In re Vantage Investments, Inc.

• Decision Date: 05 August 2005
• Docket Number: No. 04-046536-11-DRD.,04-046536-11-DRD.
• Citation: 328 B.R. 137
• Parties: In re VANTAGE INVESTMENTS, INC., Debtor.
• Court: U.S. Bankruptcy Court — Western District of Missouri

328 B.R. 137

In re VANTAGE INVESTMENTS, INC., Debtor.

No. 04-046536-11-DRD.

United States Bankruptcy Court, W.D. Missouri.

August 5, 2005.

COPYRIGHT MATERIAL OMITTED

Erlene W. Krigel, Krigel and Krigel, P.C., Kansas City, MO, for Debtor.

MEMORANDUM OPINION

DENNIS R. DOW, Bankruptcy Judge.

The matter before the Court in this Chapter 11 proceeding is the Request for Allowance and Payment of Administrative Expense ("Request") filed by Best Western International, Inc. ("Best Western"), based on a Membership Agreement ("Agreement") between Best Western and Debtor Vantage Investments, Inc. ("Debtor"). Best Western seeks this Court's order declaring that certain fees, dues and charges owed under the Agreement, liquidated damages based upon the Debtor's continued use of trademarks and logos after the termination of the Agreement and attorney's fees incurred by its counsel in this proceeding should be allowed and paid as expenses of administration. Both the Debtor and its principal secured creditor, University National Bank, N.A. ("Bank") opposed the Request. Debtor contends that it is not obligated to pay those charges accruing subsequent to the date of termination or, in the alternative, that those amounts provide no benefit to the estate and therefore are not allowable as administrative expenses. Debtor also contends that the provision in the Agreement for liquidating damages is unenforceable as a penalty and, in the alternative, that Best Western has incorrectly calculated the amount that might be due pursuant to that provision. This Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 1334(b) and 157(a) and (b). This is a core proceeding which this Court may hear and determine pursuant to 28 U.S.C. § 157(b)(2)(A). This Memorandum Opinion contains my Findings of Fact and Conclusions of Law pursuant to Rule 52 of the Federal Rules of Civil Procedure as made applicable to this matter by Rules 7052 and 9014(c) of the Federal Rules of Bankruptcy Procedure. For all the reasons set forth below, the Court grants the Request in part and overrules it in part.

I. FACTUAL AND PROCEDURAL BACKGROUND

Debtor owns and operates a hotel known at the time of filing as Best Western KC South. Pursuant to the Agreement with Best Western dated October 7, 2003, Debtor became affiliated with Best Western and was entitled to certain benefits, including usage of certain trademarks and logos of Best Western, participation in the nationwide reservation system and utilization of cooperative purchasing programs. In turn, Debtor was required to pay annual dues and certain monthly fees and charges and also to conform with certain guidelines for its operation and maintenance of the property, including submitting to inspections by Best Western personnel to insure compliance with those guidelines. Debtor's membership was conditionally approved and subject to the requirement that Debtor complete certain items identified in a property improvement plan. The agreement was for an initial term to expire on November 30, 2003, but was renewable thereafter for additional terms ending on November 30 of subsequent years. Debtor had the right to terminate the Agreement at any time. Best Western had the right to terminate the agreement on default by Debtor in performance of any obligation owed to Best Western under the Agreement.

At various times prior to the filing of the petition, Debtor apparently failed to timely pay certain fees and charges and to comply with deadlines established by Best Western for completion of items on the property improvement plan. An agreement was reached by the parties on these issues and embodied in a letter from Best Western to Debtor dated August 30, 2004 in which Best Western agreed to defer cancellation of Debtor's membership subject to certain conditions. One of the conditions was that in the event Debtor became 60 days delinquent in its account to Best Western, its participation in the reservation system would be restricted and its membership automatically cancelled within ten days if the account was not brought current. Another of the requirements was that on a Quality Assurance Assessment, an inspection conducted by Best Western pursuant to the standards agreed upon by the members, Debtor achieve a minimum score of 875 with regard to guest rooms and public areas. On October 25, 2004, Best Western sent Debtor a letter advising that as a result of continued payment default, it had suspended Debtor from participation in the reservation system effective October 18, 2004. The letter also advised that unless a payment (in the amount of $12,179.41, the balance due as of that date) was made by November 4, 2004, the Agreement would be automatically cancelled.

On October 20, 2004, Debtor filed a petition for relief in this Court under Chapter 11 of the Bankruptcy Code. After unsuccessfully attempting to resolve the monetary defaults with Best Western, on November 15, 2004, Debtor filed an Emergency Motion to Assume Executory Contract and to Compel Best Western International, Inc. to Comply With Terms of Contract. In that motion, Debtor sought an order authorizing the assumption of the Agreement with a cure of monetary and other defaults pursuant to a schedule suggested by Debtor and an order requiring Best Western to restore Debtor's ability to participate in the reservation system. Debtor proposed (in an amended motion) to cure the existing monetary default of $18,483.51 by making a payment of $12,000.00 by December 3, 2004, a $5,000 payment by December 31, 2004, a $5,000.00 payment by January 31, 2005 and the balance by February 28, 2005. Debtor also proposed to cure any existing non-monetary defaults within 45 days of the entry of an order authorizing its assumption of the Agreement. After a hearing, this Court entered an Order dated December 2, 2004, later amended on February 7, 2005, authorizing the Debtor to assume the Agreement upon the condition that the monetary and non-monetary defaults be cured within the specified time periods. That Order also provided that in the event the Debtor failed to cure the defaults by the specified dates, Best Western could issue a notice to the Debtor after which the Debtor would have ten days to either cure the defaults or to object by filing a pleading with this Court and seeking a hearing.

In order to determine whether Debtor had cured the non-monetary defaults, Best Western personnel conducted an inspection of Debtor's facility on January 18, 2005. Debtor received a score of 746. Based on this result, Best Western sent a notice of default on February 17, 2005. Best Western conducted a follow-up inspection on March 7, 2005, at which time Debtor's score was 816, still shy of the 875 minimum score required. On March 28, 2005, Best Western sent Debtor a letter advising that as a result of Debtor's failure to achieve the required minimum score, the Agreement would be canceled effective April 7, 2005. On April 6, 2005, Debtor filed an objection to Best Western's notice of default and requested a hearing with this Court to determine whether it had, as it contended, cured the default. After a hearing conducted on April 28, 2005 this Court determined that the Debtor had not cured its non-monetary defaults within the time specified by the Order or within the additional time provided in Best Western's notice of default, that the stay had therefore expired, pursuant to this Court's Order of February 7, 2005, and that Best Western had the right to take action under the Agreement and applicable law to terminate it.

Best Western filed the Request seeking the allowance and payment of administrative expenses in the total amount of $132,140.50. That amount consists of the following: (1) dues, fees and other charges owed under the Agreement, including the balance of the pre-petition defaults and amounts due under the Agreement through the end of November 2005, in the amount of $51,094.16; (2) liquidated damages, pursuant to paragraph 24 of the Agreement, for the Debtor's continued use of Best Western's trademarks and logos subsequent to the date of termination, in the amount of $48,825.00; and (3) attorney's fees incurred by Best Western's counsel relating to Debtor's defaults under the Agreement, pursuant to paragraph 36 of the Agreement, in the amount of $32,221.35. As noted above, Debtor and the Bank have both objected to the request.

II. DISCUSSION AND ANALYSIS

A. Contractual Damages

One component of the Request is a claim for the balance of various dues, fees and charges due under the Agreement. Debtor concedes that the amount of $866.41 is still due and unpaid from monetary defaults existing prior to the date of the filing of the petition and does not object to the allowance and payment of this sum as an administrative expense. As of April 1, 2005, Best Western claims that the sum of $22,951.60 is due for various fees, charges and costs for post-petition services provided to the Debtor pursuant to the Agreement. Likewise, Debtor does not object to these sums.

The balance of Best Western's claim for contractual damages is for monthly fees and charges due pursuant to the Agreement from April 1 to November 30, 2005, the date of the expiration of the term of the Agreement. Debtor and the Bank object to that portion of the claim suggesting that Best Western has no right to amounts due for periods after termination and that if it has such a right, those amounts would not properly be administrative expense claims because no benefit would be conferred on the estate in exchange for those sums.

As to the contractual right, paragraph 11 of the Agreement states that a member must abide by all terms and provisions of the Bylaws. Article II, Section 1(F) of the Bylaws, states that if a member resigns or is terminated, it must still pay dues and fees due for the remainder of the fiscal year; the fiscal year ends November 30¹. As noted above, November 30 is the anniversary of expiration of...