By Michael L. Moskowitz & Melissa A. Gueynov

In an opinion of interest to Chapter 11 practitioners, the United States District Court for the Western District of Louisiana recently held that the rental value of a chapter 11 debtor’s unused leased equipment qualifies for administrative expense status if there are intangible benefits to the estate. Kimzey v. Premium Casing Equipment LLC, 2018 U.S. Dist. LEXIS 42744 (W.D. La. Mar. 14, 2018). Read the full opinion here.

Kimzey involved oil field equipment leased - but not used - by debtor before filing for bankruptcy relief under chapter 11 of the Bankruptcy Code. Subsequent to its bankruptcy filing, debtor’s assets were purchased by a third party that did not buy the leased equipment. After the sale, lessor sought administrative expense status for the post-petition lease payments due, contending they were actual and necessary costs of preserving the bankruptcy estate.  

Section 503(b)(1)(A) of the Bankruptcy Code states that administrative expenses include the "actual, necessary costs and expenses of preserving the estate." 11 U.S.C. §503(b)(1)(A). An actual or necessary cost is one that has “conferred a benefit” upon the bankruptcy estate.  

The bankruptcy court allowed lessor’s administrative claim based on the rental value of the unused equipment. Debtor’s shareholders objected to the allowance of the administrative claim, arguing there was no benefit to the estate.  On appeal, District Judge Elizabeth Erny Foote affirmed the bankruptcy court’s allowance of the administrative claim.

Judge Foote noted there are two divergent lines of cases on this issue. First, she articulated that the Ninth Circuit acknowledges administrative expense claims “based on the fair and reasonable value of the rental equipment without regard to whether the debtor actually used the equipment.” However, other courts, including the Fourth and Tenth Circuits, allow administrative expense claims only “to the extent the debtor has made actual use of the leased property, thus establishing a tangible benefit to the estate.” Those courts, she explained, focus on “minimizing the overall administrative expenses of the estate to protect the interest of all unsecured creditors.”

Judge Foote noted the Fifth Circuit has not addressed whether the amount of an administrative expense claim should be based on the fair rental value of the leased equipment due to tangible and intangible benefits to the state, or if actual use by the debtor is required. However, the Bankruptcy Court in this case found that when a benefit can be established for the retention of the equipment for some purpose, actual use of the equipment is not required. “In the absence of a bright line rule,” the District Court affirmed the decision of the Bankruptcy Court, explaining that although there was no direct profit generated by the leased equipment, it did provide intangible benefits to the estate.

Due to the Circuit split on this issue, it will be necessary to determine the actual need for equipment post-petition. Based upon Kimzey, chapter 11 practitioners should seek to reject executory contracts as part of their First-Day Motions to avoid the possibility of significant administrative expense even though the property conferred no benefit to the estate.

Weltman & Moskowitz will continue to follow and report on this issue and keep our clients and colleagues informed of the developing impact to lessors and debtors.  Please feel free to call Weltman & Moskowitz with any questions or challenges you, your colleagues, or clients, may have.

Richard Weltman & Michael Moskowitz |

About Weltman & Moskowitz, LLP, A New York and New Jersey Business, Bankruptcy, and Creditors’ Rights Law Firm:

Founded in 1987, Weltman & Moskowitz, LLP is a highly regarded business law firm concentrating on creditors’ rights, bankruptcy, foreclosure, and business litigation. Michael L. Moskowitz, a partner with the firm, focuses his practice on business and bankruptcy litigation, as well as creditor’s rights, foreclosure, adversary proceeding litigation, corporate counseling, M&A, and transactional matters. Michael can be reached at (212) 684-7800, (201) 794-7500 or Melissa Guseynov is an associate of the firm. Melissa can be reached at