Opinion
CASE NO. 99-02967-AJM-7A, CASE NO. 99-02968-AJM-7A, (Both administered under Case No. 99-02967-AJM-7A)
March 12, 1999
John W. Graub, II, Attorney for Geneva Leasing.
Jay P. Kennedy, Attorney for John Petr, the Chapter 7 Trustee.
Steve Ancel, Attorney for the Debtor.
ORDER ON GENEVA LEASING ASSOCIATES, INC.'S APPLICATION FOR ALLOWANCE AND PAYMENT OF ADMINISTRATIVE CLAIM
Wally Zollman, M.D.P.C., the Zollman Surgery Center and two related entities each filed chapter 11 petitions on March 12, 1999. The Wally Zollman M. D. P. C. and the Zollman Surgery Center cases converted to chapter 7 on November 29, 2000 (the "Conversion Date").
While in a chapter 11 and prior to the Conversion Date, Wally Zollman, M.D.P.C. (the "Debtor") leased from Geneva Leasing Associates, Inc. ("Geneva") various pieces of medical equipment, furnishings and fixtures (the "Equipment") and made periodic lease payments. However the Debtor failed to pay the lease payments which became due on September 11, 2000 and October 11, 2000, each of which was in the amount of $10,292.22, for total unpaid lease payments of $20,584.44.
The parties have stipulated that the amount of unpaid post-petition lease payments due under the Geneva leases is $17,839.88.
On October 31, 2000 (the "Rejection Date"), this Court entered an order wherein Equipment Lease Agreements Nos. 10064-1 and 10065-1 with Geneva, both dated February 28, 1992, were rejected. Subsequently, on November 6, 2000, Geneva filed its Application for Allowance and Payment of Administrative Claim (the "Application"), seeking payment of the unpaid September and October lease payments as an administrative claim.
Hearing on Geneva's Application and the Chapter 7 Trustee's objection thereto was held on January 8, 2001 wherein Geneva appeared by counsel, John Graub; John Petr, the Chapter 7 Trustee, appeared by counsel Jay Kennedy. The Court took the matter under advisement and directed the parties to submit authority for their respective positions. The Trustee and Geneva complied with that directive on January 16, 2001 and February 2, 2001 respectively.
Geneva's Application was filed before the Conversion Date, and the Debtor objected to Geneva's Application. The hearing on Geneva's Application was held after the Conversion Date and after the Chapter 7 Trustee had been appointed, and therefore the Chapter 7 Trustee is the party in interest to raise the objection.
With respect to unexpired personal property leases, § 365(d)(10) provides that:
a trustee (or a debtor-in-possession) shall timely perform all of the obligations of the debtor . . . first arising from or after 60 days after the order for relief in a case under chapter 11 . . . until the lease is assumed or rejected notwithstanding section 503(b)(1) . . .
Both the Trustee and Geneva in their post hearing briefs cite the cases of In re Kyle Trucking, Inc., 229 B.R. 198 (Bankr.N.D.Ind. 1999) and In re Pan American Airways, 245 B.R. 897 (Bankr.S.D.Fla. 2000). Geneva also cites the case of In re Russell Cave Co., Inc. 247 B.R. 656 (Bankr.E.D.Ky 2000). These three cases are not in conflict with each other but instead view the operation of § 365(d)(10) similarly: the trustee must timely perform all of the obligations of the debtor (e.g. pay the personal property lease payments) that first arise from or after the 60th day from the date of the filing of the petition. (Compare Section 365(d)(3) that deals with unexpired leases of nonresidential personal property and requires the trustee to pay lease payments that accrue from the date than an order for relief is entered). Thus, after the 60th day, the trustee has the obligation to make timely personal property lease payments that accrue after the 60th day and any payments that accrue from that point through the date of rejection which remain unpaid will be afforded administrative expense priority status notwithstanding the requirements of 11 U.S.C. § 503(b)(1)(A) (which requires that the payment so made be for the "actual, necessary costs and expenses of preserving the estate"). Lease payments that accrued during the 60-day period and which remain unpaid, however, initially fare differently under § 365(d)(10); there is no entitlement to administrative priority under that section. Instead, the lessor must affirmatively show that its unpaid claim was an actual and necessary cost and expense of preserving the estate under § 503(b)(1)(A). Kyle Trucking, 239 B.R. at 201 ("If Congress had intended to give priority to obligations arising during the first 60 days, it would not have limited § 365(d)(10) to the obligations arising after that time."); Pan American, 245 B.R. at 900.
Obviously, § 365(d)(10) is triggered when the personal property lease is ultimately rejected. If the lease of personal property is ultimately assumed, any claims arising from the first 60 days would constitute a cost of cure that would have to be paid by the debtor. See, Kyle Trucking, 239 B.R. at 202.
Here, the Debtor filed its voluntary chapter 11 petition (and therefore the order for relief is) on March 12, 1999. The Debtor was required under § 365(d)(10) to perform the obligations that accrued under the Geneva leases on May 12, 1999 (the 61st day after the order for relief) and after, up to the Rejection Date. According to Kyle Trucking, Pan American and Russell Cave, claims for payments which accrued during that period are automatically entitled to administrative priority, and it appears that Geneva's claims fall squarely into this category — they are for payments that accrued in September and October, 2000, both after the 60-day period but before the Rejection Date.
However; the Trustee urges the Court to go a step further. The Trustee reasons that, under § 365(d)(10), no payments were due from the Debtor during the first 60 days, and therefore, the payments that were made by the Debtor during this period should be treated as prepayments and applied to unpaid claims that accrued after the 60-day period (e.g. the September and October, 2000 payments). The Trustee reads § 365(d)(10) as a prohibition against making any payments during the 60-day period, regardless of the debtor's financial capabilities. However, there is nothing in Kyle Trucking, Pan American and Russell Cave, to suggest such an interpretation of § 365(d)(10), and in fact, those cases are not dispositive of the issue. The focus of those cases was the priority of the claims which arose during the first 60 days, which necessarily presupposes that such lease payments were not paid during the first 60 days, for if they were, there would be no "claims" to wrangle over and their priority would not be an issue. The debtors in those cases, unlike the Debtor here, failed to make any payments during the 60-day period. Furthermore, nothing in those cases even remotely surmises that payments made during the first 60 days should be treated as prepayments and applied to unpaid claims that accrue after the 60-day period but before the Rejection Date. The fact that § 365(d)(10) does not require the trustee to make any payments that accrue during the first 60 days does not extinguish the creditor's right to file a claim for such payments not made, nor does § 365(d)(10) prohibit payments from being made prior to the 60th day. Section 365(d)(10) merely speaks to the priority of such claims, and since § 365(d)(10) gives no administrative priority to such claims, the lessor must seek alternate grounds for administrative priority status, and must show that a claim arising during the first 60 days meets the requirements of § 503(b)(1)(A). Therefore, if payments are not made prior to the 60th day, the issue then becomes one of whether the creditor's claim is to be treated as an administrative claim under § 503(b)(1)(A) or as a general unsecured claim. Here, no issue exists as to any claim Geneva might have for missed payments during the first 60 days since no payments were missed, and Geneva would have no claim for payments accrued during the first 60 days. Geneva's claim is only for missed payments that accrued after the 60th day, which, pursuant to § 365(d)(10), are treated as administrative claims.
Kyle Trucking simply held that payments for the first 60 days would not be treated as administrative expense under the plain language of § 365(d)(10); it does not take any position with respect to the treatment of such lease payments if they were later shown to have satisfied the requirements of § 503(b)(1)(A). However, both Russell Cave and Pan American indicate that if the creditor, upon evidentiary hearing, provides proof under 503(b)(1)(A) that the use of the equipment under the lease benefitted or preserved the estate, then claims arising from the first 60 days could still be treated as administrative expenses.
Accordingly, Geneva's Application for Allowance and Payment of Administrative Claim is APPROVED and Geneva shall be entitled to a chapter 11 administrative claim in the amount of $17,839.88.