December 17, 2014

Foley & Mansfield Wins Creditor Appeal for GE Capital Commercial, Inc. in Case of First Impression

On his first appeal to 8th Circuit Bankruptcy Appellate Panel, attorney Cameron Lallier prevailed for our client GE Capital Commercial, Inc. (GECCI). 

The Lower Court 

As a creditor in the bankruptcy proceedings of Sylva Corporation, GECCI sought reimbursement for leased equipment in use by Sylva,  which had not made payments for more than a year during the Chapter 11 case. Sylva claimed a payment was not required because GECCI could not show value to the bankruptcy estate.

After lengthy proceedings in the Bankruptcy Court, our team filed a motion arguing that Section 365 required the court to allow our claim as an administrative expense, which under the Bankruptcy Code is entitled to priority over general claims. In our motion, GECCI requested the payments due under the lease agreement for the period from the beginning of the case until the date the lease agreement was rejected, plus attorneys’ fees and expenses related to reclaiming the equipment. 

The lower court rejected GECCI’s argument, and applied Section 503, which requires a creditor to show an increased value to the bankruptcy estate. We appealed this decision.  

The Appellate Court Remands

In GE Capital Commercial, Inc. v. Sylva Corporation, Inc., A14-6016 (8th Cir. BAP, Nov. 26, 2014), a case of first impression in Minnesota, the Appellate Panel rejected the reasoning of the lower court and adopted the position advocated by our legal team. The Appellate Court held Section 365 did apply and the burden was on the debtor to show why the contract lease rate should not be applied to determine the claim.  

The Appellate Panel remanded the case to the bankruptcy court to apply the correct standard.  As a result, GECCI is entitled payment prior to other creditors on the full amount of its claim.

Significance to Lessors in Personal Property Leases

This decision means lessors will have the right to recover payment from leases of personal property, either during the case or as a priority claim at confirmation.  Second, and more importantly, the monthly lease payment will be the amount of the claim unless the debtor can establish that fair market rental payment is less than the actual monthly lease payment.

Cameron Lallier, Attorney with Foley & Mansfield -  Minneapolis