the order of the District Court.




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