Matter of Supreme Plastics, Inc.
| Citation | 8 BR 730 |
| Decision Date | 03 December 1980 |
| Docket Number | No. 80 C 1801.,80 C 1801. |
| Parties | In the Matter of SUPREME PLASTICS, INC., Bankrupt. Morton J. HARRIS, Plaintiff-Appellant, v. SUPREME PLASTICS, INC., Defendant-Appellee. |
| Court | U.S. District Court — Northern District of Illinois |
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Richard H. Fimoff, Chicago, Ill., for plaintiff.
Michael L. Ralph, Trustee, Lincolnshire, Ill., for defendant.
In this bankruptcy appeal, a secured creditor of the bankrupt challenges the bankruptcy court's disposition of his priority claims for rental payments advanced to the bankrupt's landlord both prior to the filing of the bankruptcy petition and during the periods of administration by the bankruptcy court receiver and trustee. The cause was submitted to the bankruptcy court; and it is here on a stipulation covering all facts necessary for consideration of the issues presented. The court has heard the parties in oral argument, considered the stipulated facts, briefs, and order of Bankruptcy Judge Fisher, and concludes that his decision must be modified and affirmed.
Several years prior to the filing of the involuntary petition for adjudication of bankruptcy, the bankrupt, Supreme Plastics, Inc., as tenant, entered into a long term lease with LaSalle National Bank, Trustee, as landlord, for a term extending beyond 1977 and a monthly rental of $4,950. The bankrupt then sublet a portion of the premises, reducing its rental obligation to $3,713.21 per month. However, it failed to pay this remaining rental obligation, defaulting under the terms of its lease. The landlord, therefore, instituted an action in the Circuit Court of Lake County, LaSalle National Bank, as Trustee under Trust Agreement dated November 4, 1970, known as Trust No. 41504, v. Supreme Plastics, Inc., Case No. 77 LM 563. On May 13, 1977, that court entered its final order in the case which provided, inter alia, for judgment in favor of plaintiff, a writ of restitution, and a stay of the writ for a period of ten months. The landlord did not attempt to modify or terminate the stay, and the writ was never executed.
On August 5, 1977, an involuntary petition for bankruptcy was filed against Supreme Plastics, Inc. The Bankruptcy Judge entered an order on September 1, 1977 adjudicating it a bankrupt and appointing Michael Ralph, defendant-appellee, receiver in bankruptcy. On October 14, 1977, Ralph was appointed the trustee; he continues to act in that capacity. Ralph has never assumed the bankrupt's lease with LaSalle National Bank, either in his capacity as receiver or as trustee.
At all relevant times, the bankrupt's tangible assets have been located at the leased premises. The assets include large plastic injection molding machines, manufacturing equipment, factory machinery, office equipment and furniture. The bankruptcy court held hearings on November 15, 1977 to determine the validity and amount of all lien claims and the assets affected thereby. The court determined that Morton J. Harris, plaintiff-appellant, former corporate secretary of the bankrupt, had a valid lien in the amount of $155,557.12 against five injection molding machines; that three other creditors had valid liens totaling $196,348.49 against various items; and that three further parties were the owners of various items and entitled to return thereof. The court also ordered a sale procedure requiring receipt of a minimum upset bid on each lot of encumbered assets in the amount of the lien claim as determined.
Pursuant to this order, the trustee held a sale in open court of both the encumbered and unencumbered assets on November 17, 1977. No bids were received in excess of the amount of the lien claims on the encumbered assets. Bids totaling $23,500 were returned on the unencumbered assets, and sales for the amount were confirmed. All assets sold by the trustee were removed from the premises prior to November 30, 1977. The unsold encumbered assets were abandoned by the trustee prior to that date.
During the period from July, 1977 to November, 1977, neither the bankrupt nor the estate made any payments to the landlord for rent or for use and occupancy of the premises. Rather, Morton J. Harris, to protect his substantial interest in the liened property situated on the premises, made monthly rental payments of $3,713.21, totaling $18,566.05 for the five months of July to November, 1977. These payments were made to Hawthorn Realty Group, Inc., agent of LaSalle National Bank. On October 14, 1977, LaSalle National Bank petitioned the bankruptcy court for use and occupancy expense, seeking the reasonable rental value of the premises in the amount of $3,713.21 per month. On February 22, 1978, Morton J. Harris moved to intervene and applied for reimbursement from the estate of the fair and reasonable value for the use and occupancy of the subject premises for the months of July to November, 1977. Effective December 1, 1978, Hawthorn Realty assigned to Harris its interest in any payment due by virtue of the lease or the use and occupancy of the premises, and the landlord agrees that Harris is the real party in interest entitled to any recovery due.
Harris presented several alternative arguments in support of his petition for reimbursement before the bankruptcy court. As to payments made after the filing of the involuntary petition, he relied primarily on the landlord's entitlement pursuant to Section 64(a)(1), 11 U.S.C. § 104(a)(1) (1976), to a priority claim for reasonable costs for use and occupancy of the premises. He contended he was entitled to this priority claim by virtue of the assignment or by application of the doctrine of equitable subrogation. In addition, Harris asserted that he was directly entitled to a priority claim under Section 64(a)(1) since the payments were an actual and necessary expense of preserving and administering the estate.
As to the payments made before the filing of the petition, Harris argued that he had a priority claim under general equitable principles allowing for priority treatment of expenses incurred prior to bankruptcy which preserve the assets of the bankrupt for the benefit of the estate as a whole. Finally, Harris suggested that the rent agreed upon in the lease is presumptively the fair and reasonable value of the premises. Ralph, trustee in bankruptcy, argued that Harris had made the payments as a volunteer; that the lease rental value should not be considered the reasonable value of the premises; and that it would not be equitable to reimburse Harris for all of his payments, since he advanced money on his own behalf and since the unencumbered assets of the estate were of minimal value.
The bankruptcy court concluded that the assignment was of no force and effect, since it was executed after the underlying debt had been extinguished. However, the court agreed that Harris was entitled to be subrogated to the landlord's right of compensation, and had not paid as a volunteer. Noting that the right of subrogation is a creation of equity enforced solely to accomplish substantial justice, the court limited Harris' priority claim to the portion of the rental payments which benefited the unencumbered assets of the estate rather than Harris himself. The unencumbered assets were sold for $23,500, whereas Harris' lien was fixed at $155,577.12. Thus the court divided 23,500 by the sum of 23,500 and 155,577.12 (179,077.12), arriving at a figure of approximately 13%, and awarded Harris 13% of his rental payments subsequent to the filing of the petition, or $1,868.12. The court accepted the lease rental value as the reasonable value of the premises.
Harris' other claims were denied. The court concluded that he was not entitled to a priority claim under Section 64(a)(1) for the expenses of preserving the estate subsequent to the filing of the petition because the preservation of the assets was the primary duty of the receiver or trustee. The court also held that Harris was not entitled to priority claims for payments made prior to the filing of the petition since the payments had been made primarily in his own interest. Thus the bankruptcy court granted priority treatment to Harris' claim for post-petition payments under the doctrine of equitable subrogation, but limited the recovery to that portion of the payments benefiting the unencumbered assets of the estate. Harris appealed the decision to this court.
The issues have been narrowed on appeal. Harris no longer relies on the assignment, and the trustee does not contest that the lease rental value is the reasonable value for use and occupancy of the premises. Appellee also does not dispute the decision of the bankruptcy court that Harris is entitled to be subrogated to the landlord's right to compensation for the trustee's use and occupancy of the premises. Four issues remain. Harris contends that he acquired, by subrogation, all of the landlord's rights, and so is entitled to the entire post-petition rental payment as a priority claim. He also continues to maintain that his expenses were necessary to preserve the estate, both before and after the petition was filed, and thus are entitled to priority treatment under Section 64(a)(1) and in equity. Finally, he argues that, even if his right to subrogation is limited by his interest in the debtor's property, the bankruptcy court miscalculated the percentage of his claim which should be allowed.
On November 6, 1978, a new Bankruptcy Act was enacted, effective October 1, 1979. Public Law 95-598, Title I, §§ 101 et seq., 11 U.S.C. §§ 101 et seq. (1979). The new act repealed the Bankruptcy Act of July 1, 1898, Pub.L. 95-598, Title IV, § 401(a), but provided that a case commenced under the former act, and all matters and proceedings relating to such case, would continue to be governed by the law applicable prior to the new act. Pub.L. 95-598, Title IV, § 403(a). Bankruptcy proceedings in this case were initiated on August 5, 1977....
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