In re Carmichael, Bankruptcy No. 89 B 30695.
| Citation | 109 BR 849 |
| Decision Date | 04 January 1990 |
| Docket Number | Bankruptcy No. 89 B 30695. |
| Parties | In re Lloyd CARMICHAEL and Lorraine Carmichael, Debtors. |
| Court | United States Bankruptcy Courts. Seventh Circuit. U.S. Bankruptcy Court — Northern District of Illinois |
Stephen G. Balsley, Rockford, Ill., for debtors.
Joel A. Schechter, Chicago, Ill., for applicant.
This matter comes before the Court on an Application for Payment of Administrative Expenses, filed by Crossland Credit Corp. (Crossland). The Debtors, Lloyd and Lorraine Carmichael, are represented by Attorney Stephen G. Balsley. Crossland is represented by Attorney Joel A. Schechter.
This Memorandum Opinion and Order shall represent findings of fact and conclusions of law pursuant to Rule 7052 of the Federal Rules of Bankruptcy Procedure.
The facts are virtually undisputed. The Debtors leased certain irrigation equipment, through a series of transactions, from Crossland. The lease was to terminate by its terms on December 1, 1991, and provided for annual payments of $50,000. On May 3, 1989, the Debtors filed a Petition under Chapter 12 of the Code. At that time, the Debtors were in default for one payment under the lease, in an approximate amount of $53,750. Crossland subsequently inquired whether the Debtors intended to assume or reject the lease on the irrigation equipment. The Debtors indicated that they had not decided whether to assume or reject the lease, but suggested that a mutual release of liabilities be executed in exchange for the cancellation of the lease. On May 30, 1989, Crossland rejected the Debtors' proposal.
On July 14, 1989, Crossland filed an Application to Compel Assumption or Rejection of Lease and For Administrative Expenses. The Debtors were ordered to assume or reject Crossland's lease by August 25, 1989. After failing to do so, the lease was deemed rejected. The issue which remains to be addressed is whether Crossland is entitled to recover the pro-rata share of rent on the equipment over the period between the Debtors' bankruptcy filing and the date the lease was rejected, as an administrative expense. The Debtors have alleged that the irrigation equipment sat idle on leased property pursuant to a lease that had expired prior to the Debtors' bankruptcy filing and was not used by the Debtors. The Debtors also alleged that Crossland did not attend the 341 meeting to determine whether the equipment was being used. The Debtors argued that Crossland is not entitled to obtain administrative expenses on the equipment because the equipment was not used and did not benefit the estate.
Crossland contends that although the equipment was not used by the Debtors, administrative expenses in the form of rent should be allowed for the period of time up to the date of rejection of the lease because the Debtors unreasonably withheld possession of the equipment. Specifically, Crossland asserts that the Debtors should have informed Crossland that it may take possession of the equipment because they knew they had no use for the irrigation equipment and knew they were not using the equipment.
Section 503(b) provides in relevant part:
11 U.S.C. § 503(b).
This section has been applied by several courts to requests for "use and occupancy" expenses incurred pending the assumption or rejection of executory contracts, but with differing results. One line of authority holds that the lessor has a right to assume that until a debtor rejects a lease, the leased property is being used for the purpose for which it was leased and that the debtor will pay the reasonable value of the measured by such use. See, In re Fred Sanders Co., 22 B.R. 902 (Bankr.E.D.Mich.1982); In re GHR Energy Corp., 41 B.R. 668 (Bankr.D.Mass.1984); In re Nordyke, 43 B.R. 856 (Bankr.D.Or. 1984). The court in Fred Sanders observed that:
the desire to keep a lid on expenses of administration is laudable, but an estate is not to be maintained for the debtor or creditors at the expense of those who have valid charges against property of the estate.
22 B.R. 906. Under this approach, administrative expenses are recoverable regardless of whether the debtor used the property. The case of Broadcast Corporation of Georgia v. Broadfoot II (In re Subscription Television of Greater Atlanta) 789 F.2d 1530 (11 Cir.1986), represents the line of authority which rejects the reasoning in Fred Sanders, and holds that the trustee's rejection of an executory contract or lease does not give rise to administrative expenses unless the trustee actually uses the property. In Subscription Television, a contract requiring the applicant to provide a television signal to the debtor was deemed rejected after the trustee declined to assume it within the 60 day statutory period. The applicant sought administrative expenses for the transmitting of the signal over the 60 day period, although the signal was actually transmitted only 17 days. The District Court allowed recovery for only the time the signal was actually transmitted, and the Eleventh Circuit affirmed, adopting the reasoning of the District Court.
The District Court in Subscription Television reasoned that the inclusion of the words "actual" and "necessary" in § 503(b)(1) mean that the estate must accrue a real benefit from the transaction, as opposed to mere potential benefit, for administrative expense priority to be granted on claims against the estate. The court also found that Fred Sanders misinterpreted the distinction between the entitlement to an administrative claim for the actual benefit to the estate, and the amount of administrative expenses which may be recovered, once allowed, based upon the trustee's particular use of the asset. Only after it is established that the estate actually benefited from the transaction may a court estimate the amount of the "benefit" by considering the reasonable use of the property. See also, In re Pickens-Bond Construction Co., 83 B.R. 581 (Bankr.E.D. Ark.1988); In re N-Ren, 68 B.R. 404 (Bankr.S.D.Ohio 1986); In re Intran Corp., 62 B.R. 435 (Bankr.C.D.Minn.1986).
This Court is persuaded that the decision in Subscription Television correctly interprets § 503. The use of the terms "actual" and "necessary" were not accidental but were included to impose the requirement that the estate is actually benefited. The language of § 503 continues the longstanding rule under the former Bankruptcy Act that a creditor's right to payment will be afforded priority only to the extent the estate was benefited in fact from the consideration supporting the creditor's claim. See, American Anthracite & Bituminous Coal Corp. v. Leonardo Arrivabene, S.A., 280 F.2d 119 (2nd Cir.1960); In re Mammoth Mart, Inc., 536 F.2d 950 (1st Cir.1976).
Moreover, it appears that precedent in this jurisdiction favors the position adopted in Subscription Television. Claims should be granted priority status only if the claim comports with the language and underlying purposes of § 503. See, In re Jartran, 732 F.2d 584 (7th Cir.1984). In Jartran, the court held that when third parties are induced to supply goods or services to the debtor, and the estate is benefited, the claims of those entities should be afforded priority so as to provide incentive to third parties to furnish credit necessary for the debtor's reorganization. It cannot be said that providing administrative priority to a prepetition lessor's claim would further this policy.1
The court in Jartran also addressed the cases of American Anthracite & Bituminous Coal Corp. v....
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