In re Coal-X Ltd. 76, Bankruptcy No. 84C-02237
| Decision Date | 07 April 1986 |
| Docket Number | Civ. No. 84PC-1651.,Bankruptcy No. 84C-02237 |
| Parties | In re COAL-X LTD. "76", Debtor. C & C COMPANY, a West Virginia corporation, successor in interest to Walter Kellogg, Trustee, Plaintiff. v. SEATTLE FIRST NATIONAL BANK, Defendant. |
| Court | United States Bankruptcy Courts. Tenth Circuit. U.S. Bankruptcy Court — District of Utah |
Michael N. Zundel, Jardine, Linebaugh, Brown & Dunn, Salt Lake City, Utah, for C & C Co.
Peter W. Billings, Jr. and Gary E. Jubber, Fabian & Clendenin, Salt Lake City, Utah, for Seattle First Nat. Bank.
Coal-X Ltd. "76", the debtor, filed a petition for voluntary relief under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the District of Colorado on May 18, 1984. The debtor is a limited partnership whose general partner, Coal-X, Inc., a Utah corporation, is a wholly-owned subsidiary of Gulf Energy Corporation ("Gulf"), which is also a Utah corporation. An involuntary bankruptcy petition was filed against Gulf on April 30, 1984, and Gulf consented to entry of an order for relief. Coal-X, Inc. filed a voluntary Chapter 11 petition on May 21, 1984. The debtor is one of approximately 15 limited partnerships formed by Gulf and its subsidiaries. Its principal assets consist of coal mineral interests and extraction equipment located in West Virginia. On September 4, 1984, the United States Bankruptcy Court for the District of Colorado entered an order transferring this case and those of Gulf Energy Corporation, Coal-X, Inc. and related entities to this Court.
Christian Land Corporation and C & C Company are West Virginia corporations. On May 1, 1975, Christian Land Corporation entered into an agreement to lease certain coal mining property located in West Virginia to C & C Company. On March 22, 1976, C & C Company entered into an agreement to sublease the property to Coal-X, Inc. Under the terms of the sublease, Coal-X, Inc. agreed to pay at least $60,000.00 per year to Christian Land Corporation and $25,000.00 per year to C & C Company. On October 4, 1976, Coal-X, Inc. assigned the sublease to the debtor. Seattle First National Bank ("Seafirst") is the debtor's largest secured creditor. It advanced the sum of $760,000.00 to the debtor on November 26, 1981. As security for the loan the debtor pledged all of its assets to Seafirst on December 19, 1981.
Prior to filing its bankruptcy petition on May 18, 1984, the debtor was current on minimum annual royalty payments to Christian Land Corporation and C & C Company through April 30, 1984. But the debtor failed to pay the annual royalties which became due on May 1, 1984.
On September 27, 1984, this Court entered an order converting the debtor's Chapter 11 case to a case under Chapter 7 and appointing Walter Kellogg trustee. On October 2, 1984, the trustee filed an application for authority to sell coal mining equipment located on the leased premises free and clear of liens with valid liens to attach to the sale proceeds. Following a hearing on October 19, the Court entered an order authorizing the sale. The equipment has been sold and the proceeds are available for disbursement.
On October 5, 1984, Christian Land Corporation and C & C Company filed a Notice of Lien pursuant to 11 U.S.C. § 546(b) against the debtor's estate, claiming a landlord's lien on the personal property of the debtor for rent, storage, and damages pursuant to the laws of the state of West Virginia and the lease agreement. On October 18, 1984, the trustee commenced an adversary proceeding to avoid the lien of Christian Land Company and C & C Company. The defendants consented to entry of judgment avoiding their liens and preserving them for the benefit of the estate pursuant to Sections 545 and 551 of the Bankruptcy Code. On December 6, 1984, the trustee commenced this adversary proceeding to determine the validity, priority, and extent of the landlord's lien vis-a-vis the lien of Seafirst.
On February 5, 1985, the trustee filed a motion, pursuant to Bankruptcy Rule 9019, to approve a compromise and settlement with Seafirst whereby Seafirst would stipulate to entry of judgment against it in the amount of $22,000.00. Christian Land Corporation and C & C Company objected to the proposed settlement, contending that it was not in the best interest of the estate to compromise an $85,000.00 claim, which represents the only substantial unencumbered asset of the estate, for $22,000.00. At the hearing on the motion to approve the compromise, the Court authorized C & C Company to purchase the trustee's cause of action for $22,000.00 and to prosecute it in its own name as successor in interest to the trustee.1 At the time it purchased the trustee's cause of action, C & C Company was not asked or required to release any further claims it might have against the debtor's estate and it did not agree to do so. The language of the order providing for assignment of the cause of action did not expressly or by implication preclude C & C Company from asserting an administrative claim.2
Following the substitution of parties, in June, 1985, C & C Company and Seafirst filed cross-motions for summary judgment. The matter was heard on August 27, 1985. The Court ruled from the bench that (1) the statutory landlord's lien for rent has priority over the lien of Seafirst, and (2) the landlord's lien for rent is subject to apportionment, and secured payment for rent between May 1, 1984, the date the annual rental payment was due, and October 31, 1984, the date the trustee rejected the lease. Counsel for C & C Company was directed to prepare and submit a form of judgment.
On January 15, 1985, Christian Land Corporation filed a priority proof of claim in the amount of $30,694.00, and C & C Company filed a priority proof of claim in the amount of $30,221.44. The claims represented amounts claimed as an administrative expense for the use and occupancy value of the property, as well as for post-petition damages to the property. The trustee considered the amounts claimed to be excessive and filed objections. The parties agreed to a compromise and settlement of their dispute. Seafirst objected to allowance of these claims in light of the Court's ruling in the summary judgment proceeding.
Seafirst objects to the form of the proposed judgment on the ground that it provides for a money judgment, together with postjudgment interest, against Seafirst. The creditor points out that the complaint sought only a determination of the validity, priority, and value of the statutory landlord's lien, and did not pray for a money judgment with interest. Seafirst further argues that the trustee's interest in the proceeds from the sale of the debtor's mining equipment, as measured by the preserved lien, should be reduced to the extent the estate pays C & C Company for its administrative expense claim. C & C Company replies that as successor in interest to the trustee it is entitled to keep the benefit of the avoided lien regardless of what happens to the claims they once secured. C & C Company also filed a motion to amend the summary judgment to provide for prejudgment interest.
The objection and motions were heard by the Court on October 18, 1985 and taken under advisement.
There are three issues before the Court. The first is whether C & C Company is entitled to a money judgment against Seafirst on its complaint to determine the validity, priority, and value of its landlord's lien. The second is whether C & C Company's lien should be reduced by the amount of any administrative expense claim paid to C & C Company by the trustee of the debtor's estate. The third issue is whether C & C Company is entitled to add prejudgment interest to the amount of its lien.
The Court's analysis of the relationship between C & C Company's recovery in its lien priority litigation and its claim for administrative rent must begin with Section 551 of the Bankruptcy Code, which provides:
Any transfer avoided under section 522, 544, 545, 547, 548, 549, or 724(a) of this title, or any lien void under section 506(d) of this title, is preserved for the benefit of the estate but only with respect to property of the estate.
This provision represented a change from prior law. S.Rep. No. 95-989, 95th Cong., 2d Sess. 91 (1978), reprinted in 1978 U.S. Code Cong. & Admin.News, p. 5877. Under the Bankruptcy Act, the authority of the bankruptcy court to order that an avoidable lien be preserved for the benefit of the estate was found in scattered provisions enacted during the long history of the 1898 law. Waldschmidt v. Edgcomb Metals (In re Ward), 42 B.R. 946, 951 n. 8, Bankr.L.Rep. (CCH) ¶ 70,072, 11 C.B.C.2d 569 (Bkrtcy.M.D.Tenn.1984). See Advisory Committee Note to former Bankruptcy Rule 611.
In 1973, the Supreme Court promulgated Bankruptcy Rules pursuant to 28 U.S.C. § 2075. The predecessor of Section 551 was Rule 611, which provided:
Whenever any transfer is voidable by the trustee, the court may determine, in an adversary proceeding in which are joined persons claiming interests or rights in the property subject to the transfer, whether the transfer shall be avoided only or shall be preserved for the benefit of the estate.
The Advisory Committee Note observed that "the power to preserve a voidable lien for the benefit of the estate probably inheres in the court of bankruptcy as a court of equity." Unlike Section 551, however, preservation of a lien was not automatic but discretionary with the court. See 4 COLLIER ON BANKRUPTCY ¶ 67.16, at 185-86 (14th ed. 1978).
The bankruptcy legislation proposed by the Commission on the Bankruptcy Laws of the United States in 1973 retained the discretionary character of lien preservation provided by Rule 611:
Section 4-610. Preservation of Voidable Transfer. Whenever any transfer is voidable by the trustee, the court may determine on...
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