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Kimzey v. Premium Casing Equipment LLC

United States District Court, W.D. Louisiana, Lafayette Division

March 14, 2018

TRISHA KIMZEY ET AL
v.
PREMIUM CASING EQUIPMENT, LLC

          WHITEHURST MAGISTRATE JUDGE

          MEMORANDUM RULING

          ELIZABETH ERNY FOOTE UNITED STATES DISTRICT JUDGE

         Before the Court is an appeal filed by Appellants, Trisha and Tyler Kimzey ("the Kimzeys"), unsecured creditors in the matter of In Re: Kimzey Casing Service, LLC. [Record Doc. 1]. The Kimzeys appeal an order issued by the United States Bankruptcy Court, Western District of Louisiana, which allowed an administrative expense claim filed by the Appellee, Premium Casing Equipment, LLC ("Premium"). For the reasons assigned herein, the order of the Bankruptcy Court is AFFIRMED.

         BACKGROUND INFORMATION

         On October 16, 2015 ("petition date"), Kimzey Casing Service, LLC ("KCS" or "Debtor") filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code. [Record Doc. 4, Bankr. Doc. I].[1], [2] After the petition date, KCS operated its business until December 18, 2015 ("sale date"), when the majority of KCS' assets were sold to TRK Enterprises, Inc. ("TRK") at an auction authorized by the Bankruptcy Court. Premium leased specialized oilfield equipment, CRTis, to KCS.[3] The leased equipment at issue was not sold or assigned to TRK as part of the sale.

         Following the sale, Premium filed a motion seeking the allowance of an administrative expense claim pursuant to 11 U.S.C. § 503(b)(1)(A) for post-petition lease payments due on the equipment from the date of KCS' petition to the sale date. [Record Doc. 4, Bankr. Doc. 42]. Premium argued that the lease payments in question were actual, necessary costs and expenses of preserving the bankruptcy estate of KCS. The Kimzeys objected to the claim. [Record Doc. 4, Bankr. Doc. 46 and 66]. The Bankruptcy Court allowed an administrative expense claim in the amount of $57, 752.93 against KCS. The issue on appeal is whether the Bankruptcy Court properly determined that the rental charges for the equipment were actual, necessary expenses for the preservation of the Debtor's estate such that Premium is entitled to a priority claim under 11 U.S.C. § 503(b)(1)(A) and 11 U.S.C. § 507(a)(2).

         A. Stipulated Facts of the Case

         The parties agreed to stipulated facts and presented them to the Bankruptcy Court. [Record Doc. 4, Bankr. Doc. 65]. The Bankruptcy Court relied solely on the stipulated facts to reach its decision. Accordingly, the relevant stipulated facts are provided herein.

         KCS provided oil field services, principally casing work, for owners and operators of oil and gas properties in two general areas: (a) Colorado and Wyoming (the "Colorado Division"), and (b) Ohio, Pennsylvania, and West Virginia (the "Pennsylvania Division"). [Record Doc. 3, Bankr. Doc. 65 ¶ 1]. From the filing of the bankruptcy petition through the sale of most of KCS' assets to TRK, Robert Fullop ("Fullop") was the President of KCS. Id. at ¶ 4. Fullop was knowledgeable about the details relating to all aspects of KCS' business, and conducted daily operations meetings with KCS business managers and facility supervisors. Id. The meetings reviewed and discussed safety, sales, operations, equipment, and maintenance matters at all KCS facilities. Id., Ryan Maupin ("Maupin"), a Director in Grant Thornton's Corporate Advisory & Restructuring practice, was appointed Interim Chief Executive Officer for KCS from the filing of the bankruptcy through the sale of the majority of KCS' assets to TRK. Id. at ¶ 5. During the time between the petition and the sale, Kyle Mascarenas ("Mascarenas") was the business unit manager for KCS in the Colorado Division, and was in charge of all of the persons who worked for the KCS Colorado facility. Id. at ¶ 6. During the same period of time Jordan Beckner ("Beckner") was the business unit manager for KCS in the Pennsylvania Division, and was in charge of all of the persons who worked for the KCS Pennsylvania facility. Id. at ¶ 7. Mascarenas and Beckner reported directly to Fullop. Id. at ¶ 8. Fullop reported to Maupin. Id. at ¶ 9.

         All KCS equipment in Pennsylvania was stored at the Pennsylvania facility when not in use. Id. at ¶ 10. All KCS equipment in Colorado was stored at the Colorado facility when not in use. Id. at ¶ 11. A Volant CRTi is a tool that is used to perform some of the services that KCS offered to customers in both the Colorado and Pennsylvania divisions.[4]14 at ¶ 12. On the date of the bankruptcy filing, KCS leased three pieces of specialized equipment from Premium under a lease agreement dated October 1, 2012, for a total rental amount of $25, 000 per month. Id. at ¶ 14. The leased items were (i) a Volant CRTi-3-700 and related components, and a Volant CRTi-2-5.50 and related components for $23, 200 per month ("Leased CRTis"), and (ii) drill pipe tong model HSZ-125Y, master and backup, jaws for drill pipe 4.5", 5", 5.5", 6 5/8" and lift cylinder of Chinese origin for $1, 800.00 per month. Id.[5]

         At the time that the bankruptcy case was filed, KCS had four Volant CRTi-5.5 devices at the Pennsylvania facility. Id. at ¶ 15. Three of the four Volant CRTi Devices located in the Pennsylvania Division were owned by KCS. Id. The fourth Volant CRTi was one of the pieces KCS leased from Premium. Id. At the time that the bankruptcy case was filed, KCS had four Volant CRTi devices at the Colorado Facility. Id. at ¶ 16. Three of the four Volant CRTi Devices located in the Colorado Division were owned by KCS. Id. The fourth Volant CRTi was leased by KCS from Premium. Id.

         Shortly after KCS filed for bankruptcy on October 16, 2015, Fullop and Maupin together determined that KCS needed to continue leasing the Leased CRTis from Premium. Id. at ¶ 17. This determination was based on Maupin and Fullop's combined business judgment, which was exercised in good faith. Id. Fullop and Maupin's business judgment was based on their knowledge of the then-current and expected use of the Volant CRTis, the risk of losing revenue and critical customers if the Company ran short of equipment, the related risk of destroying the Company's enterprise value while it was being marketed for a section 363 auction, and the significantly higher cost of renting similar tools elsewhere. Id. at ¶ 18. Accordingly, both Fullop and Maupin believed that retaining the lease of the Leased CRTis was an actual and necessary expense of preserving the KCS estate's value. Id.

         After the filing of the bankruptcy case, neither Fullop nor Maupin ever instructed Mascarenas or Beckner as to which Volant CRTi to use on a particular job. Id. at ¶ 19. However, Mascarenas instructed his employees in the Colorado Division not to use a Leased CRTi. Id. at ¶ 20. Likewise, Beckner instructed his employees in the Pennsylvania Division not to use a Leased CRTi. Id. at ¶ 21. At no time from the filing of the bankruptcy petition through the sale of the majority of KCS' assets were either of the Leased CRTis used on a job. Id. at ¶ 22. The Leased CRTis were not used in any manner that produced revenue for KCS. Id. at ¶ 23. The Leased CRTis were not used by KCS to perform all or part of any job for any customer. Id. at ¶ 24. Neither of the Leased CRTis produced any revenue for KCS, earned any revenue for KCS, or created any right for KCS to seek payment from any person. Id. at ¶ 25.

         The majority of KCS' assets were sold to TRK on December 18, 2015, by order of the Bankruptcy Court. Id. at ¶ 26. Pursuant to the bid procedures established by the Bankruptcy Court, TRK submitted a bid for those assets of KCS that TRK wished to purchase, and those leases that TRK wished to acquire. Id. at ¶ 27. TRK's bid did not include the Leased CRTis. Id. at ¶ 28. The bid did not seek to assume the lease of either of the Leased CRTis or the assignment of such leases to TRK. Id. at ¶ 29. KCS did not file a motion to assume the lease with Premium. Id. at ¶ 30. On December 18, 2015, KCS filed a motion to reject a number of leases, including the lease with Premium that included the Leased CRTis. Id., at ¶ 3l.[6] That motion was granted by order of the Bankruptcy Court on December 29, 2015. Id.

         B. Decision of the ...


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