The United States Bankruptcy Court for the District of New Hampshire recently held in In re Lakeshore Construction Company of Wolfeboro, Inc. 2008 Bankr. LEXIS 1868 (June 18, 2008, Decided) that an equipment lessor was entitled to an administrative claim only for the monthly rental payments accruing under an unexpired lease after the 60th day of the bankruptcy and through the date that the equipment was repossessed, but not for damages for repossession, repair, attorneys’ fees and pre-60th day rental payments.
The Lessee of construction equipment filed a Chapter 11 case and subsequently the Lessor filed a motion for relief from the automatic stay.  The bankruptcy court denied the motion but ordered the Lessee to pay adequate protection payments.  When the Lessee failed to comply with the adequate protection order, the court ordered stay relief based on noncompliance and the Lessor repossessed the equipment.  The Lessor filed a motion for allowance and payment of various administrative expenses as follows:  $20,211.85 (3 months or rent plus repossession/repair costs and legal fees) and an additional $12,106.42 (representing the 2 months of rent that accrued during the first 60 days of the bankruptcy case) for a total administrative claim of $32,318.27.
The court allowed only $14,150.52, representing 3 months of rent that had accrued after the 60th day of the case through the date of repossession.  The rationale for the court’s decision was: 
a)  Under Section 365(d)(5) of the Bankruptcy Code [1], lessees are required to make post-petition payments under an unexpired personal property lease.  A lessor is not required to make a showing of “actual and necessary” cost for preserving the estate that is required for traditional administrative claims under Section 503(b). 
b)  The court also determined that since there was no evidence that the repossession and repair expenses  incurred by the Lessor had occurred during the time between the 60th day after the petition date and repossession, there was no basis for these costs to become part of the Section 365(d)(5) administrative claim.  Additionally, the court found that there was no evidence and furthermore, that the lease did not provide for the Lessor’s attorneys’ fees during the required time period.
c)  As to the pre-60th day lease payments, the court found that the Lessor was required to show that the expenses were “actual and necessary” costs for preserving the estate under Section 503(b).  Since the Lessor failed to submit any evidence that the equipment was being used by the Lessee, there was no basis to assert a claim for administrative expense, although the court’s denial was without prejudice.
Lastly, the court required that the allowed administrative claim be paid with the same priority as other administrative claims in the bankruptcy case, based on the solvency of the estate.  The court found that administrative claims based on Section 365(d)(5) are not afforded “super-priority” status.
[1] Formerly numbered as 11 U.S.C. Section 365 (d)(10) before the enactment of The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.
The decision in this case is not surprising and serves as an important reminder to equipment lessors that although they have a very powerful right under Section 365(b)(5) to collect rents and other expenses after the 60th day of the bankruptcy, they still need to be prepared to prove the occurrence of non-rent expenses, plus be able to show the lessee’s use of the equipment to establish an administrative claim for post-petition rent obligations prior to the 60th day.
  • Peter Califano was recently appointed to a three-year term to the Insolvency Law Committee of the Business Law Section of the State Bar of California.
  • Barry Dubin recently completed his term as co-chair of the UCC Committee of the Business Law Section of the State Bar of California.

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