In re Xonics, Inc.
| Citation | 65 BR 69 |
| Decision Date | 07 August 1986 |
| Docket Number | Bankruptcy No. 84 B 2101-2108. |
| Parties | In re XONICS, INC., Xonics Medical Systems, Inc., Xonics Imaging, Inc., Xonics Photochemical, Inc., Ekoline, Inc., Standard X-Ray Company, Medical Equipment Manufacturing Co., Inc., and Radiographic Development Corporation, Debtors. |
| Court | United States Bankruptcy Courts. Seventh Circuit. U.S. Bankruptcy Court — Northern District of Illinois |
Katten, Muchin, Zavis, Pearl & Galler, Chicago, Ill., for debtors.
Robert Boehm & Associates, Ltd., Chicago, Ill., for Barrington Industrial Associates.
This cause coming on to be heard upon the Application for Payment of Use and Occupancy as an Administrative Expense filed by BARRINGTON INDUSTRIAL ASSOCIATES Barrington, represented by ROBERT BOEHM & ASSOCIATES, LTD., and upon the Response thereto filed by MEDICAL EQUIPMENT MANUFACTURING CO., INC., one of the Debtors in these Chapter 11 cases, represented by KATTEN, MUCHIN, ZAVIS, PEARL & GALLER, and the Court, having considered the record in this case and the pleadings on file, and having examined the Memoranda of Law filed by the parties in support of their respective positions, and having afforded the parties an opportunity for hearing, and being fully advised in the premises;
The Court Finds:
1. On February 17, 1984, MEDICAL EQUIPMENT MANUFACTURING CO., INC. Debtor, XONICS, INC., its parent, and six of its affiliates collectively, the "Xonics Group", each filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code. Since that time, Debtor and each of the other members of the Xonics Group have continued to operate their businesses and manage their properties as Debtors-in-Possession.
2. On August 28, 1985, the Court confirmed Debtors' Chapter 11 Plan of Reorganization. Pursuant to the Plan, the estates of the Xonics Group were substantively consolidated. The claim asserted by Barrington in this cause against the estate of Debtor constitutes a claim asserted against the consolidated estate of the Xonics Group.
3. Prior to the commencement of this case, Debtor entered into a lease, dated May 7, 1975 and amended on January 16, 1976, for approximately 50,000 square feet of commercial property commonly known as 2495 West Pembroke Avenue, Hoffman Estates, Illinois the Premises. The lessor of the Premises was LaSalle National Bank, as Trustee under Trust No. 47804. Barrington, an Illinois general partnership, was the beneficiary of the Land Trust.
4. The Premises was leased by Debtor for the purpose of offices, light manufacturing, or other use permissible under the applicable zoning classification. The lease was for a term of ten years from January, 1976. Debtor paid an annual net rent for the Premises of $90,074.50 (approximately $1.81 per square foot for approximately 50,000 square feet). The lease also provided for payment by Debtor of real estate taxes attributable to the Premises as additional rent.
5. On June 21, 1984, Debtor rejected the lease pursuant to a Court Order. On July 22, 1984, Debtor vacated the Premises.
6. On May 28, 1985, Barrington filed an application for payment of use and occupancy as an administrative expense under Section 503(a) and 503(b)(1)(A) of the Bankruptcy Code. 11 U.S.C. § 503. Barrington seeks recovery of $91,432.38 for use and occupancy of the Premises for outstanding rental charges equal to the fair market value of the Premises from February 17, 1984, the date Debtor filed its Chapter 11 petition, to July 22, 1984, the date Debtor vacated the Premises, plus the pro rata portion of the real estate taxes for Debtor's period of occupancy. Barrington's $91,432.38 claim is comprised of $64,109.59 in base rent for such period at the rate of $3.00 per square foot, and $27,322.99 in real estate taxes prorated for such period.
7. On June 19, 1985, Debtor filed a Response. In that Response, Debtor contends that Barrington's $91,432.38 claim should be denied because the use and occupancy of the Premises provided no benefit to Debtor or to the Xonics Group in the operation of their various businesses. In the alternative, Debtor argues that Barrington's claim for an administrative expense should be limited to the amount provided by the lease. Under the lease agreement, the base rent for the period between February 17, 1984 and July 22, 1984 would be $33,130.00.
8. On December 5, 1985, a trial was held on this matter before this Court. Mr. Romeo Mura testified as an expert witness on Barrington's behalf. Mr. Mura is a Senior Associate with the firm of Bennett & Kahnweiler Associates. Mr. Mura has a Bachelor's Degree as well as a Master's Degree in Civil Engineering. He also is a real estate broker licensed by the State of Illinois in 1980. Mr. Mura specializes in industrial and commercial real estate. Since 1980, he has had $32 million in sales for his real estate firm. The northwest suburbs of Chicago is the geographical area where Mr. Mura does most of his business. The Premises is located in Hoffman Estates, Illinois, which is a northwest suburb of Chicago.
9. Mr. Mura testified to the following: that the Premises was approximately ten years old, it was in excellent condition, and it was conveniently located near an expressway; the Premises had a high percentage of office space, it had ample parking spaces (a total of 44), and it was a well-insulated building and, thus, energy and cost efficient. On August 1, 1984, Mr. Mura was the listing agent for the Premises and he had shown it to a prospective client.
10. Mr. Mura further testified as to the rental values of three other comparable properties which were located within a ten-to-twenty minute drive from the Premises. Exhibit A, which was introduced into evidence, is a reduced-scale map of the northwest suburbs of Chicago. Indicated on that map are the locations of the three comparable properties in relation to the Premises. Two of these properties are located in Elk Grove Village, Illinois, and the other is located in Schaumberg, Illinois. Mr. Mura stated that he had shown these comparable properties to various prospective clients. The listing sheets for these comparable properties were admitted into evidence and marked Exhibits B, C and D.
11. Mr. Mura stated that in 1984 these similar properties leased from $3.00 to $3.50 per square foot. It was Mr. Mura's opinion that the fair market rental value of the Premises for the period from February 17, 1984 through July 22, 1984 was $3.00 to $3.25 per square foot.
12. Mr. Mura testified that in June of 1984, he visited the Premises which was then occupied by Debtor, and he observed that there were eight to ten people conducting a small office operation. He also recalled seeing equipment on the Premises that was apparently being stored.
13. Mr. Sidney Kulek testified on behalf of Debtor. Mr. Kulek was the President and Chief Executive Officer of Xonics, Inc. throughout the period in question. He was also an officer and a member of the Board of Directors of each of the members of the Xonics Group, including Debtor. Mr. Kulek was the person designated by the Court as the person responsible for the operation of the Xonics Group as Debtors-in-Possession.
14. Mr. Kulek testified to the following: Xonics, Inc. acquired Debtor in 1973. At that time, Debtor manufactured special procedure X-ray tables and high-speed film changes. In 1978, Debtor's manufacturing operations were moved from the Premises and were consolidated with one of the other subsidiaries in the Xonics Group. Since 1978, the Premises was used primarily as a warehouse to store assets owned by Debtor, and these assets were subject to the liens of secured creditors. A year prior to the bankruptcy, Debtor made attempts to sublet the Premises for $1.50 per square foot but was unsuccessful.
15. When asked about the equipment on the Premises, Mr. Kulek stated: "primarily work in progress that was used in the manufacture of Xonics Medical Systems Equipment, some obsolete Memco and Standard equipment, corporate records that we had stored there and also corporate literature." When questioned as to the number of persons on the Premises, Mr. Kulek stated: Mr. Kulek further stated that the telephones were connected and operating through July 22, 1985 which was the date Debtor vacated the Premises.
16. The parties stipulated to the fact that pursuant to the Lease, Debtor was obligated to pay real estate taxes as additional rent to Barrington, and that the 1983 real estate taxes paid by Barrington in 1984 was the sum of $63,928.78.
The Court Concludes and Further Finds:
1. Section 503(b)(1)(A) provides:
11 U.S.C. § 503.
2. The Seventh Circuit recently held that "a claim will be afforded priority under Section 503 if the debt both (1) arises from a transaction with the debtor-in-possession, and (2) is beneficial to the debtor-in-possession in the operation of the business." In re Jartran, 732 F.2d 584, 587 (7th Cir.1984).
3. In the case at bar, Barrington's claim arose from a transaction with the Debtor-in-Possession because Debtor still occupied the Premises subsequent to the filing of its Chapter 11 petition on February 17, 1984, until it vacated the Premises on July 22, 1984.
4. The Court further observes that Debtor's occupation of the Premises from February 17, 1984 through July 22, 1984 was beneficial to the Debtor-in-Possession in the operation of its business. According to the credible testimony of Mr. Mura, he noticed, during his visit in June of 1984, eight to ten people conducting a small office...
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