Recovering Attorneys' Fees As an Administrative Expense

In counseling clients on whether to structure a transaction as a lease or a loan, there are several financial considerations. The first is the potential that the client's customer could file for bankruptcy, and its impact upon recovering rent payments as a priority administrative expense. In that case, attorneys' fees are a factor as well. The Bankruptcy Code provisions that govern the rights and remedies of an equipment lessor in comparison to the rights and remedies of a secured lender differ significantly ' they may be considered more favorable to an equipment lessor than a secured lender for the reasons discussed later in this article, although certain provisions of the Code that address the remedies of a secured lender are applied to an equipment lessor as well. Section 365(d)(10) of the Bankruptcy Code provides that:

'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 ' 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 ' '

The language of this statute and its Congressional history have been interpreted and relied upon by bankruptcy courts in many circuits of the country. The courts have used the statute to grant an equipment lessor an automatic administrative expense for unpaid post-petition lease payments where the lessee remains in possession of the leased equipment on or after the 60th day from filing a bankruptcy petition until eventually assuming or rejecting the lease. This expense has been granted without the usual proofs required under Section 503(b)(1)(A) (to show actual, necessary costs of preserving the estate). In re: Furley's Transport, Inc., 263 B.R. 733 (Bankr. D. Md. 2001); In re: Russell Cave Co., 247 B.R. 656, 659 (Bankr. E.D.Ky. 2000); In re: The Elder-Beerman Stores Corp., 201 B.R. 759, 763 (Bankr. S.D. Ohio, 1996); In re: Brennick, 178 B.R. 305, 307 (Bankr. D. Mass. 1995). This extraordinary benefit from 365(d)(10) is not applicable to the first 59 days after the debtor's petition is filed but 503(b)(1)(A) is, according to the majority of courts particularly in cases where the lessee or debtor uses the leased equipment post-petition and gains some benefit from the property. In re: Raymond Cossette Trucking, Inc., 231 B.R. 80 (Bankr. D.N.D. 1999); In re: Thompson, 788 F.2nd 560 (9th Cir. 1986); Kinman & Kinman P'Ship v. Agristor Leasing, 116 B.R. 162 (D. Neb. 1990); In re: Furley's Transport, Inc. 263 B.R. 733, 740-41 (Bankr. D. M. 2001); In re: Muma's Services, Inc., 279 B.R. 478 (Bankr. D. Del 2002).

By comparison, a secured lender must demonstrate that the adequate protection afforded it by a debtor is inadequate in order to compel a super priority administrative expense status for the debtor's post-petition payments. Here, then, in this secured transaction setting (as compared with the equipment lessor scenario), the secured lender must actually have lost its secured status (in part or in whole) and have seen its claim become either bifurcated or completely unsecured to marshal the treatment of its claim for unpaid contract installments as an administrative expense, and garnish priority payments for the debtor's post petition use of the secured lender's property. 11 U.S.C. 507(b).

The issue of recovering attorney's fees in the post-petition setting is also measurably different and perhaps slightly more favorable to an equipment lessor than a secured lender. An equipment lessor may be entitled to a 365(d)(10) administrative claim for its attorneys' fees if those fees were incurred to enforce the equipment lessor's rights in a manner consistent with section 365. In re: Muma Services, Inc., 279 B.R. 478 (Bankr. D. Del. 2002); See also, In re: Shangra-La, Inc., 167 F.3d 843, 849 (4th Cir. 1999).

Section 365 contemplates either the trustee/debtor curing the defaults under a lease to assume it, or rejecting the lease and taking steps to enforce the payment of post-petition rent payments. In the first case, attorneys' fees incurred in attempting to collect sums due from debtors following default may be recovered as 'pecuniary loss' under section 365(b)(1)(B) if such monies were expended as the result of a default under the contract or lease between the parties and are recoverable under the contract and applicable state law. However, the courts will not allow administrative claims for attorneys' fees that are inconsistent with the debtor's rights under the Bankruptcy Code. In re: Child World, Inc., 161 B.R. 349 (Bankr. S.D.N.Y. 1993); In re: Best Products, Inc. 148 B.R. 413 (Bankr. S.D.N.Y. 1992). Therefore, fees to seek to shorten the time within which the debtor must assume or reject the lease and then opposing the debtor's assumption of the lease have been held not recoverable because they were incurred to deny the debtor rights it had under the Bankruptcy Code. Id. at 414. If issues raised are peculiar to bankruptcy laws, such as objection to confirmation of Chapter 12 plan, they are not recoverable; In re: Ryan's Subs Inc., 165 B.R. 465, 469 (Bankr. W.D.Mc 1994). Fees, however, for prosecuting a motion to compel a debtor to perform its leases on and after the 60th day post-petition are recoverable as administrative expense claims. In re: Exchange Resources, Inc., 214 B.R. 366 (Bankr. D. Minn. 1997); In re: Forman Enterprises, Inc., 45 Collier Bankr. Cas. 2d (MB) 664 (Bankr. W.D.Pa 2000). Legal fees for services before the 60th day, such as Objections to Debtor's motion to reject unexpired equipment leases, do not constitute administrative claims. In re: Kyle Trucking, Inc., 239 B.R. 198 (Bankr. N.D. Ind. 1999). If the leases are assumed, the fees for pre-60th day matters may be paid as part of the cure. If rejected, these fees perhaps may be taken up as part of rejection damages.

A secured lender on the other hand can only recover its legal fees if it is an oversecured creditor pursuant to 506(b) which provides, in pertinent part, that:

'To the extent that an allowed secured claim is secured by property the value of which'is greater than the amount of such claim, there shall be allowed to the holder of such claim, interest or such claim, and any reasonable fees, costs or charges provided for under the agreement under which such claim arose.'

In a secured transaction, given that the lender must be undersecured to secure a super-priority administrative expense claim for unpaid post-petition contract payments, it is obviously problematic to recover attorneys' fees as an administrative claim in light of 506(b). For equipment lessors, 11 U.S.C. 365(b)(1)(B) and 365(d)(10) seem to have done a better job of anticipating lessor's interest in recovering both rent payments and attorneys' fees for, at the minimum, enforcing the payment of same as an administrative expense claim.

Anthony L. Lamm is a partner in the law firm of Groen, Lamm, Goldberg and Rubenstone, LLC, with offices in Bensalem and Jenkintown, PA, and Cherry Hill, NJ. He is the chair of the creditors rights and leasing department, and may be reached at 215-638-9330.

In counseling clients on whether to structure a transaction as a lease or a loan, there are several financial considerations. The first is the potential that the client's customer could file for bankruptcy, and its impact upon recovering rent payments as a priority administrative expense. In that case, attorneys' fees are a factor as well. The Bankruptcy Code provisions that govern the rights and remedies of an equipment lessor in comparison to the rights and remedies of a secured lender differ significantly ' they may be considered more favorable to an equipment lessor than a secured lender for the reasons discussed later in this article, although certain provisions of the Code that address the remedies of a secured lender are applied to an equipment lessor as well. Section 365(d)(10) of the Bankruptcy Code provides that:

'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 ' 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 ' '

The language of this statute and its Congressional history have been interpreted and relied upon by bankruptcy courts in many circuits of the country. The courts have used the statute to grant an equipment lessor an automatic administrative expense for unpaid post-petition lease payments where the lessee remains in possession of the leased equipment on or after the 60th day from filing a bankruptcy petition until eventually assuming or rejecting the lease. This expense has been granted without the usual proofs required under Section 503(b)(1)(A) (to show actual, necessary costs of preserving the estate). In re: Furley's Transport, Inc., 263 B.R. 733 (Bankr. D. Md. 2001); In re: Russell Cave Co., 247 B.R. 656, 659 (Bankr. E.D.Ky. 2000); In re: The Elder-Beerman Stores Corp., 201 B.R. 759, 763 (Bankr. S.D. Ohio, 1996); In re: Brennick, 178 B.R. 305, 307 (Bankr. D. Mass. 1995). This extraordinary benefit from 365(d)(10) is not applicable to the first 59 days after the debtor's petition is filed but 503(b)(1)(A) is, according to the majority of courts particularly in cases where the lessee or debtor uses the leased equipment post-petition and gains some benefit from the property. In re: Raymond Cossette Trucking, Inc., 231 B.R. 80 (Bankr. D.N.D. 1999); In re: Thompson, 788 F.2nd 560 (9th Cir. 1986); Kinman & Kinman P'Ship v. Agristor Leasing , 116 B.R. 162 (D. Neb. 1990); In re: Furley's Transport, Inc. 263 B.R. 733, 740-41 (Bankr. D. M. 2001); In re: Muma's Services, Inc., 279 B.R. 478 (Bankr. D. Del 2002).

By comparison, a secured lender must demonstrate that the adequate protection afforded it by a debtor is inadequate in order to compel a super priority administrative expense status for the debtor's post-petition payments. Here, then, in this secured transaction setting (as compared with the equipment lessor scenario), the secured lender must actually have lost its secured status (in part or in whole) and have seen its claim become either bifurcated or completely unsecured to marshal the treatment of its claim for unpaid contract installments as an administrative expense, and garnish priority payments for the debtor's post petition use of the secured lender's property. 11 U.S.C. 507(b).

The issue of recovering attorney's fees in the post-petition setting is also measurably different and perhaps slightly more favorable to an equipment lessor than a secured lender. An equipment lessor may be entitled to a 365(d)(10) administrative claim for its attorneys' fees if those fees were incurred to enforce the equipment lessor's rights in a manner consistent with section 365. In re: Muma Services, Inc., 279 B.R. 478 (Bankr. D. Del. 2002); See also, In re: Shangra-La, Inc., 167 F.3d 843, 849 (4th Cir. 1999).

Section 365 contemplates either the trustee/debtor curing the defaults under a lease to assume it, or rejecting the lease and taking steps to enforce the payment of post-petition rent payments. In the first case, attorneys' fees incurred in attempting to collect sums due from debtors following default may be recovered as 'pecuniary loss' under section 365(b)(1)(B) if such monies were expended as the result of a default under the contract or lease between the parties and are recoverable under the contract and applicable state law. However, the courts will not allow administrative claims for attorneys' fees that are inconsistent with the debtor's rights under the Bankruptcy Code. In re: Child World, Inc., 161 B.R. 349 (Bankr. S.D.N.Y. 1993); In re: Best Products, Inc. 148 B.R. 413 (Bankr. S.D.N.Y. 1992). Therefore, fees to seek to shorten the time within which the debtor must assume or reject the lease and then opposing the debtor's assumption of the lease have been held not recoverable because they were incurred to deny the debtor rights it had under the Bankruptcy Code. Id. at 414. If issues raised are peculiar to bankruptcy laws, such as objection to confirmation of Chapter 12 plan, they are not recoverable; In re: Ryan's Subs Inc., 165 B.R. 465, 469 (Bankr. W.D.Mc 1994). Fees, however, for prosecuting a motion to compel a debtor to perform its leases on and after the 60th day post-petition are recoverable as administrative expense claims. In re: Exchange Resources, Inc., 214 B.R. 366 (Bankr. D. Minn. 1997); In re: Forman Enterprises, Inc., 45 Collier Bankr. Cas. 2d (MB) 664 (Bankr. W.D.Pa 2000). Legal fees for services before the 60th day, such as Objections to Debtor's motion to reject unexpired equipment leases, do not constitute administrative claims. In re: Kyle Trucking, Inc., 239 B.R. 198 (Bankr. N.D. Ind. 1999). If the leases are assumed, the fees for pre-60th day matters may be paid as part of the cure. If rejected, these fees perhaps may be taken up as part of rejection damages.

A secured lender on the other hand can only recover its legal fees if it is an oversecured creditor pursuant to 506(b) which provides, in pertinent part, that:

'To the extent that an allowed secured claim is secured by property the value of which'is greater than the amount of such claim, there shall be allowed to the holder of such claim, interest or such claim, and any reasonable fees, costs or charges provided for under the agreement under which such claim arose.'

In a secured transaction, given that the lender must be undersecured to secure a super-priority administrative expense claim for unpaid post-petition contract payments, it is obviously problematic to recover attorneys' fees as an administrative claim in light of 506(b). For equipment lessors, 11 U.S.C. 365(b)(1)(B) and 365(d)(10) seem to have done a better job of anticipating lessor's interest in recovering both rent payments and attorneys' fees for, at the minimum, enforcing the payment of same as an administrative expense claim.

Anthony L. Lamm is a partner in the law firm of Groen, Lamm, Goldberg and Rubenstone, LLC, with offices in Bensalem and Jenkintown, PA, and Cherry Hill, NJ. He is the chair of the creditors rights and leasing department, and may be reached at 215-638-9330.