Millwork Specialties, Inc.

UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF NORTH CAROLINA
WILMINGTON DIVISION
IN RE:
MILLWORK SPECIALTIES, INC.,
DEBTOR
CHAPTER 7
CASE NO. 09-07010-8-RDD
ORDER GRANTING APPLICATION FOR
ALLOWANCE AND PAYMENT OF AN ADMINISTRATIVE EXPENSE
Pending before the Court is the Application of Redhill Properties, LLC for Allowance and
Payment of an Administrative Expense (the “Application”) filed by Redhill Properties, LLC on
October 14, 2011 and the Response and Objection to Administrative Expenses filed by Stephen L.
Beaman the Chapter 7 Trustee, on November 28, 2011 (the “Response”). The Court conducted a
hearing on April 25, 2012 in Wilson, North Carolina to consider the Application and the Response.
Millwork Specialties, Inc. (the “Debtor”) filed a voluntary petition under Chapter 11 of the
United States Bankruptcy Code (the “Bankruptcy Code”) on August 19, 2009. The Debtor’s case
was converted to a case under Chapter 7 of the Bankruptcy Code on May 10, 2011.
In the Application, Redhill Properties, LLC (“Redhill”) seeks payment pursuant to two leases
for nonresidential real property assumed by the Debtor in the Chapter 11 Plan of Reorganization (the
“Plan”) confirmed by this Court on April 20, 2010. The Plan assumes the lease for real property at
SO ORDERED.
SIGNED this 04 day of May, 2012.
________________________________________
Randy D. Doub
United States Bankruptcy Judge
____________________________________________________________
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6260 Ocean Highway SW, Sunset Beach, North Carolina (“Sunset Beach Property”) at the rental rate
of $12,000.00 per month and the lease of 2530 James B. White Highway, Whiteville, North Carolina
(“Whiteville Property) at the rental rate of $8,000.00 per month. The Debtor operated as a debtor-in-
possession throughout the Chapter 11 case and made use of the Sunset Beach and Whiteville
Properties to manufacture doors and windows. When the Debtor’s case was converted and the Court
appointed the Chapter 7 Trustee, the Debtor’s operation ceased and the properties were primarily
used to store the assets of the Debtor before they were liquidated by the Trustee. The Trustee
occupied the Sunset Beach and Whiteville Properties for storage until July 2011. At that point, the
Trustee rejected the lease pursuant to 11 U.S.C. § 365(a).
The Application requests payment for rent for the months of June and July 2011 for both but
reduces the rental rate from $12,000.00 to $8,000 for the Sunset Beach Property and from $8,000.00
to $3,500.00 for the Whiteville Property. Redhill seeks a total of $23,000.00 in rent for June and
July 2011 as an administrative expense pursuant to 11 U.S.C. 503(b)(7).
The Bankruptcy Code provides for the payment, as an administrative expense, for “the actual,
necessary costs and expenses of preserving the estate.” 11 U.S.C. § 503(b)(1)(A). Such expenses
include claims resulting from “a nonresidential real property lease previously assumed under section
365, and subsequently rejected . . . .” 11 U.S.C. § 503(b)(7).
Approval of actual expenses requires a finding that the claim arises from a post-petition
transaction between a creditor and the debtor-in-possession. Merry-Go-Round Enter. Inc. v. Simon
DeBartolo Group, L.P., 180 F.3d 149, 157 (4th Cir. 1999). To qualify as necessary expenses, the
consideration supporting the claimant’s right to payment must be beneficial to the debtor-in-
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possession in the operation of business. Id. The party claiming entitlement to an administrative
expense bears the burden of proving the administrative claim is actual and necessary. Id.
The Court finds Redhill is entitled to $23,000.00 as an administrative expense for the use
Sunset Beach and Whiteville Properties under nonresidential real property leases previously assumed
under § 365 and subsequently rejected. The Court finds the expenses were actual and necessary to
the continuation of the Debtor’s operation at the time that the leases were assumed.
When a lease assumed under a confirmed plan is rejected pursuant to § 365 after the
bankruptcy case has been converted under 11 U.S.C. § 1112, then the rejection is deemed to have
occurred immediately before the date of the conversion. 11 U.S.C. § 365(g)(2)(B)(i); Klein Sleep
Prod., Inc. v. Costitch, 78 F.3d 18, 26 (2nd Cir. 1996). In the present case, the Debtor assumed the
lease with Redhill in the Plan confirmed on April 20, 2010. The Debtor’s case was subsequently
converted to a Chapter 7 case on May 10, 2011. The Chapter 7 Trustee rejected the leases
approximately two months later. Therefore, applying § 365(g)(2)(B)(i), the Court must treat the
rejections as if they occurred immediately prior to the conversion of the Debtor’s case from Chapter
11. Any claims arising from the rejection of the leases must be classified as a Chapter 11
administrative expense. Klein Sleep Prod., Inc., 78 F.3d at 26 (finding “[w]hen a reorganization case
is converted to a liquidation proceeding after the lease has been assumed but before it is rejected,
breach is deemed to have occured immediately before the conversion”); see also Merry-Go-Round
Enter. Inc., 180 F.3d at 156 (holding claims from a post-conversion breach of a post-petition
commercial lease entered into by a Chapter 11 debtor receive treatment as a Chapter 11
administrative expense).
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Therefore, the Application is GRANTED. Pursuant to § 365(g)(2)(B)(i), Redhill’s claim
shall be classified as a Chapter 11 administrative expense in the amount of $23,000.00 and is
subordinated to Chapter 7 administrative expenses pursuant to 11 U.S.C. § 726(b).
SO ORDERED.
END OF DOCUMENT
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