Opinion ID: 604935
Heading Depth: 2
Heading Rank: 2

Heading: Entitlement to Administrative Expense Claim

Text: 13 In addition to contending that Nalley's claim is barred by failure to comply with state law, the Trustee also raises several arguments alleging that Nalley failed to establish a valid administrative expense claim. First, the Trustee argues that a pre-petition secured creditor cannot elevate his claim to a super-priority administrative expense claim just because the debtor used the property post-petition and adequate protection proved to be inadequate. The Trustee insists that in order for a claim to qualify as an actual, necessary cost and expense of preserving the estate under 11 U.S.C. § 503(b), the creditor must establish that there has been an actual, concrete benefit to the estate on account of a transaction with the debtor which is beneficial to the estate. App.Br. at 44-46, citing In re Subscription Television, 789 F.2d 1530 (11th Cir.1986); In re James B. Downing & Co., supra; In re Jartran, Inc., 732 F.2d 584 (7th Cir.1984); and In re Advisory Info. and Management Sys., Inc., 50 B.R. 627 (Bankr.M.D.Tenn.1985). The Trustee alleges further that mere continued use of collateral by a debtor-in-possession is not enough to establish an administrative expense claim because such a claim requires the advancement of goods or services pursuant to a post-petition transaction. Based on these principles, the Trustee argues that Nalley has only a deficiency claim on the installment contracts because its predecessor-in-interest, Paccar, did not provide any new value to the estate after the imposition of the automatic stay. 14 However, this case does involve a post-petition transaction beneficial to Debtor's estate rather than a mere continued use of the trucks by Debtor. Paccar consented to forgoing foreclosure on its secured collateral only after negotiating for adequate protection payments in return for leaving the trucks in Debtor's possession. Facing a similar claim of administrative expenses for failed adequate protection, the court in In re Mutschler stated: 15 Section 503(b)(1)(A) of the Code entitles a creditor to administrative priority for any claim representing an actual and necessary cost of preserving the estate. Section 507(b) is an adjunct to the adequate protection alternative set forth in section 361. Section 507(b) simply provides that where adequate protection has been extended to a secured creditor and later proves to be inadequate, the creditor then becomes entitled to a superpriority administrative expense claim to the extent that the proffered adequate protection was insufficient. Adequate protection is a means of preserving a creditor's interest in secured collateral subject to post-petition use by the debtor. Presumably such use is desired by the debtor and is contributing to the reorganization effort. Otherwise, the debtor would doubtless return the collateral and forgo providing adequate protection. This beneficial use by the debtor is normally paid for by the adequate protection. Where adequate protection becomes inadequate or otherwise fails and the use nonetheless continues, section 507(b) comes into play by covering the creditor's unprotected interest by according it priority administrative expense status. 16 (emphasis added) 45 B.R. at 496; accord In re McGill, 78 B.R. at 780. (That the use of the collateral was necessary to the debtor's reorganization is evidenced by the debtor's efforts to retain the collateral by attempting to provide adequate protection payments). 17 Here, as in In re Mutschler and In re McGill, Debtor actively sought to retain possession of the tractors by agreeing to pay Paccar monthly adequate protection payments. The negotiation for continued possession of the tractors in return for adequate protection is a post-petition transaction providing new value to the bankruptcy estate. Debtor's efforts to retain the tractors demonstrate that the collateral was beneficial to the estate. When a debtor-in-possession uses a creditor's equipment to generate funds for the operation of a business in bankruptcy, the creditor's expense of providing that equipment is an actual and necessary cost of preserving the bankruptcy estate under § 503(b). In re CM Sys., Inc., 86 B.R. 286, 287 (Bankr.M.D.Fla.1988). The Trustee has not argued that Debtor did not use the trucks while they were in Debtor's possession, so presumably the trucks were used to generate funds for the operation of Debtor's business. Thus, expenses incurred by Paccar in furnishing these trucks to the Debtor qualify as actual and necessary expenses of preserving the estate. 18 The cases relied upon by the Trustee are readily distinguishable from the case at bar. In In re Jartran, Inc., supra, the debtor enjoyed the benefits of advertising services that were performed on the basis of pre-petition contracts. The advertising service provider claimed entitlement to administrative priority for the cost of providing the ads, but the Seventh Circuit Court of Appeals held that the debtor engaged in no post-petition transaction which induced the provision of the ads because the commitment to provide the ads was formed before the debtor filed its bankruptcy petition. In re Jartran, Inc., 732 F.2d at 588-89. In this case, by contrast, Debtor induced the post-petition provision of goods to the estate by negotiating for retention of the trucks, otherwise subject to repossession, in return for adequate protection payments. Rather than simply enjoying the benefits of a pre-petition commitment, Debtor actively bargained for the use of the tractors after filing its bankruptcy petition. 19 In Advisory Information and Management Systems, supra, the Bankruptcy Court considered a claim for administrative expenses under section 503(b)(1)(A) by a creditor who allowed the debtor-in-possession to continue using the collateral without seeking adequate protection for one year after the bankruptcy petition was filed. After commenting that there is nothing in § 503 remotely suggesting that administrative expense priority was intended as an optional remedy to adequate protection of a secured claimholder's interest in property of the estate, the court held that a secured creditor does not contribute to the administration of an estate by merely sitting back and allowing the debtor-in-possession to continue using property which the pre-petition debtor owned. In re Advisory Info. and Management Sys., Inc., 50 B.R. at 630. Similarly, the Bankruptcy Court in In re James B. Downing & Co., supra, held that a creditor who did not seek adequate protection for its lien and who did not advance any post-petition costs or expenses to preserve the estate was not entitled to claim § 503 administrative expenses. 94 B.R. at 521. 20 Unlike the creditors in Advisory Information and Management Systems and James B. Downing, Nalley's predecessor-in-interest utilized the statutory procedures provided for protection of its collateral in the possession of Debtor. Nalley does not proffer § 503 as an alternative to adequate protection of its secured claim. Instead of merely sitting back and allowing Debtor to continue using the tractors, Paccar asserted its undeniable right to repossession and agreed to forgo repossession only after and because Debtor consented to paying adequate protection. Therefore, Nalley's administrative expense claim is not barred under the inaction theory which controlled in Advisory Information and Management Systems and James B. Downing. 21 Finally, in Subscription Television, supra, this Court faced a situation where the debtor held a post-petition sixty day executory contract which obligated the creditor to provide the debtor with unscrambled television broadcast signals, but the debtor actually used the broadcast signals only seventeen days. The provider of the broadcast signals claimed a § 507 administrative expense priority for the entire sixty day period on the theory that it had been deprived of its own use of the television signals because the contract required it to keep the signals available to the debtor. This Court held: 22 That which is actually utilized by a Trustee in the operation of a debtor's business is a necessary cost and expense of preserving the estate and should be accorded the priority of an administrative expense. That which is thought to have some potential benefit, in that it makes a business more likely salable, may be a benefit but is too speculative to be allowed as an actual, necessary cost and expense of preserving the estate. 23 In re Subscription Television, 789 F.2d at 1532. Thus, this Court denied the creditor's administrative expense claim for the portion of the contract period wherein the debtor did not actually use the broadcast signals. 24 The debtor in the case at bar enjoyed more than mere potential post-petition use of collateral. Rather than entertaining a speculative benefit, the Trustee actively used Paccar's collateral throughout its post-petition possession. This is not disputed. The reasoning of Subscription Television, therefore, leads to the conclusion that Nalley is entitled to an administrative expense priority because the Trustee actually used the collateral to the benefit of the debtor's estate. Because this case does not involve a debtor's potential use of collateral, the Trustee's reliance on Subscription Television is misplaced.
25 The second argument raised by Trustee to persuade this Court that Nalley failed to establish entitlement to an administrative expense claim is based on language from the James B. Downing case. The court in James B. Downing faced the question of whether the provision of adequate protection was a prerequisite to the grant of an administrative expense priority. In resolving this issue the court quoted a passage from Bankruptcy by Ginsberg which states in part: 26 If the adequate protection given by the court proves to be inadequate, that is, the secured creditor winds up being injured from the continuation of the stay, use of the property, or funding the estate in the sense that its unsecured deficiency claim against the estate is increased, the creditor is entitled to a superpriority for the increase in the deficiency. 27 In re James B. Downing & Co., 94 B.R. at 521, quoting Ginsberg, Bankruptcy p 10,705 (1986). The Trustee seizes upon this language as establishing that an administrative expense claim is based on the amount by which an unsecured deficiency claim increases by virtue of the automatic stay. Here, the Trustee maintains that Nalley had no unsecured deficiency claim because of Paccar's failure to comply with Georgia foreclosure laws, and accordingly no administrative expense claim could arise because there was no increase in an unsecured deficiency claim. 28 The Trustee's argument fails to recognize the nature of an administrative expense claim. As described above, Nalley's administrative expense claim is distinct from the deficiency claim it might have perfected. Contrary to the implications of the dicta from James B. Downing relied upon by the Trustee, an administrative expense claim is based on the diminution in the value of the collateral by reason of the automatic 362 stay. Grundy Nat'l Bank v. Rife, 876 F.2d at 364; see also In re Colter, Inc., 53 B.R. 958, 961 (Bankr.D.Colo.1985) (Section 507(b) confers a superpriority administrative expense claim to the extent the creditor has suffered an actual decrease in the value of its interest in the collateral due to the automatic stay and the debtor's use of its collateral, less any adequate protection payments made by the debtor); In re Becker, 51 B.R. 975, 980 (Bankr.D.Minn.1985) (Actual loss sustained due to failure of adequate protection determines the amount allowed as a superpriority administrative expense under § 507(b)). Because Nalley's administrative expense claim arose from the deterioration in the value of the trucks rather than an increase in its deficiency claim on the sales contracts, the Trustee's argument cannot prevail.
29 A third argument the Trustee makes in support of its contention that Nalley failed to establish an administrative expense claim is that Nalley failed to demonstrate that the loss in value of the collateral was attributable to the automatic stay. Relying on In re Falwell Excavating Co., Inc., 47 B.R. 217 (Bankr.W.D.Va.1985), the Trustee asserts that when a creditor acquiesces to some harm to its collateral for business or other reasons, any alleged impairment of value may not be attributed solely to the automatic stay. The Trustee alleges that Nalley presented no evidence of any steps it took to preserve or protect its collateral or to require strict compliance on the part of the debtor. 30 In Falwell Excavating Co., the creditor had made a business decision to not enforce strict compliance with an adequate protection order for a period of over two years, although the adequate protection payments, if made on time, would have protected the creditor from all of the diminution in value of the collateral. In this case, even if the debtor had made all of its adequate protection payments, Paccar still would have suffered an unprotected diminution in the value of the tractors. Furthermore, no evidence suggests that Paccar, or Nalley as successor-in-interest, made a business decision not to pursue adequate protection. Because neither Nalley nor Paccar acquiesced in the harm to the tractors and because the adequate protection payments would not have covered the diminution, we find no indication that Nalley's loss was caused by anything other than the imposition of the stay, Paccar's forbearance from foreclosing, and the continued use of the trucks by Debtor.