In re Callister, Bankruptcy No. 80-02605.

Decision Date20 November 1981
Docket NumberBankruptcy No. 80-02605.
Citation15 BR 521
CourtU.S. Bankruptcy Court — District of Utah
PartiesIn re William S. CALLISTER, dba Callister & Sons Trucking, and Gloria K. Callister, Debtors.

David E. Leta, Gary F. Kennedy, Roe & Fowler, Salt Lake City, Utah, for debtor.

Elaine England, Richman & Wright, Salt Lake City, Utah, for unsecured creditors committee.

William T. Thurman, McKay, Burton, Thurman & Condie, Salt Lake City, Utah, for Ingersoll-Rand Financial Corp.

Harriet E. Styler, Salt Lake City, Utah, pro se as Trustee.

MEMORANDUM DECISION

RALPH R. MABEY, Bankruptcy Judge.

FACTUAL AND PROCEDURAL BACKGROUND

This case raises issues concerning the superpriority provision of 11 U.S.C. Section 507(b).

Debtor, the sole proprietor of a trucking business, filed a petition under Chapter 11 on December 12, 1980. Ingersoll-Rand Financial Corporation (Rand), which holds a security interest in three tractors and two trailers, filed a complaint seeking relief from the automatic stay on January 2, 1981. A hearing was held January 23. At that time, the parties stipulated that the collateral was worth $129,000,1 that the debt owing was $106,248,2 and that debtor would pay $1,232 per month beginning February 1 to Rand. Debtor also agreed to insure the equipment as required in the security agreements.3 A procedure was established for lifting the stay in the event of default.4 The court ruled that Rand was adequately protected under this arrangement.5 Two payments were made, but debtor defaulted May 1,6 and the stay was lifted June 5. The case was converted to Chapter 7 on August 5.7

Meanwhile, counsel for debtor filed an application for allowance and payment of fees in the amount of $9,052 under 11 U.S.C. Section 331. Counsel for the unsecured creditors committee likewise requested fees in the amount of $2,994. Rand objected, claiming that the fees might be allowed but not paid because it was entitled to a superpriority under 507(b).8

Hearings were held August 18 and 19. The evidence showed that two of the three tractors underwent repair from January to June and therefore conferred no benefit on the estate. The third tractor was used for approximately three weeks but it caught fire and was destroyed. Through inadvertence, no insurance was in force to indemnify this casualty.9 The trailers were used without mishap.

Debtor values the collateral, as of June 5, at $89,600.10 This is the value "as is" without repairs or payment of repair bills. In his view, with the exception of the burned tractor, minimal depreciation has occurred. The decline in value is attributable to the uninsured loss and depression in prices.

Rand values the collateral, as of the same time, and also "as is," at $63,900.11 In its view, substantial depreciation, independent of the accident, has taken place.

The court values the collateral as of June 5 at $68,900.12 Subtracting costs of repair in the amount of $7,09713 leaves $61,803. Hence, the collateral has dwindled in worth by $67,197. At least four factors account for this decrease. The uninsured loss equals $19,411.14 Error in the stipulation is responsible for $33,447.15 Market forces caused a loss of $7,993.16 Use caused a loss of $6,346.17 Because of the error in the stipulation, the allowed secured claim on January 23 was $95,553, not $106,248. The allowed secured claim on June 5 was $61,803, for a reduction of $33,750.

These facts raise several issues which may be classified under the headings of statutory construction, allowance, and rank. Under statutory construction: May a creditor ineligible for an administrative claim under 11 U.S.C. Section 503(b) qualify for superpriority status under 507(b)? Under allowance: Are losses caused by failure to obtain insurance, an error in the stipulation, market forces, and depreciation recompensable under 507(b)? Under rank: Does the superpriority take precedence over interim fees under 331? Under what, if any, circumstances may fees be paid notwithstanding the existence of or potential for a superpriority? These questions are discussed below.18

IS THE SUPERPRIORITY AN ADMINISTRATIVE EXPENSE OR SOMETHING MORE?

The superpriority provision is found in 507(b) which states:

If the trustee, under Section 362, 363, or 364 of this title, provides adequate protection of the interest of a holder of a claim secured by a lien on property of the debtor and if, notwithstanding such protection, such creditor has a claim allowable under subsection (a)(1) of this section arising from the stay of action against such property under Section 362 of this title, from the use, sale, or lease of such property under Section 363 of this title, or from the granting of a lien under Section 364(d) of this title, then such creditor\'s claim under such subsection shall have priority over every other claim under such subsection.

11 U.S.C. Section 507(a)(1) gives priority to "expenses allowed under Section 503(b)" which include, in part, "the actual, necessary costs . . . of preserving the estate."19

Debtor maintains that only creditors who have claims under 503(b) and who lose adequate protection may enjoy the benefit of 507(b). This view draws support from the face of 507(b) which speaks of "a claim allowable under subsection (a)(1) of this section" which in turn refers to 503(b).20 But 507(b), on closer analysis, is the proverbial prism in the fog. A review of its language, history, and relation to adequate protection, however, may elucidate its meaning.

The Language of 507(b)

The use of property for the estate creates an administrative claim under 503(b). Curbing repossession of property through the stay, without more, may not lead to the same result. Section 507(b), however, treats property used and property subject to the stay, implying that both, so long as they lose adequate protection, meet the standards of 503(b). Indeed, commentators appear to equate inadequate protection with allowability under 503(b). See, e.g., 3 Collier on Bankruptcy ¶ 507.05 at 507-46 (15th ed. 1980) ("In essence, 507(b) affords a superpriority to post-petition creditors in whose case the protection given by the trustee is inadequate to protect the creditor's interest thereby resulting in an administrative expense claim under Section 503(b)(1)(A)") (emphasis supplied).20a The facts, however, may belie this assumption. Here, for example, debtor needed the equipment, but circumstance, for the most part, kept it idle. If the equipment has not been an "actual, necessary cost . . . of preserving the estate," does it nevertheless qualify as a superpriority because its use is implicit in 507(b)?

History of the Superpriority

The superpriority may be difficult to articulate by statute, because it is equitable in origin and genealogy. The Commission would have permitted the trustee to use collateral subject to a request "to modify the stay by imposing such conditions on the use of the property or the proceeds thereof as will adequately protect the secured party." Report of the Commission on the Bankruptcy Laws of the United States, H.Doc.No.93-137, pt. II, Section 7-203(b)(2) (1973). Granting administrative priority was an appropriate condition "if it is clear that the proceeds of the liquidation of property of the estate available to pay the claim will be sufficient." Id. at Note 3.

The authority for this proposal was In re Yale Express System, Inc., 384 F.2d 990 (2d Cir. 1967). In Yale Express, the creditor held a security interest in truck bodies and trailers sold to a freight carrier. It sought reclamation of the collateral. The district court, feeling bound by In re Lake's Laundry, Inc., 79 F.2d 326 (2d Cir. 1935), located title to the property in the debtor and denied reclamation. On appeal, the second circuit, noting that the Uniform Commercial Code was "`well on its way to becoming a truly national law of commerce,'" discarded the "`barren distinction'" between conditional sales agreements and chattel mortgages as a basis for reclamation rulings. Instead, "bankruptcy courts should assume their proper equitable function of scrutinizing each petition for reclamation, in order to arrive at a just determination. Equitable considerations and the substance of the transaction should govern, regardless of the form of the security agreement." In re Yale Express System, Inc., 370 F.2d 433, 438 (2d Cir. 1966) (emphasis in original omitted). The case was remanded for a determination whether, in light of these "equitable considerations," the debtor should retain the property. The district court was directed to consider the possibility of rental payments for use of the equipment.

On remand, the district court again denied reclamation and a second appeal followed. A different panel of the second circuit upheld the order because it was "unable to conclude that the court had abused its equitable discretion." In re Yale Express System, Inc., 384 F.2d 990, 992 (2d Cir. 1967). The opinion relied upon findings that the equipment was essential to the business and that reorganization was "not a mere will-o'-the wisp" but a "reasonable possibility." Id. at 991. Applications for payment of rent were also denied on the ground that, if the debtor paid rent to this creditor, it would have to pay rent to all which would "nullify the reorganization as effectively as granting the petition for reclamation." Id. at 992. As an afternote, the court remarked that it had not "overlooked the creditor's contention that equitable considerations compel a favorable ruling in its behalf because the vehicles in which it claims a security interest are depreciating. But to such extent as the creditor has been damaged by the use of its property pending the reorganization, it is entitled to equitable consideration in the reorganization plan citation omitted." Id. (Emphasis supplied.)21

Yale Express alarmed lenders and they mounted an attack on its codification. One observer wrote that "granting a priority just...

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