In re Williams

• Decision Date: 27 December 1999
• Docket Number: BAP No. 99-6058 EM.
• Citation: 246 BR 591
• Parties: In re Darick Patrice WILLIAMS, Debtor. Darick Patrice Williams, Appellant, v. IMC Mortgage Company, Appellee.
• Court: U.S. Bankruptcy Appellate Panel, Eighth Circuit

246 B.R. 591 (1999)

In re Darick Patrice WILLIAMS, Debtor Darick Patrice Williams, Appellant, v. IMC Mortgage Company, Appellee.

BAP No. 99-6058 EM.

United States Bankruptcy Appellate Panel of the Eighth Circuit.

Submitted November 30, 1999.

Decided December 27, 1999.

COPYRIGHT MATERIAL OMITTED

Deborah Rae Sterling Scott, St. Louis, MO, for appellant.

Angela Redden-Jansen, St. Louis, MO, for appellee.

Before KRESSEL, DREHER, and SCOTT, Bankruptcy Judges.

PER CURIAM.

This case presents the question of whether the bankruptcy court may allow a creditor's claim for postpetition mortgage accruals as an administrative expense.

The debtor filed a chapter 13 bankruptcy case on October 15, 1998, proposing to pay his mortgage, interest, and the mortgage arrearages over the course of a sixty month plan. The postpetition monthly mortgage payments were to be paid through the plan. Other than filing its proof of claim, the mortgagee, IMC Mortgage Company ("IMC") took no action during the bankruptcy and did not request adequate protection payments at any time.¹ Upon the debtor's failure to cure the chapter 13 trustee's objections to confirmation, the case was dismissed. Inasmuch as the plan had not been confirmed on the date of dismissal, April 13, 1999, the trustee held $6,397 of the debtor's funds which had not been distributed to any creditors. The dismissal order directed the trustee to pay claims "as allowed under section 503(b) . . . and then he is to return any remaining funds to the debtor."²

On June 7, 1999, IMC filed an application for payment of administrative expenses in the amount of $5,264, asserting such amount represented the plan payments collected by the trustee but not paid because the plan was never confirmed, and $625 for attorney's fees, for a total of $5,889. On July 27, 1999, after a brief hearing during which no evidence was offered, an order was entered granting the application. This appeal followed. The debtor claims that, consistent with the clear language of the Bankruptcy Code, he is entitled to the funds. The debtor is correct.

Section 1326 of the Bankruptcy Code governs distribution of funds held in the hands of the trustee when a case is dismissed:

A payment made under this subsection shall be retained by the trustee until confirmation or denial of confirmation of a plan. . . . If a plan is not confirmed, the trustee shall return any such payment to the debtor, after deducting any unpaid claim allowed under section 503(b) of this title.

11 U.S.C. § 1326(a)(2). Section 503(b) permits allowance of administrative expenses, including:

After notice and hearing, there shall be allowed administrative expenses, other than claims allowed under section 502(f) of this title, including — (1)(A) the actual, necessary costs and expenses of preserving the estate, including wages, salaries, or commissions for services rendered after the commencement of the case. . . .

11 U.S.C. § 503(b)(1)(A).³ In contrast to proofs of claim filed under § 502, which are deemed allowed absent objection, an administrative expense claim is allowed only after determination by the court that the expense is allowable. See Toma Steel Supply, Inc. v. TransAmerican Natural Gas Corp. (In re TransAmerican Natural Gas Corp.), 978 F.2d 1409, 1415 (5th Cir. 1992), cert. dismissed, 507 U.S. 1048, 113 S.Ct. 1892, 123 L.Ed.2d 646 (1993). Although § 503(b) lists particular expenses which may be accorded administrative expense status, the term "including" in the statute indicates that the list is nonexclusive. Thus, in addition to considering the enumerated grounds for administrative expense status, the bankruptcy court has the authority to determine that additional kinds of claims may be administrative expenses. In re George Worthington Co., 921 F.2d 626, 633 (6th Cir.1990).

The law is well developed. In making a determination under § 503(b)(1)(A), whether a claim is an "actual, necessary `cost and expense' of preserving the estate," courts generally consider whether (1) the expense arose from a transaction with the estate, and (2) whether it benefitted the estate in some demonstrable way. See, e.g., Pension Benefit Guaranty Corp. v. Sunarhauserman, Inc. (In re Sunarhauserman, Inc.), 126 F.3d 811, 816 (6th Cir.1997); LaElectronica, Inc. v. Capo-Roman (In re LaElectronica, Inc.), 995 F.2d 320, 322-23 (1st Cir.1993). Section 503(b)(1)(A) requires the creditor to demonstrate that the expenses provided a tangible benefit to the bankruptcy estate before they may be granted administrative expense status. Reiter v. Fokkena (In re Wedemeier), 239 B.R. 794, 798 (8th Cir. BAP 1999).⁴ Moreover, the main policy behind granting administrative expense priority only to "actual, necessary" costs and expenses is to provide an incentive for creditors to continue or commence doing business with an insolvent entity. See Employee Transfer Corp. v. Grigsby (In re White Motor Corp.), 831 F.2d 106, 110 (6th Cir.1987); In re Jartran, Inc., 732 F.2d 584, 587 (7th Cir.1984).

The record reveals that IMC failed to meet either these tests. First, the expense — the postpetition mortgage payment — although not due until after the filing of the petition, was an obligation incurred prior to the creation of the estate. It is not sufficient that the payment became due after the petition date if the transaction was entered into prepetition. Sunarhauserman, 126 F.3d at 819; Fireman's Fund Ins. Co. v. Wheeling-Pittsburgh Steel Corp. (In re Wheeling-Pittsburgh Steel Corp.), 67 B.R. 620, 623-24 (W.D.Pa.1986). Since IMC was already committed to dealing with the debtor, no inducement to IMC was required. The liabilities between the parties were fixed prepetition. Second, there was no evidence, or reasonable articulation of a position, presented to the bankruptcy court that any benefit was accorded the estate or that the accrual of the postpetition mortgage payments was an "actual, necessary" cost of preserving the estate. The incongruous nature of IMC's argument is demonstrated by the fact that it did not expend any funds to preserve the estate. Section 503(b)(1)(A) appears to contemplate that an administrative expense include some expenditure or outlay of "costs" by the creditor. The fact situation in this case, however, is not one of a provider expending sums, labor or services.

Courts commonly recognize that § 503(b) is not intended to provide an administrative expense award to a prepetition secured lender based on the debtor's postpetition possession and use of collateral. In re Robinson, 225 B.R. 228, 233 (Bankr.N.D.Okla.1998); In re McLeod, 205 B.R. 76, 79 (Bankr.E.D.Tex.1996); In re Walter, 199 B.R. 390, 393 (Bankr.C.D.Ill. 1996); In re Barrett, 149 B.R. 494, 499 (Bankr.N.D.Ohio 1993), appeal dismissed, 1993 WL 52846 (Bankr.N.D.Ohio 1993); First State Bank v. Advisory Information and Management Sys., Inc. (In re Advisory Information and Management Sys., Inc.), 50 B.R. 627, 629 (Bankr.M.D.Tenn. 1985). Cf. In re Prime, Inc., 37 B.R. 897, 899 (Bankr.W.D.Mo.1984) (noting that where there is no demand for adequate protection, an administrative claim in the amount of the debt payments is inappropriate because it gives the creditors something they did not request and payment in lump sum would be discriminatory in relation to the treatment of other secured creditors).⁵ Courts reach this conclusion, in part, because a prepetition secured creditor has not been induced to deal with the debtor postpetition; the possibility of having to deal with a debtor in bankruptcy being one of the many considerations a lender must evaluate at the time of the original loan transaction. Advisory Information, 50 B.R. at 629. Further, the prepetition secured creditor is not contributing a benefit to the estate because the debtor is merely continuing to use property that the debtor already owns. In re Provincetown-Boston Airline, Inc., 66 B.R. 632, 634 (Bankr.M.D.Fla.1986); Advisory Information, 50 B.R. at 630. The lender is simply "allowing" the debtor to use collateral that the debtor has a statutory right to use. See Provincetown-Boston Airline, Inc., 66 B.R. at 634; Advisory Information, 50 B.R. at 630. In short, a debtor's expense of maintaining a residence does not benefit the estate; it only benefits the debtor.

At the hearing before the bankruptcy court, IMC did not make any argument, nor did it submit any evidence in support of its position, that its claim met these criteria. Thus, IMC not only failed to establish that it has a kind of claim that should be allowable as an administrative expense, but also failed to establish as a factual matter that it's claim fell within any category of claims in the statute. Cf. Woburn Assocs. v. Kahn (In re Hemingway Transport, Inc.), 954 F.2d 1, 4-5 (1st Cir.1992) (provisions of § 503 must be strictly construed and burden is upon claimant seeking administrative priority status). There was no showing of a postpetition contract or of benefit to the estate.

Rather than attempting to meet these requirements with evidentiary proof, IMC asserts that its claim for postpetition mortgage payments is entitled to administrative expense status because its debt is secured, it did not receive payment during the pendency of bankruptcy case, and the plan provided that postpetition mortgage payments would be made through the plan, thus suggesting that the debtor paid the sums to the trustee with the intent that they be used to pay IMC. Even were IMC's assertions accepted as evidence, the claim is simply not the kind of claim which is allowable as an administrative expense. IMC, a prepetition creditor, did not get paid during the pendency of the bankruptcy case—the position of every creditor in every chapter 13 case that is dismissed preconfirmation.⁶ Its position is no different from the creditor who is secured, for example, by an automobile. The creditors' rights and expectations are that, upon confirmation, the funds will be distributed to them...