This mаtter came before the court on Ford Motor Credit Company, LLC’s motion for allowance of administrative expense claim. At a preliminary hearing, the court provided the parties with an opportunity to supplement the record, and both Ford and the trustee filed written memoranda in support of their positions. This is a core proceeding under 28 U.S.C. § 157(b)(2)(B), and the court has jurisdiction under 28 U.S.C. § 1334. This decision constitutes the court’s findings of facts and conclusions of law pursuant to Fed. R. Bankr.P. 7052.
BACKGROUND
The facts of the case are undisputed. On April 27, 2006, Ford leased to the debtors a 2006 Ford Fusion SE. The debtоrs filed a chapter 13 petition on June 22, 2006, and their plan was confirmed August 10, 2006. The confirmed plan provided for an assumption of the lease and direct lease payments to be made by the debtors. After the debtors defaulted under the terms of the lease and the automatic stay was lifted, the vehicle was repossessed by Ford and sold. According to Ford, the following amounts are due under the lease:
Reconditioning: $ 72.50
Repo/Auction Fees: $ 85.00
Towing: $ 110.00
Repo/Outside Agent Fees: $ 250.00
Maintenance Fee: $ 375.31
Service Charges: $1,979.48
Termination Lease Balance: $3,219.67
Total: $6,091.96
Ford has asserted the estate should pay the total amount due, $6,091.96, as an administrative claim.
ARGUMENTS
Ford argues that once the debtors chose to assume the lease, damages flowing from the post-petition breach are entitled to administrative claim status under 11 U.S.C. § 503(b)(1)(A). A confirmed plan binds the debtors and their decision to assume the lease thereby obligates the estate on the lease in the event of their default. 11 U.S.C. §§ 365(g)(2), 1327(a). Courts have allowed section 503(a) administrative expense claims in similar situations in chapter 13 cases.
See, e.g., In re Wells,
The trustee opposed the motion, citing the Sixth Circuit’s recent decision denying administrative claim status to a lessor, reasoning that if the lessor wished to obtain additional relief against the debtors, it would have to be done outsidе the plan.
In re Parmenter,
DISCUSSION
A Chapter 13 debtor may assume an unexpired lease pursuant to 11 U.S.C. §§ 365, 1322(b)(7). As noted by one court, once a debtor assumes an obligation, the payment may be made in one of three ways under 11 U.S.C. § 1322:(1) entirely from the property of the estate; (2) partially from the property of the estate and property of the debtor; or (3) entirely from the property of the debtor.
1
Ford
Once a default occurs in an assumed lease, 11 U.S.C. § 365(g)(2)(A) controls the timing of the breach, i.e., whether the breach is deemed to arise pre- or post-petition. That section provides thаt if the “rejection,” obviously used here to mean the default and end of the assumed contract, occurs in an unconverted case, the time of the rejection is the actual time of the breach. This is the time the breach matures into a claim. I say “obviously” because there is not аn actual rejection, as that term is used in other parts of section 365, at the moment of default. The contract was assumed pursuant to the plan and order of confirmation, and “rejection,” with the attendant notice and motion, is impossible at this point. Thus, the breach arises post-рetition, and 11 U.S.C. § 502(g), relating to rejection damages for unassumed leases, does not apply.
Nevertheless, such a post-petition breach may give rise to an administrative claim under 11 U.S.C. § 503(b)(1)(A), which allows for payment of “the actual, necessary costs and expenses of preserving thе estate.” I am persuaded this is the only way a party contracting with the debtor can obtain administrative priority, or even a claim against the estate colleetible from plan payments, because the bankruptcy code does not clearly indicate how damages fоr the breach of an assumed lease are treated. Section 365(g)(2)(A) only tells us
when
the damages accrue, not how they are paid, if at all. Unlike the court in
In re Wells,
An administrative claim will be afforded priority under section 503(b) if the debt “both (1) arises from a transaction with the debtor-in-pоssession and (2) is beneficial to the debtor-in-possession in the operation of the business.”
In re Jartran, Inc.,
The district court in
Benn
agreed with the bankruptcy court’s conclusion that administrative expense claims for breached assumed auto leases were not warranted because there was no benefit to the estates (multiple cases with the same issue were consolidated for the purpose of the decision).
Benn,
The
Benn
case, which included the Par-menters among its several debtors’ cases, was affirmed by the Sixth Circuit for slightly different reasons, including the
res judicata
effect of a confirmed plan, in
In re Parmenter,
The
Parmenter
court considered various cases which have allowed administrative expenses in similar circumstances,
see, e.g., In re Wells,
The dissenting opinion in the
Parmenter
case rejected the application of
res judica-ta
principles, noting the confirmed plan did not say one way or the other whether the creditor could receive administrative expenses for the debtors’ default. The dissent noted that when a chapter 11 debtor-in-possession assumes an unexpired lease and later defaults on the lease payments, the court may treat the resulting deficiency as an administrative expense claim, and the same is true when a chapter 13 debtor assumes a lease and defaults. The dissent found no convincing reason for treating creditors dealing with a chapter 13 debtor differently from creditors dealing with a chapter 11 debtor-in-possession.
Id.
at 611. The dissent further noted Judge Lundin’s treatise makes no distinction based on the identity of the disbursing agent.
Id.
at 613 (citing 4 Keith M. Lundin,
Chapter 13 Bankruptcy
§ 296.1 (3d ed. 2000 & Supp.2004)). The dissent read the plan as implicitly accepting the notion that assumed leases that are later breached trigger administrative expense claims and found no meaningful difference betweеn payments “outside” and “inside” the plan.
Id.
at 614. All payments to creditors, either by the chapter 13 trustee or directly
from
debtors, are payments
I agree with the Parmenter dissent that principles of res judicata do not apply because breach or rejection damages are not addressed at the time of confirmation. Also, it makes no difference whether the lease payments are being made by the trustee or debtor-direct. They are still being paid pursuant to the plan. Likewise, I see no reason to apply different principles of liability for assumed lease defaults in ongoing chapter 11 and 13 cases; both are subject to chapters 3 and 5 of the bankruptcy code, and both are forms of an ongoing case and reorganization. On the other hand, I do not believe the code supports automatic treatment of the lessor’s claim as an administrative expense claim. No such provision is in sections 365, 502, 503, or anywhere else, and it is a post-petition claim timed by section 502(g)(1). So to obligate the estate, there must be benefit to the estate as required by section 503(b)(1)(A).
Here, both debtors were employed and had one other vеhicle, along with the leased vehicle in question. Both cars, including the one that is the subject of this claim, would have allowed them to go to their separate jobs, to grocery stores, to medical appointments, and other activities that are part of everyday life. This is the sort of contract that benefits the reorganization of a chapter 13 debtor. That may not be true for all types of executory contracts that could be assumed by debtors (say, rental of a piano by someone who does not play professionally), but the use of an automobile is ubiquitous in this society and it is reasonable and necessary for the debtors to perform in this case. For this reason, I disagree with the district court in the Benn case, which found there was no benefit to the estate because the vehicles (actually, the leasehold interest in the vehicles) vestеd in the debtors upon confirmation, and payments were made directly by the debtor instead of by the trustee. I believe this is too narrow an interpretation of what benefits the estate. Almost anything that helps a chapter 13 debtor perform under a plan that makes payments to creditors is a benefit that gives rise to administrative claim status. I also find that the estate received a benefit regardless of where the property vested. This puts the focus on whether the lease helped the debtor perform under the plan, much as if the debtor contracted for a serviсe rather than an asset.
This is not to say that every lease that benefits the debtor helps him or her perform under a plan. The above example of a rented piano used by a debtor .who does not play professionally would probably not qualify as an administrative expensе for this reason, notwithstanding that it makes the debtor happy and entertains friends and family. A breach of the assumed piano lease would, therefore, be like any other debt that arises after the date of the petition, as 11 U.S.C. § 365(g)(2)(A) tells us this is the proper time for determining when the debt arises.
I am less concerned than the
Parmenter
majority thаt allowing the damages for breach of the car lease moves the claim ahead of others who will receive distributions from the confirmed plan. Ford was to receive 100% of the amount due under the lease from the start. The plan provided, and Schedule J disclosed, that leasе payments were part of the debtors’ expenses. These expenses were taken into consideration when plan payments were proposed, so Ford at all times was to be paid its full contract amount before other claimants were paid. This is consistent
True, the debtors originally were paying Ford directly rather than through the trustee. Allowing an administrative claim of the magnitude Ford has filed might make the plan unfeasible, as it now has to be paid out of trustee payments at 100%. On the other hand, elimination of this expense might free up funds originally committed to the lease, some of which could then be paid into thе plan. Or not. A plan modification that would change distributions to creditors of lower priority would require notice and an opportunity for interested parties to inquire into whether the modification is necessary or to object. Chapter 13 plans frequently must be changed when the debtors’ circumstances change, and inability to continue lease payments is but one of the possible events that debtors experience during a case that are not necessarily unfair to creditors.
For the reasons stated above, the trustee’s objection is overruled as to the classification of Ford’s claim as an administrative expense. The merits of the amount of the claim were not challenged at this stage of the proceedings, so the court takes no position on that matter. A separate order will be entered consistent with this decision.
ORDER GRANTING CREDITOR’S MOTION FOR ALLOWANCE OF ADMINISTRATIVE EXPENSE CLAIM
For the reasons stated in the court’s memorandum decision entered on this date, IT IS ORDERED the creditor’s motion for allowance of administrative expense claim is granted.
Notes
. The Benn court cited the following subsections of section 1322, in which the plan may: (7) subject to section 365 of this title, provide for the assumptiоn, rejection, or assignment of any executory contract or unexpired lease of the debtor not previously rejected under such section;
(8) provide for the payment of all or part of a claim against the debtor from property of the estate or properly of the debtor;
(9) provide for the vesting of property of the estate, on confirmation of the plan or at a later time, in the debtor or in any other entity.
11 U.S.C. § 1322(b).