Jartran, Inc., Matter of

• Decision Date: 19 April 1984
• Docket Number: No. 83-2304,83-2304
• Citation: 11 B.C.D. 1181,732 F.2d 584
• Parties: 10 Collier Bankr.Cas.2d 1069, 11 Bankr.Ct.Dec. 1181, Bankr. L. Rep. P 69,831 In the Matter of JARTRAN, INC., Debtor. Appeal of REUBEN H. DONNELLEY CORPORATION and Sandra C. Tinsley, Inc.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 584

732 F.2d 584

10 Collier Bankr.Cas.2d 1069, 11 Bankr.Ct.Dec. 1181,

Bankr. L. Rep. P 69,831

In the Matter of JARTRAN, INC., Debtor Appeal of REUBEN H. DONNELLEY CORPORATION and Sandra C. Tinsley, Inc.

No. 83-2304.

United States Court of Appeals Seventh Circuit.

Argued Feb. 16, 1984.

Decided April 19, 1984.

James E. Carmel, Carmel, Baker & Marcus, Ltd., Chicago, Ill., for appellant.

Gerald F. Munitz, Nachman, Munitz & Sweig, Ltd., Chicago, Ill., for appellee.

Before BAUER and CUDAHY, Circuit Judges, and BEATTY, District Judge. ^*

CUDAHY, Circuit Judge.

Appellants Reuben H. Donnelley Corporation ("Donnelley") and Sandra C. Tinsley, Inc. ("Tinsley") filed a claim for administrative priority against appellee Jartran, Inc.'s ("Jartran") estate. The bankruptcy judge denied the claim and, on appeal, the district court affirmed. Our appellate jurisdiction was properly invoked under 28 U.S.C. Sec. 1293(b) and, for the reasons set forth below, we affirm.

I.

The facts are undisputed and can be stated briefly. Jartran is in the business of leasing trucks to consumers nationwide. Pursuant to an agreement dated September 11, 1979 (the "Agreement"), Tinsley, an advertising agency, placed Jartran's orders for classified advertisements in telephone directories (the "Yellow Pages") with Donnelley. Donnelley, in turn, arranged with the Yellow Pages' publishers nationwide for Jartran's ads to appear. Under the Agreement, Tinsley and Jartran were liable to Donnelley for the cost of the advertising. Donnelley was liable to the publishers of the various directories. Although the parties were irrevocably committed to pay for the advertising several months before the ads were to appear, ¹ the Agreement provided that Tinsley and Jartran would be billed for the ads only after they were published.

On December 31, 1981, Jartran filed for reorganization under Chapter 11 of the Bankruptcy Code, 11 U.S.C. Secs. 1101-1174. At that time, the closing date had passed for many directories which had not yet been published. Appellants claim that the amount owing for ads placed in such directories, $1,311,695.50, should be treated as an administrative expense. ² As is apparent from our discussion of the law relating to the allowance of administrative expenses, the key fact is that the irrevocable commitment by Jartran, Donnelley and Tinsley to place the ads was made before the filing of the petition in bankruptcy.

II.

Section 503 of the Bankruptcy Code provides as follows:

Sec. 503

....

(b) After notice and a hearing, there shall be allowed, administrative expenses ... including--

(1)(A) The actual, necessary costs and expenses of preserving the estate, including wages, salaries or commissions for services rendered after the commencement of the case[.]

It is well settled that expenses incurred by the debtor-in-possession in attempting to rehabilitate the business during reorganization are within the ambit of Sec. 503. See Reading Co. v. Brown, 391 U.S. 471, 475, 88 S.Ct. 1759, 1761, 20 L.Ed.2d 751 (1968) (construing predecessor to Sec. 503). Appellants claim that, because the ads involved in the case were not published until after the "commencement of the case" and presumably aid Jartran in its efforts to rejuvenate its business, the cost of those ads should be treated as an administrative expense. As an administrative expense, the fees for the ads would be afforded priority ahead of certain pre-petition creditors.

The policies underlying the provisions of Sec. 503 (and its predecessor, Sec. 64(a)(1) of the Bankruptcy Act, 11 U.S.C. Sec. 104(a)(1) (1976)) are not hard to discern. If a reorganization is to succeed, creditors asked to extend credit after the petition is filed must be given priority so they will be moved to furnish the necessary credit to enable the bankrupt to function. See In re Mammoth Mart, Inc., 536 F.2d 950, 954 (1st Cir.1976) (Coffin, Chief Judge). Thus, "[w]hen third parties are induced to supply goods or services to the debtor-in-possession ... the purposes of [Sec. 503] plainly require that their claims be afforded priority." Id. (emphasis added; footnote omitted). Without a provision like Sec. 503, efforts to reorganize would be hampered by the necessity of advance payment for all goods and services supplied to the estate since presumably no creditor would willingly assume the status of a non-priority creditor to a debtor undergoing reorganization.

This involves no injustice to the pre-petition creditors because it is for their benefit that reorganization is attempted. If reorganization successfully rehabilitates the debtor, presumably the pre-petition creditors will be better off than in a liquidation. See Reading Co. v. Brown, supra, 391 U.S. at 478, 88 S.Ct. at 1763. However, because priority should not be afforded unless it is founded on a clear statutory purpose, if the appellants' claim does not comport with the language and underlying purposes of Sec. 503, their claim must fail. See In re Chicago, Milwaukee, St. Paul & Pacific Railroad, 658 F.2d 1149, 1163 (7th Cir.1981) (general rule is equality of distribution; deviation must appear in the statute), cert. denied, 455 U.S. 1000, 102 S.Ct. 1632, 71 L.Ed.2d 867 (1982). Any preference for claims not intended by Congress to have priority would dilute the value of the intended priority and thus frustrate the intent of Congress. Id.; In re Mammoth Mart, supra, 536 F.2d at 953.

Recognizing the need for careful criteria in granting priority, the court in Mammoth Mart established a two part test for determining whether a debt should be afforded administrative priority. Under these criteria a claim will be afforded priority under Sec. 503 if the debt both (1) "arise[s] from a transaction with the debtor-in-possession" and (2) is "beneficial to the debtor-in-possession in the operation of the business." In re Mammoth Mart, Inc., 536 F.2d at 954. This test is, of course, essentially an effort to determine whether the underlying statutory purpose will be furthered by granting priority to the claim in question, and we will apply it in that spirit.

There is no question that the appearance of ads in Yellow Page directories throughout the country is beneficial to Jartran, as a debtor-in-possession, in the operation of its business. After filing the petition in bankruptcy, Jartran continued to place new ads in directories throughout the nation, thus evidencing the importance of Yellow Pages advertising to the success of the Jartran business. Therefore, the only serious question on appeal is whether the district court incorrectly concluded that the claim did not arise from a transaction with the debtor-in-possession.

Stated this simply, we believe that the district court's conclusion was correct: the agreement among the parties was entered into, and the ads were placed without possibility of revocation, before the petition was filed. Appellants urge, however, that the publication date rather than the closing date is the key date for Sec. 503 purposes. They argue forcefully that, because the ads were published after the petition in bankruptcy was filed, appellants "supplied [consideration] to the debtor-in-possession in the operation of the business." Mammoth Mart, supra, 536 F.2d at 954. ³ Appellants support this argument by pointing out that appellants provided additional services after the closing date, and, presumably, after the petition was filed, including "review of advertising copy for correctness, size of advertisement, placement by page and category, accuracy of telephone listings and addresses, review of art work, and response to numerous queries from publishers concerning the advertisements." Appellants' brief at 7. It was also necessary for Donnelley and Tinsley (presumably after the filing of the petition) to examine the final, published ads to ascertain their correctness. Then, and only then, would Jartran be billed for the advertisements.

We recognize that the services performed by appellants after the closing date, and after the filing of the petition, were significant and of value to Jartran. However, appellants do not allege that Jartran, after the filing of the petition, requested that appellants continue work on ads for which the closing date had passed. Nor is it claimed that Jartran had a duty to take affirmative steps to prevent Donnelley from engaging in post-petition performance. Thus, it was the pre-petition Jartran and not Jartran as debtor-in-possession that induced appellants to perform these services. To serve the policy of the priority, inducement of the creditor's performance by the debtor-in-possession is crucial to a claim for administrative priority in the context of the furnishing of goods or services to the debtor. See In re Mammoth Mart, Inc., supra, 536 F.2d at 954. Because the closing date occurred before the debtor-in-possession came into existence (through the filing of the Chapter 11 petition), the bankruptcy court in the case before us held that the debtor-in-possession did not induce appellants' performance. See In re Jartran, Inc., 33 B.R. 339, 341 (Bkrtcy.N.D.Ill.1982), aff'd No. 82 C 7568 (N.D.Ill. June 13, 1982) (adopting order of Bankruptcy Court). ⁴

As noted, the reason that inducement of the creditor's performance by the debtor-in-possession is crucial to a claim for administrative priority is rooted in the policies that gave rise to the creation of the priority. Thus, administrative priority is granted to post-petition expenses so that third parties will be moved to provide the goods and services necessary for a successful reorganization. See In re Mammoth Mart, Inc., supra, 536 F.2d at 954. In the case before us, no inducement by the debtor-in-possession was required because the liability for the costs of the ads was irrevocably incurred before the petition was filed. This construction of the requirements for the administrative priority provides as full an opportunity as can be furnished for...