In re Sturgis Iron & Metal Co., Inc.

• Decision Date: 30 September 2009
• Docket Number: No. HK 08-02966.,HK 08-02966.
• Citation: 420 B.R. 716
• Parties: In re STURGIS IRON & METAL CO., INC., Debtor.
• Court: U.S. Bankruptcy Court — Western District of Michigan

420 B.R. 716

In re STURGIS IRON & METAL CO., INC., Debtor.

No. HK 08-02966.

United States Bankruptcy Court, W.D. Michigan.

September 30, 2009.

COPYRIGHT MATERIAL OMITTED

Richard E. Kruger, Esq., Detroit, MI, attorney for the Debtor.

Robert H. Skilton, Esq., Grand Rapids, MI, attorney for Fifth Third Leasing Co.

Aaron M. Silver, Esq., Detroit, MI, attorney for the Official Committee of Unsecured.

Creditors Dean E. Rietberg, Esq., Grand Rapids, MI, attorney for the United States Trustee.

OPINION RE: FIFTH THIRD LEASING'S AUGUST 22, 2008 MOTION

JEFFREY R. HUGHES, Bankruptcy Judge.

The SEET Connecticut Statutory Trust ("SEET Connecticut") has a commercial equipment lease with Sturgis Iron & Metal Co. ("Debtor"). Fifth Third Leasing Company ("Fifth Third") is the trust's servicing agent. Fifth Third requests, over the Committee's objection, the allowance of an administrative claim for rents and taxes owed on account of that lease.

BACKGROUND

Debtor recycled metal from scrapped vehicles. The equipment it used to process the vehicles included the shredder it leased from SEET Connecticut. That shredder, which is large enough to accommodate a school bus, is still located at Debtor's Indiana facility.

Debtor filed for Chapter 11 relief on April 4, 2008. Debtor intended from the outset to liquidate its operations and, in fact, it rejected the lease with Connecticut SEET by June of that same year. Nonetheless, two payments for rent had accrued prior to the lease's rejection and, as a consequence, Fifth Third demands that it be allowed as administrative rent the $404,120.16 that had accrued. The Committee opposes the request, arguing instead that Fifth Third is entitled to at most a nominal amount because the estate used the shredder little, if at all, postpetition.

Fifth Third also asks that it be allowed an administrative expense for 2008 property taxes associated with the shredder. Fifth Third calculates that the Debtor's pro rata share is $40,312.56. However, the Committee argues that the estate owes Fifth Third nothing because the lease had been rejected well before Debtor had any obligation to account for the taxes due.

DISCUSSION

A. Is Fifth Third Entitled To Receive As Administrative Rent Under Section 503(b)(1)(A)¹ The Two Postpetition Monthly Payments That Came Due Under The Lease Before Debtor Rejected It?

1. Logic and the Plain Meaning of Section 503(b)(1)(A)

It would appear at first glance that the Committee comes to this battle aboard a dreadnought while Fifth Third approaches on an open raft.² After all, the position the Committee advocates—that a lessor's claim for administrative rent is to be limited to only that which reflects the estate's actual use of the property demised—is supported by no less than 34 cases gathered from what the Committee accurately describes as "myriad" others. In contrast, Fifth Third has managed to muster only a single decision: In re Palace Quality Services, Inc.³

However, Fifth Third does enjoy the singular advantage of the undersigned being both the author of Palace Quality and this opinion.⁴ Fifth Third also has the benefit of logic and the English language, for both call into question the position the Committee advocates. Perhaps the law tolerates inconsistencies better than either science or mathematics. Nonetheless, the law, and in particular, codes, require at the very least that there be harmony between the rule espoused and the underlying concepts from which that rule is derived.

The Committee's problem is simply that the "well established" rule it cites falls short of this standard. To begin, executory contracts and unexpired leases are not, as the Committee would have it, interchangeable. An executory contract, to use Professor Countryman's definition, is:

[a] contract under which the obligation of both the bankrupt and the other party to the contract are so far unperformed that the failure of either to complete performance would constitute a material breach excusing the performance of the other.

Terrell v. Albaugh, 892 F.2d 469, 471, n. 2 (6th Cir.1989) (quoting from Vern Countryman, Executory Contracts in Bankruptcy: Part I, 57 Minn. L.Rev. 439, 460 (1973)).⁵

For example, A's agreement to sell Blackacre to B in exchange for $10,000 is an executory contract because A's obligation to deliver the deed to Blackacre as promised would be excused if B reneged on his promise to pay just as B's obligation to pay $10,000 would be excused if A reneged on his promise to deliver Blackacre.

A textbook lease does not fit this definition.⁶ A lease may still be unperformed from the tenant's perspective because of his promise to pay periodic rent over the lease's term.⁷ However, there typically is no corresponding unperformed promise on the part of the landlord because his commitment to turnover possession of the subject property would have been fulfilled at the outset of the lease.⁸ Indeed, a landlord's relationship with his tenant is more akin to an estoppel. The law, in other words, estops a landlord from retaking possession of what otherwise rightfully belongs to him only because the landlord agreed to relinquish possession of his property in the first place. The law equally recognizes, though, that this relinquishment of possession is itself a function of conditions the landlord also imposed, such as the tenant's timely payment of a specified rent. As a consequence, the landlord can be kept at bay only so long as these conditions are being met. This is the reason why legal scholars describe a lease as property cum onere—i.e., property with a burden. Palmer v. Palmer, 104 F.2d 161, 163 (2nd Cir.1939) and BLACKS LAW DICTIONARY (6th ed.1990).⁹

However, as burdened as the tenant's right to possess the landlord's property may be, it is nonetheless clear from the Bankruptcy Code's legislative history that this right, or better, leasehold, is still a property interest under Section 541.

This section [Section 541] defines property of the estate, and specifies what property becomes property of the estate. The commencement of a bankruptcy case creates an estate. Under paragraph (1) of subsection (a), the estate is comprised of all legal or equitable interest of the debtor in property, whenever located, as of the commencement of the case. The scope of this paragraph is broad. It includes all kinds of property, including tangible or intangible property, causes of action (see Bankruptcy Act § 70a(6)), and all other forms of property currently specified in section 70a of the Bankruptcy Act § 70a, as well as property recovered by the trustee under section 542 of proposed title 11, if the property recovered was merely out of the possession of the debtor, yet remained "property of the debtor." The debtor's interest in property also includes "title" to property, which is an interest, just as are a possessory interest, or leasehold interest, for example.

H.R.Rep. No. 95-595, at 367 (1978), as reprinted in 1978 U.S.C.C.A.N. 5963, 6323; S.Rep. No. 95-989, at 82 (1978), as reprinted in 1978 U.S.C.C.A.N. 5787, 5868 (emphasis added).¹⁰

As such, a leasehold, like all other interests of the debtor, immediately becomes property of the estate whenever bankruptcy relief is sought.¹¹

But the burdened nature of the leasehold acquired also calls into play a fundamental precept of bankruptcy law—that the estate can gain no greater right under the leasehold than had the debtor previously enjoyed unless the Bankruptcy Code itself creates that greater right. As the Supreme Court itself observed:

Property interests are created and defined by state law. Unless some federal interest requires a different result, there is no reason why such interests should be analyzed differently simply because an interested party is involved in a bankruptcy proceeding.

Butner v. U.S., 440 U.S. 48, 55, 99 S.Ct. 914, 918, 59 L.Ed.2d 136 (1979).¹²

And the Sixth Circuit has likewise stated:

Under 11 U.S.C. § 541, the trustee succeeds only to the title and rights in properly that the debtor had and takes the property subject to the same restrictions that existed at the time the debtor filed the petition. Thus, a debtor's rights may not be expanded beyond what they were at the commencement of the case.

Demczyk v. Mutual Life Ins. Co. of New York (In re Graham Square, Inc.), 126 F.3d 823, 831 (6th Cir.1997) (citations omitted). See also, In re Cook, 457 F.3d 561, 566 (6th Cir.2006) and Spradlin v. Jarvis (In re Tri-City Turf Club, Inc.), 323 F.3d 439, 443-44 (6th Cir.2003).¹³

How, then, does this rule apply when the interest acquired at the outset of the case is a burdened asset like an executory contract or an unexpired lease? The Committee contends that bankruptcy in fact overrides the normal relationship between the parties through its suspension of the nondebtor's right to demand further performance under the executory contract or lease until the estate makes its own decision under Section 365 to assume or reject the same. The Committee, though, can point to no provision within Section 365 itself that includes such a prohibition.¹⁴

Indeed, what Section 365 actually offers to the trustee is the ability to suspend the estate's own performance under a lease or contract yet still avoid the consequences of any resulting default should it later elect to assume the same. Take, for example, a debtor who supplies parts to a third party pursuant to a requirements contract. If that debtor were to file for Chapter 11 relief, it could decide as debtor-in-possession to temporarily halt postpetition deliveries in order to assess whether it was in the estate's interest to continue with that contract or not. If, after reflection, the debtor decided to assume the contract, then it could in effect regain its right to resume deliveries and to receive payment for the same so long as the debtor was able to cure the estate's previous default and otherwise comply with the requirements of Section 365(b). Or the debtor, as...