Nat'l Union Fire Ins. Co v. Vp Bldg.S Inc

• Citation: 606 F.3d 835
• Decision Date: 04 June 2010
• Docket Number: No. 08-4537.,08-4537.
• Parties: NATIONAL UNION FIRE INSURANCE CO., Appellant,v.VP BUILDINGS, INC., Appellee.
• Court: U.S. Court of Appeals — Sixth Circuit

606 F.3d 835

NATIONAL UNION FIRE INSURANCE CO., Appellant,v.VP BUILDINGS, INC., Appellee.

No. 08-4537.

United States Court of Appeals, Sixth Circuit.

Argued: Dec. 4, 2009.

Decided and Filed: June 4, 2010.

Rehearing and Rehearing En Banc Denied Aug. 31, 2010.^*

ARGUED: G. Eric Brunstad, Jr., Dechert, LLP, Hartford, Connecticut, for Appellant. H. Slayton Dabney, King & Spalding, New York, New York, for Appellee. ON BRIEF: G. Eric Brunstad, Jr., Matthew J. Delude, Collin O'Connor Udell, Dechert, LLP, Hartford, Connecticut, for Appellant. H. Slayton Dabney, Franklin Ciaccio, King & Spalding, New York, New York, for Appellee.

Before: KENNEDY, COOK, and WHITE, Circuit Judges.

KENNEDY, J., delivered the opinion of the court, in which COOK and WHITE, JJ., joined. COOK, J. (pp. 840-42), delivered a separate concurring opinion in which WHITE, J., joined.

OPINION

CORNELIA G. KENNEDY, Circuit Judge.

National Union Fire Insurance Company (“National Union”) appeals the district court's affirmance of the bankruptcy court's decision disallowing National Union's petition for administrative expenses. National Union provided the estate with workers' compensation insurance, and asks that the estate's contractual obligation to reimburse it for certain anticipated payments be granted administrative expense priority. Both the bankruptcy court and the district court rejected this argument, finding that the claim was not “actual” and did not benefit the estate. Because this case is controlled by our decision in In re HNRC Dissolution Co., 536 F.3d 683 (6th Cir.2008), we AFFIRM.

I. FACTUAL AND PROCEDURAL BACKGROUND

LTV Steel Company, Inc. and its subsidiaries filed voluntary petitions for Chapter 11 bankruptcy on December 29, 2000. LTV's subsidiaries include VP Buildings, Inc., United Panel, Inc., Varco Pruden International, Inc., VP-Graham, Inc., and LTV-Walbridge, Inc., collectively the “VP debtors.”

The parties agree that National Union provided the LTV entities, including VP debtors, with workers' compensation insurance during calendar year 2001. This insurance, mandated by state law, guarantees that injured workers will be compensated in a timely manner regardless of the financial health of the employer. When an injury occurs in a covered year (such as 2001), National Union's insurance coverage is implicated. However, the actual payments to an injured employee are often required for years, or even decades, after the covered year.

The parties agree that under the terms of this agreement, which was entered into post-petition for post-petition activities and incorporates an earlier agreement, LTV and the VP Debtors are ultimately responsible for any workers' compensation claim that is incurred in 2001, regardless of when the benefits are actually paid (subject to certain limits not at issue). When a workers' compensation claim matures for an injury that occurred in 2001, the parties' contract requires National Union to pay the entirety of the claim and seek reimbursement from the VP Debtors. This obligation of the VP Debtors is described in the contract as “deductible loss reimbursements,” and defined as “the portion of any Loss and ALAE [Allocated Loss Adjustment Expense] [National Union] pay[s] that [VP Debtors] must reimburse [National Union] for under any ‘Deductible’ or ‘Loss Reimbursement’ provisions of a Policy.” The contract makes it clear that the VP Debtor's “Payment Obligation” means “the amounts that [VP Debtors] must pay [National Union]”, and includes “any portions thereof not yet due and payable [of] Deductible Loss Reimbursements ...” In return for National Union advancing this money, National Union charged LTV a premium (which was paid) and obtained collateral.

Employees were injured in 2001, imposing an obligation on National Union to pay out future benefits. National Union asked that the reimbursement of this obligation for payments that are not due until after the closure of the bankruptcy estate be given administrative priority status. Because the injured employees' claims are ongoing in nature, there is uncertainty as to the amount that National Union will ultimately pay. The parties agreed to arbitrate the amount of National Union's claim. The arbitration panel concluded that National Union's reimbursement claim for all LTV entities is valued at $2,494,498 for 2001. The arbitration award did not allocate liability to the various subsidiaries. Teresita Miranda, a manager with American International Companies, submitted an unsigned declaration that asserts, based on her review of the records, $993,769 is the amount that is attributable to the VP Debtors. The VP Debtors dispute this figure. The “[c]onfidential source data” supporting Miranda's conclusion has not been provided to the court.

The bankruptcy plan to liquidate the VP Debtors' assets and dissolve the estates was confirmed by order of the bankruptcy court on December 17, 2003. The bankruptcy court denied National Union's claim for administrative expense priority on December 21, 2007. The court concluded that the expense was not “actual” because National Union had not yet paid the benefits for the years after the closure of the bankruptcy estate. Moreover, the bankruptcy court found that reimbursement of the payments would not benefit the estate. National Union appealed, elected to have the case heard by the district court rather than the BAP, and the district court affirmed the bankruptcy court on September 29, 2008. National Union filed a timely notice of appeal.

II. DISCUSSION

“We review the bankruptcy court's decision directly, according no deference to the district court. The bankruptcy court's findings of fact are reviewed for clear error, and questions of law are reviewed de novo.” Phar-Mor, Inc. v. McKesson Corp., 534 F.3d 502, 504 (6th Cir.2008) (quoting In re S. Air Transp., Inc., 511 F.3d 526, 530 (6th Cir.2007)).

The bankruptcy code provides that administrative expenses, “the actual, necessary costs and expenses of preserving the estate,” 11 U.S.C. § 503(b)(1)(A) “are, as a rule, entitled to priority over prepetition unsecured claims,” Hartford Underwriters Ins. Co. v. Union Planters Bank, N.A., 530 U.S. 1, 5, 120 S.Ct. 1942, 147 L.Ed.2d 1 (2000) (citing 11 U.S.C. §§ 507(a)(1), 726(a)(1), 1129(a)(9)(A)). “The purpose of [this priority] is to facilitate the rehabilitation of insolvent businesses by encouraging third parties to provide those businesses with necessary goods and services.” In re United Trucking Service, Inc., 851 F.2d 159, 161 (6th Cir.1988) (citing In re Mammoth Mart, Inc., 536 F.2d 950, 954 (1st Cir.1976)). However, “[c]laims for administrative expenses under § 503(b) are strictly construed because priority claims reduce the funds available for creditors and other claimants.” In re Federated Dept. Stores, Inc., 270 F.3d 994, 1000 (6th Cir.2001). “ ‘[A] debt qualifies as an ‘actual, necessary’ administrative expense only if (1) it arose from a transaction with the bankruptcy estate and (2) directly and substantially benefitted the estate.' ” In re Eagle-Picher Industries, Inc., 447 F.3d 461, 464 (6th Cir.2006) (quoting Pension Benefit Guar. Corp. v. Sunarhauserman, Inc. (In re Sunarhauserman, Inc.), 126 F.3d 811, 816 (6th Cir.1997)). The party seeking the priority “has the burden of proving that his claim constitutes an administrative expense.” McMillan v. LTV Steel, Inc., 555 F.3d 218, 226 (6th Cir.2009) (citing In re White Motor Corp., 831 F.2d 106, 110 (6th Cir.1987)).

The parties agree that the provision of insurance benefitted the estate, and that the transaction was entered into post-petition. However, the parties dispute whether the claim is “actual” under the meaning of the Bankruptcy Code and whether National Union's claim for reimbursement benefitted the estate.

We do not decide this case without precedent. In a published opinion, we recently adopted the reasoning of a district court that rejected the claimant's arguments:

To that effect, the narrow application of § 503(b)(1)(A) is rather unambiguous on its face: the claimed expense must have been an “actual” cost that is “necessary” to the “preservation” of the estate. See In re Patch Graphics, 58 B.R. at 745 (citing In re Club Dev. & Mgmt. Corp., 27 B.R. 610, 612 (9th Cir.BAP1982)) (“An administrative expense may not be allowed absent a finding that the expense is necessary for preserving the estate.”). It is in this regard that Zurich's claim fails as a simple matter of statutory interpretation on both fronts: the claimed expenses are not “actual” (i.e., not yet realized) and the payment thereof, when the obligations are realized, cannot act to preserve an estate that no longer exists. At the moment Zurich's Claim was filed on the bar date for administrative expense claims, the ultimate loss projection for the deductible obligations was entirely speculative by nature and prospective by definition.

Nevertheless, despite LCC's subtle mention otherwise, there can be no question that Zurich will be forced to “advance” a substantial portion, if not all, of the deductible obligations in question. A key consideration, however, is the reality that Zurich is only contractually obligated to pay the deductibles, and subsequently seek reimbursement, once the claims actually “arise.” Zurich contends that “arise” in this context should be viewed from a more macro perspective, effectively arguing that, even though the legal obligation to pay the expenses will not accrue until sometime in the future, the underlying event giving rise to the future claim (e.g., an employee's initial injury) necessarily occurred during the bankruptcy administration. In other words, Zurich asserts that the accrual of the claims should essentially relate back to the underlying insurance coverage as part and parcel of the relevant insurance policies, which include the premium obligations that were assigned administrative priority and satisfied accordingly. But Zurich does not, and cannot, provide any

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