UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF KENTUCKY
LEXINGTON DIVISION
IN RE:
RUSSELL CAVE COMPANY, INC.
f/k/a
The J. Peterman Company
DEBTOR CASE
NO. 99-50142
CHAPTER
11
MEMORANDUM OPINION & ORDER
This matter is before the Court on the debtor’s
Objection to Certain Equipment Lease Claims (Doc. #518) and the Responses of
Heller Financial Leasing, Inc. (Doc. #536) and IOS Capital, Inc. (Doc. #551).
The debtor has filed a Reply to each of the Responses (Doc. #s 552 and
553). The parties have briefed their
positions, a hearing was conducted on March 9, 2000, and the matter has been
submitted to the Court for decision.
The record in this case shows that the debtor filed
its Chapter 11 petition in this Court on January 25, 1999. The debtor’s Objection, filed herein on
January 31, 2000, had attached to it “Exhibit A, Schedule of Leases” which
listed claims it sought to have disallowed and expunged. Included were the certain claims of Heller Financial
Leasing, Inc. (“Heller”) and IOS Capital, Inc. (“IOS”). Only Heller’s claim is addressed in the text
of the Objection, however. There it is
set out that on October 15, 1999, Heller filed a Chapter 11 Administrative
Expense Claim and Request for Payment of Administrative Expense (“the Original
Claim”) in the total amount of $6,265.77 regarding the debtor’s lease of
equipment from the date of filing through March 22, 1999, when the lease was
rejected. Heller then filed an amended
Chapter 11 Administrative Expense Claim and Request for Payment of
Administrative Expense (“the Amended Claim”) on November 1, 1999. The Amended
Claim asserted an administrative expense claim in the amount of $11,873.87,
consisting of $6,265.77 post-petition rent and $5,608.10 for alleged damages to
leased equipment. The debtor has
objected to both the Original Claim and the Amended Claim.
The debtor’s objections to Heller’s claims had two
bases. The first was that Heller failed
to attach to its Amended Claim any documentation or other proof of damage to
the equipment caused by the debtor.
That objection is not addressed by this opinion and order. The second, and the one that will be discussed
here, is that claims under an equipment lease arising within 60 days of the filing
of the petition do not constitute an administrative expense under 11 U.S.C.
§503 nor a priority claim under 11 U.S.C. §507.
In that regard, the debtor further contends that
pursuant to 11 U.S.C. §365(d)(10), a 1994 amendment to §365, it is the
beneficiary of a 60-day abeyance period during which claims that arise do not
represent administrative claims. This
section provides in pertinent part as follows:
(10)
The trustee shall timely perform all of the obligations of the debtor, except
those specified in section 365(b)(2), first arising from or after 60 days after
the order for relief in a case under chapter 11 of this title under an
unexpired lease of personal property (other than personal property leased to an
individual primarily for personal, family, or household purposes), until such
lease is assumed or rejected notwithstanding section 503(b)(1) of this title,
unless the court, after notice and a hearing and based on the equities of the
case, orders otherwise with respect to the obligations or timely performance
thereof.
Since
the lease with Heller (as well as the others listed in Exhibit A) was rejected
within this 60-day period, the debtor contends that the effect of §365(d)(10)
is to deprive the lessor of the opportunity to recover an administrative
expense related to the use of this equipment during that period. The debtor does not deny that it used
Heller’s equipment during this period.
Heller’s response to the debtor’s position on this
issue is that the debtor has completely misconstrued §365(d)(10). Heller asserts that to interpret the section
as providing a 60-day exception to the debtor’s administrative expense
obligation under 11 U.S.C. §503(b)(1)(A) “makes no sense and is .... not
required by a ‘plain meaning’ reading of the statutes.” Unfortunately there is little case law and
less legislative history available to assist the Court in discerning the proper
application of this statute to the instant matter. The Court believes, however, that a review of Code treatment of
real and personal property leases both before and after 1994 will be helpful.
Prior to 1994, personal property leases were
specifically addressed only in 11 U.S.C. §365(d)(2), which deals with
assumption and rejection of executory contracts and unexpired leases. It states that
the
trustee may assume or reject an executory contract or unexpired lease of
residential real property or of personal property of the debtor at any time
before the confirmation of the plan but the court, on request of any party of
such contract or lease, may order the trustee to determine within a specified
period of time whether to assume or reject such contract or lease.
A
lessor of personal property who sought lease payments as an administrative expense
was required in every instance to make application under 11 U.S.C.
§503(b)(1)(A), which allows, after notice and a hearing, administrative
expenses including “the actual, necessary costs and expenses of preserving the
estate, ....” Pursuant to §503(b)(1)(A),
the burden is on the claimant to demonstrate that the expenses were actual and
necessary and that they benefitted the estate.
See In re United Trucking Service, Inc., 851 F.2d 159 (6th
Cir. 1988).
Also in effect both before and after 1994, §365(d)(3)
deals with leases of nonresidential real property. It states in pertinent part as follows:
The
trustee shall timely perform all the obligations of the debtor, except those
specified in section 365(b)(2), arising from and after the order for relief
under any unexpired lease of nonresidential real property, until such lease is
assumed or rejected, notwithstanding section 503(b)(1) of this title.
The
language of this provision is very similar, although not identical, to the
language found in §365(d)(10). Both
sections direct the trustee to “timely perform all the obligations of the
debtor .... notwithstanding section 503(b)(1) of this title.” In In re Brennick, 178 B.R. 305
(Bkrtcy.D.Mass. 1995), the court engaged in an enlightening discussion of this
language as it is found in §365(d)(3):
Most of
the decisions seem to agree on at least two aspects of the statute. First, they rule the language
‘notwithstanding section 503(b)(1) of this title’ does away with the need for a
hearing authorizing payment of the administrative expense claim. .... [The
statute] does contain a clear command–that the trustee ‘shall timely perform’
the debtor’s obligation to pay rent.
This (and the similar provision in section 365(d)(10)) is the only
provision in the Code requiring the estate to perform the debtor’s obligations
at all, much less in a timely manner.
Legislative history gives the reason for the command – the coercive
nature of a lessor’s extension of credit.
(Cites omitted.)
At
307-308. This analysis, with which this
Court agrees, makes it clear that the purpose of §365(d)(10) is to mandate the
performance of the debtor’s obligations under an unexpired lease, beginning at
the 60th day after filing, not to provide a 60-day “free” period
during which the debtor may use the equipment and the lessor may not even seek
payment.
The comparison of §§365(d)(3) and (d)(10) makes it
clear why the court in In re Elder-Beerman Stores Corp., 201 B.R. 759
(Bkrtcy.S.D.Ohio 1996), characterized the 60-day period set out in §365(d)(10)
as an “abeyance period.” Section
365(d)(3) requires the trustee to pay rent from the time the petition is filed;
section 365 (d)(10) does not require the trustee to make personal property lease
payments until 60 days have passed. Thus, the 60-day “abeyance period” is the time when the
requirement to pay rent is not in effect. The debtor maintained that Elder-Beerman
Stores supported its position, based on that court’s denominating the
60-day period as an “abeyance period.”
This Court agrees with Heller, however, that Elder-Beerman Stores
comports with its view of this issue, and that the debtor’s interpretation of
that opinion is incorrect.
This Court also agrees with the Brennick
court’s observation concerning the language “notwithstanding section 503(b)(1)
of this title,” i.e., that it eliminates the necessity of making an application
under that statute, with its attendant requirements to show that the expenses
were actual and necessary and that they benefitted the estate, during the
period when the trustee is directed to perform the debtor’s obligations. The debtor appears to argue, however, that
this language in §365(d)(10) does away with a claimant’s right to apply for
administrative expenses under §503(b)(1) during the period not encompassed by
the directive to the trustee to act.
This argument by the debtor is in reply to IOS’s
position that §365(d)(10) not only does not provide a 60-day “free” period, it
does not even speak to the first 59 days after the filing of a petition. IOS maintains that a creditor like itself
may make application for administrative expenses relative to unexpired leases
of personal property pursuant to §503(b)(1) up until the 60th day
after filing, after which the trustee is required to perform the
debtor’s obligations under the lease.
IOS’s position is bolstered by a statement made by Senator Grassley
concerning the proposed change in 11 U.S.C. §365 (140 Cong. Rec. S14461 (daily
ed. October 6, 1994)):
Section
219 makes needed changes in the treatment of leases of personal property. Sixty days after the order for relief, the
debtor will have to perform all obligations under the equipment lease, unless
the court holds a hearing and determines otherwise, with the burden on the
debtor. The word ‘first’ as used in the
section refers to the payments and the performance of all other obligations
that initially become due more than sixty days after the order for relief. The purpose of that reference is to make it
clear the intent that the provision does not affect payments originally
due prior to 60 days before the order for relief.
It
seems clear, therefore, that both case law and legislative history, sparse as
it is, supports the positions of Heller and IOS.
In consideration of all of the foregoing, is the
opinion of this Court that the debtor’s Objection to Certain Equipment Lease
Claims, specifically those of Heller Financial Leasing, Inc. and IOS Capital,
Inc. as it relates to their right to seek payment for administrative claims for
use of the leased equipment for the 60 days following filing of the petition,
should be overruled, and the Court hereby so ORDERS.
Entered this day of April, 2000.
By
the Court -
Judge
William S. Howard
Copies to:
Gregory D. Pavey, Esq.
W. Robinson Beard, Esq.
Gregory R. Schaaf, Esq.
U.S. Trustee