In re Beltway Medical, Inc.

• Decision Date: 12 December 2006
• Docket Number: No. 06-13801-BKC-LMI.,06-13801-BKC-LMI.
• Citation: 358 B.R. 448
• Parties: In re BELTWAY MEDICAL, INC., Debtor.
• Court: U.S. Bankruptcy Court — Southern District of Florida

358 B.R. 448

In re BELTWAY MEDICAL, INC., Debtor.

No. 06-13801-BKC-LMI.

United States Bankruptcy Court, S.D. Florida, Miami Division.

December 12, 2006.

COPYRIGHT MATERIAL OMITTED

Douglas J. Snyder, Esq., Coral Gables, FL, for Debtor.

ORDER GRANTING IN PART AND DENYING IN PART ADMINISTRATIVE CLAIM STATUS TO POSTPETITION ATTORNEY'S FEES AND EXPENSES INCURRED BY COUNSEL FOR LANDLORD SEAGIS DEERWOOD, LLC

LAUREL MYERSON ISICOFF, Bankruptcy Judge.

This matter came before the Court on Motion of Seagis Deerwood, LLC, for Order (I) Directing Payment of Administrative Rent and (II) Compelling Debtor to Assume or Reject Real Property Lease (CP # 19)(the "Motion"). The Court has already entered an Order on the Motion granting the request of Seagis Deerwood, LLC, (the "Landlord") for payment of post-petition administrative rent. In addition, the Landlord seeks administrative claim status for, and the immediate payment of, attorney's fees and expenses incurred by its counsel post-petition. For the reasons set forth below, the request is granted in part and denied in part.

FACTS

The Debtor is in the business of assembling belt equipment for medical devices. On or about March 11, 2005, the Debtor entered into a Business Property Lease (the "Lease") with Deerwood. Business Park, L.C.¹ for the rental of warehouse property located in Miami, Florida. The Debtor fell behind in the rent and the Landlord sued for eviction and payment of back rent owed under the Lease.

The Debtor filed for protection under Chapter 11 of the Bankruptcy Code on August 10, 2006 (the "Petition Date"). The Landlord filed the Motion on August 25, 2006 alleging that the Debtor had failed to pay the rent due on and after the Petition Date. In addition to seeking the immediate payment of rent and compelling assumption or rejection of the Lease, the Landlord sought immediate payment of attorney's fees and costs "incurred by Landlord to enforce the terms of the Lease."

On September 13, 2006, this Court entered its Order on Motion of Seagis Deerwood, LLC, for Order (I) Directing Payment of Administrative Rent and (II) Compelling Debtor to Assume or Reject Real Property Lease (CP # 32). The Order directed the Debtor to pay all postpetition rent obligations arising out of the Lease. The Court took under advisement the issue of whether attorney's fees and expenses incurred by counsel for the Landlord are entitled to administrative priority and payment.

Paragraph 21 of the Lease (the "Attorney Fee Provision") states:

Tenant [the Debtor] agrees to pay all costs and expenses of collection and reasonable attorney's fees and court costs on any part of said rental that may be collected by an Attorney [sic], suit, distress, or foreclosure.

The Lease does not describe the attorney fee obligation as additional rent under the Lease.

On September 13, 2006, the Landlord filed its Notice of Filing Summary of Post-Petition Attorneys' Fees and Expenses Incurred by Counsel for Landlord Seagis Deerwood, LLC (CP # 31) (the "Summary"). The Summary lists fees and expenses incurred by the Landlord's counsel from the Petition Date through September 7, 2006, including work done in preliminary review of the case, in connection with the Landlord's pursuit of post-petition administrative rent, in relation to the Debtor's motion for the use of cash collateral, and in relation to assumption or rejection of the Lease. The total amount of fees and expenses reflected in the Summary is, seven thousand one hundred seventy-two dollars and twenty five cents ($7,172.25).

JURISDICTION

The Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(B).

DISCUSSION

The issue before the Court is whether, and to what extent, the Landlord is entitled to an administrative expense claim for attorney's fees and expenses' incurred by the Landlord's counsel, and when such claim, if any, should be paid.

I. ADMINISTRATIVE PRIORITY

11 U.S.C. § 365(d)(3) requires a trustee (or debtor-in-possession) to "timely perform all the obligations of the debtor, ... 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." While any debate as, to whether this Bankruptcy Code section requires post-petition rent to be paid as an administrative expense has been resolved, for the most part, in favor of administrative priority, see, e.g., CIT Communications Finance Corp. v. Midway Airlines Corp. (In re Midway Airlines Corp.), 406 F.3d 229 (4th Cir.2005); In re CHS Electronics, Inc., 265 B.R. 339 (Bankr.S.D.Fla.2001), the debate rages on whether the trustee's obligation of timely performance includes payment of other amounts that may be due under a nonresidential lease, such as late charges or attorney's fees and costs. Furthermore, even courts that have recognized the trustee's obligation to pay at least some such charges as an administrative expense (the majority view), have not agreed on when these expenses should be paid.

In In re Midway Airlines Corp., the United States Court of Appeals for the Fourth Circuit held that the landlord or lessor is entitled to recover payments due under the lease such as attorney's fees, late fees, and interest as administrative expenses if the trustee's obligation has not been performed, or has not been modified by the court. 406 F.3d at 236. Bankruptcy courts have also interpreted the section 365(d)(3) mandate to "perform all obligations" to include attorney's fees authorized by a lease. See In re Revco D.S., Inc., 109 B.R. 264 (Bankr.N.D.Ohio 1989); In re Narragansett Clothing Co., 119 B.R. 388 (Bankr.D.R,J.1990); In re MS Freight Distribution, Inc., 172 B.R. 976 (Bankr. W.D.Wash.1994); In re Geonex Corp., 258 B.R. 336 (Bankr.D.Md.2001). In In re MS Freight Distribution, Inc., the court concluded that section 365(d)(3) required a trustee to fulfill all obligations of the debtor under the lease during the sixty (60) days prior to assumption or rejection, noting "[t]o the extent the lease .. . requires the payment of interest, late fees and attorney's fees and costs, [the landlord] may recover those amounts." Id. at 979; see also In re Pacific Sea Farms, Inc., 134 B.R. 11 (Bankr.D.Hawai`1991).

A minority of courts have declined to extend administrative priority to attorney's fees incurred prior to assumption or rejection of a lease. In In re Pudgie's Dev. of N.Y., Inc., 202 B.R. 832 (Bankr.S.D.N.Y. 1996), the lease in question provided that counsel fees incurred to enforce the lease were to be considered part of the rent. The court nevertheless denied administrative priority to the landlord's attorney fee request and reasoned:

Given the fact that section 365(d)(3) mandates a departure from the normal priority of claims, it should be strictly construed. While the statutory obligation of "timely" performance is unambiguous with respect to rent, the obligation with respect to counsel fees is not. The language employed in section 365(d)(3) suggests a Congressional purpose to grant landlords a preferred position with respect to those obligations arising under the lease in a contractually determined time frame . [which] makes sense in the context of rent obligations; it does not with respect to an obligation to pay attorney's fees, which may fortuitously arise before or after the time period in question. In re Pudgie's Dev. of N.Y., Inc., 202 B.R. at 837. The Court rejects this view.

The legislative history of section 365(d)(3) illustrates Congress' intent to fully compensate landlords during the first sixty (60) days of a bankruptcy case, or such longer time as an extension is granted, while the trustee or debtor-in-possession preserves its right to assume or reject the lease. In re Pacific Sea Farms, 134 B.R. at 14. Where the trustee or debtor-in-possession fails to perform the primary obligation under the lease (i.e. to pay rent), and the landlord incurs legal fees seeking to obtain payment, it follows that the attorney's fees, if authorized under the lease and linked to enforcement of the payment obligation, are entitled to the same administrative priority as the rent obligation. This result is not inconsistent with the findings of other bankruptcy courts. See, e.g., In re Exchange Resources, Inc., 214 B.R. 366 (Bankr.D.Minn.1997); Cf. In re Food Etc., LLC, 281 B.R. 82 (Bankr. S.D.Ala.2001)(court allowed reasonable attorney's fees to equipment lessor in case involving the similar language of § 365(d)(10)).

However, the landlord's entitlement to an administrative priority claim is limited first, to those attorney's fees and expenses, if any, authorized under the lease, see Cukierman v. Uecker (In re Cukierman), 265 F.3d 846 (9th Cir.2001)(holding that a threshold question that must be resolved prior to determination of whether attorney's fees and expenses may be entitled to administrative priority, is, what are the obligations of the lease), and, second, to fees and expenses incurred as a result of the trustee's or debtor-in-possession's failure to pay post-petition rent, rather than all fees and expenses incurred by a landlord in connection with a tenant's bankruptcy. In Alvarado v. Walsh (In re LCO Enterprises, Inc.), 180 B.R. 567 (9th Cir. BAP 1995), a landlord sought to recover attorney's fees incurred in defense of a preference action brought by the Chapter 11 trustee. The court recognized that attorney's fees are recoverable if linked to litigation enforcing the contract, but denied the landlord's request as the preference litigation was based wholly in bankruptcy law. "Absent bad faith or harassment, attorneys' fees are not available for the litigation of federal bankruptcy issues under a contract which provides for attorneys' fees for enforcement of the contract." Id. at 571. In In re Geonex Corp., the court considered a lease which obligated the debtors to ...