In re: Kittusamy, LLP
NV-16-1242-LJuKu
| 9th Cir. BAP | Mar 10, 2017Background
- Kittusamy, LLP and affiliate DMP entered lease/sublease arrangements with Siemens for medical imaging equipment; leases contained a $1 purchase option and were later assigned to Siemens Financial.
- Kittusamy defaulted; Siemens Financial accelerated the lease balances and filed a secured proof of claim for about $3.34 million in Kittusamy’s involuntary Chapter 11 case.
- The bankruptcy court granted relief from stay; Siemens Financial foreclosed and sold the equipment to Partap Investments, LLC via an “As Is/Where Is” Bill of Sale that also assigned Siemens Financial’s asserted bankruptcy claims and certain sublease rights to Partap.
- Partap filed a proof of administrative claim for $917,593.26 under § 503(a)(2) for Kittusamy’s postpetition use of the equipment (petition date through March 9, 2016).
- The bankruptcy court disallowed the administrative claim in full, finding the lease documents were disguised security agreements, Siemens Financial (as a secured creditor) had no administrative claim to transfer, and Partap failed to prove diminution in value or the amount owed for any post-purchase period. The BAP affirmed.
Issues
| Issue | Plaintiff's Argument (Partap) | Defendant's Argument (Siemens/Kittusamy) | Held |
|---|---|---|---|
| Whether the Bill of Sale transferred a right to assert an administrative claim for postpetition rent | The Bill of Sale transferred “all…rights” including sublease interests and thus Partap can assert administrative claim inherited from those rights | Siemens Financial never had an administrative claim to transfer; as a secured creditor it was limited to adequate protection and diminution remedies | Bill of Sale did not vest Partap with right to assert an administrative claim for pre-purchase postpetition rent; affirmed |
| Whether the lease documents were true leases or disguised security agreements | Partap did not dispute this finding on appeal | Leases functioned as security agreements; thus lessor/assignee could not claim administrative priority for unpaid rent | Court’s finding that the leases were disguised security agreements stands (not challenged) |
| Whether Partap proved diminution in value of collateral (pre-purchase) to support § 507(b) or comparable administrative recovery | Partap relied on prior debtor testimony and disclosure statement valuations to show >$525k diminution (difference between alleged petition-date value and Partap’s purchase price) | Forced-sale price and bundled nature of purchase (claim assignment + sublease rights) do not establish fair market value; evidence insufficient | Partap failed to prove diminution in value; bankruptcy court did not err |
| Whether Partap was entitled to administrative claim for use of equipment after it purchased the equipment (post-purchase period) | As the purchaser/owner after March 3, 2016, Partap argued it should recover unpaid rent for the six days post-purchase included in its claim | Partap’s filed application did not segregate or prove amounts attributable to post-purchase period; burden of proof unmet | Denial affirmed: Partap did not present evidence of amount owed post-purchase, so entire claim disallowed |
Key Cases Cited
- BFP v. Resolution Trust Co., 511 U.S. 531 (forced-sale price does not equal fair market value)
- Microsoft Corp. v. DAK Indus., Inc. (In re DAK Indus., Inc.), 66 F.3d 1091 (9th Cir.) (claimant bears burden to prove administrative expense; narrow construction of "actual, necessary costs")
- Burlington N. R.R. Co. v. Dant & Russell, Inc. (In re Dant & Russell, Inc.), 853 F.2d 700 (9th Cir.) (standard of review for allowance/disallowance of claims)
- TrafficSchool.com, Inc. v. Edriver Inc., 653 F.3d 820 (9th Cir.) (abuse-of-discretion standard explained)