Earnest Reiter v. Habbo Fokkena ( 1999 )

United States Bankruptcy Appellate Panel
FOR THE EIGHTH CIRCUIT
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No. 99-6020NI
No. 99-6021NI
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In re: Kevin J. Wedemeier and *
Kenda R. Wedemeier, *
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Debtors. *
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Ernest Reiter and Louise Reiter, *
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Cross Claimants - Appellants, *
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v. * Appeals from the United States
* Bankruptcy Court for the
Habbo G. Fokkena, Chapter 7 Trustee, * Northern District of Iowa
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Cross Claim Defendant - Appellee. *
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Arnold A. Bartz and Delores J. Bartz, *
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Cross Claimants - Appellants, *
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v. *
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Habbo G. Fokkena, Chapter 7 Trustee, *
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Cross Claim Defendant - Appellee. *
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Submitted: August 26, 1999
Filed: October 4, 1999
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Before KRESSEL, WILLIAM A. HILL, and SCHERMER, Bankruptcy Judges.
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WILLIAM A. HILL, Bankruptcy Judge.
Landlords Ernest Reiter, Louise Reiter, Arnold Bartz and Delores Bartz appeal from
the bankruptcy court’s March 4, 1999, summary judgment order which avoided their liens
in the debtors’ 1998 crops and granted them administrative expense claims for less than the
total annual rent due under their respective leases with the debtors. We have jurisdiction
over this appeal from the final order of the bankruptcy court. See 28 U.S.C. § 158(b). For
the reasons set forth below, we affirm in part, reverse in part, and remand for further
proceedings in conformity with this opinion.
BACKGROUND
The facts are undisputed. Debtors Kevin and Kenda Wedemeier are farmers in Iowa.
In 1998, they leased 149.6 acres of farm land from Ernest and Louise Reiter and 183 acres
of farm land from Arnold and Delores Bartz. Both lease contracts were for a term of one
year, and both lease contracts specifically state that the tenant must “farm said premises in
a good and farmlike manner” and “raise the greatest amount of grain thereon, the nature of
the soil and season will permit.” The Reiter lease ran from January 16, 1998, to January 16,
1999. The total annual rent was $18,000.00 due in equal installments of $9,000.00 on March
1, 1998, and December 1, 1998. The Bartz lease ran from March 1, 1998, to March 1, 1999.
The total annual rent was $20,130.00 due in unequal installments of $4,500.00 and
$15,630.00 on March 1, 1998, and November 15, 1998, respectively.
The debtors paid the March installment of $4,500 due under the Bartz lease but failed
to pay the March installment of $9,000 due under the Reiter lease. Nevertheless, in May,
the debtors planted crops on the farm land leased from the landlords. On June 8, 1998,
before any of the landlords perfected a contractual lien in the debtors’ growing crops, the
debtors filed a Chapter 7 bankruptcy petition. The debtors continued to care for the crops
during the postpetition period and remained in possession of the leased farm land through
harvest. Meanwhile, the trustee neither assumed nor rejected either of the two leases.
Therefore, by operation of 11 U.S.C. § 365(d)(4), the leases were deemed rejected on August
7, 1998, 60 days after the debtors filed their bankruptcy petition.
By complaint filed August 25, 1998, the First National Bank of Oelwein
commenced an adversary proceeding to determine, inter alia, the priority of interests in the
debtors’ 1998 growing crops. Subsequently, on October 20, 1998, the debtors, the trustee,
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and the First National Bank of Oelwein entered a stipulation for settlement of the adversary
proceeding initiated by the bank. Pertinent portions of the settlement stipulation provided
the following: (1) that the debtors would be employed by the trustee to harvest the growing
crops at the standard rate for such work; (2) that $34,538.25 in crop proceeds, representing
the cash rent due the landlords, would be deposited in an escrow account; (3) that the debtors
and the bank would waive all rights to the escrowed funds; and (4) that the rights of the
trustee and the landlords regarding the escrowed funds would be preserved subject to later
determination by the court. The landlords subsequently filed cross-claims to recover their
rent from the escrowed funds. The trustee responded by filing a motion for summary
judgment seeking avoidance of the landlords’ liens in the crop proceeds, seeking a
determination as to whether the landlords would be allowed administrative claims for rent,
and seeking a determination of the value of these claims, if allowed. A hearing on the
summary judgment motion was conducted on February 10, 1999.
On March 4, 1999, the bankruptcy court issued an order which granted summary
judgment to the trustee, avoided the landlords’ liens, and granted the landlords administrative
claims for rent. The bankruptcy court calculated the landlords’ administrative claims on a
per diem basis by dividing the total annual rent due under each lease by 365 and multiplying
that figure by the number of postpetition days (142) the leased farm land was used by the
estate to grow crops. Accordingly, the Bartzes were awarded an administrative rent claim
totalling $7,003.44, and the Reiters were awarded an administrative rent claim totalling
$7,831.30. The Bartzes appeal from the bankruptcy court’s March 4, 1999, order and assert
that their administrative claim should equal $15,630.00, the full amount of rent remaining
due under their lease with the debtors. The Reiters appeal from the same order and similarly
assert that their administrative claim should equal $18,000.00, the full annual rent due under
their lease with the debtors. Further, the Reiters assert that the trustee should be equitably
or judicially estopped from avoiding their liens. We will first dispose of the lien avoidance
issue before moving on to the principal basis for the appeal.
STANDARD OF REVIEW
On appeal, we review the bankruptcy court’s findings of fact for clear error and its
conclusions of law de novo. Fed. R. Bankr. P. 8013; In re Usery, 123 F.3d 1089, 1093 (8th
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Cir. 1997); O’Neal v. Southwest Mo. Bank (In re Broadview Lumber Co.), 118 F.3d 1246,
1250 (8th Cir. 1997) (citing First National Bank of Olathe v. Pontow, 111 F.3d 604, 609 (8th
Cir. 1997)). Mixed questions of law and fact are subject to plenary review. Loehrer v.
McDonnell Douglas Corp., 98 F.3d 1056, 1061 (8th Cir. 1996).
DISCUSSION
The Reiters seek to equitably or judicially estop the trustee from avoiding their liens,
asserting that the trustee is taking inconsistent positions regarding their lease with the debtors
by obtaining the benefits of the lease without assuming its obligations. Generally, the
doctrine of equitable estoppel based on inconsistent positions will not permit a party to
“maintain inconsistent positions or to take a position in regard to a matter which is directly
contrary to, or inconsistent with, one previously assumed by him, at least where he had, or
was chargeable with, full knowledge of the facts, and another will be prejudiced by his
action.” 28 Am. Jur. 2d Estoppel and Waiver § 68 (1966). The related doctrine of judicial
estoppel “prohibits a party from taking inconsistent positions in the same or related
litigation.” Hossaini v. Western Missouri Medical Center, 140 F.3d 1140, 1142 (8th Cir.
1998) (citations omitted). The underlying purpose of the doctrine is to protect the integrity
of the judicial process. Id. at 1143 (citations omitted).
However, the facts of this case do not indicate that the trustee has taken inconsistent
positions with respect to the Reiter lease. The trustee neither assumed nor rejected the Reiter
lease, and after 60 days, it was deemed rejected. The trustee also sought to avoid any liens
the Reiters had in the debtors’ crops. The Bankruptcy Code specifically permits a trustee to
take precisely these actions. See 11 U.S.C. §§ 365, 545. The trustee never asserted that the
lease was valid. Likewise, the trustee never asserted that the lease was invalid. Therefore,
neither judicial estoppel nor equitable estoppel based on inconsistent positions applies here.
Moreover, the bankruptcy court was correct in approving the trustee’s avoidance of
the liens claimed by the landlords in this case. On this issue, the bankruptcy court engaged
in the following analysis:
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Landlord liens may arise through statute and through contract. In re
Arnold, 88 B.R. 917, 919 (Bankr. N.D. Iowa 1988). A contractual lien must
be perfected by compliance with U.C.C. Article 9 filing requirements. In re
Waldo, 70 B.R. 16, 18 (Bankr. N.D. Iowa 1986). The trustee may avoid a
landlord’s unperfected contractual lien in crops. Id.; 11 U.S.C. § 545(2). A
landlord also has a statutory lien in crops pursuant to Iowa Code § 570.1
which has no requirements for perfection. Arnold, 88 B.R. at 919. Such a lien
is subject to avoidance under § 545(3) which wholly invalidates statutory liens
for rent. Id. Trustee may avoid the postpetition perfection of a lien under §
549(a). See In re Aztec Concrete, Inc., 136 B.R. 535, 537 (Bankr. S.D. Iowa
1992). Furthermore, a postpetition perfection of a security interest is void as
violating the automatic stay. In re Prine, 222 B.R. 610, 611 (Bankr. N.D. Iowa
1997).
Based on the foregoing, Trustee may avoid the liens claimed by Bartz
and Reiter. On the date Debtors filed their Chapter 7 petition, the landlords’
contractual liens were unperfected and are avoidable under § 545(2). Their
statutory liens arising from Iowa Code sec. 570.1 are avoidable under §
545(3). Bartz’ postpetition perfection of its lien by filing a financing
statement with the Iowa Secretary of State on June 12, 1998 is avoidable under
§ 549 and void under § 362(a).
See Bankruptcy Court Order of March 4, 1999, at 3-4. We agree with the bankruptcy court’s
analysis. In addition, we observe that the trustee could also have avoided unperfected
security interests in the debtors’ crops pursuant to 11 U.S.C. § 544(a)(1), as no security
interest was perfected in the debtors’ crops by any of the landlords before the debtors filed
their bankruptcy petition. Therefore, we affirm the bankruptcy court’s decision on the lien
avoidance issue.
The pivotal issue deals with the landlords’ administrative claims for rent.
Administrative expense status is accorded to “the actual, necessary costs and expenses of
preserving the estate.” 11 U.S.C. § 503(b)(1)(A). Expenses must provide tangible benefit
to the bankruptcy estate before they are accorded administrative status. In the Matter of JAS
Enterprises, Inc., 180 B.R. 210, 217 (Bankr. D.Neb. 1995) (citations omitted), aff’d 113 F.3d
1238 (8th Cir. 1997) (unpublished table decision). After determining that the expenses were
“actual, necessary, and provided tangible benefit to the bankruptcy estate, the court must
determine the amount of the allowed administrative claim.” Id.
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In this case, the parties stipulated that the trustee’s postpetition use of the leased farm
land produced a tangible benefit to the bankruptcy estate, and the bankruptcy court adopted
this stipulation as a finding of fact. See Bankruptcy Court Order of March 4, 1999, at 5.
Accordingly, the parties as well as the bankruptcy court agree that the landlords are entitled
to administrative claims for rent. However, there is no similar agreement as to the method
for calculating the amount of these claims. The bankruptcy court found that the estate
occupied the leased farm land for a total of 142 postpetition days–from June 8, 1998, to
October 29, 1998. For the purpose of this discussion, we make no distinction between the
60-day postpetition prerejection period and the subsequent 82-day postrejection period. We
limit our discussion to address the proper approach to calculating each administrative claim
under the facts of this case and pursuant to § 503(b)(1)(A) of the Bankruptcy Code. We
conclude that this issue presents a mixed question of law and fact because it requires the
application of an objective legal standard to the established facts of the case. See Loehrer
v. McDonnell Douglas Corp., 98 F.3d 1056, 1061 (8th Cir. 1996).
The amount of an administrative claim arising from the bankruptcy estate’s use of
another entity’s property is the value of the benefit that accrued to the estate as a result of
the estate’s use of the property. 4 Collier on Bankruptcy ¶ 503.06[6][c], at 503-39
(Lawrence P. King ed., 15th ed. rev. 1999). The measure of the benefit to the estate is the
reasonable rental value of the property that was used or occupied. Id.; See also In the Matter
of JAS Enterprises, Inc., 180 B.R. at 217. The reasonable rental value of property used by
the estate is presumed to be the rental rate specified in the lease contract; however, this
presumption may be overcome by contrary evidence. In the Matter of JAS Enterprises, Inc.,
180 B.R. at 217. The bankruptcy estate’s liability for administrative rent under §
503(b)(1)(A) is based on the prevention of unjust enrichment. Burlington Northern R.R. Co.
v. Dant & Russell, Inc. (In re Dant & Russell, Inc.), 853 F.2d 700, 707 (9th Cir. 1988)
(citations omitted); In re Strause, 40 B.R. 110, 113 (Bankr. W.D.Wis. 1984).
In this case, the parties stipulated that the rent specified in the lease contracts is the
reasonable rental value of the farm land to the estate over the entire one-year term of each
lease, and the bankruptcy court adopted this stipulation as a finding of fact. See Bankruptcy
Court Order of March 4, 1999, at 6. In the absence of contrary evidence, the rental rates
specified in the lease contracts must be applied to the facts of this particular case in order to
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determine the amount of each lessor’s administrative rent claim. In calculating
administrative rent, the bankruptcy court found the rental rate per day by dividing the total
annual rent under each lease by each lease’s 365-day term. The bankruptcy court then
multiplied this result by the number of postpetition days the bankruptcy estate used each
landlord’s property. In using this method of calculating administrative rent, the bankruptcy
court relied heavily on Sullivan v. Norton (In re Norton), 112 B.R. 932 (C.D. Ill. 1990) and
In re Strause, 40 B.R. 110 (Bankr. W.D.Wis. 1984).
Like the present case, Norton and Strause both dealt with administrative rent claims
arising from unexpired nonresidential farm land leases that were ultimately rejected by the
trustee. The Norton and Strause courts both calculated the amounts of the administrative rent
claims using the same method that the bankruptcy court used in this case. However, the
Norton and Strause courts rely on no particular authority for using this method. See Norton,
112 B.R. at 936-37; Strause, 40 B.R. at 112-13. Much like the present appellants, the
landlord in Strause argued that the leased farm land had no value during the winter months
and that, therefore, the total annual rent should be apportioned over a nine-month period
instead of the 370-day lease term when calculating the per diem rental rate. Strause, 40 B.R.
at 112. The Strause court reasoned:
Whatever the precise value to the tenant of the land during winter dormancy,
it is something more than nil: some corn fodder may remain; a renewal of the
lease may induce the tenant to carry out additional maintenance work on
buildings or equipment. The very inclusion of these months in the lease period
suggests some detriment to the lessor and value to the tenant. . . . The only
sensible course is to consider the $50,000.00 as a unit, covering the whole
term of the lease, payable in unequal installments, and to divide this total by
the 370 days of the lease's term. This method would seem to be justified not
only "faute de mieux" but also because the test to be applied is benefit to the
estate, and consequently to all the creditors. The per diem calculation here
chosen protects, as far as possible under the Code, the bargain of the parties,
as well as the interests of other creditors.
Id. at 112-113. We respectfully disagree with the Strause court’s conclusion that non-
growing season days and growing season days are equally valuable merely because some
undetermined value may attach to non-growing season days. In this case, using the method
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outlined above to calculate the amount of the administrative rent claims at issue does not
fairly approximate the reasonable rental value of the property used by the bankruptcy estate
during the period of time it was actually used.
The value of an administrative rent claim cannot be determined without due
consideration of how the land was actually used and the value of that use to the estate. In
this case, the leased farm land was used to produce crops of corn and soybeans. Therefore,
the majority of the economic benefit available to the bankruptcy estate necessarily attached
to the growing season because farm land cannot produce grain outside that period of time.
The Strause court characterized the value of farm land outside the growing season as
“something more than nil,” suggesting that the existence of corn fodder may be a possible
benefit during that period. Strause, 40 B.R. at 112. If farm land that is the subject of an
agricultural lease has some value outside the growing season, then that value can and should
be determined from appropriate evidence. The total annual rent under the farm lease may
then be apportioned appropriately between the growing season and the non-growing season.
We recognize that the Norton and Strause method of calculating administrative rent
claims may be appropriate in situations where the reasonable rental value of the lessor’s
property remains constant during the entire term of the lease. For example, administrative
rent claims involving retail business space may be determined by prorating the lease rent on
a per diem basis. See In the Matter of Longua, 58 B.R. 503 (Bankr. W.D.Wis. 1986); In re
Rare Coin Galleries of America, Inc., 72 B.R. 415 (D.Mass. 1987). However, farm land
differs from standard nonresidential commercial property in that its reasonable rental value
drops remarkably during the non-growing season. The method employed by the bankruptcy
court to calculate the amount of the lessors’ administrative claims failed to recognize this
important distinction because it assigned to non-growing season days the same per diem
value as growing season days. Accordingly, the bankruptcy court’s calculation resulted in
a per diem rental rate significantly lower than what the reasonable rental rate would
otherwise be for the similar use of similar farm land during a similar period of time. The
debtors filed their bankruptcy petition shortly after planting their crop, and the bankruptcy
estate used the lessors’ farm land for 142 days (almost the entire growing season) until the
crop matured and was harvested. Therefore, during this 142-day period, the estate extracted
nearly all of the economic value available from the land. The task for the bankruptcy court
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is to attribute a value to this 142-day period, recognizing the unique value that period held
for the estate.
Based on the foregoing, we reverse the bankruptcy court with respect to its
determination of the amount of the landlords’ administrative claims. On this issue, we
remand the case to the bankruptcy court for further proceedings consistent with this opinion.
CONCLUSION
For the reasons discussed, the bankruptcy court’s summary judgment order is affirmed
on the lien avoidance issue. With respect to the calculation of the landlords’ administrative
claims, the bankruptcy court’s summary judgment order is reversed and remanded for further
proceedings consistent with this opinion.
SCHERMER, Bankruptcy Appellate Panel Judge, dissenting:
I respectfully dissent. I would adopt the position of the trial judge.
A true copy.
Attest:
CLERK, U.S. BANKRUPTCY APPELLATE PANEL,
EIGHTH CIRCUIT.
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