Microf, LLC v. Cumbess (In re Cumbess)

594 B.R. 843

IN RE: Paul L. CUMBESS, Debtor.

Microf, LLC, Movant,

v.Paul L. Cumbess, Debtor, and Camille Hope, Chapter 13 Trustee, Respondents.

Case No. 17-51678-AEC

United States Bankruptcy Court, M.D. Georgia, Macon Division.

Signed November 30, 2018

Jason M. Orenstein, Jason M. Orenstein, PC, Macon, GA, for Debtor.

Contested Matter

ORDER DENYING CREDITOR'S MOTION FOR ALLOWANCE AND PAYMENT OF ADMINISTRATIVE CLAIM

Austin E. Carter, United States Bankruptcy Judge

Before the Court is Microf, LLC's Motion for Allowance and Payment of Administrative Claim (Doc. 39), and the Debtor's opposition thereto (Doc. 40), which came on for hearing on August 8, 2018. Attending the hearing were counsel for Microf, LLC ("Microf"), counsel for the Debtor Paul L. Cumbess (the "Debtor"), and Camille Hope, the Chapter 13 trustee (the "Trustee"). After the hearing, the parties were given time to submit post-hearing briefs. Microf and the Trustee did so.

A proceeding to determine allowance of an administrative expense is a core proceeding under 28 U.S.C. § 157(b)(2)(A), (B), and (O). Having considered the parties' pleadings and arguments, the remainder of the record, and applicable legal authority, the Court states its findings of fact and conclusions of law in accordance with Federal Rule of Bankruptcy Procedure ("Bankruptcy Rule") 7052, which is made applicable through Bankruptcy Rule 9014(c).

I. Findings of Fact

No witnesses testified at the hearing, but the following facts are undisputed. In 2015, prior to filing of this case, the Debtor entered into a rental lease agreement (the "Lease") with Microf for HVAC equipment for his residence.¹

The Debtor filed his bankruptcy petition in August 2017 and his plan was confirmed a short while later (See Doc. 21). The confirmed plan provides for the Debtor's assumption of the Lease and states that the Debtor will be the disbursing agent to Microf (Doc. 21, ¶ 2(m), (l) ). The confirmed plan also provides for the curing of pre-petition arrearage due to Microf, to be disbursed by the Trustee (Doc. 21, ¶ 2(m) ).

As to estate property, the confirmed plan provides that:

Unless otherwise ordered by the court, all property of the estate, whether in the possession of the trustee or the debtor, remains property of the estate subject to the court's jurisdiction, notwithstanding § 1327(b), except as otherwise provided in paragraph (m) above. Property of the estate not paid to the trustee shall remain in the possession of the debtor.

(Doc. 21, ¶ 2(p) ).

Several months after plan confirmation, the Debtor defaulted on payments due under the Lease. As of July 6, 2018, the Debtor owes $1,763.95 in arrearages on the Lease.

At the hearing, the Debtor's attorney acknowledged that the Debtor has possession of the HVAC equipment, and that the Debtor "is benefiting from its use." No evidence or other information about the Debtor's use of the HVAC equipment or any other heating or cooling equipment was offered.

The question before the Court is whether the amounts due for post-confirmation missed Lease payments qualify as administrative expenses under § 503(b)(1)(A).²

II. Conclusions of Law

A. Summary

Microf asserts that the bankruptcy code and applicable case law provide that a debtor's post-confirmation default under a lease assumed in a chapter 13 plan gives rise to the lessor's administrative expense claim for damages. Microf seeks the allowance of an administrative expense for its claim and, if necessary, an order requiring a modified plan to provide for the payment of that claim.

The Trustee opposes this motion, arguing primarily that (1) the Debtor's use of the leased HVAC equipment does not meet the "actual, necessary costs and expenses of preserving the estate" standard of § 503(b)(1)(A), and (2) even if the Lease payments were actual and necessary to preserve the estate, Microf's claim is already classified in the plan and cannot now—post-confirmation—be reclassified as an administrative expense, as such reclassification would unfairly grant priority to Microf's claim ahead of other creditors' claims. The Trustee also recites several policy and practical concerns that she suggests should weigh against Microf's Motion.

The Debtor takes no position as to whether the missed Lease payments qualify as administrative expenses, but expresses concern about the mechanics, method, and payment schedule of both the current arrears and any future arrears. The Debtor opposes any order requiring plan modification.

After due consideration, the Court holds that Microf has not met its burden with respect to its Motion. Contrary to Microf's assertion, the Court finds that an administrative expense claim does not arise automatically from the default under a lease assumed by a debtor in a chapter 13 plan. Therefore, to establish an administrative expense claim, Microf must demonstrate that the subject of the assumed lease—here, the HVAC equipment—was an actual and necessary expense for the preservation of the estate. Microf has failed to do so.

B. Standard and Burden of Proof

Section 503 establishes the standard for allowance of administrative expenses. Under § 503(b)(1)(A), a party may move for allowance of administrative expenses for the "actual, necessary costs and expenses of preserving the estate." 11 U.S.C. § 503(b)(1)(A). In assessing whether an expense falls within § 503(b)(1)(A), the Court must consider whether there has been "an actual, concrete benefit to the estate." Broadcast Corp. of Ga. v. Broadfoot (In re Subscription Television of Greater Atlanta) , 789 F.2d 1530, 1532 (11th Cir. 1986). A potential benefit is not sufficient. Id. The standard for allowance of an administrative claim should be narrowly construed. Varsity Carpet Servs., Inc. v. Richardson (In re Colortex Indus., Inc.) , 19 F.3d 1371, 1377 (11th Cir. 1994) ("[S]ection 503 priorities should be narrowly construed in order to maximize the value of the estate preserved for the benefit of all creditors." (citing Otte v. U.S. , 419 U.S. 43, 53, 95 S.Ct. 247, 42 L.Ed.2d 212 (1974) ) ); Matter of Concrete Prod., Inc. , 208 B.R. 1000, 1006 (Bankr. S.D. Ga. 1996) ("The claim of priority should be founded on a strict statutory basis; if the claim does not derive from the language of Section 503, it must fail.").

The claimant bears the burden of proving both that the expense was actual and necessary, as well as the value provided. In re Bridgeport Plumbing Prod., Inc. , 178 B.R. 563, 569 (Bankr. M.D. Ga. 1994) (Laney, J.) ("The burden of proving entitlement to an administrative expense claim was on [the claimant], to prove not only that the expense was ‘actual’ and ‘necessary,’ but also the reasonable value of the expense.").

C. Analysis

a. Presumed Benefit to Estate

Administrative claims are governed by § 503(b)(1)(A). This section provides, in relevant part, that allowed administrative expenses shall include "the actual, necessary costs and expenses of preserving the estate." 11 U.S.C. § 503(b)(1)(A).

Microf argues that an assumed lease is presumptively beneficial the estate. In support of this assertion, Microf cites two well-known bankruptcy treatises, W. Homer Drake, Jr., Paul W. Bonapfel & Adam M. Goodman, Chapter 13 Practice and Procedure , § 6:10 (2018) and Collier on Bankruptcy ¶ 503.06[6][b] (Richard Levin & Henry J. Sommer eds., 16th ed. 2018).

Chapter 13 Practice and Procedure indeed recognizes the "general principle ... that assumption itself creates the administrative expense obligation such that the nondebtor party need not show benefit to the estate as a result of the assumption," but the treaties also notes, and Microf concedes, that "adherence to this rule is not universal." Chapter 13 Practice and Procedure § 6:10. Two cases are cited for its stated general principle. Id. , § 6.10 n.5 (citing In re Michalek , 393 B.R. 642 (Bankr. E.D. Wis. 2008) and In re Wells , 378 B.R. 557 (Bankr. S.D. Ohio 2007) ). The Court does not consider In re Michalek to support the general principle for which it is cited. To the contrary, in that case, the court held that an administrative claim does not automatically arise from a post-petition breach of a lease assumed under a chapter 13 plan. In re Michalek , 393 B.R. 642, 644, 646 ("I do not find support in the code for the proposition that a post-assumption breach automatically obligates the estate, or the plan, for damages from that breach.... I do not believe the code supports automatic treatment of the lessor's claim as an administrative expense claim.... So to obligate the estate, there must be benefit to the estate as required by section 503(b)(1)(A)").³

The second case cited in Chapter 13 Practice and Procedure , In re Wells , does support the principle that an administrative claim should result automatically upon a default under an assumed lease. However, that case has been distinguished and criticized by more recent holdings. For its holding, the Wells court relied primarily upon an unpublished Sixth Circuit decision involving a chapter 11 debtor. See In re Wells , 378 B.R. at 560 (citing In re Revco D.S., Inc. , No. 93-3597, 1994 WL 376884 (6th Cir. July 18, 1994) ). A later Sixth Circuit case criticizes Wells based on the distinctions between a chapter 11 debtor-in-possession and a chapter 13 debtor. Ford Motor Credit Co. v. Bankr. Estate of Parmenter (In re Parmenter) , 527 F.3d 606, 610 (6th Cir. 2008) ("[T]here is a material difference between the two settings: Whereas a Chapter 11 debtor-in-possession acts on behalf of the estate, a Chapter 13 debtor who assumes and pays for a lease outside of the plan does not." (citations omitted) ). Other opinions similarly attach significance to the difference between chapter 11 and chapter 13 cases. See, e.g., In re Rosenhouse , 453 B.R. 50, 56 (Bankr. E.D.N.Y. 2011) ("Unlike in a chapter 11 case, the Bankruptcy Code and Rules do not establish any requirement that the court approve a chapter 13 debtor's assumption of a personal property lease as being in the best interests...