Creditor that Filed an Excessive Claim Draws Court’s Rebuke and Possible Sanctions
This post is about a junkyard, hogs getting slaughtered, and a bankruptcy judge poised to sanction a creditor and her counsel. The message from the case to would-be claimants in other cases is simple: do not “overreach.” In re U Lock, Inc., Case No. 22-20823, 2023 WL 308210, at *1 (Bankr. W.D. Pa. Jan. 17, 2023).
More specifically, in this case, a junkyard is the location of the debtor’s property, which consists of “construction debris, scrap piles, tire mounds, collapsed trailers, and inoperable vehicles.” It is also environmentally contaminated. Id.
The phrase “hogs get slaughtered” is how the court characterized what can happen when a creditor’s claim is “beyond the pale.” Id. at *1, 4.
And sanctions are what the creditor and her counsel might receive for filing that claim. In the court’s view, the claim was a “fanciful nonstarter” because, among other reasons, it lacked “a factual basis” and sought an amount that was “grossly unreasonable.” Id.
Administrative expense claims are governed by Bankruptcy Code section 503(b)(1)(A). A claimant must show a claim is for “the actual, necessary costs and expenses of preserving the estate.” As is discussed below, the focus is on what benefits the bankruptcy estate, not on what a claimant asserts it lost.
In U Lock, Inc., the debtor operated a self-storage facility and hoped to develop the property into a retail plaza. The purchase price of the property was $325,316, which was funded by the creditor. In pre-bankruptcy litigation, the creditor had also obtained exclusive deeds to the property.
In April 2022, an involuntary chapter 7 was filed against the debtor. Two months later, the creditor received relief from the automatic stay to begin environmental remediation at the site. According to the court, the creditor “had effective control of the property.” Id. at *2.
After the bankruptcy estate’s assets were sold for $70,000, the creditor filed an administrative expense claim for the estate’s post-petition use of the property. But the claim amount was $144,000, which was more than double the amount of the estate’s assets.
To calculate her claim, the creditor used a return-on-investment metric. The pre-bankruptcy rent of the storage facility was $1,500 a month, an amount the court found reasonable. But the claim asserted that a “reasonable value for the use” of the property was $18,000 a month.
The claim “elicited universal derision” from other parties-in-interest and was, in the court’s words, “patently absurd.” Id. at *4.
Under well-established case law, the creditor — effectively the landlord here — was entitled to “the payment of rent for the use and occupancy of real estate.” Zagata Fabricators, Inc. v. Superior Air Prods., 893 F.2d 624, 627 (3d Cir. 1990). But the amount a debtor must pay a landlord has to be “reasonable.” As the court noted, “[a]fter all, an administrative expense is measured by the ‘benefit to the estate, not the loss to the creditor.’” Id. (emphasis in original).
The court concluded it was unreasonable for the creditor to seek $144,000 when the property was worth $70,000. The claim represented what the creditor asserted she had lost, rather than a reasonable amount of benefit she had provided to the estate for the debtor’s post-petition use of the property.
That was the “overreach” that has led to a hearing on sanctions. In the court’s words, “the amount of the claim is so beyond the pale that the Court cannot fathom a proper, non-frivolous purpose” of the request. 2023 WL 308210, at *4.
