In November 2007, sylva corp. (“sylva”) and a predecessor‑in‑interest to ge capital commercial, inc. (“ge”) entered into a “lift lease agreement” (the “lease”) for certain equipment (the “equipment”). The lease was for an initial term of sixty (60) months expiring on november 20, 2012 (the “initial term”). Pursuant to paragraph 11 of the lease, sylva had the option to purchase the equipment either during the initial term or upon expiration of the initial term upon compliance with specific requirements set forth therein. Pursuant to paragraph 23 of the lease, sylva retained the right to terminate the lease and return the equipment upon the expiration of the initial term upon delivery of prior notice to ge. If sylva did not elect to purchase the equipment or terminate the lease at the expiration of the initial term, paragraph 23 of the lease provided for an automatic month‑to‑month renewal of the lease until either sylva or ge provided the other with at least 90 days’ written notice of its intent to terminate the lease. Prior to the end of the initial term, Sylva did not elect to purchase the equipment or terminate the lease and return the equipment. Accordingly, the initial term was extended automatically on a month‑to‑month basis from and after December 1, 2012. On april 3, 2013, sylva filed a voluntary petition with the united states bankruptcy court in the district of minnesota (the “district court”) for bankruptcy protection under chapter 11 of the u.s. bankruptcy code.
In May 2013, ge filed a proof of claim for prepetition amounts due under the lease asserting, among other things, that (i) the contract underlying the claim is a true lease and (ii) if the lease is rejected, all amounts asserted under the lease become a non‑contingent liability of sylva. Subsequently, in Ooctober 2013, ge filed a motion seeking to compel sylva to assume or reject the lease. In its response, sylva contended that the lease had expired in december 2012 and that the only issue should be whether ge is adequately protected, not whether the lease should be assumed or rejected. Thereafter, the parties entered into a settlement pursuant to which (i) the parties stipulated that ge had a valid lessor’s interest in the leased equipment, (ii) the parties acknowledged that, as of the bankruptcy filing date, sylva owed unpaid amounts of $12,766.79, (iii) sylva agreed to cease using the equipment and to make the equipment available for ge to reclaim, (iv) the parties acknowledged that, to the extent the lease remained in effect, sylva was authorized to reject the lease and (v) the parties agreed that the settlement would not prejudice ge’s right to enforce additional default‑related rights and remedies, including the filing of a motion for allowance of administrative expense or sylva’s right to contest any claims by ge. In march 2014, ge filed a motion for allowance of unpaid lease obligations as an administrative expense pursuant to both 11 u.s.c. § 365(d) and § 503(b). Sylva objected, claiming that the lease was a financing agreement as opposed to a true lease. Prior to the evidentiary hearing, the parties again stipulated to facts providing, among other things, that sylva rejected the lease on april 1, 2014. The stipulation did not include a reservation of rights. The district court denied ge’s motion, holding that it would only analyze the motion under section 503(b)(1)(a) and would not consider any relief under section 365(d)(5). Analyzing section 503(b)(1)(a), the district court determined that ge failed to meet its burden of proving that the estate received a tangible benefit from the use of the equipment. Ge then appealed to the united states bankruptcy appellate panel for the eighth circuit (the “panel”), arguing, among other things, that the district court erred by declining to consider ge’s motion under 11 u.s.c. § 365(d)(5).
Examining the facts at hand, the panel found that the district court, in failing to evaluate ge’s motion under section 365(d)(5), erred as a matter of law and shifted the burden of proof with respect to the unpaid obligations under the lease as an administrative claim from the objecting party (sylva) to the claiming party (ge). The panel further noted that the written record supported ge’s request that its motion be considered pursuant to section 365. In connection therewith, the panel noted that (i) ge expressly argued for relief pursuant to section 365(d)(5) throughout the case, (ii) ge’s proof of claim asserted its rights under the lease as a true lease (which is expressly governed by section 365(d)(5)), (iii) in october 2013, ge filed a motion to compel sylva to accept or reject the lease and demanded that sylva pay the post‑petition rent payments pursuant to section 365 and (iv) in february 2014, ge entered into a stipulation in which ge reserved its right to seek an administrative expense claim and subsequently filed the motion. The panel remanded the case to the district court, directing the district court to first determine whether sylva’s assertion that the lease is not a “true lease” is still in dispute following the stipulations the parties agreed to prior to the filing of the motion. The panel then instructed the district court that, if it is determined that the lease is in fact a “true lease,” the district court should then analyze the issue under section 365(d)(5) for the period from or after 60 days after the filing of the date of rejection (april 1, 2014). The panel further noted that “because § 365(d)(5) does not mandate performance prior to the 60th day post‑petition, the request for an administrative expense claim for the lease payments due during that period is properly analyzed under §503(b)(1)(a)”. Ge capital commercial, inc. V. Sylva corp., inc. (in re sylva corp., inc.), 519 b.r. 776, 2014 bankr. Lexis 4849 (bankr. 8th cir. 2014).
