Douglas E. Wells

UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF OHIO
WESTERN DIVISION
In Re
DOUGLAS E. WELLS
Debtor
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Case No. 06-14331
Chapter 13
Judge Hopkins
MEMORANDUM OF DECISION
ON ORDER GRANTING ADMINISTRATIVE EXPENSE
Presently before the Court is: (1) the Motion Of Mazda American Credit For Allowance Of
Its Administrative Expense Claim And For An Order Requiring The Ch. 13 Trustee To Adjust
Distributions Until Mazda's Administrative Expense Claim Has Received Equal Pro-Rata Treatment
("Motion") (Doc. 38); and (2) the Amended Request Of Mazda American Credit For Payment Of
An Administrative Expense ("Amended Request") (Doc. 51). By its Motion and Amended Request,
Mazda American Credit ("Mazda") seeks allowance of an administrative expense claim in the
amount of $4,021.18. The Debtor opposes the requested relief.
THE LEASE , THE PLAN , AND THE DEFAULT
At the time of filing, the Debtor and Mazda were parties to a lease for a 2004 Mazda RX8.
The Debtor proposed a chapter 13 plan whereby the lease would be assumed and the Debtor would
make direct payments to Mazda outside the plan. 	The plan was confirmed without objection.
Pursuant to the plan, property of the estate vested in the Debtor upon confirmation. Shortly after
This document has been electronically entered in the records of the United
States Bankruptcy Court for the Southern District of Ohio.
IT IS SO ORDERED.
Dated: November 02, 2007
____________________________________________________________
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confirmation, the Debtor defaulted and Mazda obtained relief from the automatic stay. Following
recovery and auction of the vehicle, Mazda seeks payment of a $4,021.18 deficiency as an
administrative expense.
THE TREND ALLOWING ADMINISTRATIVE EXPENSE TREATMENT
Until recently, case law reflected a trend towards awarding an administrative expense claim
to lessors of personal property based upon the post-assumption default by chapter 13 debtors. See
In re Enderle, 352 B.R. 444 (Bankr. E.D. Mich. 2006); In re Smith, 315 B.R. 77 (Bankr. W.D. Tex.
2004); In re Masek, 301 B.R. 336 (Bankr. D. Neb. 2003); In re Wright, 256 B.R. 858 (Bankr.
W.D.N.C. 2001); In re Hall, 202 B.R. 929 (Bankr. W.D. Tenn. 1996); In re Pearson, 90 B.R. 638
(Bankr. D.N.J. 1988). 	These decisions are predicated upon 11 U.S.C. § 365(g)(2)(A), which
provides in relevant part:
[T]he rejection of an executory contract or unexpired lease of the debtor constitutes
a breach of such contract or lease–
. . .
(2) if such contract or lease has been assumed under this
section or under a plan confirmed under chapter 9, 11, 12, or 13 of
this title–
(A) if before such rejection the case has not
been converted under section 1112, 1208, or 1307 of
this title, at the time of such rejection[.]
The seminal case on this issue, a chapter 11 case, provides the rationale for the allowance of an
administrative expense:
The logic behind granting administrative expense status to liabilities flowing
from the rejection of an assumed contract or lease is quite simple. The filing of a
bankruptcy creates a new judicial entity that is separate and apart from the Debtor
which existed prior to bankruptcy proceedings. . . . The assumption of an executory
contract by a Debtor-in-Possession is an act of administration creating an obligation
of the estate which is legally distinct from the obligations that existed prior to an
assumption of the contract. In contrast to the rejection of [an] unassumed contract
which arises from a transaction with the prebankruptcy Debtor, the rejection of an
assumed contract arises directly from a transaction with the Debtor-in-Possession.
In re Multech Corp., 47 B.R. 747, 750-51 (Bankr. N.D. Iowa 1985).
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BENN
The Debtor relies upon Ford Motor Credit Co. v. Benn, 362 B.R. 1 (E.D. Mich. 2007). Benn
represents a departure from the trend of cases mentioned. For the reasons outlined below, the Court
disagrees with the reasoning of Benn.
Benn involved a district court review of an issue arising in three substantially similar
bankruptcy cases. The material facts of Benn are virtually identical to the facts in this case. All of
the debtors were parties to unexpired vehicle leases with Ford Motor Credit Company ("Ford"). The
confirmed chapter 13 plans provided that the leases would be assumed and the debtors would make
direct payments to Ford outside the plan. Postconfirmation, the debtors defaulted and Ford obtained
relief from the automatic stay. 	After liquidating the vehicles at auction, Ford filed motions for
allowance of administrative expense claims. The bankruptcy court denied Ford's motions, primarily
on the grounds of res judicata. Alternatively, the bankruptcy court relied upon the fact that property
of the estate vested in the debtors upon confirmation pursuant to the express terms of the confirmed
plans. Given that estate property vested in the debtors, the bankruptcy court concluded that the
leases provided no benefit to the estate. On appeal, the district court affirmed the decision of the
bankruptcy court.
1. Benefit to the Estate
The Benn court noted that administrative expenses are governed by 11 U.S.C. § 503. The
court then applied the two-part test for administrative expenses set forth in In re United Trucking
Service, Inc., 851 F.2d 159 (6th Cir. 1988). In United Trucking, the Sixth Circuit determined that
a creditor seeking an administrative expense claim must prove that the debt arose from a transaction
with the debtor and benefitted the estate. Id. at 161-62. Applying this standard, the district court
in Benn agreed with the bankruptcy court's conclusion that administrative expenses were not
warranted because there was no benefit to the estates. Specifically, the debtors did not need the
vehicles to preserve their bankruptcy estates when they could have found alternative transportation
at a lower cost. Benn, 362 B.R. at 5.
Respectfully, this Court believes that United Trucking is not the applicable standard.
Significantly, the lease in United Trucking was never assumed. As such, the case did not turn on
§ 365(g)(2)(A) or the Multech analysis.
The applicable Sixth Circuit decision is In re Revco D.S., Inc., No. 93-3597, 1994 WL
376884 (6th Cir. July 18, 1994). In Revco, the Sixth Circuit noted that § 365(g) entitles a lessor to
an automatic administrative expense claim under § 502(b) if a debtor breaches an assumed lease.
Id. at *1. Therefore, the benefit to the estate analysis set forth in United Trucking is irrelevant to
the issue of whether the breach of an assumed lease gives rise to an administrative expense.
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2. Res Judicata
The other basis for the Benn decision is res judicata and the binding effect of a confirmed
plan under 11 U.S.C. § 1327(a). Because the confirmed plans provided that the debtors would pay
Ford directly, the district court agreed with the bankruptcy court that § 1327(a) precluded Ford from
seeking payment from the estate. Benn, 362 B.R. at 6.
Benn does not stand alone on this point. 	In re White, 370 B.R. 713 (Bankr. E.D. Mich.
2007), decided after Benn, reaches the same conclusion. White involved another vehicle lease with
Ford where the debtors confirmed a plan that assumed the lease and provided for direct payment to
Ford by the debtors outside the plan. The plan also provided that property of the estate vested in the
debtors upon confirmation. At the end of the lease term, the Debtors returned the vehicle to Ford.
Thereafter, Ford moved for an administrative expense claim based upon excess mileage and other
miscellaneous charges. The court denied the motion on the grounds of res judicata. Because the
confirmed plan did not classify Ford as an administrative claimant, the court concluded that Ford
could not later seek a different treatment of its claim. Id. at 714, 718.
A. Scope of Binding Effect of Plan
The binding effect of a confirmed plan is subject to limitations.
[W]here a plan fails to state its intended effect on a given issue, any ambiguity may
reflect that that issue was not considered by the bankruptcy court, and/or that the
parties did not contemplate that the plan would resolve the issue. Additionally, it
may offend due process to confer preclusive effect on matters not explicitly
determined in a confirmed plan.
In re Summerville, 361 B.R. 133, 141 (B.A.P. 9th Cir. 2007). 	Courts therefore do not preclude
subsequent litigation unless, among other things, the second action raises the same issue that was
determined by the confirmed plan. See In re Layo, 460 F.3d 289, 292 (2d Cir. 2006). Consequently,
the plan will not preclude subsequent litigation unless the latter involves the same "nucleus of
operative fact." Id.
Respectfully, this court does not believe that a § 365(g)(2)(A) motion raises the same nucleus
of operative fact presented at confirmation of a plan that assumes an unexpired lease. By its express
terms, § 365(g)(2)(A) does not apply until some point after confirmation. 	As such, there is no
reason for the creditor to seek or litigate administrative treatment under § 365(g)(2)(A) at the time
of confirmation. If a creditor attempted to do so, the issue would be summarily dismissed for lack
of ripeness.
B. Binding Effect of Assumption
Although the issue raised under § 365(g)(2)(A) is not litigated at confirmation, the issue of
whether the lease is assumed by the estate is actually litigated. Consequently, this is the issue that
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Case No. 06-14331
1 Benn reasons that "allowing Ford to gain priority over other creditors who expected
to be paid by the Trustee from the Debtors' estates would be manifestly unfair to
those creditors." 	This Court disagrees. 	Those creditors could have objected to
confirmation of a plan that proposed to assume the lease and render the estate a
guarantor of the debtor's direct payments. 	If a creditor fails to object to the
assumption, it has only itself to blame.
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is entitled to preclusive effect. Neither Benn nor White address the binding effect of assumption
upon the bankruptcy estate.
It is well-established that the act of assumption obligates the bankruptcy estate. In re Dehon,
Inc., 352 B.R. 546, 565-66 (Bankr. D. Mass. 2006) ("non-debtor party is entitled to compensation,
from the bankruptcy estate, for all monetary defaults under the contract"); In re UAL Corp., 346
B.R. 456, 467 (Bankr. N.D. Ill. 2006) (assumption commits the estate to full performance under the
contract); In re Braude Jewelry Corp., 333 B.R. 156, 159 (Bankr. N.D. Ill. 2005) (assumption
provides lessor with another entity from which it may recover); In re Vantage Investments, Inc., 328
B.R. 137, 143 (Bankr. W.D. Mo. 2005) (assumed contract is deemed an obligation of the estate); see
also 2 Norton Bankr. Law & Practice 2d § 39:27 (2007) ("If an executory contract or unexpired
lease is assumed after the case is commenced, the assumption creates a new administrative
obligation of the estate."). Even if a plan requires a debtor to make direct payments to a lessor
outside the plan, the assumption of the lease obligates the estate as a guarantor. Otherwise, the act
of assumption is meaningless. Therefore, once a lease is assumed by plan confirmation, the debtor,
the trustee and all creditors are bound by the implications of the assumption. If an interested party
does not want the estate to be liable for a post-assumption breach, then that party must object to
confirmation.1
In this case, it is the Debtor who opposes the binding effect of the Mazda lease assumption.
Pursuant to § 1327(a), the Debtor is bound by his decision to obligate the estate on the lease in the
event of his default.
W HITE ' S ANALYSIS OF § 365(g)(2)(A)
Whereas Benn does not mention § 365(g)(2)(A), White does. 	White concluded that §
365(g)(2)(A) was inapplicable because the debtors in that case never rejected the lease. White, 370
B.R. at 720. 	The court drew a distinction between breach and rejection, stating that the latter
requires a motion and court approval. Id. In support, the court cited Thinking Machines Corp. v.
Mellon Fin. Servs. Corp. (In re Thinking Machines Corp.), 67 F.3d 1021, 1025-28 (1st Cir. 1995).
Respectfully, this Court does not believe that a motion and court approval are needed to reject an
assumed lease. Thinking Machines was not an assumption case. The debtor never assumed the lease
in the first place. The decision addressed § 365(d)(3) and the effective date of the rejection of an
unassumed commercial lease. The First Circuit concluded that rejection was effective upon court
approval and not the time at which the trustee first decides to reject the unassumed lease.
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Case No. 06-14331
2 Some may argue that Mazda seeks to contravene the plan's provision that payments
to Mazda would come directly from the Debtor. 	However, a plan provision
(continued...)
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When a lease has been assumed, "rejection" under § 365(g)(2)(A) occurs when the lease is
breached. See In re Klein Sleep Prods., Inc., 78 F.3d 18, 26 (2d Cir. 1996) ("[T]he rejection of an
assumed lease–that is, breach of contract committed by the trustee or debtor-in-possession while
administering the estate–gives rise to a debt entitled to the same administrative expense priority.");
Braude Jewelry, 333 B.R. at 161; Pearson, 90 B.R. at 642 ("Any breach of the assumed obligations,
whether in the form of a default or a formal rejection of the lease, thereby constitutes a breach by
the postpetition debtor of postpetition obligations."); Norwegian Health Spa, Inc., 79 B.R. 507, 509
(Bankr. N.D. Ga. 1987) ("If a debtor breaches an assumed lease, the breach occurs post-petition,
whether or not the debtor formally rejects the lease and triggers the application of § 365(g)."); 2
Norton Bankr. L. & Prac. 2d § 39:25 ("A 'rejection' following postpetition assumption of an
unexpired lease is nothing more than a post-assumption default under the lease[.]"). Therefore, §
365(g)(2)(A) applies when a chapter 13 debtor breaches an assumed lease.
W HITE ' S APPLICATION OF NOLAN
As noted above, White determined that the binding effect of plan confirmation under §
1327(a) precluded Ford from seeking an administrative claim. White then considered whether Ford
could prevail if its motion were treated as a motion to modify the plan under 11 U.S.C. § 1329(a).
White concluded that In re Nolan, 232 F.3d 528 (6th Cir. 2000) precluded such a modification.
1. Nolan
In Nolan, the Sixth Circuit held that a chapter 13 debtor could not modify a confirmed plan's
§ 1325(a)(5) treatment of a secured claim. Postconfirmation, the debtor wanted to surrender the
collateral, discontinue plan payments on the creditor's secured claim, and pay the entire deficiency
as an unsecured claim.
2. Applicability of Nolan
Because § 1327(a) does not preclude Mazda from seeking an administrative expense, as
discussed above, plan modification is unnecessary. For this reason alone, Nolan is inapplicable.
Nonetheless, for the sake of clarity, the Court will address the distinctions between Nolan and the
pending case.
In Nolan, the confirmed plan made an express determination of the creditor's secured claim
that the debtor attempted to modify postconfirmation. The lease assumption issue before this Court
and White is different. The confirmed plan in this case did not expressly state that Mazda is not
entitled to an administrative claim in the event of default. Consequently, Mazda is not seeking to
modify an express determination made under the confirmed plan.2 Nolan is distinguishable for the
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Case No. 06-14331
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providing for direct payment is not the same as a plan provision providing that
Mazda is limited to payment from the Debtor alone. The Debtor's plan did not limit
Mazda's recourse to the Debtor alone. As discussed above, the plan's assumption of
the lease bound the estate as a guarantor of the lease in the event of default. Mazda's
request is wholly consistent with the binding effect of the lease assumption.
3 Nolan was predicated upon § 1327(a). See Nolan, 232 F.3d at 533.
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same reasons that § 1327(a) does not preclude the instant litigation.3 The issue was never litigated
at confirmation.
CONCLUSION
For the foregoing reasons, this Court finds the majority line of decisions to be more
persuasive than Benn and White. 	Accordingly, the Motion and Amended Request will be
GRANTED. Mazda will be awarded an administrative expense claim in the amount of $4,021.18
pursuant to § 365(g)(2)(A). An order to this effect will be entered.
Copies to:
Douglas E. Wells
68 Ledgerwoods Drive, No. 18B
Amelia, OH 45102
Gregory M. Wetherall
gmw@gw-law.net
John A. Schuh
jaschuhohecf@nuvox.net
Chapter 13 Trustee
Cincinnati@cinn13.org
U.S. Trustee
ustpregion09.ci.ecf@usdoj.gov
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