Furr's Supermarkets, Inc.

UNITED STATES BANKRUPTCY COURT
DISTRICT OF NEW MEXICO
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06/12/06
Furr's Supermarkets, Inc.
01-10779
Memorandum Opinion re: [1807-1] Application For Administrative Expenses in the
following amounts: $174,349.60 (based on rate of rent for storage of equipment
from 12/19/01 to 7/3/02); $70,520.55 should be allowed and paid if the value of
comparable storage space is used to measure a fair and reasona
Received on: 2003-04-14 15:31:07.000
2003-04-14 00:00:00.000
2003-04-15 00:00:00.000
James Burke
Case 01-10779-nlj7 Doc 2068 Filed 04/14/03 Entered 04/15/03 08:46:00 Page 1 of 19

1TGAAR asserts two claims, one for rent or storage, and
one for damages resulting from the removal of equipment from
leased premises. Trustee's Motion addresses only the legal
basis for asserting a rent/storage claim.
UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF NEW MEXICO
In re:
FURRS SUPERMARKETS, INC.
Debtor. No. 11-01-10779 SA
MEMORANDUM OPINION ON TGAAR'S
MOTION FOR PAYMENT OF
ADMINISTRATIVE EXPENSES -and-
CROSS MOTIONS FOR SUMMARY JUDGMENT
This matter is before the Court on the Motion for Payment
of Administrative Expenses filed by TGAAR Properties, Inc.
d/b/a Westwood Village Shopping Center ("TGAAR") ("Motion")
(doc. 1807). TGAAR is represented by Robert K. Whitt. The
Chapter 7 Trustee objected to the Motion (doc. 1826). Trustee
is represented by Jacobvitz, Thuma & Walker, a Professional
Corporation (David T. Thuma). The Court has also considered
the following: Trustee's Motion for Partial Summary Judgment1
on TGAAR, Inc.'s Motion for Payment of Administrative Expenses
(doc. 1888), TGAAR's Amended Motion/Application for Payment of
Administrative Expenses (doc. 1928), TGAAR's Response to
Trustee's Motion for Partial Summary Judgment on TGAAR, Inc.'s
Motion for Payment of Administrative Expenses -and- TGAAR's
Cross-Motion for Partial Summary Judgment (docs. 1929, 1930),
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TGAAR's Memorandum of Law (doc. 1931), Trustee's Response to
TGAAR Properties, Inc.'s Cross-Motion for Partial Summary
Judgment and Objection to the Amended Motion for Payment of
Administrative Expenses (doc. 1955), the Affidavit of Yvette
J. Gonzales (doc. 1956), Trustee's Supplement to Response to
TGAAR Properties, Inc.'s Cross-Motion for Partial Summary
Judgment, and Objection to the Amended Motion for Payment of
Administrative Expenses (doc. 1958), TGAAR's Reply to
Trustee's Response to TGAAR's Cross-Motion for Partial Summary
Judgment and to the Trustee's Supplement to Response (doc.
1965) and TGAAR's Supplement to Response to Trustee's Motion
for Partial Summary Judgment (doc. 2041). The Court has also
considered Debtor's Motion for Order Extending Time Within
Which Debtor May Assume or Reject Unexpired Leases of
Nonresidential Real Property (doc. 157), Order Extending Time
Within Which Debtor May Assume or Reject Unexpired Leases of
Nonresidential Real Property (doc. 326), Debtor's Motion to
Reject Certain Unexpired Real Estate Leases, Subleases, and
Equipment Leases (doc. 903), the Order Granting in Part
Debtor's Motion to Reject Certain Unexpired Real Estate
Leases, Subleases, and Equipment Leases (doc. 1031), and
Trustee's Report of Sale [of Store #966] (doc. 1725). The
Court has jurisdiction pursuant to 28 U.S.C. 1334 and 157 and
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this is a core proceeding pursuant to 28 U.S.C. section
157(b)(2)(A) and (B).
The matters before the Court are cross-motions for
summary judgment. Summary judgment is governed by Federal
Rule of Civil Procedure 56, made applicable by Bankruptcy Rule
7056. That rule provides for judgment, or partial judgment,
if the Court finds that there is no genuine issue of material
fact. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-48
(1986).
FACTS
1. Debtor filed its chapter 11 proceeding on February 8,
2001.
2. At the time of the filing, Debtor operated a large number
of grocery stores in Texas and New Mexico and was lessee
for Furr's Store #966 located in Midland, Texas.
3. The lease ("Lease") had been acquired from Safeway
Stores, Incorporated, and had a primary term ending on
December 31, 2001, with six five-year renewal options
requiring written notice six months before the expiration
of the then current term of the Lease. Rent was due on
the first day of the month in advance, and there were
provisions for percentage rent (not applicable here.)
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The monthly rent was approximately $19,000 per month plus
ad valorem taxes of approximately $33,000 per year.
4. Debtor filed a motion for an extension of time to assume
the Lease on March 1, 2001. (doc. 157).
5. On April 6, 2001, the Court entered an Order granting an
extension of time to assume the Lease to August 10, 2001.
(doc. 326).
6. On or about June 18, 2001, Debtor signed a letter
purporting to exercise the first five year extension of
the lease.
7. The Debtor had not, by August 11, 2001, filed a motion to
assume or reject the Lease.
8. Debtor filed a motion to reject the Lease on August 17,
2001. The motion was granted by order entered September
6, 2001. The order also provided that the automatic stay
was terminated with respect to the Lease as of August 31,
2001.
9. In a letter dated August 23, 2001, Debtor notified TGAAR
that it would be closing all its stores effective August
31, 2001.
10. In a letter dated August 31, 2001, Debtor sent the keys
to Store #966 to TGAAR.
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11. Lessor has received no payments after August 31, 2001.
The Court assumes that all post petition obligations
under the lease were paid through August 31, 2001.
12. Debtor turned over the keys but left most of its personal
property located at the store, including shelves, racks,
meat counter equipment, deli equipment, dairy cases,
check out counters, and other items typically found in a
retail grocery store (the "Equipment").
13. The Chapter 11 case was converted to Chapter 7 on
December 19, 2001.
14. The Chapter 7 Trustee sold the Equipment at auction on or
about May 30, 2002. The auction was held in store #966.
The Trustee reports receiving total proceeds from store
#966 of $24,742.50. (doc. 1725). She paid the
auctioneer's commission of $4,948.50 and received a net
of $19,794.00. (Id.) (Whether the Trustee is entitled
to only 10% of the net proceeds, as asserted in the
Trustee’s Supplement to Response at 4 (doc 1958), is of
questionable relevance.)
15. Between August 31, 2001 and May 30, 2002, TGAAR did not
seek relief from the automatic stay, or any other relief
from the Court to dispose of the Equipment, charge for
storage, or otherwise protect its interests. TGAAR did
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send some bills to the Trustee for storage, which
prompted discussions among the parties.
16. No agreement was entered into between the Trustee and
TGAAR regarding storage of the Equipment, and no order
was entered regarding storage.
17. There is a great deal of sometimes conflicting evidence
in the motions, briefs and affidavits about a potential
sale of the store #966 lease, the surrender of the keys
and property and the ramifications thereof, the requests
by TGAAR for the estate and trustee to remove assets,
whether the Equipment should be left at the leased
premises in case a new tenant would want to use it, a
refusal to allow removal of assets without paying rent,
phone calls between the parties, negotiations among the
parties to sell/buy the Equipment, objections to
auctions, etc. The fact is, any of the parties could
have acted sooner. The Court finds that the Debtor, the
Trustee, and TGAAR are not "at fault" for the existence
of this claim; alternatively they are all equally "at
fault."
18. In addition to rent, TGAAR seeks an additional $15,000
for cleaning and dump fees, and $120,000 to repair
damages done by buyers in removing equipment from the
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2TGAAR's original motion requested $5,000 for dump fees
and $15,000 to repair damages done in removing the Equipment.
Page -7-
store2. It is true that a lessor need not prove damages
with mathematical exactitude, see In re Goldblatt Bros.,
Inc., 66 B.R. 337, 346 (Bankr. N.D. Ill. 1986), but TGAAR
admits that its numbers are estimates. See, e.g.
Affidavit of Gary R. Baily and Gary Glasscock ¶¶ 24, 26
("Affidavit")(attached to Response to Trustee's Motion
for Summary Judgment, doc. 1929). The Court would
require further explanation and/or proof before finding
that those numbers are accurate.
19. TGAAR also, as an alternative request, seeks rent for the
Lease premises at the rate of $3.00/square foot/year,
which it claims is the fair market rental of comparable
storage space in the Midland, Texas area. Store #966
contains approximately 44,000 square feet. Affidavit ¶
27. There is no evidence on what portion of the 44,000
square feet was "necessary" for storage of the Equipment.
20. TGAAR filed a withdrawal of its administrative proof of
claim on or about February 22, 2002 (doc. 1577). The
Trustee raises this withdrawal in her response to TGAAR's
cross motion for summary judgment. The Court, however,
is not considering this withdrawal in connection with
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3Section 365(a) provides, in part: "[T]he trustee, subject
to the court's approval, may assume or reject any executory
contract or unexpired lease of the debtor."
4Bankruptcy Rule 6006(a) provides: "A proceeding to
assume, reject, or assign an executory contract or unexpired
lease, other than as part of a plan, is governed by Rule
9014."
5Bankruptcy Rule 9014 provides, in part: "In a contested
matter in a case under the Code not otherwise governed by
these rules, relief shall be requested by motion, and
reasonable notice and opportunity for hearing shall be
afforded the party against whom relief is sought."
Page -8-
these motions because it seems that the withdrawal may
have been filed in error. See TGAAR's Reply, ¶ 1 p.3
(doc. 1965).
21. TGAAR raises an objection to the Trustee's late-filed
response to its motion for summary judgment. The Court
finds that the short delay was not prejudicial to the
parties or the Court and therefore overrules the
objection.
CONCLUSIONS OF LAW
1. Debtor did not assume the Lease. Assumption is a formal
process that requires a motion, notice to the creditors,
and a court order. See 11 U.S.C. § 365(a)3 and Bankruptcy
Rules 6006(a)4 and 90145. See also Lindsey v. Department
of Labor (In re Harris Management Company, Inc.), 791
F.2d 1412, 1414 (9th Cir. 1986)(Assumption requires
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"express approval" of court.); In re JAS Enterprises,
Inc., 180 B.R. 210, 215 (Bankr. D. Neb. 1995), aff'd. 113
F.3d 1238 (8th Cir. 1997)("[T]he Bankruptcy Code does not
permit a debtor to assume an unexpired lease without
court approval and prior notice to creditors.") Cf.
Gretchen’s of Minneapolis, Inc. v. Highland House, Inc.
(In re Interco, Inc.), 186 F.3d 1032, 1034 (8th Cir.
1999)(Executory contract may only be rejected with court
approval.) There was no motion to assume the Lease, no
notice, and no court order.
2. Debtor's post-petition extension of the Lease was not an
assumption (see conclusion 1) and was not a new post-
petition contract. Under Texas law an extension of a
lease continues the original lease and is not a new
contract. See Pruett Jewelers, Inc. v. Weingarten, Inc.,
426 S.W. 2d 902, 904 (Tx. Ct. App. 1968); Springfield
Fire & Marine Ins. Co. v. Republic Ins. Co., 262 S.W.
814, 817 (Tx. Ct. App. 1924). See also In re Country
Club Estates at Aventura Maintenance Association, Inc.,
227 B.R. 565, 567 (Bankr. S.D. Fl. 1998)(Automatic
renewal clause continues the original contract.)
Therefore, cases cited by TGAAR such as Devan v. Simon
DeBartolo Group, L.P. (In re Merry-Go-Round Enterprises,
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6Section 365(d)(4) provides, in part: "[I]f the trustee
does not assume or reject an unexpired lease of nonresidential
real property under which the debtor is the lessee within 60
days after the date of the order for relief, or within such
additional time as the court, for cause, within such 60-day
period, fixes, then such lease is deemed rejected, and the
trustee shall immediately surrender such nonresidential real
property to the lessor."
7Section 365(b)(3) provides, in part: "The trustee shall
timely perform all the obligations of the debtor, ... arising
from and after the order for relief under any unexpired lease
of nonresidential real property, until such lease is assumed
Page -10-
Inc.), 180 F.3d 149 (4th Cir. 1999) and Nostas Associates
v. Costich (In re Klein Sleep Products, Inc.), 78 F.3d 18
(2nd Cir. 1996), dealing with rejection after assumption
or post-petition contracting, are inapplicable to this
case.
3. The Lease was rejected by operation of law on August 11,
2001. See 11 U.S.C. § 365(d)(4)6. Debtor had an extension
until August 10, 2001, and did not file a motion to
assume the Lease by the deadline. The Lease is therefore
deemed rejected.
4. Alternatively, the Lease was rejected as of August 31,
2001 pursuant to the September 6, 2001 order (doc. 1031).
5. It does not matter whether the lease was rejected on
August 11 or 31 because post-petition obligations were
paid through the end of August. Therefore, there is no
claim for section 365(b)(3)7 rents.
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or rejected, notwithstanding section 503(b)(1) of this title."
8Section 365(g) provides, in part: "[T]he rejection of an
... unexpired lease of the debtor constitutes a breach of such
... lease -- (1) if such contract or lease has not been
assumed under this section or under a plan confirmed under
chapter 9, 11, 12, or 13 of this title, immediately before the
date of the filing of the petition."
9Section 502(g) provides, in part: "A claim arising from
the rejection, under section 365 of this title ... of an
executory contract or unexpired lease of the debtor that has
not been assumed shall be determined and shall be allowed ...
or disallowed ... the same as if such claim had arisen before
the date of the filing of the petition."
Page -11-
6. The automatic stay terminated for the Lease property on
August 31, 2001. Therefore, after August 31, 2001 TGAAR
was free to take steps to evict Debtor, relet the
property, seize the Equipment, or take whatever steps it
wanted consistent with Texas law.
7. Rejection of the Lease gives TGAAR a prepetition
unsecured claim for damages. See 11 U.S.C. § 365(g)8 and
502(g)9. See also Medical Malpractice Insurance
Association v. Hirsch (In re Lavigne), 114 F.3d 379, 387
(2nd Cir. 1997).
8. TGAAR's claim consists of any prepetition arrearages
under the Lease, plus a claim under the extended Lease
for rent and other lease charges after August, 2001.
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10Section 502(b)(6) provides, in part: "[If there has been
an objection to a claim] the court, after notice and a
hearing, shall determine the amount of such claim ... as of
the date of the filing of the petition, and shall allow such
claim in such amount except to the extent that -- (6) if such
claim is the claim of a lessor for damages resulting from the
termination of a lease of real property, such claim exceeds --
(A) the rent reserved by such lease, without acceleration, for
the greater of one year, or 15 percent, not to exceed three
years, of the remaining term of such lease, following the
earlier of -- (i) the date of the filing of the petition; and
(ii) the date on which such lessor repossessed, or the lessee
surrendered, the leased property; plus (B) any unpaid rent due
under such lease, without acceleration, on the earlier of such
dates."
11Section 503(b)(1)(A) provides: "After notice and a
hearing, there shall be allowed administrative expenses ...
(1)(A) the actual, necessary costs and expenses of preserving
the estate, including wages, salaries, or commissions for
services rendered after the commencement of the case."
Page -12-
9. Under Texas law, TGAAR must mitigate its damages. Austin
Hill Country Realty, Inc. v. Palisades Plaza, Inc., 948
S.W.2d 293, 299 (Tx. 1997).
10. TGAAR's unsecured rent claim is limited by 11 U.S.C. §
502(b)(6)10.
11. A portion of TGAAR's claim is an administrative claim
under 11 U.S.C. § 503(b)(1)(A)11 for the fair rental value
for storage of the Equipment from and after August 31,
2001 to May 30, 2002. See, e.g., In re Trak Auto
Corporation, 277 B.R. 655, 666-67 (Bankr. E.D. Va.
2002)("This District has previously held 'once a lease is
rejected ... if the debtor remains in possession by
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failing to vacate the premises, the estate becomes liable
to the lessor for an administrative expense claim arising
from the benefit accruing to the estate for the continued
use of the estate.'"); Boyd v. Dock's Corner Associates
(In re Great Northern Forest Products, Inc.), 135 B.R.
46, 59 (Bankr. W.D. Mi. 1991)("It is well established
that post-petition storage costs, or use and possession
costs, may be granted administrative expense priority.")
An expense is administrative only if it arises out of a
transaction between the creditor and the debtor in
possession or trustee and only to the extent that the
consideration supporting the claim was supplied to and
beneficial to the trustee or debtor in possession.
Bachman v. Commercial Financial Services, Inc. (In re
Commercial Financial Services, Inc.), 246 F.3d 1291, 1294
(10th Cir. 2001); Isaac v. Temex Energy, Inc. (In re
Amarex, Inc.), 853 F.2d 1526, 1530 and n.4 (10th Cir.
1988) (citations omitted); In re Climax Chemical Company,
167 B.R. 665, 666 (Bankr. D. N.M. 1994). See also
Burlington Northern Railroad Company v. Dant & Russell,
Inc. (In re Dant & Russell, Inc.), 853 F.2d 700, 706 (9th
Cir. 1988)("The statute is explicit. Any claim for
administrative expenses and costs must be the actual and
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necessary costs of preserving the estate for the benefit
of its creditors.")(citation omitted.) The Court finds
that the estate benefitted from the storage of the
Equipment. However, the Court cannot find what
percentage of the 44,000 square feet was necessary for
storage, so it cannot determine the actual and necessary
cost of preserving the estate. See In re Grimm &
Rothwell, Inc., 108 B.R. 186, 190 (Bankr. S.D. Oh. 1989)
(Estate charged for use of only 20% of premises because
only 20% was used for post-petition storage.) The
benefit received by the estate, however, will not exceed
the actual value of the Equipment because it would not be
"necessary" to pay more to store equipment than it was
worth. In re C & L Country Market of New Market, Inc.,
52 B.R. 61, 63 (Bankr. E.D. Pa. 1985)("We hold, that in
the absence of countervailing circumstances, the actual,
necessary costs and expenses of preserving assets of the
estate under § 503(b)(1)(A) cannot exceed the value of
those assets.")
12. TGAAR argues that as a holdover tenant under Texas law,
the estate must pay the rent fixed by the lease. While
this may be true under state law, it is not true in the
bankruptcy context. The amount of TGAAR's administrative
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claim is limited by the value to the estate of the
services it received. Dant & Russell, Inc., 853 F.2d at
707. "This limitation acknowledges that the debtor-in-
possession or trustee's liability for actual use and
occupancy is not compensatory but rather is founded upon
the equitable principle of preventing unjust enrichment."
Id. Potential benefit does not satisfy the requirement,
nor does mere possession. General American
Transportation Corporation v. Martin (In re Mid Region
Petroleum, Inc.), 1 F.3d 1130, 1133 (10th Cir. 1993).
The reasonable rental value of the property used provides
the measure of a landlord's administrative claim for
rent. Reiter v. Fokkena (In re Wedemeier), 237 F.3d 938,
941 (8th Cir. 2001).
13. TGAAR also argues that the rent stated in the lease is
presumptively the fair rental value of the property for
the period after the lease was rejected. Dant & Russell,
853 F.2d at 707. The Court would agree if the
Debtor/Trustee continued to use the space as a store. In
this case, the property was used only for storage, and
the Court finds that TGAAR's alternative valuation of
$3.00/square foot is more realistic.
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14. This Court believes that the benefit to the estate cannot
exceed the proceeds realized from the sale of the assets
that were preserved. See Restatement (First) of
Restitution § 155:
Where a person is entitled to restitution
from another because the other, without
tortious conduct, has received a benefit,
the measure of recovery for the benefit
thus received is the value of what was
received, limited, if the recipient was not
at fault or was no more at fault than the
claimant, to its value in advancing the
purposes of the recipient....
The Court also finds that storage fees that exceed the
value of the property stored cannot be "necessary"
expenses for the purposes of Bankruptcy Code § 503(b)(1).
15. The portion of TGAAR's administrative rent claim for the
period September 1, 2001 through December 19, 2001 is a
chapter 11 administrative expense. The portion of
TGAAR's administrative rent claim for the period after
December 19, 2001 is a Chapter 7 administrative expense.
16. Neither the Chapter 11 or Chapter 7 administrative
expenses for rent are entitled to super-priority. See In
re Daisy/Cadnetix Inc., 126 B.R. 87, 91 (Bankr. N.D. Ca.
1991)(Chapter 11 administrative rent claim has the same
status as all other Chapter 11 administrative claims.);
In re Dawson, 162 B.R. 329, 333 (Bankr. D. Ks.
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1993)(Trustee ordered to pay chapter 7 administrative
rent subject to disgorgement if assets insufficient to
pay all administrative expenses in full.) Therefore,
TGAAR will be paid pro-rata with other administrative
expenses.
SUMMARY
Trustee's Motion for Partial Summary Judgment, to deny
TGAAR an administrative claim for rent or storage as a matter
of law, will be denied.
TGAAR's Cross Motion for Summary Judgment, to establish
its administrative claim, will be denied because the Court
finds that there are genuine fact issues related to the amount
of TGAAR's claim and the claim's classification as
unsecured/administrative.
An order will enter.
Honorable James S. Starzynski
United States Bankruptcy Judge
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I hereby certify that on April 14, 2003, a true and correct
copy of the foregoing was either electronically transmitted,
faxed, delivered, or mailed to the listed counsel and parties.
Robert K. Whitt
505 N. Big Spring, Suite 402
Midland, TX 79701
David T. Thuma
500 Marquette NW Suite 650
Albuquerque, NM 87102
Office of the United States Trustee
PO Box 608
Albuquerque, NM 87103-0608
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