IN RE:  FROST GARDEN CENTER, INC. CASE NO. 92-51274

UNITED STATES BANKRUPTCY COURT

EASTERN DISTRICT OF KENTUCKY

LEXINGTON

 

IN RE:

FROST GARDEN CENTER, INC. CASE NO. 92-51274

DEBTOR

MEMORANDUM OPINION

This case is before the court on the motion of James P. Curless, by counsel, for allowance of his claim, in behalf of himself and his co-lessors, for post-petition rent in the amount of $3,812.53, as an administrative expense as authorized by title 11 U.S.C. 503(a).

The latter section of the Bankruptcy Code, as amended October 22, 1994, provides:

11 U.S.C. 503. Allowance of administrative expenses.

(a) An entity may timely file a request for payment of an administrative expense, or may tardily file such a request if permitted by the court for cause.

The October 22, 1994 amendment, shown in italics, does not apply in cases commenced under title 11 before the date of the amendment. P.L. 103-394, sec. 702. Nevertheless, the facts of this case illustrate the wisdom of the amendment.

FINDINGS OF FACT:

The debtor, a corporation whose equity security holders were John Frost and his wife, Paulette Frost, filed a petition for relief under chapter 7 of the Bankruptcy Code on June 30, 1992. The debtor had operated a nursery on 10.11 acres at 2750 Palumbo Drive, Lexington, Kentucky, leased from Martha G. White, single, Norma W. Curless and James P. Curless, her husband. The initial term of the lease was for 10 years commencing on July 1, 1985 and ending on June 30, 1995. The lessee was given an option to renew the lease for a period of 5 years commencing on July 1, 1995 and ending on June 30, 2000. The rental was $1,500 per month for the first 36 months and $1,800 thereafter, subject to increase in accordance with the Consumer Price Index. The rental for the renewal term was subject to the agreement of the parties, but adjusted in accordance with the CPI was $1,972.80 per month.

At the time of the lease the property was unimproved. The lease permitted the debtor lessee to construct improvements on the premises for use and occupancy by the lessee without cost to the lessors. The improvements were to be of such a nature that they could be removed by the lessee upon termination of the lease without substantial damage to the premises. The lessee was also authorized to remove from the premises trade fixtures and equipment which could be removed without substantial damage to the premises.

The debtor caused to be erected on the premises a 48’ x 48’ prefabricated building with wooden support beams, with steel clamps, and a metal roof. The building, which is constructed on a poured concrete slab, contains an office, bathrooms, a kitchen, and a large display or sales room. The exterior of the building is of heavy, weathered wood, much like a barn. The office and other interior rooms appear to be wood paneled.

In Schedule B to the petition the debtor estimated the value of the prefabricated building it had placed on the leased premises at $8,400.00 if removed from the premises and $15,000.00 if the building remained on the premises. The building is connected to a sewer line and to all other utilities. At a hearing held on August 3, 1992 on the lessors’ objection to the trustee’s proposed sale of the inventory, equipment, plant stock and buildings of the debtor, there was testimony of John Frost that the original cost of the building, including installation cost, was in the range of $30,000. The assessed value of the building for tax purposes was $40,000. Under the lease the debtor was required to pay any increase in the property tax on the leased premises resulting from improvements erected thereon.

The remainder of the leased premises was occupied by greenhouses erected by the debtor and by plants and trees offered for resale.

The chapter 7 trustee was appointed on July 1, 1992. On July 17, 1992 he gave notice to all creditors and parties in interest of the proposed sale of the assets of the debtor, including six portable greenhouses and the prefabricated building, at a public auction to be held August 8, 1992. Prior to the sale the court overruled the objection of the lessors to the sale, determining the lessors held neither a landlord’s lien nor a security interest in the assets. By agreement of the parties the prefabricated building was withdrawn from the sale because there was a dispute as to whether the prefabricated building was permanently affixed to the real estate and had become part of the real estate.

At the sale held on August 8, 1992 the assets of the debtor, other than the prefabricated building, were sold at public auction for a total of $18,788.00.

On August 21, 1992, upon proper application the trustee was authorized to employ H & H General Contractor, Inc. at a price of $1,050.00 to furnish topsoil and backfill holes resulting from the removal and sale of trees, to grade the leased premises and remove debris left by purchasers of plants and equipment at the August 8, 1992 sale.

On August 27, 1992 the trustee gave notice to the lessors of his rejection of the lease between the debtor and the lessors.

The only property remaining on the premises after that date was the prefabricated building which had not been sold because the lessors objected to the sale, contending the lessors held a landlord’s lien and security interest in the assets of the debtor and that the building was affixed to the real estate and could not be removed without substantial damage to the leased premises.

CommerceNational Bank (now National City Bank) claimed a security interest in the prefabricated building pursuant to a security agreement dated September 10, 1986, which grants the bank a security interest in "all of the Debtor’s machinery, equipment, furniture, and fixtures, now owned or hereafter acquired; inventory, now owned or hereafter acquired; accounts receivable, now existing or hereafter arising; general intangibles…." The security agreement recites that the collateral secures a $15,000 note and any renewals, extensions or modification thereof and any and all liabilities of the debtor to the secured party now existing or hereinafter incurred. The bank filed two proofs of claim for a total of $18,062.36. In view of the fact the prefabricated building appeared to be removable, and, in fact, was required to be removed by the terms of the lease, counsel for the bank argued the prefabricated building was subject to the bank’s security interest. See Pacific Metal Co. v. Northwestern Bank of Helena, 667. P.2d 958 (S.Ct. Mont. 1983).

On January 27, 1993, after notice and a hearing, the court authorized the trustee to disburse $11,576.09 ($10,953.35 plus interest from June 30, 1992) to CommerceNational Bank in partial satisfaction of its lien claims. The court also authorized the trustee to pay Thompson and Riley Auctioneers $3,757.60 and $1,050.00 to H & H General Contractor, Inc. as administrative expenses of the auction held August 8, 1992. Subsequently the court authorized the trustee to pay an additional $360.00 to the lessors as reimbursement for cleanup expenses they had incurred to restore the leased premises to its original condition.

On April 15, 1993 the trustee made application to the court to approve two compromise agreements he had entered into with CommerceNational Bank and the lessors with respect to the prefabricated building remaining on the leased premises. Pursuant to one agreement CommerceNational Bank would release its claim to a security interest in the prefabricated building for $2,250.00. Pursuant to the other agreement the trustee proposed to sell the prefabricated building to the lessors for $4,500.00. Following a hearing held on May 13, 1993, on notice to all creditors and parties in interest, the court approved these compromise agreements. The trustee’s application indicated the problems inherent in disassembling and removing the prefabricated building from the lessors’ premises. A permit authorizing removal would have to be obtained from the Urban County Planning and Zoning Commission. Removing the concrete slab on which the building is located and capping the utilities would cost $5,808.00, not including the cost of disassembling and removing the building itself. The resale value of the building removed from the premises was estimated to be between $8,400.00 and $14,000. Selling the building to the lessors for only $4,500.00 was disquieting because the assessed value of the building for property tax purposes is $40,000. See proof of claim no. 35 filed by James P. Curless for the lessors.

The lessors filed three proofs of claim. Claim no. 34 is a claim in the amount of $3,812.53 for rent from June 30 through August 27, 1992. Claim no. 35 is a claim in the amount of $627.31 for reimbursement for property taxes which were supposed to be paid by the debtor under the terms of the lease. Claim no. 37 is a claim for prepetition rent in the amount of $28,853.00.

There is no indication on claim no. 34 that the $3,812.53 claim for post-petition rent was filed as an administrative priority claim. Under section 503(a) of the Bankruptcy Code administrative expense claimants may file a request for payment with the court. Rule 2016 of the Federal Rules of Bankruptcy Procedure indicates a request for payment of an administrative expense should be presented to the court by application.

On March 16, 1995 the trustee objected to claims no. 35 and 37 filed by James P. Curless for the lessors. Claim no. 35 was objected to on the grounds the claim for accrued, unpaid prepetition rent was not sufficiently documented. In the schedules to the petition, the debtor did not indicate it owed back rent to the lessors. The lessors did not amend the claim in response to the objection. Claim no. 37 for reimbursement for taxes was objected to on the grounds that the lease made the lessors responsible for taxes. This is not entirely correct. The lessees were responsible for any increase in taxes resulting from improvements on the premises. However, the amount of taxes owed by the debtor and the amount owed by the lessors was not readily determinable. The trustee’s objections to these claims were noticed for hearing on June 5, 1995. There was no appearance or response by the lessors to the trustee’s objections to their claims. Orders were entered sustaining the objections.

A final order of distribution was entered on January 24, 1997, signed off on by the United States Trustee, pursuant to which the claim of the lessors for postpetition rent, claim no. 34 in the amount of $3,812.53, was allowed as an unsecured claim and a dividend of $64.04 was paid on the claim.

On March 19, 1997, James P. Curless, by counsel, filed a motion for allowance of his claim in the amount of $3,812.53 for postpetition rent as an administrative expense under section 503(b)(1) of the Bankruptcy Code.

As part of the same motion the movant alternatively seeks, pursuant to section 506(c) of the Bankruptcy Code, to surcharge and recover from CommerceNational Bank the amount of the lessors’ postpetition rent claim as an expense of preserving the collateral on which the bank held a lien.

CONCLUSIONS OF LAW:

The Bankruptcy Code as implemented by the Federal Rules of Bankruptcy Procedure requires a request for payment of an administrative expense to be presented to the court by application. 11 U.S.C. 503(a) and (b)(1)(A); Rule 2016. The reason for this is to allow for a notice and a hearing before the court approves the application. For this reason the court is not persuaded the claim filed by James P. Curless for the lessors claiming postpetition rent operated as an application for payment of an administrative expense in conformity with Rule 2016. This is especially true in view of the fact the claim made no mention that it was for an administrative expense. The claimant did not state any basis for allowance of the claim as an administrative priority claim as claimant was invited to do in paragraph 10 of the claim form. The claim is filed as an unsecured claim and without objection was allowed in that manner. 11 U.S.C. 502(a). There is no testimony concerning the alleged promise of the trustee to see that the claim in question was paid.

The problem the court has with allowing this claim at this late date as an administrative expense claim either under 503(b) or 506(c) stems from the fact that neither the creditors nor the court was aware of the claim at the time of the hearing on the trustee’s application to approve the compromise whereby the prefabricated building was sold to the lessors for $4,500.

The application and notice to creditors of the proposed compromise did not indicate the lessors were claiming a right to reimbursement in the amount of $3,812.53 from the $4,500 and were in effect agreeing to pay only $687.47 for a building having an assessed value of $40,000. Had this fact been revealed there might have been objections to the compromise and it seems unlikely the court could have been persuaded to approve the compromise. This is especially true in view of the fact that CommerceNational Bank was to be paid $2,250 from the proceeds of the sale for release of its security interest in the building. Thus, if the postpetition rent claim of the lessors were allowed, the building would have been sold for a net loss to the estate of $1,562.53. The court believes that by not timely asserting the right to set off this administrative expense claim against the purchase price of the building the lessors waived the claim.

Because the administrative expense claim in question was not timely brought to the attention of the court and because the court finds that allowing the claim and providing for payment thereof by ordering a refund of the dividends paid on unsecured claims or by ordering payment by CommerceNational Bank would be inequitable, the court shall overrule the motions of the lessors. The court believes the lessors received a windfall based on the price they paid to retain the prefabricated building on the leased

premises. The court is not persuaded there are any equitable considerations that warrant the relief requested by the lessors.

Dated:

By the court –

________________________________
JOE LEE, U.S. BANKRUPTCY JUDGE

Copies to:

John T. Hamilton, Esq.

Stephen Palmer, Esq.

J. James Rogan, Trustee

Scott Rickman, Esq.

U.S. Trustee

UNITED STATES BANKRUPTCY COURT

EASTERN DISTRICT OF KENTUCKY

LEXINGTON

 

IN RE:

FROST GARDEN CENTER, INC. CASE NO. 92-51274

DEBTOR

 

ORDER

 

In conformity with the memorandum opinion of the court this day entered, IT IS ORDERED that the motions of James P. Curless, for himself and others as lessors, for allowance of the lessors’ postpetition rent claim as an administrative expense are overruled.

Dated:

By the court –

________________________________
JOE LEE, U.S. BANKRUPTCY JUDGE

Copies to:

John T. Hamilton, Esq.

Stephen Palmer, Esq.

J. James Rogan, Trustee

Scott Rickman, Esq.

U.S. Trustee