In Re CIS Corp.
OPINION AND ORDER
INTRODUCTION
Appellant Communications Satellite Corporation (“COMSAT”) appeals from a decision of the United States Bankruptcy Court of the Southern District of New York denying the allowance and immediate payment of an administrative expense. U.S. Bankr., S.D.N.Y. Nos. 89B 10073 (PBA) through 89B 10084 (PBA) inclusive (Prudence Abram, U.S.B.J.). COMSAT requests that this Court reverse the Bankruptcy Court’s decision and grant administrative status to the monthly equipment lease payments owed by the debtor, Continental Information Systems Corporation (“CIS”), to COM-SAT. For the reasons that follow, the decision of the Bankruptcy Court is affirmed and the request for administrative status is denied.
BACKGROUND
Appellee CIS, as the original lessor, leased computer equipment to COMSAT for a five-year term beginning on December 1, 1986. In November 1987, COMSAT then subleased a portion of the equipment back to CIS for the remainder of the lease term. The sublease agreement granted CIS the right to sub-sublease the equipment.
CIS sub-subleased the equipment to a third party, Data Hardware, Inc., for a three-year term beginning on May 1, 1988 and ending on April 30, 1991. Data Hardware prepaid the total amount due to CIS under its three-year sub-sublease on or about June 28, 1988. On January 13, 1989, CIS filed a petition for bankruptcy under Chapter 11, but continued making payments on the sublease to COMSAT until December 1989. On June 7, 1991, COM-SAT filed a motion in Bankruptcy Court for an order requiring CIS to assume or reject the sublease and granting an expense of administration in the amount of' $132,-000.00. This figure represents the amount of the unpaid rent under the sublease for the period between January 1990 and April 1991, the term for which CIS had not paid the rent on the sublease to COMSAT, but for which it was sub-subleasing the equipment to Data Hardware.
After hearing oral argument on COM-SAT’s motion for the payment of an administrative expense under 11 U.S.C. § 503(b)(1)(A), the Bankruptcy Court denied the motion. The court found that the sublease conferred no benefit on the bankrupt estate of CIS because Data Hardware had prepaid the entire amount owed under the sub-sublease to CIS before CIS filed for bankruptcy. Because the use of the equipment resulted in no positive cash flow and thus conferred no benefit on the bankrupt estate, but only on the pre-petition entity of CIS, the court denied the request for an expense of administration.
DISCUSSION
Because the instant motion presents a mixed question of law and fact, a de novo standard of review applies.
In re Mader,
1. Equitable Principles of Administrative Expense Status
The purpose of granting administrative expense priority in a Chapter 11 context is to give creditors an incentive to continue to conduct business with a bankrupt entity, thus aiding in the debtor’s maintenance, preservation and rehabilitation.
Broadcast Corp. of Georgia v. Broadfoot,
11 U.S.C. § 503(b)(1)(A) therefore states that such administrative expenses shall include those that are “the actual, necessary costs and expenses of preserving the estate, including wages, salaries, or commissions for services rendered after the commencement of the case.”
Id.
Although the section does not fully define “necessary expenses,” the phrase “including” is not limiting.
See
3 Collier on Bankruptcy H 503.04[1] (15th ed. 1989) (administrative expenses can also include “costs of operating a business, for storage of property, for rent, for taxes and other costs incidental to protection and conservation”). Despite the statute’s potentially broad reach, courts grant administrative status sparingly because of the presumption in bankruptcy that the “debtor’s limited resources will be equally distributed among his creditors.”
Trustees of the Almagamated Ins. Fund v. McFarlin’s, Inc.,
2. Requirements for Administrative Expense Status
An allowance for administrative expense priority should be narrowly construed to include only those creditors that perform services that are actual and necessary to preserve the bankrupt estate or that enable it to maintain its business.
Broadcast,
To sustain its burden, Appellant must establish two elements. First, it must show either that the debtor-in-possession (not the pre-petition entity) incurred the transaction on which the claim is based, or that the claimant furnished the consideration to the debtor-in-possession (not the pre-petition entity). Second, it must show that the transaction resulted in a direct benefit to the debtor-in-possession.
In re Mammoth Mart, Inc.,
The Appellant satisfies the first part of this test. In the context of a lease, the consideration is the use of the equipment that is furnished to the debtor for the term of the lease. Thus, although the lease was entered into before CIS filed its petition for bankruptcy, CIS had use of the equipment for a period after it filed for bankruptcy. The present ease is thus distinguishable from the cases that Appellee cites.
See
Appellee’s Memorandum at 12-16. In those cases, the claimant creditor supplied the consideration prior to the debt- or’s petition for bankruptcy.
See In re Jartran, Inc.,
The second part of the test is the issue on which this appeal turns: whether COM-SAT’s sublease of the equipment to CIS constituted a benefit to CIS. Even though a creditor technically performs on a contract for the debtor-in-possession, he will not be entitled to administrative expense priority unless this performance benefits the debtor-in-possession.
Mammoth Mart,
This actual use of the equipment, however, did not benefit CIS as debtor-in-possession because Data Hardware had completely prepaid the amount due under the sub-sublease to the pre-petition entity of CIS. The bankrupt estate therefore de
Appellant also argues that CIS as debtor-in-possession derived a benefit because COMSAT’s continued performance on the sublease enabled the estate to avoid liability to Data Hardware. This speculative benefit is not quantifiable, and a mere potential benefit does not qualify as a benefit for the purposes of determining administrative expense status.
ICS Cybernetics,
Because the CIS estate derived no concrete, discernible benefit from its actual use of the computer equipment, the cost of subleasing the equipment from COMSAT is not entitled to administrative expense priority. The Appellant has failed to satisfy the second prong of the Mammoth Mart test, and therefore failed to show that this expense was necessary for preserving the estate according to the requirements of 11 U.S.C. § 503(b)(1)(A).
3. Reading Co. v. Brown is Inapposite
The Appellant argues that the instant case qualifies as an exception to the requirement that the creditor confer a benefit on the debtor-in-possession, as provided in
Reading Co. v. Brown,
CONCLUSION
For the foregoing reasons, this Court affirms the decision of the Bankruptcy Court. This action is ordered removed from the Court’s active docket.
SO ORDERED.