442 B.R. 684
Bankr. W.D. Ark.2010Background
- Dec 26, 2006, Debtor entered into TRAC lease with Trans Lease for three tractors at $4,768.77 monthly for 42 months, Debtor responsible for maintenance and risk of loss.
- Debtor filed Chapter 11 on July 13, 2009; continued possession and use of tractors post-petition.
- Trans Lease moved to require assumption/rejection; hearing held Oct 27, 2009; issue contested as to lease vs secured transaction.
- Adequate protection payments of $750/month were ordered starting March 2010; Debtor made two payments.
- April 20, 2010, court found the arrangement was a lease requiring assumption or rejection; Debtor rejected on Apr 30, 2010 and surrendered tractors on May 17, 2010.
- Debtor testified that two tractors were used post-petition to maintain operations; one tractor was inoperable and not used post-petition.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether rent during first 59 days is an administrative expense under § 503(b)(1)(A). | Trans Lease seeks administrative priority for all rents in first 59 days. | Debtor argues only actual, necessary costs with a benefit to estate; may limit to actual use. | Trans Lease entitled to § 503(b)(1)(A) for first 59 days for two tractors; amount $6,166.74. |
| Whether rent for the 60th day onward qualifies under § 365(d)(5) as administrative expense. | Lease payments after day 60 are administrative and not limited by § 503(b)(1)(A). | Equities require modification; uses § 365(d)(5) to potentially adjust payments. | Trans Lease entitled to payments under § 365(d)(5) up to rejection date, totaling $34,716.18 after deducting adequate protection payments. |
| What Rent baseline governs the § 503(b)(1)(A) calculation for the first 59 days. | Rent value fixed by lease should be used; presumption of reasonable rental value. | Actual use evidence rebutts presumption; avoid punitive treatment for non-use. | Presumption rebuttable; two operable tractors used, one inoperable; rental value limited to actual use. |
| Whether adequate protection payments affect § 503(b)(1)(A) calculations. | Adequate protection payments could substitute for lease rent. | Adequate protection and § 503(b)(1)(A) are distinct; use lease rate, not protection payments. | Adequate protection payments are not used to calculate § 503(b)(1)(A); use lease rate, with adjustments for actual use. |
| Whether the period after 60 days and before rejection can be treated retroactively under § 365(d)(5). | Retroactive modification possible in extraordinary circumstances. | Retroactive modification generally not proper; only prospective modifications allowed. | No retroactive modification; apply § 365(d)(5) prospectively; debtors owe $34,716.18. |
Key Cases Cited
- In re Mid Region Petroleum, Inc., 1 F.3d 1130 (10th Cir.1993) (two-prong test for administrative expense: arises from estate and benefits estate)
- In re Smith, 315 B.R. 77 (Bankr.W.D.Ark. 2004) (burden on claimant to prove entitlement to administrative status)
- In re Athens/Alpha Gas Corp., 332 B.R. 578 (8th Cir. BAP 2005) (broad definition of 'transaction' under § 503(b)(1)(A))
- Williams v. IMC Mortgage Co. (In re Williams), 246 B.R. 591 (8th Cir.1999) (tangible benefit requirement to estate)
- In re Dant & Russell, Inc., 853 F.2d 700 (9th Cir.1988) (use of actual use vs. rental value groundwork)
- In re Midway Airlines Corp., 406 F.3d 229 (4th Cir.2005) (§ 365(d)(5) treatment of lease obligations post-petition)
- Giant Eagle, Inc. v. Phar-Mor, Inc., 528 F.3d 455 (6th Cir.2008) (equities-based modification under § 365(d)(5))
- In re Burival, 613 F.3d 810 (8th Cir.2010) (notwithstanding clause of § 365(d)(5) and administrative expenses)