Opinion
No. 7-02-11881 MA.
September 13, 2006
George Moore, Attorney for Trustee, Albuquerque, NM.
Melissa Morris, Attorney for Isidro Salcido, Albuquerque, NM.
Steve H. Mazer, Attorney for Manny Ohiri, Albuquerque, NM.
William P. Gordon, Attorney for Debtor, Albuquerque, NM.
ORDER DENYING REQUEST FOR PAYMENT OF ADMINISTRATIVE EXPENSES
THIS MATTER is before the Court on the Request for Payment of Administrative Expenses ("Motion") filed by creditor Isidro Salcido, by and through his attorney of record, Melissa Morris. The Motion requests payment as an administrative expense of the bankruptcy estate for the rental value of certain real property located at 5047 Edith Blvd. NE ("Property") for a period of time during the pendency of the bankruptcy proceeding during which certain personal property was stored at that location. The Court held a final hearing on the Motion on July 25, 2006 and took the matter under advisement.
Upon review of the evidence and the record of this proceeding, the Court finds that Isidro Salcido is not entitled to a claim for an administrative expense. The Court will, therefore, deny the Motion. The Court FINDS:
1. General Waste Corporation ("GWC") filed a voluntary petition under Chapter 11 of the Bankruptcy Code on March 28, 2002.
2. Manny Ohiri is the principal of GWC. See Voluntary Petition (Docket # 1) and Statement of Financial Affairs (Docket # 15), reflecting Manny Ohiri as Chairman and CEO of GWC.
3. GWC operated its business on the Property.
4. Isidro Salcido was the seller under a real estate contract for the purchase of the Property by Manny Ohiri.
5. On October 16, 2003, the bankruptcy proceeding converted from Chapter 11 to Chapter 7. ( See Docket # 84).
6. Philip J. Montoya was appointed as the Chapter 7 Trustee. Id. The Chapter 7 Trustee secured the Property and ceased operation of GWC's business.
7. After the conversion from Chapter 11 to Chapter 7, Isidro Salcido declared a default under the real estate contract for the sale of the Property to Manny Ohiri, and, on January 27, 2004, he recorded a special warranty deed which transferred title to the Property back to himself. See Adversary Proceeding No. 04-1234 — Memorandum, ¶ 15 (Docket # 27). The last full payment Isidro Salcido received under the real estate contract was for the month of September 2003; he received a partial payment for the month of November 2003.
8. On January 11, 2005, the Chapter 7 Trustee, Manny Ohiri, and Isidro Salcido entered into a Stipulation and Agreement whereby Manny Ohiri agreed to remove all of the personal property and equipment from the Property within sixty days of the date of entry of an order approving the Stipulation and Agreement. ( See Docket # 127). The Stipulation and Agreement recites that Isidro Salcido claims a landlord's lien in all of the property of Manny Ohiri stored on the Property. An order approving the Stipulation and Agreement was entered on January 19, 2005. ( See Docket # 128).
9. Manny Ohiri failed to remove the personal property and equipment from the Property within the sixty-day period contained in the Stipulation and Agreement, and Isidro Salcido filed a motion to compel Manny Ohiri's compliance with the Stipulation and Agreement. ( See Docket # 135). The Court granted the motion to compel compliance on June 16, 2005. ( See Docket # 144).
10. The Chapter 7 Trustee and Manny Ohiri reached a compromise concerning the ownership of certain personal property, whereby Manny Ohiri paid $20,500.00 to the bankruptcy estate in exchange for acquiring all interests of the bankruptcy estate in personal property. ( See Docket # 139). The Court approved the compromise on July 1, 2005 ( See Docket # 145).
11. Isidro Salcido filed a second motion to compel compliance, requesting the Court to compel Manny Ohiri to comply with the order of June 16, 2005. ( See Docket # 148). The Court granted the second motion to compel compliance, finding Manny Ohiri in contempt of the June 16, 2005 order, awarding attorneys' fees incurred in prosecuting the second motion to compel compliance to Isidro Salcido, and directing that all property be removed from the Property no later than October 3, 2005. ( See Docket # 158). The order provided further that in the event the personal property was not removed from the Property, Manny Ohiri was required to pay Isidro Salcido the sum of $500.00 per week until all property belonging to Manny Ohiri was removed. Id.
12. Isidro Salcido filed this Motion on August 18, 2005. ( See Docket # 152; See also, Docket # 156 — duplicate motion filed September 22, 2005).
13. The bankruptcy statements and schedules filed by the GWC identify a lease for the Property. Manny Ohiri is identified in Schedule G. as the other party to the lease.
14. During the pendency of the Chapter 11 proceeding, the debtor-in-possession did not seek to assume any executory contract or unexpired lease concerning the Property.
15. The Chapter 7 Trustee did not seek to assume any unexpired lease regarding the Property that may been in existence as of the conversion date.
16. There was no agreement between the Chapter 7 Trustee and Isidro Salcido for the use of the Property as a storage facility.
17. The Chapter 7 Trustee testified that he affirmatively responded to an interrogatory stating that Isidro Salcido would be entitled to an administrative expense to the extent property of the bankruptcy estate was stored on the Property, but that estate ownership of the personal property was never determined by the Court.
18. The lease between Manny Ohiri and GWC was not offered or admitted into evidence.
19. Isidro Salcido presently rents the Property to another party for $1,800.00 per month. The lessee uses the Property to operate a machine shop.
DISCUSSION
Isidro Salcido asserts that personal property of the bankruptcy estate was stored on the Property and seeks payment as an administrative expense by the bankruptcy estate for the rental value of the Property for the period beginning January 27, 2004, the date Isidro Salcido terminated Manny Ohiri's interest in the Property and the Chapter 7 Trustee had possession of the Property, through July 1, 2005 when the Chapter 7 Trustee sold all remaining personal property of the bankruptcy estate to Manny Ohiri. The Chapter 7 Trustee counters that Isidro Salcido did not own the Property during the pendency of the Chapter 11 proceeding, that neither the debtor-in-possession nor the trustee assumed any unexpired lease for the Property, and that there is no agreement between the Chapter 7 Trustee and Isidro Salcido which would give rise to a claim for rent for use of the Property that would constitute an administrative expense under 11 U.S.C. § 503(b)(1)(A).
Administrative expenses compensable from the bankruptcy estate include the following:
the actual, necessary costs and expenses of preserving the estate, including wages, salaries, or commissions for services rendered after the commencement of the case.
Generally, "[t]o be deemed an administrative expense, the expense must: (1) arise out of a transaction between the creditor and the bankrupt's trustee or debtor-in-possession; and (2) benefit the debtor-in-possession in the operation of the business." In re Climax Chemical Co., 167 B.R. 665, 666 (Bankr.D.N.M. 1994) (citing Mid-Region Petroleum, Inc. 1 F.3d 1130, 1132 (10th Cir. 1993) (quoting In re Amarex, Inc., 853 F.2d 1526, 1530 (10th Cir. 1988)). Section 503(b) should be construed narrowly, and the claimant seeking payment of an administrative expense under 11 U.S.C. § 503(b) bears the burden of proof by a preponderance of the evidence standard. In re Grimm Rothwell, Inc., 108 B.R. 186, 189 (Bankr.S.D.Ohio 1989) (citing In re 1 Potato 2, Inc., 71 B.R. 615, 618 (Bankr.D.Minn. 1987) (remaining citations omitted).
See also, In re TSB, Inc., 302 B.R. 84, 87 (Bankr.D.Idaho 2003) ("This provision [§ 503(b)] is construed narrowly, in order to `maximize and protect the limited assets of the bankruptcy estate for the benefit of the unsecured creditors.'") (quoting In re Coolex, 96.1 I.B.C.R. 35, 36 (Bankr.D.Idaho 1996) (remaining citation omitted)).
Costs incurred by the trustee for storing property of the bankruptcy estate can constitute administrative expenses under 11 U.S.C. § 503(b)(1)(A). 4 Collier on Bankruptcy ¶ 503.06[1] (Alan N. Resnick and Henry J. Sommer, eds. 15th ed. rev. 2006) ("The actual and necessary expenditures of the trustee . . . for storage of property, for rent and for other goods and services incidental to protecting, conserving, maintaining and rehabilitating the estate are certainly contemplated within the phrase `actual, necessary costs and expenses of preserving the estate.'"). See also, In re Great Northern Forest Products, Inc., 135 B.R. 46, 59 (Bankr.W.D.Mich. 1991) ("It is . . . well established that post-petition storage costs, or use and possession costs, may be granted administrative expense priority.") (citations omitted).
The Chapter 7 Trustee points out that no agreement exists between the bankruptcy estate and Isidro Salcido for the storage of estate property on the Property; therefore, there has been no post-petition transaction between Isidro Salcido and the estate to support a claim for administrative expense. Cf. In re Shermco, Inc., 185 B.R. 564, 566 (Bankr.E.D.Mo. 1995) (denying application for payment of administrative expenses where no court-approved post-petition agreement for storage existed). However, some courts have allowed the storage costs for estate property as an administrative expense under 11 U.S.C. § 503(b) even in the absence of an express agreement. See, e.g., In re Grimm Rothwell, Inc., 108 B.R. 186 (Bankr.S.D.Ohio 1989) (finding that although the evidence submitted at trial did not establish the existence of a rental agreement, the trustee's use of the property as a storage space was necessary and preserved the estate such that the claimant was entitled to an administrative expense for the fair rental value of the property); Great Northern Forest Products, Inc., 135 B.R. at 59-60 (Bankr.W.D.Mich. 1991) (citing Grimm Rothwell with approval and finding that despite the absence of a formal rental agreement, property of the estate remained on the premises, entitling claimant to an administrative expense for the storage use of the premises as an actual cost necessary to preserve the estate). But compare In re Macomb Occupational Health Care, LLC, 300 B.R. 270 (Bankr.E.D.Mich. 2003) (considering several hypothetical situations regarding administrative expenses under § 503(b) based on continued possession and use of property after a lease has been rejected).
See also, Shermco, 185 B.R. at 566 (acknowledging that "[n]otwithstanding the absence of an unexpired lease, and notwithstanding the absence of a postpetition order allowing an administrative expense for rent [i.e., a post-petition agreement approved by the court between the chapter 7 trustee and the claimant for the use of the property], the Applicant may be entitled to a priority expense if it can be established that the rents were actual, necessary costs and expenses of preserving the estate.").
The Macomb court summarized its conclusions as follows:
[A] landlord has no inherent right to recover rent from the bankruptcy estate if the bankruptcy estate remains in possession of the premises subsequent to its post-petition rejection of the underlying lease agreement with that landlord. The landlord could negotiate a new lease with the bankruptcy estate under which the estate itself would agree to pay rent for its continued possession of the premises. However, absent such an express agreement, the landlord would have to establish that the bankruptcy estate and it had reached an implicit agreement to establish a new landlord/tenant relationship . . . for the estate's post-rejection possession of the premises. . . .
[E]ven if the landlord is able to establish a basis under applicable state law to recover rent from the bankruptcy estate for its post-rejection occupancy of the premises. . . . [t]he amount which would ultimately be allowed as an administrative claim for the estate's occupancy of the premises during the post-rejection interval would only be that portion which was determined by the bankruptcy court to be actually necessary to preserve the estate after notice and an opportunity to be heard was given to appropriate parties.
Macomb, 300 B.R. at 295.
Under the circumstances present in this case, Isidro Salcido has failed to meet his burden of proving entitlement to an administrative claim for the storage of property of the estate on the Property. Any unexpired lease which may have existed between GWC and Manny Ohiri as of the date this bankruptcy proceeding converted to Chapter 7, was deemed rejected by operation of 11 U.S.C. 365(d)(4), sixty days after conversion. The Chapter 7 Trustee did not assume or reject the lease, nor did the Chapter 7 trustee request additional time within which to assume or reject the lease. Thus, assuming GWC was a lessee under an unexpired lease as of the date the bankruptcy converted to chapter 7, the lease was deemed rejected as of December 15, 2004, sixty days after the conversion date. 11 U.S.C. § 365(d)(4). Isidro Salcido did not forfeit Manny Ohiri's interest in the Property until January 27, 2004, after the deemed rejection of any existing lease for the Property.
Section 365(d)(4) provides:
Notwithstanding paragraphs (1) and (2), in a case under any chapter of this title, if the trustee does not assume or reject an unexpired lease of nonresidential real property under which the debtor is the lessee within 60 days after the date of the order for relief, or within such additional time as the court, for cause, within such 60-day period, fixes, then such lease is deemed rejected, and the trustee shall immediately surrender such nonresidential real property to the lessor. 11 U.S.C. § 365(d)(4).
Assuming Isidro Salcido acquired all of Manny Ohiri's interests in the Property, including Manny Ohiri's interest as lessor of the Property to GWC, any administrative expense claim based on the storage of personal property of the bankruptcy estate that accrued after the deemed rejection of the lease must be measured by the benefit to the estate. See TSB, Inc., 302 B.R. at 88 (a "chapter 7 administrative expense accrued during this post-rejection period . . . arises under § 503(b)(1)(A) and not under § 365(d)(3). Instead of being calculated per the lease terms (as is the case for post-petition, pre-rejection rent under § 365(d)(3) . . .), the benefit conferred on the estate from the continued possession and use of the real property after lease rejection must be determined on competent proof . . ."); In re Dawson, 162 B.R. 329, 333 (Bankr.D.Kan. 1993) ("The portion of the expense representing lease obligations arising after the lease was deemed rejected are governed by § 503.") (citing In re Virginia Packaging Supply Co., Inc., 122 B.R. 491, 494 (Bankr.E.D.Va. 1990)).
"The measure of the benefit to the estate is typically the reasonable rental value of the property that was occupied or used by the trustee." 4 Collier on Bankruptcy ¶ 503.06[6][c][ii] (Alan N. Resnick and Henry J. Sommer, eds. 15th ed. rev. 2006). In establishing the amount of an allowed administrative claim arising from the possession of property by the Chapter 7 trustee after a lease has been deemed rejected, "the terms of the lease should be used to value the benefit conferred by the use of the premises in the absence of evidence that said terms were unreasonable.") In re PYXSYS Corp., 288 B.R. 309, 318 (Bankr.D.Mass. 2003) (citing In re Rare Coin Galleries of Am., 72 B.R. 415, 417 (D.Mass. 1987).
See also Grimm Rothwell 108 B.R. at 190 ("[A]bsent evidence to the contrary, the fair rental rate is the contract rental rate rather than a rental value determined by the specific use of the premises.") (citations omitted); In re Aerospace Technologies, Inc., 199 B.R. 331, 340 (Bankr.M.D.N.C. 1996) ("While the court has discretion to fix the reasonable administrative rent, the contract rent is presumptively the reasonable value for such use and occupancy. . . . such a presumption may be rebutted by the Trustee demonstrating that the reasonable worth or value of the lease is different than the contract rate.") (citations omitted). But see In re Cardinal Industries, Inc., 109 B.R. 738, 741 (Bankr.S.D.Ohio 1989) ("Once the lease has been rejected . . . and absent a hold-over which prevents a new tenant from entering into possession, the contract rate is not necessarily determinative of the amount of the administrative rent claim. `[O]nce the lease is deemed rejected, the lease rate no longer controls; instead, the debtor is only required to pay the reasonable rental value of the premises.'") (quoting Corporate Property Investors v. Chandel Enterprises, Inc. (In re Chandel Enterprises, Inc.), 64 B.R. 607, 610 (Bankr.C.D.Cal. 1986)).
In this case, although the parties acknowledged the existence of a lease between GWC and Manny Ohiri, the lease was not admitted into evidence. Nor was any testimony as to the amount of the rent under the lease between GWC and Manny Ohiri offered at the final hearing. Thus there is no evidence of the fair rental value for the Property based on the lease. Isidro Salcido's testimony that he now rents the Property for $1,800.00 per month is, likewise, insufficient evidence to establish the fair rental value for the Property during the time the Chapter 7 trustee retained possession of the Property. As "[t]he burden of proving entitlement to an administrative priority expense is on the claimant," TBS, Inc., 302 B.R. at 87 (citation omitted), the Court must conclude based on the evidence presented at the final hearing that Isidro Salcido failed to sustain his burden.
At closing argument, counsel for Isidro Salcido asserted that the monthly rent under the lease between GWC and Manny Ohiri was $1,200.00, and that this figure is sufficient evidence for purposes of establishing the amount of the administrative expense claim. Argument before the Court does not constitute evidence. See In re Wallace, 298 B.R. 435, 441 (10th Cir. B.A.P. 2003), aff'd, 99 Fed.Appx. 870 (10th Cir. 2004) ("Opening statements are not evidence.") (citing Exeter Bankcorporation, Inc. v. Kemper Sec. Group, Inc., 58 F3d 1306, 1312 n. 5 (8th Cir. 1995) (quoting United States v. Fetlow, 21 F.3d 243, 248 (8th Cir. 1994) for the proposition that "`[s]tatements of counsel are not evidence' and do not create issues of fact.'") (remaining citations omitted)).
Even if the Court were to assume that the parties stipulated that the monthly rent under the lease between GWC and Manny Ohiri was $1,200.00, the testimony of the Chapter 7 Trustee that any property of the estate located on the Property had little value indicates that the continued use of the Property conferred little benefit to the estate. Coupled with the fact that there was no post-petition agreement between Isidro Salcido and the estate for the continued use of the Property, the elements required for payment of an administrative expense under 11 U.S.C. § 503(b)(1)(A) have not been met. See Climax Chemical Co., 167 B.R. at 666 ("The benefit must be real and arise from the transaction for which the claim is filed.") (citing Mid Region Petroleum, 1 F.3d at 1133).
Other factors particular to this case also support the conclusion that Isidro Salcido is not entitled to a claim for administrative expenses. Although property of the bankruptcy estate was most likely stored on the Property after the case was converted to Chapter 7 and while the Chapter 7 Trustee had possession of the Property, there were ongoing disputes between the Chapter 7 Trustee and Manny Ohiri over the ownership of many items of personal property. No adjudication as to the ownership of the personal property ever occurred. Eventually, Manny Ohiri paid the bankruptcy estate $20,500.00 to acquire all of the personal property of the estate, which included personal property stored on the Property. Thus, while storage of the personal property conferred some benefit to the state because it enabled the Chapter 7 Trustee to recover funds from the sale of all of the personal property to Manny Ohiri, the value to the estate for the storage of a portion of the personal property of the bankruptcy estate is difficult to quantify. Cf. Grimm Rothwell, 108 B.R. at 190 (determining that the amount of space used by the trustee is vital to the determination of the amount of the administrative expense claim, and setting the claim at 20% of the stated rental amount because the trustee used only 20% of the premises for storage of property of the estate).
In addition, after Isidro Salcido forfeited Manny Ohiri's interest under the real estate contract, he did not immediately seek to force the Chapter 7 trustee to vacate the Property pursuant to 11 U.S.C. § 365(d)(4). No action was taken by Isidro Salcido until January 2005, when Isidro Salcido, Manny Ohiri, and the Chapter 7 Trustee entered into the Stipulation and Agreement which provided for Manny Ohiri's removal of the personal property from the Property. Isidro Salcido enforced his rights under the Stipulation and Agreement through further proceedings before the Court. Isidro Salcido did not file his Motion seeking payment of an allowed administrative expense for the storage of the personal property until more than fifteen months after the Chapter 7 Trustee took possession of the Property. See 11 U.S.C. § 503(a) (requiring a "timely" request for payment of an administrative expense unless a tardy request is permitted by the court for cause).
Based on the foregoing, the Court concludes that Isidro Salcido has offered insufficient evidence as to the value and the benefit conferred upon the estate by continued use of the Property by the Chapter 7 Trustee, and has, therefore, not established his entitlement to payment of a claim for administrative expenses pursuant to 11 U.S.C. § 503(b)(1)(A).
WHEREFORE, IT IS HEREBY ORDERED that the Request for Payment of Administrative Expenses is DENIED.