In re Snelson

305 B.R. 255

In re James Edward SNELSON, Debtor.

No. 01-43150-BJH-11.

United States Bankruptcy Court, N.D. Texas, Fort Worth Division.

July 7, 2003.

David G. Aelvoet, Linebarger, Goggan, Blair & et al, San Antonio, TX, Margaret G. Baker, Brown and Shapiro, Pasadena, TX, Michael W. Deeds, Linebarger, Goggan, Blair et al., Dallas, TX, Cynthia G. Dooley, Brousseau & Associates, Dallas, TX, Josephine Garrett, Ft. Worth, TX, James R. Gravley, Gravley, Wheeler, McCray & Leggett, Abilene, TX, David L. Hooper, Abilene, TX, John E. Johnson, Jameson and Dunagan, Dallas, TX, Sherrel K. Knighton, Linebarger, Goggan, Blair and Sampson, Dallas, TX, June A. Mann, Mann and Stevens, Houston, TX, Ronald M. Mapel, Ronald M. Mapel, Attorney at Law, San Angelo, TX, David L. Pritchard, Bedford, TX, Peter Michael Reed, McCreary, Veselka, Bragg and Allen, Austin, TX, Tommy J. Swann, McCleskey, Harriger, Brazill and Graf, Lubbock, TX, Thomas Michael Wheeler, Gravley, Wheeler, McCray and Leggett, Abilene TX, Mark S. Zachary, McMahon, Surovik, Suttle, et al., Abilene, TX, for Creditors.

William Sterrett Parkinson, Office of the U.S. Trustee, Dallas, TX, U.S. Trustee.

Tim Truman, Hill-Gilstrap, P.C., Ft. Worth, TX, for Debtor.

MEMORANDUM OPINION

BARBARA J. HOUSER, Bankruptcy Judge.

Before the Court is Citicorp Vendor Finance, Inc.'s ("Citicorp") Motion for Allowance and Payment of Administrative Expense Claim Pursuant to 11 U.S.C. § 503(a) (the "Administrative Claim Motion"). The Court has core jurisdiction over the Administrative Claim Motion pursuant to 28 U.S.C. §§ 1334 and 157(b)(2)(B).

A contested hearing on the Administrative Claim Motion was commenced on March 24, 2003, but, due to an inadequate time estimate, the Court did not have sufficient time available within which to conclude the hearing. The Court asked the parties to obtain a continued hearing date that was convenient to the parties and any remaining witnesses. The hearing resumed on May 7, 2003. At the conclusion of that hearing, Citicorp asked for the opportunity to file a post-hearing brief on certain issues. The Debtor asked for the opportunity to reply. Pursuant to an agreed schedule, the Debtor's reply brief was filed on May 28, 2003, at which time the Court took the Motion under advisement. This Memorandum Opinion constitutes the Court's findings of fact and conclusions of law in accordance with Federal Rule of Civil Procedure 52, made applicable here by Federal Rule of Bankruptcy Procedure 7052.

FACTUAL AND PROCEDURAL BACKGROUND

The Debtor filed a voluntary chapter 11 case (the "Case") on April 30, 2001 (the "Petition Date"). Prior to the Petition Date, the Debtor, as the owner of J.E. Snelson Printing Co., entered into an equipment lease with Citicorp dated July 28, 1999 (the "Lease"). The Lease provided for the use of one Komori Six color printing press and other related equipment (the "Equipment") for 84 months, payable at a $3,533.93 monthly rental rate. See Citicorp's Trial Exhibit 1. The Lease provides that it is "governed by and [to be] construed according to the laws of the State of New Jersey." Citicorp's Trial Exhibit 1.

After the Petition Date, the Debtor moved to assume the Lease and, upon the Debtor's filing of a certificate of no objection, the Court entered an order granting the Debtor's motion to assume on August 21, 2001 (the "Assumption Order"). Following entry of the Assumption Order, the Debtor failed to make the required monthly payments under the Lease. As a result, Citicorp filed a motion for relief from stay so that it could exercise its remedies under the Lease, and the parties negotiated an agreed order (the "Agreed Stay Order") allowing the stay to lift and Citicorp to repossess and sell the Equipment. The Agreed Stay Order was signed by both parties and entered by the Court on April 16, 2002.

Thereafter, Citicorp obtained a fair market value appraisal of the Equipment, resold it, and obtained net proceeds of $89,250.00 from the sale. After crediting the net sale proceeds and the post-petition Lease payments made by the Debtor, Citicorp claims to be owed an additional $90,858.69 in accordance with the terms of the Lease. See Citicorp's Second Supplement to Request of Citicorp Vendor Finance, Inc. for Allowance of Administrative Expense Claim (the "Second Supplement"). Citicorp asserts an administrative expense claim for this unpaid amount, as well as a claim for its attorneys' fees and expenses incurred in the Case after the entry of the Assumption Order in the amount of $28,872.50, bringing Citicorp's total requested administrative expense claim to $119,731.19. See Second Supplement.

The Debtor filed a terse, 2-page response to the Administrative Claim Motion generally denying Citicorp's entitlement to such a claim. The most specific allegation in the Debtor's response was the following statement: "Debtor DENIES that Citicorp [] properly mitigated its damages, and DENIES that there is any sum due to Citicorp under the lease." Debtor's Response and Objection to Citicorp's Administrative Claim Motion at p. 2.

At the initial hearing held on March 24, 2003, the Debtor's legal argument focused on his contention that the Lease was not a true lease, but rather was a secured financing. Specifically, the Debtor argued that (i) even though he had characterized the Lease as an executory contract in Schedule G and actually treated the Lease as a lease by assuming it, the underlying transaction with Citicorp was not really a lease arrangement but was a secured financing,¹ and (ii) because the Lease was really a secured financing, and not a lease, Citicorp's sale of the Equipment had to occur in a commercially reasonable manner pursuant to article 9 of the Uniform Commercial Code. The Debtor then asserted that Citicorp failed to dispose of the Equipment in a commercially reasonable manner.

In response, Citicorp argued that the Debtor was judicially estoppel from asserting that the Lease was not a true lease due to his actions in the Case including (i) characterizing the Lease as an executory contract in Schedule G, (ii) assuming the Lease in accordance with Section 365 of the Bankruptcy Code, (iii) continuing to treat the Lease as a true lease after assumption, and (iv) continuing his characterization of the Lease as a true lease in his proposed plan of reorganization and disclosure statement (which was proceeding to confirmation on a substantially contemporaneous time line). In support of its judicial estoppel argument, Citicorp relied upon the Fifth Circuit's decision in In re Coastal Plains, Inc., 179 F.3d 197 (5th Cir.1999) (holding that judicial estoppel prevents a party from successfully asserting one legal position in a prior proceeding and then assuming a contrary position because its interests have changed).²

The Debtor was unable to cite the Court to any authority in support of his position that he should not be judicially estopped from changing his position regarding the nature of the underlying transaction with Citicorp. Specifically, the Debtor had no cases to support his request that the Court permit the recharacterization of the underlying transaction as a secured financing after assumption of the Lease as an executory contract.

Because the scope of relevant testimony and other evidence would depend upon the outcome of this threshold issue, the Court ruled from the bench that the Debtor was judicially estopped from making its secured financing argument. Thereafter, Citicorp began presenting its evidence in support of its requested administrative claim. As noted previously, the parties had underestimated the time needed to hear the Administrative Claim Motion and the Court ran out of available time to conclude the hearing on March 24. When the recess occurred, both Citicorp and the Debtor had rested their respective cases-in-chief, but Citicorp had certain rebuttal evidence it wished to present, so the evidence was not yet closed.

The Debtor did not seek to amend his response in opposition to the Administrative Claim Motion after the Court ruled that he was judicially estopped to make his secured financing argument, and neither party filed additional substantive briefing on the legal issues presented by the motion prior to the continued hearing.³ When the continued hearing resumed on May 7, 2003, the Court asked the Debtor if he wished to make a further opening argument. The Debtor declined and Citicorp moved forward with the balance of its evidence.

Thereafter, in his closing argument, the Debtor argued for the first time that the Lease contained an invalid penalty clause. Specifically, the Debtor argued that the Lease was a finance lease governed by Article 2A of the New Jersey Uniform Commercial Code (the "UCC"), and that the Lease's liquidated damages clause was a penalty which was unenforceable under New Jersey law. According to the Debtor, once a liquidated damages clause is held unenforceable as a penalty, the UCC provides an alternate damage calculation on which Citicorp had failed to offer the evidence necessary to the Court's determination of Citicorp's lawful damages. Thus, according to the Debtor, Citicorp had failed to carry its burden of proof and the Administrative Claim Motion must be denied. See Debtor's [Post-Trial] Brief in Support of His Objection to Citicorp's Request for Allowance of Administrative Claim (the "Debtor's Post-Trial Brief") at pp. 8-9.

Citicorp was not prepared to make a closing argument addressing the Debtor's new legal theory and asked to file a post-trial brief addressing it. The Court permitted both parties to file post trial briefs on the relevant issues. Citicorp did not seek to reopen the evidence.

LEGAL ANALYSIS

Under the Bankruptcy Code, the Debtor had the right to assume or reject the Lease. 11 U.S.C. § 365. However, after electing to assume it, the Debtor was required to perform the Lease in accordance with its terms. See In re Texas Health Enters., Inc., 246...