Home Bankruptcy Creditor that Filed an Extreme Declare Attracts Courtroom’s Rebuke and Potential Sanctions

Creditor that Filed an Extreme Declare Attracts Courtroom’s Rebuke and Potential Sanctions

Creditor that Filed an Extreme Declare Attracts Courtroom’s Rebuke and Potential Sanctions

This submit is a few junkyard, hogs getting slaughtered, and a chapter choose poised to sanction a creditor and her counsel.  The message from the case to would-be claimants in different instances is easy: don’t “overreach.”  In re U Lock, Inc., Case No. 22-20823, 2023 WL 308210, at *1 (Bankr. W.D. Pa. Jan. 17, 2023).

Extra particularly, on this case, a junkyard is the situation of the debtor’s property, which consists of “building particles, scrap piles, tire mounds, collapsed trailers, and inoperable automobiles.”  It is usually environmentally contaminated. Id.

The phrase “hogs get slaughtered” is how the court docket characterised what can occur when a creditor’s declare is “past the pale.”  Id. at *1, 4.

And sanctions are what the creditor and her counsel may obtain for submitting that declare.  Within the court docket’s view, the declare was a “fanciful nonstarter” as a result of, amongst different causes, it lacked “a factual foundation” and sought an quantity that was “grossly unreasonable.”  Id.

Administrative expense claims are ruled by Chapter Code part 503(b)(1)(A).  A claimant should present a declare is for “the precise, mandatory prices and bills of preserving the property.”  As is mentioned under, the main target is on what advantages the chapter property, not on what a claimant asserts it misplaced.

In U Lock, Inc., the debtor operated a self-storage facility and hoped to develop the property right into a retail plaza.  The acquisition value of the property was $325,316, which was funded by the creditor.  In pre-bankruptcy litigation, the creditor had additionally obtained unique deeds to the property.

In April 2022, an involuntary chapter 7 was filed in opposition to the debtor.  Two months later, the creditor obtained aid from the automated keep to start environmental remediation on the website.  In accordance with the court docket, the creditor “had efficient management of the property.”  Id. at *2.

After the chapter property’s property had been bought for $70,000, the creditor filed an administrative expense declare for the property’s post-petition use of the property.   However the declare quantity was $144,000, which was greater than double the quantity of the property’s property.

To calculate her declare, the creditor used a return-on-investment metric.  The pre-bankruptcy hire of the storage facility was $1,500 a month, an quantity the court docket discovered affordable.  However the declare asserted {that a} “affordable worth for the use” of the property was $18,000 a month.

The declare “elicited common derision” from different parties-in-interest and was, within the court docket’s phrases, “patently absurd.”   Id. at *4.

Beneath well-established case legislation, the creditor — successfully the owner right here — was entitled to “the fee of hire for the use and occupancy of actual property.”  Zagata Fabricators, Inc. v. Superior Air Prods., 893 F.second 624, 627 (3d Cir. 1990).  However the quantity a debtor should pay a landlord needs to be “affordable.”  Because the court docket famous, “[a]fter all, an administrative expense is measured by the ‘profit to the property, not the loss to the creditor.’” Id. (emphasis in unique).

The court docket concluded it was unreasonable for the creditor to hunt $144,000 when the property was price $70,000.  The declare represented what the creditor asserted she had misplaced, slightly than an inexpensive quantity of profit she had supplied to the property for the debtor’s post-petition use of the property.

That was the “overreach” that has led to a listening to on sanctions.  Within the court docket’s phrases, “the quantity of the declare is so past the pale that the Courtroom can’t fathom a correct, non-frivolous function” of the request.  2023 WL 308210, at *4.