Dislocation expenses in an assignment for the benefit of creditors.

• Author: Rosenberg, Robert A.

INTRODUCTION

The subject of this Article is whether incurred dislocation expenses, based on pre-existing leases, are allowable as administrative costs in the context of an assignment for the benefit of creditors. The discussion necessarily begins with a reference to the assignment statute.

The assignment for the benefit of creditors statute, chapter 727 of the Florida Statutes, recognizes "administrative expenses" which the assignee must pay "[t]o the extent reasonable and necessary." (1) "Expenses incurred during the administration of the estate" are accorded a first priority right of payment from assets of the assignment estate, after the satisfaction of secured creditors from the liquidation of any collateral. (2)

1. FACTUAL BACKGROUND

   Great Western Steamship Company ("GWS") was in the business of transporting cargo from ports in Asia to the United States and various nations in the Caribbean. (3) In January 2006, there were fourteen leases between GWS and GE Seaco. (4) Seven were long-term leases (for a period of five years) and the others were for shorter terms. (5) GWS leased approximately 1,600 cargo containers from GE Seaco for use in its shipping business. (6) The majority of these containers were either twenty or forty feet in size. (7) The variations in the terms of the leases and the sizes of the containers yielded slight variations in the daily base rental charged for each piece of equipment while it was on-hire. (8) Each of these leases specifically required GWS to redeliver all of the equipment to specified locations in Asia when the leases concluded. (9)

   GE Seaco asserted that all leases between the parties were subject to the General Trading Terms Agreement. (10) Pursuant to Section 10 of the Agreement, GE Seaco had various remedies including, but not limited to, the right to take possession of the containers and to recover from GWS any amounts due under the particular lease, along with any rent that may become due in the future. (11) In addition to the remedies provided in Section 10, the Agreement described in the meaning of "Dislocation Charges":

   Lessee shall also be obliged to pay to [GE Seaco] a dislocation charge of US$ 750 per 20 ft. container and US$1,500 per 40 ft. container to compensate [GE Seaco] for lost rent and administrative costs arising from the default. (12) On January 17, 2006, GWS executed an assignment in favor of the assignee. (13) The assignee filed the Petition Commencing Assignment for the Benefit of Creditors on January 19, 2006 (the "Petition Date"). (14) On the Petition Date, GWS was transporting goods for numerous customers in cargo containers that GWS had leased from GE Seaco and other cargo container leasing companies. (15) The laden cargo containers were aboard ships at various points of transit and not immediately identifiable by the assignee. (16) In order to maximize the estate to provide the greatest return to creditors, the assignee chose to complete the delivery of the goods in transit. (17)

   On January 19, 2006, GE Seaco demanded in writing that the assignee disclose the location of each cargo unit and not move loaded units until GE Seaco agreed in writing. (18) GE Seaco sent a Notice of Default and Termination to GWS terminating the leases between the parties on January 20, 2006. (19) GE Seaco never sent the assignee any writing withdrawing or attempting to withdraw the Notice of Default and Termination. (20) Triggered by the assignee's disregard of GE Seaco's written demand, on January 25, 2006, GE Seaco filed an Emergency Motion for Temporary Injunction (the "Injunction Motion") seeking to prevent any further usage of its equipment by the assignee. (21) GE Seaco confirmed that "[t]he cargo container leases have all been terminated in accordance with their terms." (22)

   On January 26, 2006, the court conducted a hearing to consider the Injunction Motion. (23) At this hearing, GE Seaco's counsel announced that an agreement between the assignee and GE Seaco resolved the Injunction Motion, whereby $300,000 of the estate's funds were to be placed in the trust account of the assignee's counsel as a security deposit in case any of the GE Seaco containers were not returned. (24) The assignee's counsel added that by agreeing to the resolution of the injunctive motion, the assignee was simply agreeing to a resolution of the injunction, was not admitting any of the allegations contained in the motion, and the agreement was without prejudice to the assignee contesting any claims made by GE Seaco in the future. (25) The words "assume" and "assumption" appear nowhere in the transcript from the proceedings on January 26, 2006. (26)

   The assignee paid $300,000 to GE Seaco pursuant to two separate orders dated March 26, 2007 and July 20, 2007. (27) Thus, the assignee was free to continue to use the leased equipment. By doing so, the assignee was able to both generate more than $1 million of additional revenue for the estate and avoid a number of significant claims that could have been asserted by scores of GWS customers whose merchandise would not have been delivered as promised.

   Pursuant to Fla. Stat. [section] 727.112(2), the deadline for creditors of the estate to file claims was May 19, 2006, or 120 days after the Petition Date. (28) GE Seaco timely filed its Proof of Claim. On July 28, 2006, the assignee filed his First Omnibus Objection to Claims. (29) Included in that pleading was an objection to GE Seaco's Proof of Claim. (30) On October 1, 2007, GE Seaco filed its Supplemental Claim. As set forth in Section B of the Supplemental Claim:

   [GE Seaco] seeks an allowance as an administrative expense the $2,384,072.45 of "dislocation charges" that were included as part of its Proof of Claim previously filed herein. That amount is based upon the provisions of Article 10 of the General Trading Terms executed by ... Assignee on 1/26/06 when he elected to continue the use of the equipment which [GE Seaco] had leased to Great Western. (31) On November 5, 2007, the Special Magistrate appointed to preside over GE Seaco's motion for administrative rent issued a Report and Recommendation. (32) The Special Magistrate rejected GE Seaco's argument that the agreement emanating from the January 26, 2006 hearing represented the assignee's assumption of any of the leases:

   GE Seaco claims that the January 26, 2006 agreement amounted to an assumption of the leases...