Jimmy L. Croom, UNITED STATES BANKRUPTCY JUDGE.
This matter is before the Court on the chapter 7 trustee's ("Trustee") motion for
This proceeding arises in a case referred to this Court by the Standing Order of Reference, Misc. Order No. 84-30 in the United States District Court for the Western District of Tennessee, Western and Eastern Divisions, and is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(B). This Court has subject matter jurisdiction over core proceedings pursuant to 28 U.S.C. §§ 157(b)(1)(A). This memorandum opinion shall serve as the Court's findings of facts and conclusions of law. Fed. R. Bankr. P. 7052.
The parties in this matter filed a Joint Pre-trial Stipulations of Fact on April 10, 2019. These stipulations are as follows:
Joint Pre-Trial Stipulations of Fact in Connection with the Am. Mots. by CNH Industrial Capital America, LLC For Allowance of Administrative Expense Claim and the Trustee's Am. Obj. Thereto, ECF No. 388.
In her objection to CNHi's motion for an administrative expense, the Trustee asserts that CNHi failed to establish a basis for its administrative expense claim. The Trustee argues that CNHi's failure to pursue adequate protection during the pendency of the case defeats CNHi's claim. The Trustee also asserts that CNHi's failure to provide any justification for its delay in liquidating the collateral defeats its claim.
The Trustee filed a Motion for Summary Judgment as to CNHi's Administrative Expense Application (ECF No. 391), a Statement of Undisputed Material Facts in support thereof (ECF No. 392), and a memorandum of law in support thereof (ECF No. 393) on April 10, 2019. The additional facts set forth in the Trustee's Statement of Undisputed Material Facts are as follows:
Stmt. Of Undisputed Material Facts at ¶¶ 8, 10, 12, 13, 14 and 15, ECF No. 392.
CNHi filed a Response to the Trustee's Statement of Undisputed Material Facts on April 24, 2019 (ECF No. 399). CNHi agreed that all of the facts set forth in the Trustee's Statement of Undisputed Facts were undisputed.
CNHi also filed a Response in Opposition to the Trustee's Motion for Summary Judgment on April 24, 2019 (ECF No. 398.) CNHi stated in this pleading that
Resp. in Opp'n to Mot. for Summ. J. at 1, ECF No. 398. Facts set forth in CNHi's Response that have not previously been set forth in the case are as follows:
Id. at 2. At the hearing in this matter, counsel for the Trustee stated that they do not dispute any of these additional facts.
CNHi filed a Statement of Additional Undisputed Material Facts (ECF No. 401) on April 25, 2019. All of the facts set forth therein have been previously set forth in the Joint Pre-trial Statement of Undisputed Material Facts, the Trustee's Motion for Summary Judgment and the pleadings in support thereof, or CNHi's Response to the Motion for Summary Judgment.
At the hearing on the Trustee's summary judgment motion, counsel for CNHi stated that they had the farm equipment appraised shortly before the Debtors filed for chapter 11 relief. That assessment indicated there was between $500,000 (wholesale value) and $800,000 (retail value) worth of equity in the equipment at the time of the bankruptcy filings.
Federal Rule of Civil Procedure 56, made applicable to bankruptcy proceedings by Federal Rules of Bankruptcy Procedure 7056 and 9014, provides that summary judgment is appropriate "if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(a). As the Supreme Court recognized in the case of Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986), "this standard provides that the mere existence of some alleged factual dispute between the parties will not defeat an otherwise properly supported motion for summary judgment; the requirement is that there be no genuine issue of material fact." Id. at 247-48, 106 S.Ct. 2505 (emphasis added). The substantive law on the underlying issue determines which facts are material to the inquiry. Id. at 248, 106 S.Ct. 2505 ("Only disputes over facts that might affect the outcome of the suit under the governing law will properly preclude the entry of summary judgment."). "Where the record taken as a whole could not lead a rational trier of fact to find for the non-moving party, there is no genuine issue for trial." Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 587, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986) (internal quotation marks and citation omitted).
The party moving for summary judgment has the initial "burden of proving that no genuine issue as to any material fact exists and that it is entitled to a judgment as a matter of law." R.S.W.W., Inc., v. City of Keego Harbor, 397 F.3d 427, 433 (6th Cir. 2005). Pursuant to Fed. R. Civ. P. 56(c), the movant must support its assertion that there are no genuine factual disputes by
Fed. R. Civ. P. 56(c)(1). "The moving party need not support its motion with evidence disproving the nonmoving party's claim, but need only show ... that there is an absence of evidence to support the nonmoving party's case." Employers Ins. of Wausau v. Petroleum Specialties, Inc. 69 F.3d 98, 102 (6th Cir. 1995) (citing Celotex Corp. v. Catrett, 477 U.S. 317, 325, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986)) (internal quotation marks omitted). The burden then shifts to the nonmoving party to "come forward with `specific facts showing that there is a genuine issue for trial.'" Matsushita Elec. Indus. Co., 475 U.S. at 587, 106 S.Ct. 1348 (citing Fed. R. Civ. P. 56(e)) (emphasis in original)). "The nonmoving party must identify specific facts, supported by evidence, and may not rely on mere allegations contained in the pleadings." Harris v. Gen. Motors Corp., 201 F.3d 800, 802 (6th Cir. 2000) (citing Lujan v. Defenders of Wildlife, 504 U.S. 555, 561, 112 S.Ct. 2130, 119 L.Ed.2d 351 (1992) and Anderson, 477 U.S. at 248, 106 S.Ct. 2505). In so doing, the nonmoving party is not required to "produce evidence in a form that would be admissible at trial[.]" Celotex Corp. v. Catrett, 477 U.S. 317, 324, 106 S.Ct. 2548, 91 L.Ed.2d 265, (1986). The
When considering a motion for summary judgment, a court must view all the facts and make all reasonable inferences in favor of the non-moving party. Flagg v. City of Detroit, 715 F.3d 165, 178 (6th Cir. 2013). The court does not, however, "weigh the evidence to determine the truth of the matter, but instead, simply determines whether a genuine issue for trial exists." Anderson, 477 U.S. at 249, 106 S.Ct. 2505. The essential inquiry is "whether the evidence presents a sufficient disagreement to require submission to a jury or whether it is so one-sided that one party must prevail as a matter of law." Anderson, 477 U.S. at 251-52, 106 S.Ct. 2505.
In this case, CNHi argues that §§ 503(b) and 507(a) entitle it "to the allowance of an administrative claim for the depreciation of the Collateral caused by the use of the Collateral by the Debtors after the Petition Date." Am. Mot. by CNHi for Allowance of Administrative Expense Claim at 5, ECF No. 338. In order to determine whether the Trustee is entitled to judgment as a matter of law on this issue, the Court must determine what facts are essential to resolution of the matter and whether any of these facts are in dispute.
Section 503(b)(1)(A) of the Bankruptcy Code authorizes an administrative expense for "the actual, necessary costs and expenses of preserving the estate including—(i) wages, salaries, and commissions for services rendered after the commencement of the case[.]" 11 U.S.C. § 503(b)(1)(A). Section 507(a) of the Code grants such expenses first priority status. 11 U.S.C. § 507(a)(2); Fed. R. Bankr. P. 9001(11). "The purpose of this priority is to facilitate the rehabilitation of insolvent businesses by encouraging third parties to provide those businesses with necessary goods and services." Nat'l Union Fire Ins. Co. v. VP Bldgs., Inc., 606 F.3d 835, 838 (6th Cir. 2010) (citations omitted). "[B]ecause priority claims reduce the funds available for creditors and other claimants," claims for administrative expenses must be "strictly construed." Id. (citing In re Federated Dep't Stores, Inc., 270 F.3d 994, 1000 (6th Cir. 2001)). Although bankruptcy courts have "broad discretion to determine whether a claim for an administrative expense is, in actuality, an administrative expense," they "should strictly scrutinize [the] claims and narrowly construe the terms `actual' and "`necessary.'" In re Moore, 109 B.R. 777, 780 (Bankr. E.D. Tenn. 1989) (citations omitted). The movant has the burden of proving that a claim qualifies as an administrative expense and "that the expenses were reasonable, necessary and benefited the estate." Id. (internal quotation marks and citations omitted); Nat'l Union Fire Ins., 606 F.3d at 838. The movant must demonstrate "that the claimed expenses are entitled to administrative priority" by a preponderance of the evidence. In re HNRC Dissolution Co., 371 B.R. 210, 226 (E.D. Ky. 2007) (citation omitted).
The issue of whether deprecation is allowed to be requested as an administrative expense under 11 U.S.C. §§ 503(b)(1) and 507(a)(2) was addressed by the United States Bankruptcy Court for the Middle District of Tennessee in the case of In re Advisory Information & Management Systems, Inc., 50 B.R. 627 (Bankr. M.D. Tenn. 1985). In that case, a pre-petition
The Advisory Court agreed with the debtor and held that a "creditor is not entitled to an administrative expense allowance," for collateral depreciation "between the date of the debtor's bankruptcy filing and the date the creditor was granted relief" from the automatic stay. Id. In so doing, the court relied heavily on a decision issued by the Seventh Circuit Court of Appeals in 1984, In re Jartran, Inc., 732 F.2d 584 (7th Cir. 1984). The Advisory Court quoted heavily from In re Jartran:
In re Advisory Info. & Mgmt. Sys., Inc., 50 B.R. at 628-29 (quoting In re Jartran, Inc., 732 F.2d at 586).
With these guideposts in mind, the Advisory court analyzed the case before it.
In re Advisory Info. & Mgmt. Sys., Inc., 50 B.R. at 629. The Advisory Court continued, stating:
Id. at 630. Because the creditor never sought adequate protection and chose to wait a year after the case was filed to seek relief from the stay, the Advisory Court denied the creditor's claim.
Id. at 629-30. Had the debtor fraudulently withheld the collateral from the creditor or contested the creditor's request from the automatic stay in bad faith, the Advisory Court indicated the outcome may have been different. Id. at 630.
The issue of whether deprecation is allowed to be requested as an administrative expense under 11 U.S.C. §§ 503(b)(1) and 507(a)(2) was more recently addressed by
In December 2003, the creditor requested an administrative expense for the debtor's use of the collateral "during the period between commencement of the case and the onset of the adequate protection payments." Id. at 686. The bankruptcy court denied the creditor's request, noting that "[g]enerally what's required is ... proof of a post-petition trans-action [sic] with the estate and ... proof that there has been direct and substantial benefit to the estate or the debtor in possession." Id. at 687 (citing bankruptcy court hearing transcript). Because there was no such transaction in the case before it, the bankruptcy court denied the creditor's application. Id. In ruling from the bench, the bankruptcy court reasoned as follows:
Id. (citing bankruptcy court hearing transcript).
On appeal, the BAP affirmed the bankruptcy court. The BAP relied on the Sixth Circuit's test for analyzing requests for administrative expense claims.
Id. (citing PBGC v. Sunarhauserman, Inc. (In re Sunarhauserman, Inc.), 126 F.3d 811, 816 (6th Cir. 1997) (citing Employee Transfer Corp. v. Grigsby (In re White Motor Corp.), 831 F.2d 106, 110 (6th Cir. 1987))); see also Nat'l Union Fire Ins. Co., 606 F.3d at 838. The BAP continued,
Id. at 687-88 (emphasis added) (citing United Trucking Serv., Inc. v. Trailer Rental Co. (In re United Trucking Serv., Inc.), 851 F.2d 159, 162 (6th Cir.1988) and White Motor Corp., 831 F.2d at 110). Because there was no transaction with the post-petition debtor for the period in which the creditor was seeking an administrative expense, the BAP concluded that the bankruptcy court had properly denied the creditor's claim. In re Gasel Transp. Lines, Inc., 326 B.R. at 688 ("The debtor in possession was able to retain and use [the] collateral during the first fifteen weeks of the chapter 11 case solely by virtue of the automatic stay.")
In issuing its ruling, the BAP recognized that it might have reached a different result had the creditor been seeking an administrative expense claim for the time period after entry of the agreed order on October 16, 2003. That order required the debtor to provide the creditor with adequate protection. In return, the creditor agreed to hold off on repossessing the collateral even though the court had already lifted the automatic stay. The BAP stated that the creditor's "willingness to allow the Debtor to use its non-cash collateral on specified terms—after the stay was terminated—constituted a new, postpetition transaction with the estate." Id. at 688. As such, the BAP reasoned "[t]he problem for Volvo is that the Agreed Order, and its arguable inducement for Volvo to do new business with the Debtor's estate, occurred after the time period for which it sought an administrative expense claim." Id.
A number of other courts around the country have agreed with the holdings in In re Advisory Info. & Mgmt. Sys., Inc., and In re Gasel Transp. Lines, Inc., including the Bankruptcy Appellate Panel of the Eighth Circuit and various district and bankruptcy courts. Williams v. IMC Mortg. Co. (In re Williams), 246 B.R. 591, 595 (8th Cir. BAP 1999) ("Courts commonly recognize that § 503(b) is not intended to provide an administrative expense award to a prepetition secured lender based on the debtor's postpetition possession and use of collateral."); Tidewater Fin. Co. v. Henson, 272 B.R. 135, 139 (D. Md. 2001); In re Robinson, 225 B.R. 228, 233 (Bankr.N.D.Okla.1998) ("It is the ruling of the Court today ... that § 503(b) of the Bankruptcy Code does not provide an alternative means to obtain adequate protection on an after-the-fact basis."); In re Lovay, 205 B.R. 85, 87 (Bankr. E.D. Tex. 1997); In re McLeod, 205 B.R. 76, 79 (Bankr. E.D. Tex. 1996); In re James B. Downing & Co., 94 B.R. 515, 521-22 (Bankr. N.D. Ill. 1988); In re Provincetown-Boston Airline, Inc., 66 B.R. 632, 634 (Bankr. M.D. Fla. 1986) ("The secured creditor is not contributing to the estate by allowing a Debtor-in-Possession to use collateral which it already owns and has a statutory right to use."); In re Briggs Transp. Co., 47 B.R. 6 (Bankr. D. Minn. 1984).
Having set forth the substantive law on the issue of whether CNHi is entitled
In the case at bar, the parties stipulated to several facts. First, the Court never entered an order requiring the Blankenships or the Farms Debtor to make adequate protection payments to CNHi. Second, the Debtors offered to make adequate protection payments to CNHi, but CNHi rejected this offer. Third, the parties never entered an order providing that the equity cushion would serve as adequate protection for CNHi's claims. Fourth, the Court continued CNHi's motion to lift the automatic stay seven times between June 16, 2016, and March 23, 2017. Fifth, the Court did not lift the automatic stay as to CNHi's collateral until March 24, 2017.
There is only one fact on which the parties disagree under the first element of the administrative expense issue: whether CNHi had an agreement with the Debtors that qualifies as a transaction with the bankruptcy estate sufficient to justify an administrative expense award. CNHi alleges that the Debtors' agreement to allow the equity cushion to serve as adequate protection is sufficient to satisfy the first prong of the inquiry even though the parties never entered an order that memorialized this agreement. The Trustee disagrees and argues that the absence of a court order defeats CNHi's claim.
In supporting its claim for an administrative expense, CNHi relies on the holding in Bonapfel v. Nalley Motor Trucks (In re Carpet Center Leasing Co.), 991 F.2d 682 (11th Cir. 1993). In that case, the debtor was engaged in the trucking business.
Id. at 684, opinion amended on denial of reh'g, 4 F.3d 940 (11th Cir. 1993). Although the debtor made the adequate protection payments, not all the payments were timely. Approximately one year after the case was filed, the court appointed a chapter 11 trustee. Following this appointment, the trustee and Paccar entered into an agreed order which lifted the automatic stay and allowed Paccar to foreclose on the tractors.
After the vehicles were liquidated, the creditor sought an administrative expense claim "for the diminution in value of the collateral that occurred because of Debtor's continued use of the trucks pursuant to the automatic stay in bankruptcy." Id. at 685. The bankruptcy court awarded the creditor an administrative expense priority award in this amount pursuant to § 507(a). The district court affirmed the award. Id. at 685. On appeal, the Eleventh Circuit agreed with the lower courts and affirmed the administrative expense award.
CNHi also relies on the case of In re Rose, 347 B.R. 284 (Bankr. S.D. Ohio 2006) in moving for its administrative expense. As was the case in Carpet Center Leasing, however, there was an order of adequate protection entered in the Rose case. The Rose Court specifically acknowledged this fact in awarding the creditor an administrative expense:
In re Rose, 347 B.R. at 288-89 (emphasis added); see also Employee Transfer Corp. v. Grigsby (In re White Motor Corp.), 831 F.2d 106, 111 (6th Cir. 1987) (Sixth Circuit held that a creditor was not entitled to an administrative expense claim because creditor's postpetition performance of a service contract was not "court ordered" or induced by the postpetition debtor).
Although neither the In re Carpet Center Leasing or the In re Rose case are directly on point, CNHi is correct that issuance of a court order for adequate protection is not necessarily fatal to a claim for an administrative expense. In United Trucking Service, Inc., v. Trailer Rental Co., Inc. (In re United Trucking Service, Inc.), 851 F.2d 159 (6th Cir. 1988), the debtor leased 55 trailers from Trailer Rental Company. The lease required the debtor to maintain the trailers in good condition and to make any necessary repairs at its own expense. After the debtor filed for bankruptcy relief, the lessor filed a motion to compel the debtor to reject or assume the lease. The lessor expressed concerns that the debtor was not maintaining the trailers and/or making any necessary repairs and asserted that the debtor's continued use of the trailers would result in even more damage and deterioration. The bankruptcy court gave the debtor 30 days to assume or reject the lease. When the debtor failed to respond, the lessor filed another motion to protect its interest. The bankruptcy court then ordered the debtors to produce the trailers for inspection and to provide proof of insurance. The debtor produced 4 of the 55 trailers. The bankruptcy court responded by issuing an order that required the debtor to produce all of the trailers for inspection. The order provided that the debtor's failure to comply would deem the lease rejected. The debtor returned 53 of the 55 trailers over the next two months, all of which were in a state of disrepair, and asserted that the other two trailers had been stolen prepetition. The lessor then filed an application for an administrative expense for repair estimates, casualty loss of the two
In reviewing the case, the Sixth Circuit first set forth the two-step test a court must use in analyzing a creditor's claim for an administrative expense:
Id. at 161-62 (quoting In re White Motor Corp., 831 F.2d at 110 and Cramer v. Mammoth Martin, Inc. (In re Mammoth Mart), 536 F.2d 950, 954 (1st Cir. 1976). The Sixth Circuit also noted that in proving the first prong of the test, the movant ordinarily must demonstrate that "the debtor-in-possession induce[d] the creditor's performance and performance [was] then rendered to the estate." Id. at 162. However, because "this case involves a claim arising from [the debtor's] post-petition continued use of leased equipment that allegedly was not in accordance with the terms of the pre-petition lease agreement," the Sixth Circuit determined that the key inquiry was not on whether the postpetition debtor induced the lessor's performance. Id. at 162. Instead, the Circuit held that
Id. (citing American Anthracite & Bituminous Coal Corp. v. Leonardo Arrivabene, S.A., 280 F.2d 119 (2d Cir.1960)).
This situation in the case at bar is entirely distinct from the one in In re United Trucking Service, Inc. In that case, the creditor continued to allow the debtor to use the rented property post-petition. In the Debtors' case, the Debtors had an ownership interest in the farm equipment at the time they filed their bankruptcy petitions. The bankruptcy court in In re Advisory Information and Management Systems recognized the distinction in relation to claims for administrative expenses:
In re Advisory Info. & Mgmt. Sys., Inc., 50 B.R. at 630; see also In re Purdy, 763 F.3d 513, 518 (6th Cir. 2014) ("A lease involves payment for the temporary possession, use and enjoyment of goods, with the expectation that the goods will be returned to the owner with some expected residual interest of value remaining at the end of the lease term. In contrast, a sale involves an unconditional transfer of absolute title to goods, while a security interest is only an inchoate interest contingent on default and limited to the remaining secured debt.) As Judge Gregg recognized in his concurrence in In re Gasel Transportation Lines, Inc., a secured creditor has
In re Gasel Transp. Lines, Inc., 326 B.R. at 691 (quoting In re Advisory Info. & Mgmt. Sys., Inc., 50 B.R. at 630) (footnote omitted). Accordingly, this Court holds that In re United Trucking Service, Inc., is inapplicable to the case at bar.
Another case relied on by CNHi is In re Collins & Aikman Corp., 384 B.R. 751 (Bankr. E.D. Mich. 2008). In that case, a tooling manufacturer moved for an administrative expense claim for post-petition services it provided to the debtor pursuant to a pre-petition contract. Although the debtor testified at the hearing that a postpetition email it sent to the tooling manufacturer was intended to induce the manufacturer's continued performance, the debtor argued that the tooling manufacturer "was incapable of being induced to that performance" because it was "contractually obligated to perform" post-petition[.]" Id. at 760. The bankruptcy court found this argument without merit.
Id. Based on this post-petition inducement, the court determined that the tooling manufacturer was entitled to an administrative expense for the post-petition services it provided to the debtor regardless of the fact there was no order requiring such. Id.
As with United Trucking, In re Collins & Aikman Corp. is entirely distinct from the case at bar. The creditor in Collins & Aikman was obligated to perform services to the debtor under a pre-petition contract. At the time of filing, the creditor had stopped providing those services. The debtor then offered the creditor an inducement to resume its services and continue performing. That is not what occurred in the case at bar. The Debtors had an ownership interest in the farming equipment at the time the case was filed. There has been no indication that the Debtors were in default at the time of filing. In fact, CNHi's counsel stated that the valuation done close in time to the chapter 11 filings indicated CNHi had between $500,000 and $800,000 worth of equity.
The other cases cited by CNHi in its memorandum of law in support of its motions for allowance of administrative expense claims are equally inapplicable to the case at bar. In In re Colter, Inc., 53 B.R. 958 (Bankr. D. Colo. 1985), the collateral at issue was cash collateral. In such instances, a creditor may object to the use of cash collateral "absent adequate protection." Id. at 959. The parties in Colter entered an agreed order allowing the debtors to use the cash collateral in exchange for monthly adequate protection payments. Id.
Although the other case cited by CNHi, In re Becker, 51 B.R. 975 (Bankr. D. Minn.
In re Becker, 51 B.R. 975, 979 (Bankr. D. Minn. 1985) (internal quotation marks and citation omitted). In the case at bar, CNHi was already shielded from loss at the time the Debtors allegedly agreed to provide them adequate protection. CNHi's counsel stated that there was between $500,000 and $800,000 in equity shortly before the chapter 11 case was filed.
In the case of In re Blehm Land & Cattle Co., 859 F.2d 137 (10th Cir. 1988), the Tenth Circuit was asked to review an order denying a creditor's application for an administrative expense. The creditor in Blehm, Travelers Insurance Company, had first deed of trust interests in all of the Debtor's real property in Weld County, Colorado. The debtor operated a feed lot on this property at the time of filing for chapter 11 relief. Because the feed lot business was not doing well at the time of the bankruptcy filing, the debtor negotiated with a third party "to lease a portion of the Debtor's real property for the purpose of constructing an oil field waste water disposal system." In re Blehm Land & Cattle Co., 71 B.R. 818, 820 (D. Colo. 1987), rev'd, 859 F.2d 137 (10th Cir. 1988). Approximately five months after execution of the leases, Travelers learned of the debtor's intent to permit construction of the waste water disposal system. Travelers informed the lessee it did not consent to the construction. Travelers also filed a motion for a temporary restraining order and preliminary injunction, which was granted by the bankruptcy and district courts. Id.
Eventually the bankruptcy court appointed a chapter 11 trustee. The trustee rejected the lease negotiated by the debtor and entered into a new lease of the land with the same lessee. The trustee then entered into negotiations with Travelers to get the temporary restraining order and preliminary injunction lifted and to obtain Travelers' permission to use the property. Id. The trustee and Travelers eventually reached an agreement which required that compensation be paid to Travelers for use of the property. The parties memorialized this agreement in a Memorandum of Agreement, but did not file this agreement with the bankruptcy court. Id.
Following the lessee's breach, Travelers filed an application for a superpriority administrative expense for all amounts the trustee was obligated to pay pursuant to the Memorandum of Agreement. "The Application contended that the Agreement between Travelers and the Trustee was in the nature of, and was intended to be, an adequate protection agreement requiring periodic cash payments to Travelers." Id. at 821. The bankruptcy court disagreed and denied the application based on the fact that the parties "failed to obtain court approval of the Memorandum of Agreement out of which the expense arose." In re Blehm Land & Cattle Co., 859 F.2d at 138. The district court affirmed.
In a per curiam decision, the Tenth Circuit reversed.
Id. at 139 (emphasis in original). The Tenth Circuit continued,
Id. at 140 (citing H.R.Rep. No. 595, 95th Cong., 1st Sess. 338-40, reprinted in 1978 U.S.Code Cong. & Admin.News 5787, 5963, 6295, 6296). The court cautioned, however, that ex parte adequate protection agreements should be strictly scrutinized.
Id. at 140 (internal citations omitted).
"Adequate protection safeguards a secured creditor's interest in its depreciating collateral during the pendency of the automatic stay." In re Norton, 347 B.R. 291, 298 (Bankr. E.D. Tenn. 2006) (citation omitted). "Adequate protection comes in a variety of forms, including periodic payments, additional or replacement liens, and other relief that provides the indubitable equivalent to the protections afforded to the creditor outside of bankruptcy. In re Shivshankar P'ship LLC, 517 B.R. 812, 817 (Bankr. E.D. Tenn. 2014) (internal quotation marks and citation omitted). In certain circumstances, an equity cushion can also serve as adequate protection of a secured creditor's interest in collateral. In re Packard Square, LLC, 574 B.R. 107, 121 (Bankr. E.D. Mich. 2017).
For purposes of the Trustee's motion for summary judgment, the Court will presume that the Debtors in this case had an ex parte agreement with CNHi that the equity cushion in the equipment would serve as adequate protection of CNHi's secured interest. This presumption, however, does not end the inquiry. CNHi can only satisfy the first prong of the administrative expense inquiry if can demonstrate that such agreement qualifies as a transaction with the bankruptcy estate sufficient to establish its entitlement to an administrative expense. The Court finds that resolution of this question is purely a legal interpretation rather than a factual one. Therefore, the Court concludes that summary judgment is appropriate.
Reviewing the facts of this case in the light most favorable to CNHi, the Court concludes that the parties' ex parte agreement to allow the equity cushion to serve as adequate protection for CNHi's interest does not give rise to an administrative expense for CNHi. CNHi stated it conducted a valuation of the collateral shortly before the Debtors filed for bankruptcy relief. According to counsel for CNHi, that assessment indicated the Debtors had between $500,000 and $800,000 worth of equity in the farm equipment. There were no
Id. at 634.
This Court simply cannot conclude that a debtor's ex parte agreement to allow an equity cushion that existed at the time of filing to serve as adequate protection qualifies as a post-petition inducement that would entitle a creditor to receive an administrative expense claim. As the Tenth Circuit stated In re Blehm Land & Cattle Co., "ex parte adequate protection agreements should receive close scrutiny from the court." 859 F.2d at 140. This Court concludes that an ex parte agreement such as the one in the case at bar cannot withstand this heightened level of scrutiny. There was a large equity cushion at the time the Debtors filed for bankruptcy relief. CNHi asserts that the debtors agreed for the equity cushion to serve as adequate protection post-petition. However, in doing this, the Debtors did not offer CNHi anything they did not have at the time the case was filed. Therefore, this Court cannot conclude that the Debtors offered any inducement to CNHi that would entitle it to an administrative expense claim. As the bankruptcy court held in In re Gasel, this was not "a post-petition transaction ... with the debtor." 326 B.R. at 686 (quoting bankruptcy court transcript). Instead, the Court concludes that the agreement CNHi had with the Debtors arose out of a prepetition contractual relationship with the Debtors and that the agreement occurred pre-petition. Had the Debtors agreed to provide additional adequate protection to CNHi after the case was filed, the result would be different.
Because the undisputed material facts do not demonstrate that CNHi made an agreement with the post-petition Debtors, it is unnecessary to address the second prong of the inquiry. As stated supra, failure to prove one of the elements is fatal to the claim as a whole.
An order will be entered in accordance herewith.
For the reasons set forth in the Court's Memorandum Opinion re: the Chapter 7 Trustee's Motion for Summary Judgment as to CNH Industrial Capital America,
