In re: Kittusamy, LLP

FILED MAR 10 2017 1 NOT FOR PUBLICATION SUSAN M. SPRAUL, CLERK 2 U.S. BKCY. APP. PANEL OF THE NINTH CIRCUIT 3 UNITED STATES BANKRUPTCY APPELLATE PANEL OF THE NINTH CIRCUIT [4] 5 In re: ) BAP No. NV-16-1242-LJuKu ) 6 KITTUSAMY, LLP, ) Bk. No. 2:15-bk-13868-abl ) 7 Debtor. ) ______________________________) 8 ) PARTAP INVESTMENTS, LLC, ) 9 ) Appellant, ) 10 ) MEMORANDUM* v. ) 11 ) KITTUSAMY, LLP, ) 12 ) Appellee. ) 13 ______________________________) 14 Argued and Submitted on February 24, 2017 at Las Vegas, Nevada [15] Filed - March 10, 2017 [16] Appeal from the United States Bankruptcy Court 17 for the District of Nevada 18 Honorable August B. Landis, Bankruptcy Judge, Presiding _________________________ [19] Appearances: Samuel A. Schwartz of The Schwartz Law Firm argued 20 for Appellant Partap Investments, LLC; Bart Kurt Larsen of Kolesar & Leathan, Chtd. argued for 21 Appellee Kittusamy, LLP. _________________________ [22] Before: LAFFERTY, JURY, and KURTZ, Bankruptcy Judges. [25] 26 * This disposition is not appropriate for publication. 27 Although it may be cited for whatever persuasive value it may have (see Fed. R. App. P. 32.1), it has no precedential value. 28 See 9th Cir. BAP Rule 8024-1. 1 INTRODUCTION 2 Pre-petition, Kittusamy, LLP (“Kittusamy”) defaulted on 3 payments due under agreements to lease medical imaging equipment. 4 After an order for relief was entered in Kittusamy’s involuntary 5 chapter 111 case, the lessor filed a proof of claim asserting a 6 secured claim of approximately $3.3 million.2 Thereafter, the 7 lessor was granted relief from stay and foreclosed its security 8 interest. The equipment was sold to Partap Investments, LLC 9 (“Partap”) at a private foreclosure sale; the bill of sale also 10 transferred to Partap the lessor’s rights under the proof of 11 claim filed in Kittusamy’s bankruptcy case and Kittusamy’s rights 12 under a sublease. 13 Thereafter, Partap filed an application for allowance of an 14 administrative claim of $917,593.26 based on unpaid postpetition 15 rent from the petition date through a date six days after Partap 16 purchased the equipment. The bankruptcy court disallowed the 17 administrative claim in its entirety, finding that the leases 18 were not true leases but were disguised security agreements, so 19 that the rights transferred to Partap could not have included an 20 administrative claim for postpetition rent. Additionally, viewed 21 through the alternative lens of a secured creditor’s rights, the 22 bankruptcy court found that Partap had not met its burden of 23 proving a diminution in value of the collateral for any relevant 24 period. [1] 26 Unless otherwise indicated, all chapter and section references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532 . [2] Although characterized as leases, the relevant documents 28 granted lessor a security interest in the equipment. -2- 1 We AFFIRM. 2 FACTS 3 The facts are not in dispute. Kittusamy is a Nevada limited 4 liability partnership. Prem K. Kittusamy, M.D., and Bhuvaneswari 5 P. Kittusamy, M.D., are the principals of the LLP. 6 In 2008 and 2009, Kittusamy and its affiliate, DMP 7 Equipment, LLC, entered into agreements to lease medical imaging 8 equipment from Siemens Medical Solutions USA, Inc. (“Siemens 9 Medical”). Kittusamy leased one piece of equipment through a 10 Master Equipment Lease Agreement and Leasing Schedule that set 11 forth the details of the financing; DMP leased four pieces of 12 equipment, also via a Master Equipment Lease Agreement and a 13 separate Leasing Schedule for each item. DMP then subleased that 14 equipment to Kittusamy under an Equipment Sublease Agreement 15 (“Sublease”). 16 All three parties entered into a Consent to Sublease and 17 Agreement under which Siemens Medical approved the sublease and 18 Kittusamy agreed to be bound by the terms of the DMP Master 19 Lease. All of the Leasing Schedules provided that Kittusamy had 20 the option to purchase the equipment for a “Nominal Fixed 21 Purchase Option Price of $1.00” at the end of the lease term. 22 Thereafter, Siemens Medical assigned its interests in the Master 23 Equipment Lease Agreements, Leasing Schedules, and Sublease and 24 Consent (collectively, the “Lease Documents”) to Siemens 25 Financial Services, Inc. (“Siemens Financial”). At some point, 26 Kittusamy defaulted on its obligations under the Lease Documents; 27 according to its proof of claim, Siemens Financial accelerated 28 the amounts due under the Lease Documents on November 4, 2014. -3- 1 On July 2, 2015, an involuntary chapter 11 petition was 2 filed against Kittusamy; Kittusamy consented to entry of an order 3 for relief, which was entered August 10, 2015. Siemens Financial 4 filed proof of claim no. 23-1 asserting a secured claim of 5 $3,343,487.18 representing prepetition amounts due under the 6 leases, including late charges, property taxes, discounted 7 accelerated balance of future rentals, and attorneys’ fees and 8 costs through December 10, 2015. Siemens Financial then moved 9 for relief from the automatic stay, which the bankruptcy court 10 granted. Thereafter, Siemens Financial foreclosed on its 11 security interest, selling the equipment to Partap for 12 $924,641.70 plus $75,358.30 in sales tax through an “As Is,” 13 “Where Is” Bill of Sale and Non-Recourse Assignment dated 14 March 2, 2016 (“Bill of Sale”). Siemens Financial also 15 transferred to Partap “all of Siemens Financial’s rights, title 16 and interests in any claim Siemens Financial has asserted in the 17 Kittusamy, LLP Bankruptcy Case No. 15-13868-ABL . . .” and all of 18 Kittusamy’s and DMP’s “respective rights, titles and interests, 19 in and to the equipment . . . and sublease[.]” 20 On March 3, 2016, Partap filed a Notice of Transfer of 21 Siemens Financial’s claim in Kittusamy’s bankruptcy case. On 22 March 9, 2016, Partap filed proof of claim no. 41-1 asserting an 23 administrative claim of $917,593.26 pursuant to § 507(a)(2) for 24 Kittusamy’s postpetition use of the equipment. The amount of the 25 claim was based on the monthly payments due under the DMP Master 26 Lease and the Sublease only (not the Kittusamy Master Lease) [28] -4- 1 through March 9, 2016,3 and included more than $300,000 in late 2 fees. 3 Kittusamy filed an objection to Partap’s unsecured and 4 administrative claims; Partap filed an application for approval 5 of its administrative claim, and an “opposition” to Kittusamy’s 6 objection to claims. The bankruptcy court heard argument and 7 took the matters under submission. On July 19, 2016, the 8 bankruptcy court made oral findings and conclusions on the record 9 and entered written orders (1) sustaining Kittusamy’s objections 10 to Partap’s administrative and unsecured claims and (2) denying 11 Partap’s motion to allow its administrative claim. Partap timely 12 appealed. Partap appeals only the bankruptcy court’s 13 disallowance of its administrative claim. 14 JURISDICTION 15 The bankruptcy court had jurisdiction pursuant to 28 U.S.C. 16 §§ 1334 and 157(b)(2)(B). We have jurisdiction under 28 U.S.C. 17 § 158. 18 ISSUE 19 Did the bankruptcy court abuse its discretion in disallowing 20 Partap’s administrative claim? 21 STANDARDS OF REVIEW 22 We review the bankruptcy court’s legal conclusions de novo 23 and its findings of fact for clear error. See Allen v. U.S. 24 Bank, NA (In re Allen), 472 B.R. 559, 564 (9th Cir. BAP 2012). [3] 26 At oral argument, Partap’s counsel asserted that it was owed an administrative claim for amounts due through early April 27 when Kittusamy surrendered the equipment. However, both the proof of claim and the application to approve it requested 28 amounts due only through March 9, 2016. -5- 1 A bankruptcy court’s order allowing or disallowing a proof 2 of claim, including an administrative claim, is reviewed for 3 abuse of discretion. Burlington N. R.R. Co. v. Dant & Russell, 4 Inc. (In re Dant & Russell, Inc.), 853 F.2d 700, 707 (9th Cir. 5 1988); Bitters v. Networks Elec. Corp. (In re Networks Elec. 6 Corp.), 195 B.R. 92, 96 (9th Cir. BAP 1996). A bankruptcy court 7 abused its discretion if it applied the wrong legal standard or 8 its findings were illogical, implausible or without support in 9 the record. TrafficSchool.com, Inc. v. Edriver Inc., 653 F.3d 10 820, 832 (9th Cir. 2011). 11 Questions of contract interpretation are subject to de novo 12 review unless extrinsic evidence was introduced on issues such as 13 intent. Captain Blythers, Inc. v. Thompson (In re Captain 14 Blythers, Inc.), 311 B.R. 530, 534 (9th Cir. BAP 2004), aff’d, [15] 182 F. App’x 708 (9th Cir. 2006). 16 DISCUSSION 17 A. The bankruptcy court did not abuse its discretion in 18 disallowing Partap’s administrative claim. 19 Under § 503(b), the bankruptcy court, after notice and a 20 hearing, shall allow an administrative expense claim for “the 21 actual, necessary costs and expenses of preserving the estate[.]” 22 The party seeking administrative priority bears the burden of 23 proof. Microsoft Corp. v. DAK Indus., Inc. (In re DAK Indus., 24 Inc.), 66 F.3d 1091 , 1094 (9th Cir. 1995). To keep 25 administrative costs to the estate at a minimum, the term 26 “actual, necessary costs and expenses of preserving the estate” 27 is narrowly construed. Id. An administrative claimant must 28 demonstrate that its claim (a) arose from a transaction with the -6- 1 debtor in possession as opposed to the preceding entity, and 2 (b) directly and substantially benefitted the estate. Id. at 3 1094. 4 Here, the bankruptcy court made the following findings 5 relevant to Partap’s administrative claim: (1) the leases were 6 security agreements under N.J. Stat. Ann. § 12A:1-203(b)4; 7 (2) the Bill of Sale did not transfer to Partap a right to assert 8 an administrative claim for the period prior to Partap’s purchase 9 of the equipment; (3) any administrative claim would be limited 10 to the actual value of Kittusamy’s use of the equipment, not the 11 monthly payments under the Lease Documents, and Partap had not 12 provided sufficient evidence of the diminution in value of the 13 equipment during the pendency of the case. The court also noted 14 that Partap might be entitled to an administrative claim based on 15 the diminution in value of the equipment from the time Partap 16 purchased the equipment in March 2016, but that Partap had not 17 provided any evidence of what that diminution might be. 18 Partap has not assigned error to the bankruptcy court’s 19 finding that the leases were disguised security agreements, but 20 disputes that the Bill of Sale did not transfer to Partap a right 21 to assert an administrative claim and that any administrative 22 claim would be limited to the actual value of Kittusamy’s use of 23 the equipment. We conclude that the bankruptcy court did not err 24 in these findings. [4] 26 The Lease Documents provide that they are to be construed in accordance with the laws of the state of New Jersey. The 27 parties do not dispute that New Jersey law applies to the analysis of whether the leases are security agreements. As it 28 happens, New Jersey and Nevada law are consistent in this regard. -7- 1 1. The bankruptcy court did not err in finding that Partap 2 had no right to assert an administrative claim for 3 postpetition rents based on the Bill of Sale. 4 As noted above, the Bill of Sale transferred to Partap “all 5 of Siemens Financial’s rights, title and interests in any claim 6 Siemens Financial has asserted in the Kittusamy, LLP Bankruptcy 7 Case No. 15-13868-ABL[.]” The bankruptcy court found that 8 Siemens Financial had neither filed an administrative claim nor 9 transferred any such claim to Partap under the Bill of Sale and 10 thus Partap was not entitled to assert an administrative claim as 11 successor-in-interest to Siemens Financial. Additionally, the 12 bankruptcy court found that, as a secured creditor, Siemens 13 Financial would not have been entitled to assert an 14 administrative claim for the lease payments, but would have been 15 entitled only to adequate protection for the postpetition 16 diminution in the value of the equipment. Importantly, Partap 17 has not assigned error to this latter aspect of the bankruptcy 18 court’s ruling. 19 Partap argues that the bankruptcy court did not consider 20 page 2 of the Bill of Sale, which provides for the transfer to 21 Partap of “all of Kittusamy’s and DMP’s . . . respective rights, 22 titles and interests in, and to the equipment . . . and sublease 23 . . . described in Schedule 1 hereto . . . , subject to the terms 24 and conditions hereof.” Schedule 1 lists the five pieces of 25 equipment along with “[r]ights, title and interest in and to that 26 certain Equipment Sublease Agreement entered into between 27 Kittusamy, LLC and DMP Equipment, LLC regarding the above 28 equipment.” Partap contends that the transfer of the interests -8- 1 in the Sublease entitled Partap to assert an administrative claim 2 against Kittusamy for its failure to make payments under the 3 Sublease. Partap points out that contracts should be construed 4 so as to avoid rendering portions of them superfluous, Penske 5 Logistics, Inc. v. KLLM, Inc., 285 F. Supp. 2d 468, 474 (D.N.J. 6 2003), and argues that the bankruptcy court’s interpretation of 7 the Bill of Sale renders Schedule 1 meaningless. 8 Additionally, Partap notes that the Bill of Sale expressly 9 excludes certain claims that were not transferred to Partap and 10 argues that if Siemens Financial had intended to exclude the 11 transfer of its right to an administrative claim it would have 12 done so; Partap further contends that the fact that Siemens 13 Financial never filed an administrative claim or opposed Partap’s 14 application for allowance of its administrative claim is evidence 15 that the Bill of Sale included the transfer of the right to 16 assert an administrative claim. 17 Finally, Partap argues that in fact Siemens Financial did 18 assert a right to file an administrative claim in its motion for 19 relief from stay, which stated: 20 [T]o the extent that the adequate protection to which Siemens Financial is entitled proves to be inadequate, 21 and the value of its interest in the Siemens Equipment continues to decline, Siemens Financial asserts that 22 any claim arising therefrom is entitled to an administrative expense claim pursuant to Section 507(b) 23 of the Bankruptcy Code. 24 Partap argues that because the Bill of Sale referred to 25 “asserted” rather than “filed” claims, Siemens Financial’s 26 reservation of rights in its motion for relief from stay gave 27 Partap the right to file an administrative claim. 28 We find these arguments unconvincing. With respect to any -9- 1 right of a lessor to assert an administrative claim for unpaid 2 rent, Siemens Financial could not transfer to Partap a right it 3 did not have. As noted, Partap does not assign error to the 4 bankruptcy court’s finding that Siemens Financial was a secured 5 creditor, not a lessor, and the transfer of rights under the 6 Sublease did not change the character of the leases as security 7 agreements. Where the property in question is not owned by the 8 lessor but is instead owned by the lessee under a disguised 9 security agreement, the lessor is not entitled to an 10 administrative priority claim under § 503(b)(1)(A) for unpaid 11 post-petition lease payments. See Williams v. IMC Mortg. Co. 12 (In re Williams), 246 B.R. 591, 595 (8th Cir. BAP 1999) (noting 13 that § 503(b) is not intended to provide an administrative 14 expense award to a prepetition secured lender based on the 15 debtor’s postpetition possession and use of collateral, and 16 citing cases); See also In Re ES2 Sports & Leisure, LLC, 519 B.R. 17 476, 480 (Bankr. M.D.N.C. 2014). Further, the payment 18 obligations under the Lease Documents were incurred prepetition, 19 not postpetition. This circumstance alone would have barred 20 Siemens Financial from asserting an administrative claim. See 21 In re Williams, 246 B.R. at 594 (postpetition mortgage payments, 22 although not due until after the filing of the petition, were an 23 obligation incurred prior to the creation of the estate, thus the 24 requirement that the administrative claim arise from a 25 postpetition transaction was not met). This conclusion is 26 bolstered by the fact that Siemens Financial apparently 27 accelerated the amounts due under the Lease Documents in November 28 2014, eight months prepetition. -10- 1 The bankruptcy court did not err in finding that the Bill of 2 Sale did not grant Partap a right to file an administrative claim 3 for unpaid rent for the period prior to its purchase of the 4 equipment. 5 2. The bankruptcy court did not err in finding that Partap 6 had not presented sufficient evidence of diminution in 7 value. 8 With respect to the transfer of any rights as a secured 9 creditor, i.e., a right to assert a claim for postpetition 10 diminution in value of the equipment, Partap asserted in the 11 bankruptcy court that the equipment had diminished in value by 12 $525,358.30 before March 3, 2016, the date Partap purchased the 13 equipment. Partap contended that the beginning value of the 14 equipment was $1.45 million, based on Prem Kittusamy’s testimony 15 at a confirmation hearing on March 18, 2016 regarding 16 negotiations with Siemens Financial, in which Dr. Kittusamy 17 stated that the parties had agreed at some point during the 18 bankruptcy that the equipment was worth between $1.4 and 19 $1.5 million. Partap also noted that Kittusamy’s Proposed 20 Disclosure Statement to Accompany Debtor’s First Amended 21 Chapter 11 Plan of Reorganization filed October 30, 2015 valued 22 the equipment at $1,397,518. From $1.45 million, Partap 23 subtracted the amount it paid for the equipment, $924,641.70, 24 yielding $525,358.30. 25 The bankruptcy court found this evidence insufficient to 26 establish the diminution in value, but did not elaborate on its 27 specific reasoning. However, we find no error in the bankruptcy 28 court’s conclusion. Even assuming (without deciding) that -11- 1 Dr. Kittusamy’s testimony and/or the disclosure statement were 2 competent evidence of the equipment value as of the petition 3 date,5 it is far from clear whether the price paid by Partap to 4 purchase the equipment reflects its fair market value on that 5 date. 6 First, the price obtained at a forced sale does not 7 necessarily reflect fair market value. See BFP v. Resolution 8 Trust Co., 511 U.S. 531, 537-38 (1994) (noting that market value 9 is the antithesis of forced-sale value, and that “fair market 10 value” presumes market conditions that do not obtain in the 11 context of a forced sale). 12 Second, as pointed out by Partap, it purchased not only the 13 equipment but also Siemens Financial’s right to collect on its 14 claim filed in the bankruptcy case and Kittusamy’s and DMP’s 15 rights under the Sublease. Therefore, the purchase price does 16 not appear to have been based solely on the fair market value of 17 the equipment. In short, Partap failed to provide sufficient 18 evidence from which the bankruptcy court could discern the fair 19 market value of the equipment and therefore its diminution in 20 value. 21 3. The bankruptcy court did not err in disallowing 22 Partap’s administrative claim for the period after 23 March 3, 2016. 24 The bankruptcy court disallowed Partap’s administrative [25] 26 5 Kittusamy notes that Dr. Kittusamy’s testimony was in the 27 context of describing failed efforts to reach a compromise with Siemens Financial to retain the equipment, and that no final 28 agreement on value was ever reached. -12- 1 claim in its entirety, thus implicitly denying a claim for the 2 six-day period after Partap had purchased the equipment. Partap 3 argues that the bankruptcy court erred in this aspect of its 4 ruling because, as the owner of the equipment, Partap was 5 entitled to an administrative claim for Kittusamy’s use of the 6 equipment after March 3, 2016. 7 Partap’s argument might make sense had it filed an 8 application for allowance of such a claim. Instead, according to 9 Partap’s application for allowance of its administrative claim, 10 claim no. 41-1 was based on unpaid postpetition rent from the 11 petition date through March 9, 2016. Assuming without deciding 12 that Partap was entitled to an administrative claim for unpaid 13 rent accruing after it purchased the equipment on March 3, 2016, 14 Partap did not differentiate in its application between the pre15 and post-purchase periods or provide any explicit evidence of the 16 amount due for the period after it purchased the equipment. 17 Keeping in mind that it was Partap’s burden to prove its 18 entitlement to an administrative claim, there was a failure of 19 proof with respect to the amount of any such claim. Thus, the 20 bankruptcy court did not err in disallowing the claim in its 21 entirety.6 22 CONCLUSION 23 For the reasons explained above, the bankruptcy court did 24 not abuse its discretion in disallowing Partap’s administrative [25] 26 6 This is not to suggest that Partap could not seek relief 27 for Kittusamy’s continued retention and use of the equipment after the purchase date. However, any such relief would be 28 premised upon Partap’s status as the owner of the equipment. -13- 1 claim. Accordingly, we AFFIRM. [28] -14-