Personal Property Leases in Chapter 11s: What Are You Entitled to Recover?

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The United States Bankruptcy Appellate Panel for the Eighth Circuit recently provided guidance regarding the proper analysis and valuation of a personal property lessor’s administrative expense claim in a Chapter 11 bankruptcy proceeding in a case of first impression in Minnesota. Attorneys representing debtors and creditors alike should take note as the decision establishes a timetable with significant evidentiary and monetary implications.

GE Capital Commercial, Inc. (GECC) and Sylva Corporation, Inc. entered into a personal property lease prior to Sylva’s Chapter 11 filing. Pursuant to the lease, Sylva was obligated to, inter alia, make monthly lease payments to GECC. The lease expired during the Chapter 11, but a provision of the lease extended the lease on a month-to-month basis. Sylva used the equipment during the Chapter 11 after the original term of the lease expired, but only sparingly and not on a full-time basis. Sylva failed to make all but one of the monthly lease payments during the Chapter 11 case.

Eventually, Sylva obtained an order rejecting the lease, 13 months after the case was filed. 11 U.S.C. § 1128(a)(9) (A). Sylva’s confirmed plan of reorganization provided all administrative claims would be paid in full as required by the Bankruptcy Code. 11 U.S.C. §§§ 365(d) (5). GECC brought a motion for allowance of an administrative expense for monthly amounts which came due after the Chapter 11 filing but before the rejection of the lease. GECC sought allowance of administrative expense status for its claim for unpaid lease obligations which arose after the first 60 days of the case but prior to the rejection of the lease pursuant to 11 U.S.C. §§§ 365(d)(5) and 503. (A Debtor is permitted 60 days to determine whether to assume a personal property lease. 11 U.S.C. § 365(d) (5)). Sylva objected to the allowance of the claim. Sylva argued the lease was a disguised security agreement and even if it was a true, lease Section 365(d)(5) did not require Sylva to pay all of the monthly lease obligations, but only the reasonable and actual use of the equipment by Sylva.

After an evidentiary hearing, the Bankruptcy Court ruled against GECC and denied the administrative expense claim. GECC appealed the decision to the Eighth Circuit Bankruptcy Appellate Panel. The panel reversed the decision of the Bankruptcy Court.

The panel, in a case of first impression in Minnesota, ruled the Bankruptcy Court improperly denied appellant’s claim for allowance of an administrative expense claim pursuant to 11 U.S.C. § 365(d)(5) and remanded the matter for a determination of the full balance of all monthly unpaid post-petition lease payments as an administrative expense.

The Eighth Circuit Court of Appeals previously analyzed the nearly identical statutory language in the context of a real property lessor’s motion for allowance of an administrative expense claim pursuant to 11 U.S.C. § 365(d)(3). In re Burival, 613 F. 3d at 810 (8th Cir. 2010). The Eight Circuit Court of Appeals, in re Burival, analyzed the interplay between 11 U.S.C. § 365(d)(3) and 11 U.S.C. § 503)(b)(1) and concluded:

The plain language of § 365(d) (3) governs an unexpired lease of nonresidential real property and excepts section 503(b)(1). Rent obligations in such leases must be performed when they arise after filing and before rejection; any reduction based on subsection 503(b)(1) would violate the specific language of § 365(d)(3). [The lessor] must perform the … rent obligation whether or not it preserves the estate. In re Burival, 613 F.3d at 812 (emphasis supplied).

In Burival the Eighth Circuit concluded claims under 11 U.S.C. § 365(d) (3) are entitled to administrative expense priority status, holding “[s]ection 365(d)(3) expressly preempts subsection 503(b)(1), but not the introductory authorization of ‘administrative expenses’ in § 503(b).” Id. at 812-813.

Bankruptcy Courts within the Eighth Circuit had the opportunity to analyze Burival’s impact on administrative expense claims made pursuant to 11 U.S.C. § 365(d)(5). In re Double G Trucking of the Arlatex, Inc., 442 B.R. 684, 689 (Bankr. W.D. Ark. 2010), the court developed two guidelines to assist practioners: (1) during the first 59 days after the bankruptcy filing, a lessor is entitled to an administrative expense claim pursuant to 11 U.S.C. § 503(b)(1) (A) where the debtor actually uses the equipment and the reasonable rental value of the property is presumed to be the amount of rent fixed in the lease; and (2) from 60 days after filing the petition until rejection of the unexpired lease, the lessor is automatically entitled to an administrative expense for all amounts due under the lease and such claim is not limited by the need to show a benefit to the estate as required by § 503(b)(1)(A). Id. At 688 and 699.

The Bankruptcy Appellate Panel in Sylva agreed with this reasoning. It is clear now that in Minnesota, a debtor who does not timely reject a lease of personal property prior to the first 60 days of a Chapter 11 case may expose the bankruptcy estate to substantial unpaid administrative expense claims, even where the debtor does not utilize the equipment.  Cameron A. Lallier 

Cameron Lallier

Cameron A. Lallier is an attorney with Foley & Mansfield, where he represents banks and other financial institutions in matters involving Chapter 7 and 11 bankruptcies and the enforcement of security interests. A Minnesota Rule 114 Qualifed Neutral, he also assists clients in matters involving general commercial and civil litigation. Cam can be reached at (612) 338-8788 or via email at [email protected].

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