On an issue where the circuits are split, District Judge Elizabeth Erny Foote of Shreveport, La., ruled that the rental value of leased equipment, although sitting unused during a chapter 11 case, is eligible for administrative expense status if the lessor can show intangible benefits to the estate.
The case involved equipment leased before filing to a bankrupt drilling contractor. The leased equipment sat unused from the filing of the chapter 11 petition until the debtor’s property was sold about two months later. The purchaser did not buy the leased equipment nor request an assignment of the lease. After the sale, the debtor rejected the lease.
The bankruptcy court granted the lessor’s motion and allowed an administrative claim of almost $60,000, based on the rental value of the unused equipment. The undisputed facts showed that the debtor’s top officers decided to retain the equipment shortly after the chapter 11 filing because it might be required to serve customers and renting other equipment would be more expensive. It was undisputed that the debtor did not generate revenue with the equipment before selling the assets.
The debtor’s shareholders objected to the allowance of the administrative claim and appealed, claiming there was no actual and necessary benefit to the estate as required by Section 503(b)(1)(A). Judge Foote upheld the bankruptcy court’s allowance of the administrative claim in a March 14 opinion.
Regarding unused but rented personal property, Judge Foote said there are two lines of cases. She said the Ninth Circuit is among courts that allow administrative expense claims “based on the fair and reasonable value of the rental equipment without regard to whether the debtor actually used the equipment.” She said those courts are concerned about “creating an undue burden on the creditor” to monitor a debtor’s use of the equipment.
According to Judge Foote, courts in the other camp, including the Fourth and Tenth Circuits, allow administrative expense claims only “to the extent the debtor has made actual use of the leased property, thus establishing a tangible benefit to the estate.” Those courts, she said, focus on “minimizing the overall administrative expenses of the estate to protect the interest of all unsecured creditors.”
Since the Fifth Circuit has not taken a position, Judge Foote sided with the bankruptcy court and held that the leased equipment “provided intangible benefits to the estate,” even though the equipment did not contribute to generating “a direct profit.”