GE Capital Commercial, Inc. v. Sylva Corporation, Inc. ( 2014 )


Menu:
  •        United States Bankruptcy Appellate Panel
    For the Eighth Circuit
    ___________________________
    No. 14-6016
    ___________________________
    In re: Sylva Corporation, Inc.
    lllllllllllllllllllllDebtor
    ------------------------------
    GE Capital Commercial, Inc.
    lllllllllllllllllllllMovant - Appellant
    v.
    Sylva Corporation, Inc.
    lllllllllllllllllllllDebtor - Appellee
    ____________
    Appeal from United States Bankruptcy Court
    for the District of Minnesota - Minneapolis
    ____________
    Submitted: October 28, 2104
    Filed: November 26, 2014
    ____________
    Before FEDERMAN, Chief Judge, SALADINO and SHODEEN, Bankruptcy
    Judges.
    ____________
    SALADINO, Bankruptcy Judge.
    The Appellant, GE Capital Commercial, Inc. (“GE Capital”), appeals the
    decision of the bankruptcy court denying its motion for allowance of an
    administrative expense claim for unpaid lease obligations against the Debtor-
    Appellee, Sylva Corporation, Inc. (“Sylva”). For the reasons set forth below, we
    reverse and remand for further proceedings.
    FACTUAL BACKGROUND
    The parties are in agreement on the pertinent facts applicable to this appeal.1
    In November 2007, Sylva entered into a “Lift Lease Agreement” with a predecessor
    to GE Capital for the lease of certain equipment2 used in Sylva’s business operation.
    The lease was for an initial term of 60 months, expiring on November 30, 2012, and
    provided for Sylva to make monthly lease payments on the terms set forth in the lease
    agreement.
    Paragraph 11 of the lease agreement gave Sylva the option to purchase the
    equipment during the lease term or upon expiration of the initial term by complying
    with the specific terms contained in that paragraph. Sylva did not do so. Paragraph
    23 of the lease agreement gave Sylva the right to terminate the lease agreement upon
    expiration of the initial term by giving notice and returning the equipment. Again,
    Sylva did not do so. Therefore, pursuant to Paragraph 23, the lease automatically
    renewed on a month-to-month basis following the initial term until such time as either
    party provided the other with at least 90 days’ written notice of its intent to terminate
    the lease agreement. Upon expiration of the initial term on November 30, 2012, Sylva
    1
    Prior to the evidentiary hearing in bankruptcy court on April 29, 2014, the
    parties filed a stipulation of facts. The facts in this section are taken from that
    stipulation and from undisputed portions of the record.
    2
    The equipment consisted of a Rotochopper Model EC266 Wood Grinder
    Processor and a Superior Model 20X70 Stacking Conveyor.
    -2-
    had not provided any such notice to GE Capital and retained possession of the
    equipment. Therefore, the lease continued on a month-to-month basis.
    On April 3, 2013, Sylva filed its voluntary petition for relief under Chapter 11
    of the United States Bankruptcy Code in the District of Minnesota. Sylva is
    continuing in possession of its property and operating and managing its business as
    a debtor-in-possession.
    GE Capital filed its proof of claim on May 9, 2013, specifically identifying the
    basis of its claim as a “true lease” and further asserting:
    This is a contingent claim arising from an equipment lease
    except for those amounts designated as “Pre-Petition
    Amounts Due” below. In the event this lease is rejected all
    amounts asserted hereunder become a non-contingent
    liability of the debtor. The claim reflected herein is
    consistent with Claimant’s position that the contracts
    underlying the claim are true leases. . . .
    Sylva has not objected to GE Capital’s proof of claim nor has it commenced
    an adversary proceeding to determine the nature and extent of GE Capital’s interest
    in the equipment.
    On October 17, 2013, GE Capital filed a motion for an order compelling Sylva
    to assume or reject the lease agreement and for relief from the automatic stay or, in
    the alternative, granting adequate protection. Sylva filed its response to GE Capital’s
    motion asserting that the lease expired in December 2012 and that there is no lease
    in force for Sylva to assume or reject. Sylva asserted that the issue should be whether
    GE Capital is adequately protected, not whether the lease should be assumed or
    rejected. The bankruptcy court held an initial hearing on November 13, 2013, and set
    the matter for evidentiary hearing to take place on February 8, 2014.
    -3-
    In the meantime, on December 2, 2013, Sylva filed an amended motion to sell
    property of the estate free and clear of liens. The property subject to that motion
    included, but was not limited to, the equipment that is the subject of the lease
    agreement with GE Capital. In its objection to Sylva’s sale motion, GE Capital
    asserted that Sylva is obligated to continue making monthly payments and had failed
    to perform its obligations under the terms of the lease agreement as required by 11
    U.S.C. § 365.3 Others parties in interest also objected to the sale motion, and it was
    later withdrawn by Sylva.
    Prior to the scheduled hearing on GE Capital’s motion to compel assumption
    or rejection of its lease, the parties entered into a settlement which resulted in the
    filing of a stipulation with the bankruptcy court on February 21, 2014. The stipulation
    specifically states that it is filed in resolution of GE Capital’s motion to compel the
    assumption or rejection of its lease and that it is entered into by and between Sylva
    and GE Capital. The stipulation contains a section entitled “RECITALS,” which
    contains many unqualified statements which are directly contrary to some of the
    positions taken by Sylva in its filings related to this appeal. In particular, the recitals
    identify the lease and its terms, state that “GECCI has a valid lessor’s interest in [the
    equipment]”; that monthly rental payments for February, March, and April of 2013
    were due and unpaid, together with sales/use tax and late fees for a total pre-petition
    past due amount as of the bankruptcy filing date of $12,766.79.
    The stipulation has a second section entitled “STIPULATION” containing
    provisions whereby Sylva agreed to cease using the equipment and to make the
    equipment available for reclamation by GE Capital. The stipulation also contained a
    provision stating that “[u]pon approval of this Stipulation by the Court, to the extent
    3
    In this particular filing, and others in the bankruptcy court, GE Capital
    erroneously refers to 11 U.S.C. § 365(B)(5) – a section which does not exist. This
    error was corrected in GE Capital’s filings on appeal, and we presume that the
    references in the bankruptcy court filings were meant to be references to § 365(d)(5).
    -4-
    the Lease Agreement remains in force, Debtor is authorized to reject the Lease
    Agreement.” Finally, there is a reservation of rights provision whereby the parties
    agree that the stipulation would be without prejudice to GE Capital’s right to enforce
    additional default-related rights and remedies, including, but not limited to, filing of
    a motion for allowance of administrative expense. It was also without prejudice to
    Sylva’s rights, including the right to contest any claims made by GE Capital.
    On March 4, 2014, GE Capital filed the underlying motion for administrative
    expense, Sylva objected, and the matter was set for evidentiary hearing on April 29,
    2014. Sylva again argued in its objection that the agreement is not a true lease, but
    instead is a financing agreement. The objection also indicates that Sylva did actually
    use the equipment for a total of 130 hours in calendar year 2013.
    Prior to the evidentiary hearing, the parties again filed a stipulation of facts.
    The stipulation included the background facts set forth in the prior stipulation
    regarding GE Capital’s motion to assume or reject, described the events leading up
    to Sylva’s confirmed plan, and specifically provided that “[t]he Lease Agreement
    between Debtor and GECCI was rejected by the Debtor on April 1, 2014.” This
    stipulation did not include a reservation of rights.
    BANKRUPTCY COURT DECISION
    An evidentiary hearing was held on GE Capital’s motion for administrative
    expense and the resistance of Sylva on April 29, 2014, and the bankruptcy court
    subsequently issued its oral ruling denying the motion for administrative expenses.
    In its ruling, the bankruptcy court expressly stated that it would only analyze the
    motion under § 503(b)(1)(A) and would “not make any determinations about an
    administrative expense claim under 365(d)(5) . . . .” As a result, the bankruptcy court
    determined that GE Capital had the burden to prove by a preponderance of the
    evidence that the estate received a tangible benefit for the use of the equipment.
    -5-
    Ultimately, the court determined that GE Capital had failed to meet its burden of
    proof and denied its motion for an administrative expense claim.
    STANDARD OF REVIEW
    Here, the bankruptcy court’s factual findings are not at issue. Rather, the issue
    is whether the bankruptcy court properly applied and interpreted the appropriate
    statute. Such a determination is reviewed de novo. Wegner v. Grunewaldt, 
    821 F.3d 1317
    , 1320 (8th Cir. 1987); Pummill v. Greensfelder, Hemker & Gale (In re Richards
    & Conover Steel Co.), 
    267 B.R. 602
    , 609 (B.A.P. 8th Cir. 2001).
    DISCUSSION
    The question presented in this appeal is whether the bankruptcy court erred in
    analyzing GE Capital’s motion for determination of administrative expense using
    only the legal standards and evidentiary burdens under 11 U.S.C. § 503(b)(1)(A)
    instead of those under 11 U.S.C. § 365(d)(5). In its motion to the bankruptcy court,
    GE Capital requested allowance as an administrative expense the lease payments due
    under the lease agreement for the period from the date of bankruptcy filing until the
    date the lease agreement was rejected, plus attorneys’ fees and expenses related to
    reclaiming the equipment. To complicate matters, GE Capital asserted in its motion
    that it was entitled to the administrative expense claim under both § 365(d) and
    § 503(b).4 The legal standards and burdens under those two sections are quite
    different, and the bankruptcy court expressly elected to analyze the motion under
    § 503(b) rather than § 365(d)(5). Thus, we must determine whether the bankruptcy
    court erred in doing so.
    4
    For good measure, GE Capital also threw in § 105(a), the provisions of which
    do not come into play in this appeal.
    -6-
    GE Capital argues that the bankruptcy court should have applied the legal
    standards and burdens under § 365(d)(5), which provides as follows:
    The trustee shall timely perform all of the
    obligations of the debtor, except those specified in section
    365(b)(2), first arising from or after 60 days after the order
    for relief in a case under chapter 11 of this title under an
    unexpired lease of personal property (other than personal
    property leased to an individual primarily for personal,
    family, or household purposes), until such lease is assumed
    or rejected notwithstanding section 503(b)(1) of this title,
    unless the court, after notice and a hearing and based on
    the equities of the case, orders otherwise with respect to
    the obligations or timely performance thereof.
    (Emphasis added.)
    Next, GE Capital argues that due to a relative lack of controlling law
    interpreting § 365(d)(5), we should follow the same analysis the Eighth Circuit Court
    of Appeals has established for interpreting § 365(d)(3). With a couple of significant
    exceptions, § 365(d)(5) is very similar to § 365(d)(3), which provides:
    The trustee shall timely perform all the obligations
    of the debtor, except those specified in section 365(b)(2),
    arising from and after the order for relief under any
    unexpired lease of nonresidential real property, until such
    lease is assumed or rejected, notwithstanding section
    503(b)(1) of this title.
    The operative language of both sections is precisely the same: “The trustee
    shall timely perform all the obligations of the debtor . . . under an [any] unexpired
    lease . . . until such lease is assumed or rejected, notwithstanding section 503(b)(1)
    -7-
    of this title.” Both sections require the trustee (or debtor-in-possession)5 to timely
    perform all post-petition obligations of the debtor under unexpired leases until such
    time as the lease is assumed or rejected. There are, however, some differences.
    Section 365(d)(3) deals with unexpired leases of nonresidential real property, whereas
    § 365(d)(5) deals with unexpired leases of personal property. The obligation to
    perform in § 365(d)(5) begins “from or after 60 days after” bankruptcy filing, whereas
    the obligation in § 365(d)(3) begins “from and after” the order for relief. Finally, §
    365(d)(5) contains an important exception to the performance obligation since it
    concludes with the clause “unless the court, after notice and a hearing and based on
    the equities of the case, orders otherwise . . . .”
    Relying on an Eighth Circuit case interpreting § 365(d)(3), GE Capital asserts,
    both in its motion to the bankruptcy court and in this appeal, that it is “automatically”
    entitled to an administrative expense claim for the post-petition rent that became due.
    In Burival v. Roehrich (In re Burival), 
    613 F.3d 810
    (8th Cir. 2010), the Eighth
    Circuit Court of Appeals had the opportunity to interpret a lessor’s right to an
    administrative expense claim under 11 U.S.C. § 365(d)(3). In that case, the appellants
    argued that the landlord was not entitled to an administrative expense priority for
    post-petition, pre-rejection lease payments under the Bankruptcy Code. The Eighth
    Circuit disagreed, stating:
    To the contrary, § 365(d)(3) claims have priority status.
    Section 365(d)(3) expressly preempts subsection 503(b)(1),
    but not the introductory authorization of “administrative
    expenses” in § 503(b). The administrative expenses listed
    in the subsections of § 503(b) – preceded by “including” –
    are not exclusive. See 11 U.S.C. § 102(3) (in the
    bankruptcy code, “including” is not limiting). Because §
    5
    11 U.S.C. § 1107(a) states that with certain exceptions not applicable here, a
    debtor-in-possession shall have all of the rights, powers, and duties of a Chapter 11
    trustee.
    -8-
    365(d)(3) claims have a status at least equal to a claim
    under subsection 503(b)(1), the BAP correctly approved
    Pritchett’s claim as an administrative expense. In re
    Pacific-Atlantic Trading 
    Co., 27 F.3d at 405
    .
    613 F.3d at 812-13.
    While we agree with GE Capital that the operative language of § 365(d)(3) and
    (d)(5) are similar enough that cases under § 365(d)(3), such as Burival, are relevant
    to provide guidance to a court interpreting a situation under § 365(d)(5), they are not
    necessarily “automatic” or dispositive. Instead, when applied to a situation under
    § 365(d)(5), the Eighth Circuit’s analysis in Burival is a starting point that is subject
    to the exceptions and qualifications found in § 365(d)(5) and not in § 365(d)(3) –
    namely the 60-day exclusion and the exception based on the equities of the case. See
    CIT Commc’ns Fin. Corp. v. Midway Airlines Corp. (In re Midway), 
    406 F.3d 229
    ,
    234 (4th Cir. 2005) (stating that in construing § 365(d)(10) [now § 365(d)(5)], courts
    often look to decisions construing § 365(d)(3)).
    Here, the bankruptcy court expressly declined to consider the matter under
    § 365(d)(5).6 However, we note that GE Capital expressly argued in its motion that
    it was entitled to an administrative expense claim under § 365(d)(5) for the post-
    petition rent payments, which is a position it has consistently taken throughout the
    bankruptcy case. For example, its proof of claim clearly asserted its rights under its
    lease as a “true lease.” On October 17, 2013, GE Capital filed a motion to compel,
    6
    Specifically, the bankruptcy court stated “I do not make any determinations
    about an administrative expense claim under 365(d)(5) because [an attorney for GE
    Capital] argued that the conflicting case law under 365(d)(5) is irrelevant here
    because GECC couldn’t satisfy the requirements of 503(b)(1)(A).” We are not
    entirely clear as to why the bankruptcy court took that position since GE Capital
    repeatedly asserted its claim under § 365 throughout the bankruptcy case, and we
    found no such argument by GE Capital on the record to the effect that § 365(d)(5) is
    irrelevant.
    -9-
    among other things, assumption or rejection of its lease and demanded performance
    of Sylva’s obligation to pay the post-petition rent payments under § 365. On
    December 6, 2013, GE Capital objected to Sylva’s motion to sell, again asserting its
    right to be paid its lease payments. In February 2014, Sylva and GE Capital entered
    into a stipulation resolving GE Capital’s motion to assume or reject, in which GE
    Capital expressly reserved its right to seek an administrative expense claim. Finally,
    GE Capital did in fact file a motion seeking an administrative expense claim which
    resulted in this appeal. Thus, the written record supports GE Capital’s request that its
    motion be considered under§ 365.7
    We note, as did the bankruptcy court, that the burden of proof under §
    503(b)(1) is on the claimant seeking an administrative expense claim. Williams v.
    IMC Mortg. Co. (In re Williams), 
    246 B.R. 591
    , 594 (B.A.P. 8th Cir. 1999). However,
    under § 365(d)(5), the entitlement to the administrative expense claim is automatic
    unless the debtor or objecting party can show that the court should order otherwise
    based on the equities of the case. CIT Commc’ns Fin. Corp. v. Midway Airlines Corp.
    (In re Midway), 
    406 F.3d 229
    , 240-241 (4th Cir. 2005) (“This interpretation is
    consistent with the overall purpose of § 365(d)(10) [now § 365(d)(5)], which is to
    ‘shift to the debtor the burden of bringing a motion while allowing the debtor
    sufficient breathing room after the bankruptcy petition to make an informed
    decision.’” (citing H.R. Rep. No. 103-835, at 50 (1994), reprinted in 1994
    7
    We also recognize that the bankruptcy court gave some deference to the
    argument by Sylva to the effect that an attorney for GE Capital had stated at an earlier
    hearing that the lease had expired and the only thing executory was the purchase
    option. That statement was made at a hearing in November 2013 on GE Capital’s
    motion to compel assumption or rejection of its lease, and in the context of a
    discussion about an anticipated sale of the equipment by Sylva. The parties did not
    stipulate or consent to anything at that hearing, other than setting the motion for an
    evidentiary hearing. In any event, the statement is clearly inaccurate and is directly
    contrary to the written position taken by GE Capital throughout the case.
    Accordingly, we give it no weight in this appeal.
    -10-
    U.S.C.C.A.N. 3340, 3359)); see also Burival v. Roehrich (In re Burival), 
    613 F.3d 810
    , 812 (8th Cir. 2010) (holding that under § 365(d)(3), the debtor’s rent obligations
    “must be performed when they arise after filing and before rejection” regardless of
    whether the lease preserved or benefitted the estate).
    By declining to consider GE Capital’s motion under 11 U.S.C.§ 365(d)(5), the
    bankruptcy court shifted the burden of proof from the objecting party to the claimant,
    which is erroneous as a matter of law.
    Finally, there was some discussion in the bankruptcy court’s oral ruling and in
    the briefs on appeal as to whether the lease agreement GE Capital had with Sylva was
    a “true lease” or a disguised security agreement. The bankruptcy court did not rule on
    this issue. We note that prior to the bankruptcy court hearing on the motion for
    administrative expense, GE Capital and Sylva filed a stipulation with the bankruptcy
    court in which they agreed that the parties entered into the lease agreement, that it
    continued on a month-to-month basis following the initial term, that Sylva failed to
    make any payments under the lease since the petition filing date, and that “the Lease
    Agreement between Debtor and GECCI was rejected by the Debtor on April 1, 2014.”
    Notwithstanding those stipulations, and its earlier stipulations in connection with the
    motion to compel assumption or rejection, Sylva continues to argue in opposition to
    the motion for administrative expense that the lease is not a “true lease,” but is really
    a finance agreement.
    Of course, the foregoing discussion regarding § 365(d)(3) and (d)(5) would be
    applicable only if the “lease agreement” were a true equipment lease and not a
    secured financing arrangement. See, e.g., Alegre v. Michael H. Clement Corp. (In re
    Michael H. Clement Corp.), 
    446 B.R. 394
    , 402 (N.D. Cal. 2011) (citing City of San
    Francisco Market Corp. v. Walsh (In re Moreggia & Sons, Inc.), 
    852 F.2d 1179
    , 1182
    (9th Cir. 1988) and Gibson v. Harris Pine Mills (In re Harris Pine Mills), 
    862 F.2d 217
    , 220 n.5 (9th Cir. 1988)); Westship, Inc. v. Trident Shipworks, Inc., 
    247 B.R. 856
    -11-
    (M.D. Fla 2000); In re Extraction Tech. of VA, L.L.C., 
    296 B.R. 393
    , 399 (Bankr.
    E.D. Va. 2001). Thus, we believe that is the threshold issue that must be decided
    before any analysis under § 365 or § 503. See, e.g., Gen. Elec. Capital Corp. v.
    Collins & Aikman Corp. (In re Collins & Aikman Corp.), 
    351 B.R. 459
    (E.D. Mich.
    2006) (dismissing interlocutory appeal because bankruptcy court had not conclusively
    determined whether agreements at issue were true leases or executory contracts);
    Hotel Syracuse, Inc. v. City of Syracuse Indus. Dev. Agency (In re Hotel Syracuse,
    Inc.), 
    155 B.R. 824
    (Bankr. N.D.N.Y. 1993) (in adversary proceeding to determine
    whether debtor may assume executory contract, the court must first determine
    whether the agreement is a true lease or some other type of financial arrangement).
    The bankruptcy court did not rule on that issue and we will not either.
    Upon remand, the bankruptcy court should first determine whether Sylva’s
    assertion that the lease agreement is not a “true lease” is still a disputed issue
    following the stipulations entered into by the parties and the confirmed plan of
    reorganization of Sylva. If it is, the court should establish a procedure to adjudicate
    that issue. If the bankruptcy court ultimately determines that the lease agreement is
    a “true lease,” it should then analyze the issue under 11 U.S.C. § 365(d)(5) for the
    period from or after 60 days after the filing date to the date of rejection. Because §
    365(d)(5) does not mandate performance prior to the 60th day post-petition, the
    request for an administrative expense claim for the lease payments due during that
    period is properly analyzed under § 503(b)(1)(A). See In re Double G Trucking of the
    Arlatex, Inc., 
    442 B.R. 684
    , 689 (Bankr. W.D. Ark. 2010). Accordingly, upon remand
    the bankruptcy court should make specific factual and legal findings with respect to
    the use of the equipment and the benefit to the estate during that period of time.
    -12-
    CONCLUSION
    For the reasons set forth above, the decision of the bankruptcy court is reversed
    and remanded for further proceedings consistent with this opinion.
    ______________________________
    -13-