In re Steiner
| Decision Date | 12 June 1985 |
| Docket Number | Bankruptcy No. 84-00861. |
| Citation | 50 BR 181 |
| Parties | In re Edwin Lewis STEINER, III and Kay Lenore Steiner, Debtors. |
| Court | U.S. Bankruptcy Court — Northern District of Ohio |
John M. Carey, Toledo, Ohio, for Lyons.
Richard Curtin, Columbus, Ohio, for DIP.
John J. Hunter, Toledo, Ohio, for Marion PCA.
This cause comes before the Court upon the Objection to Claim filed by the Debtors-In-Possession in this case. The Court has conducted a Hearing on this Objection, at which the parties agreed that the Court may make a dispositive decision on the merits of the Objection based upon the arguments of counsel filed prior to the Hearing. The Court has reviewed those arguments as well as the Exhibits attached thereto. Based upon that review and for the following reasons the Court finds that the Objection should be sustained in part, and that the Hearing should be continued for further hearings consistent with this Opinion.
On February 29, 1980, the Debtors-In-Possession entered into a lease agreement with Baldwin United Leasing Company (hereinafter Baldwin), whereby Baldwin would lease to the Debtors-In-Possession an implement of John Deere farming equipment. It is unclear exactly what type of equipment is involved, inasmuch as the documents list the item only as a "John Deere". The terms of that lease provided for annual rent payments of Thirteen Thousand Three Hundred Six and no/100 Dollars ($13,306.00) in each of the four (4) years the lease was to be in effect. On January 12, 1982, the Debtors-In-Possession entered into a second lease with Baldwin for the use of an Allis-Chalmers combine. The terms of that lease called for annual rent payments of Twenty-two Thousand Five Hundred Sixty-eight and no/100 Dollars ($22,568.00) in each of the five (5) years the lease was to exist. Subsequent to the execution of these agreements, Baldwin assigned its rights in the leases to Lyons Capital Resources, Inc. (hereinafter Lyons), the claimant involved in the present Objection.
In addition to the provisions for rent, the lease provided that upon its expiration, the Debtors-In-Possession would have the option to purchase the leased equipment at present fair market value. The contract also provided that in the event the lease was declared to be in default, the Debtors-In-Possession would be liable to the Lessor for the remaining rent due on the lease, the expenses of selling or re-leasing the equipment, and certain residual values that were based upon the property's depreciation during the pendency of the lease. The Debtors-In-Possession's liability for future rent was to be reduced by any proceeds realized by the Lessor from the re-leasing or sale of the property.
On May 21, 1984, the Debtors-In-Possession filed their voluntary Chapter 11 Petition with this Court. At that time they were in default of the January 1, 1984, payment for the combine. They were also in default of the John Deere lease for failure to pay certain residual values. Although the disposition of the John Deere equipment is unclear, the Debtors-In-Possession remained in possession of the combine throughout the 1984 growing season. No money has been paid to Lyons for the post-petition use of the combine; however, the parties have agreed that Lyons is entitled to a pro-rated allowance of the contract rental rate for that usage. On or about December 12, 1984, after the Debtors-In-Possession had completed harvesting the 1984 crops, the combine was returned to Lyons.
Lyons has filed a claim in this case for the amounts it asserts are due and owing as a result of the Debtors-In-Possession's breach of the lease. Specifically, Lyons claims that they are owed all rent due at the time the Petition was filed, all future rent reserved by the lease, late charges, and the residual values. The Debtors have objected to these claims on several grounds. Included in these assertions is the contention that the accelerated rents constitute a penalty, claims for which are not properly allowable. The Debtors also assert that the leases were, in fact, contracts for the purchase of the equipment and should, therefore, be treated as such.
The provisions of 11 U.S.C. § 365(a) state in pertinent part:
Under this provision, a trustee or a debtor-in-possession, see, 11 U.S.C. § 1107, may reject any executory contract to which the debtor is a party. In a Chapter 11 case a debtor has until confirmation of the plan to accept or reject a contract. 11 U.S.C. § 365(d). If the debtor rejects a contract, it is deemed to constitute a breach of the contract which occurred immediately prior to the filing of the petition.
The claim which results from the rejection of an unexpired lease is governed by the provisions of 11 U.S.C. § 502 which states in pertinent part:
"(g) A claim arising from the rejection, under section 365 of this title or under a plan under chapter 9, 11, or 13 of this title, of an executory contract or unexpired lease of the debtor that has not been assumed shall be determined, and shall be allowed under subsection (a), (b), or (c) of this section or disallowed under subsection (d) or (e) of this section, the same as if such claim had arisen before the date of the filing of the petition."
Under this section, a claim arising from the rejection of an unexpired lease of personal property is limited in the same manner as is a claim for the rejection of an unexpired lease of real estate. See, Allied Technology, Inc. v. R.B. Brunemann & Sons, Inc. (In re Allied Technology, Inc.), 25 B.R. 484 (Bkcy.S.D. Ohio 1982). Such limitations are addressed by the provisions of 11 U.S.C. § 502(b) which state, in pertinent part:
Under these provisions, the lessor of a rejected lease is entitled to a claim for all pre-petition rent due prior to the filing of the petition and to the future rent that would have been paid had the lease not been breached. The lessor's claim for future rent is, however, limited to the greater of one (1) year's rent or fifteen (15%) percent of the total amount which would have been paid over the life of the lease up to a total of three (3) years' rent. The Bankruptcy Code does not require a debtor to honor a claim for any amount of future rent which exceeds these amounts. The Code also, by exclusion, precludes the allowance of a lessor's claim for any other charges which arise under the terms of the contract.
In the present case, the Debtors-In-Possession have not yet had a plan of reorganization confirmed by this Court. Accordingly, the period in which to accept or reject contracts has not yet expired. As indicated in Matter of Computerized Steel Fabricators, Inc., 40 B.R. 344 (Bkcy.S.D.N. Y.1984), the rejection of an executory contract requires Court approval, and until such time as the rejection is approved the contract continues in effect. However, as a practical matter, the Debtors-In-Possession have rejected the lease by virtue of their return of the combine to Lyons. While such procedure is not favored, it would serve no purpose to hold that the contract had not been rejected simply because the Court has not yet sanctioned the rejection. Furthermore, it is anticipated that the plan of reorganization will...
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