In re Palace Quality Services Industries, Inc., 98-57698.
| Decision Date | 09 October 2002 |
| Docket Number | No. 98-57698.,98-57698. |
| Citation | 283 B.R. 868 |
| Parties | In re PALACE QUALITY SERVICES INDUSTRIES, INC., Debtor. |
| Court | U.S. Bankruptcy Court — Eastern District of Michigan |
Daniel M. Katlein, Detroit, MI, for Debtor.
Alicia S. Wellford, Detroit, MI, for RDK&Z Lease Company.
Mark S. Shapiro, Southfield, MI, for Chapter 7 Trustee.
Debtor leased equipment from RDK & Z Lease Company ("RDK & Z") for use in its business. The issue before me is whether RDK & Z may recover from the estate the actual post-petition rents and late fees due under the lease agreement which arose prior to its rejection by the Chapter 7 trustee. The Chapter 7 trustee contends that RDK & Z is not entitled to any recovery subsequent to the cessation of Debtor's operations during the Chapter 11 proceeding.
For the reasons stated in this opinion, I conclude that RDK & Z is entitled to an administrative claim for these unpaid post-petition rents and late fees. I do not agree with RDK & Z's contention that it is entitled to this claim because of Section 365(d)(10) of the Bankruptcy Code.1 Rather, I conclude that RDK & Z is entitled to this claim simply because these unpaid rents and late fees constitute expenses entitled to administrative priority under Section 503(b)(1).
Debtor filed for relief under Chapter 11 of the Bankruptcy Code on October 9, 1998. Debtor operated its business in the Chapter 11 proceeding until sometime in June 2000. However, Debtor did not immediately convert to a Chapter 7 proceeding once it ceased operations. Rather, Debtor remained in the Chapter 11 proceeding as a non-operating entity for approximately five months. It finally converted on November 1, 2000.
Debtor had leased from RDK & Z two washing machines for use in its commercial laundry business. The machines, known as "tunnel washers," were so large that one party described them as two missile silos set on their sides. Debtor neither assumed nor rejected the RDK & Z lease agreement during the Chapter 11 proceeding although Debtor did continue using the two tunnel washers until it ceased operations. The tunnel washers remained at Debtor's former business location.
The Chapter 7 trustee did not operate Debtor's business after the case was converted and therefore the tunnel washers remained unused during the Chapter 7 proceeding. The Chapter 7 trustee did not assume or reject the RDK & Z lease agreement and he did not seek an extension of the time within which he could assume or reject it. Therefore, the RDK & Z lease agreement was deemed rejected as a matter of law as of December 30, 2000. 11 U.S.C. §§ 348(c), 365(d)(1). Neither RDK & Z nor the Chapter 7 trustee made any effort to remove the tunnel washers from Debtor's former business premises after the rejection of the lease and they were still at that location when RDK & Z filed its motion.
Debtor's lease agreement with RDK & Z required it to pay $17,250.00 per month as rent for the two tunnel washers. Debtor, as debtor-in-possession of the Chapter 11 estate, paid this amount to RDK & Z as post-petition rent for the remaining three months of 1998, for all of 1999, and for the first three months of 2000. However, Debtor paid only $16,850.00 per month to RDK & Z for April, May, and June of 2000 and Debtor did not pay anything to RDK & Z after it ceased operations in June 2000. The Chapter 7 trustee has made no rental payments to RDK & Z on account of the tunnel washers.
RDK & Z's motion seeks the allowance of an administrative expense in the amount of $120,675.00. Of this total, RDK & Z claims that $81,000.00 represents unpaid lease payments during the balance of Debtor's Chapter 11 proceeding,2 $3,450.00 represents contractual late fees on account of the unpaid Chapter 11 rents, $34,500.00 represents the two months of rent during the period between the November 1, 2000 conversion and the December 30, 2000 lease rejection, and $1,725.00 represents contractual late fees for these two months of unpaid rent. RDK & Z's claim against the estate does not include any amount for periods after December 2000 although Debtor remained in possession of the tunnel washers after that date. Apparently, RDK & Z concedes that whatever right it has against the estate for post-petition rental payments terminated upon the automatic rejection of the lease agreement under Section 365(d)(1).
RDK & Z offers separate theories for the allowance of its Chapter 11 administrative expense claim and its Chapter 7 administrative expense claim. RDK & Z relies upon Section 365(d)(10) as the basis for its Chapter 11 administrative claim. It argues that that section, in and of itself, creates an administrative-type claim against the estate equal to the difference between what Debtor should have paid RDK & Z under the lease agreement between the petition date (October 9, 1998) and the conversion date (November 1, 2000) and what Debtor actually paid to RDK & Z on account of the lease during this time period.
RDK & Z relies upon a different theory with respect to its Chapter 7 administrative claim.3 RDK & Z argues that it has an actual Section 503(b)(1)(A) administrative expense claim for the two months of lease payments owing subsequent to Debtor's conversion to a Chapter 7 proceeding. It further contends that the actual rent due under its lease agreement with Debtor for this period represents the tunnel washers' reasonable rental value.
The Chapter 7 trustee asserts that RDK & Z is entitled to a Chapter 11 administrative claim in the amount of $1,200, that amount being the unpaid balance of the rents owing for April, May, and June 2000, and to no Chapter 7 administrative expenses at all. He contends that RDK & Z should have removed the tunnel washers and re-let them once Debtor ceased operations. He suggests that RDK & Z's reason for not repossessing the tunnel washers was that RDK & Z's own interests were better served by leaving the tunnel washers in place and re-letting them to whomever might purchase the remaining equipment and the building in which they are housed.4
RDK & Z served its motion upon the Chapter 7 trustee and the mailing matrix and notified all recipients of their right to file written objections to the motion. The Chapter 7 trustee and two administrative claimants filed timely objections. Pursuant to this court's local rules, a hearing was held to consider these objections. Only RDK & Z and the Chapter 7 trustee appeared at the hearing. Neither party offered any proofs because there was no material fact at issue.5
Both Trustee and RDK & Z have focused on whether Section 365(d)(10) automatically grants RDK & Z an administrative priority claim for unpaid rents for the time period between when Debtor ceased operations (June 2000) and the conversion of Debtor's case from a Chapter 11 proceeding to a Chapter 7 proceeding (November 2000). RDK & Z contends that it is irrelevant whether Debtor ceased operations or not because Section 365(d)(10) required Debtor to continue making lease payments during that time period in any event.
(10) The trustee shall timely perform all of the obligations of the debtor, except those specified in section 365(b)(2), first arising from or after 60 days after the order for relief in a case under chapter 11 of this title under an unexpired lease of personal property (other than personal property leased to an individual primarily for personal, family, or household purposes), until such lease is assumed or rejected notwithstanding section 503(b)(1) of this title, unless the court, after notice and a hearing and based on the equities of the case, orders otherwise with respect to the obligations or timely performance thereof. This subsection shall not be deemed to affect the trustee's obligations under the provisions of subsection (b) or (f). Acceptance of any such performance does not constitute waiver or relinquishment of the lessor's rights under such lease or under this title.
Trustee's argument against the allowance of RDK & Z's claim for unpaid lease payments during this time period is based upon the interplay of Section 365(d)(10) and Section 348(d) of the Bankruptcy Code. Trustee acknowledges the case law which holds that the failure to comply with the performance obligations mandated by Section 365(d)(10) creates the equivalent of a priority claim. See, e.g., In re Kyle Trucking, Inc., 239 B.R. 198 (Bankr.N.D.Ind.1999); Omni Partners, L.P. v. Pudgie's Dev. of NY, Inc. (In re Pudgie's Development of NY, Inc.), 239 B.R. 688 (S.D.N.Y.1999). However, Trustee contends that a lessor's claim for this unfulfilled obligation loses its priority status upon conversion of the Chapter 11 proceeding to a Chapter 7 proceeding because of Section 348(d).
(d) A claim against the estate or the debtor that arises after the order for relief but before conversion in a case that is converted under section 1112, 1208, or 1307 of this title, other than a claim specified in section 503(b) of this title, shall be treated for all purposes as if such claim had arisen immediately before the date of the filing of the petition.
Trustee's argument is that while a lessor's claim for unpaid Chapter 11 lease payments may be the equivalent of a Section 503(b)(1) claim, it is not in fact a Section 503(b)(1) claim and Section 348(d) is quite clear that all post-petition claims incurred in a Chapter 11 proceeding other than those entitled to priority under Section 503(b) are to be treated as if they arose pre-petition if the Chapter 11 proceeding is subsequently converted to a Chapter 7 proceeding.
In re Eastern Agri-Systems, Inc., 258 B.R. 352 (Bankr.E.D.N.C.2000) appears to be the only reported case which has addressed this...
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