In re Athens/Alpha Gas Corp., 05-6020ND.

• Decision Date: 04 November 2005
• Docket Number: No. 05-6020ND.,05-6020ND.
• Citation: 332 B.R. 578
• Court: U.S. Bankruptcy Appellate Panel, Eighth Circuit
• Parties: In re ATHENS/ALPHA GAS CORPORATION, a Texas corporation, Debtor. Robert M. Hallmark & Associates, Inc.; Frank Celeste; William R. Austin; Phoenix Energy, Inc.; Bobby Lankford; and Erskine Williams, Interested Parties — Appellants. v. Athens/Alpha Gas Corporation, Debtor — Appellee.

332 B.R. 578

In re ATHENS/ALPHA GAS CORPORATION, a Texas corporation, Debtor Robert M. Hallmark & Associates, Inc.; Frank Celeste; William R. Austin; Phoenix Energy, Inc.; Bobby Lankford; and Erskine Williams, Interested Parties — Appellants. v. Athens/Alpha Gas Corporation, Debtor — Appellee.

No. 05-6020ND.

United States Bankruptcy Appellate Panel of the Eighth Circuit.

Submitted October 11, 2005.

Filed November 4, 2005.

Jon R. Brakke of Fargo, North Dakota, for appellants.

Appellees did not participate in the appeal.

Before KRESSEL, Chief Judge, FEDERMAN, and MAHONEY, Bankruptcy Judges.

MAHONEY, Bankruptcy Judge.

The appellants appeal from an order of the bankruptcy court dated April 19, 2005, denying their claim for administrative expenses. For the reasons stated below, we reverse.

Facts & Procedural History

The parties jointly own an oil and gas well in North Dakota. The debtor operates it and owns approximately 50 percent of the working interest. The appellants own approximately 45 percent of the working interest in the well. The parties divide income and expenses based on these percentages.

The debtor filed its Chapter 11 petition in October 2002. Post-petition, the well turned a profit of approximately $1 million but the debtor used the proceeds to pay operating expenses and debts unrelated to the well instead of distributing the appellants' share of the funds to them.

The appellants sought allowance under 11 U.S.C. § 503(b)(1)(A) for administrative expenses in the amount of $399,089.65 for their share of the post-petition gross revenues. The debtor did not dispute the amount of the claim nor did it dispute the claim's status as an administrative expense, but asserted a right to a contractual penalty offsetting most of the claim. After a trial on the matter, the bankruptcy court ruled that the appellants did not have an administrative expense claim, first because there was no post-petition transaction from which the debt arose, second because the appellants incurred no actual expense, third because the appellants took the incompatible positions that the expenditure of their share of the funds benefitted the estate while also arguing that the debtor's management of the well was improper, and finally because the appellants did not put money, goods, or services into the debtor to increase the likelihood of a successful reorganization. The bankruptcy court also ruled against the debtor on its setoff claim.

Standard of Review

The decision to award administrative expense priority is within the discretion of the bankruptcy court, and such a decision is reviewed for abuse of discretion. Vafer Inv. Group, L.L.C. v. Case (In re Visionaire Corp.), 299 B.R. 530, 532-33 (8th Cir. BAP 2003). A court abuses its discretion "when its ruling is founded on an error of law or a misapplication of law to the facts." Id. (quoting First Nat'l Bank of Olathe, Kansas v. Pontow (In re Pontow), 111 F.3d 604, 609 (8th Cir.1997) and Sholdan v. Dietz (In re Sholdan), 108 F.3d 886, 888 (8th Cir.1997)).

Discussion

"Administrative expenses" include "the actual, necessary costs and expenses of preserving the estate". § 503(b)(1)(A). To be entitled to priority status for administrative expenses, the creditor must prove that (1) it has a claim against the estate and (2) the claim arose as a cost of administration. AgriProcessors, Inc. v. Iowa Quality Beef Supply Network, L.L.C. (In re Tama Beef Packing, Inc.), 290 B.R. 90, 95 (8th Cir. BAP 2003). A court must consider whether the expense arose from a transaction with the estate and whether it tangibly benefitted the estate. Id. at 96 (citing Williams v. IMC Mortgage Co. (In re Williams), 246 B.R. 591, 594 (8th Cir. BAP 1999)).

In this case, the bankruptcy court ruled that the appellants do not have an administrative expense claim because it did not involve a post-petition transaction with the estate. The court found that the appellants' claim is based on their pre-petition ownership rights, and that the appellants did not incur any expense or provide an outlay of costs to the bankruptcy estate.

The parties' agreement regarding revenue distribution was indeed a pre-petition agreement. However, the appellants' right to a share of the revenue at issue here arose when the profits became available and should have been distributed; in other words, their claim is against post-petition assets which were derived from the post-petition production and sale of oil and gas. The bankruptcy court misapplied the law to the facts in ruling otherwise.

The term "transaction" is broadly defined. Distilled to its essence, it is an act between parties which alters their legal relationship, as is stated in the legal definition adopted previously by this court:

[A transaction is] [a]n act of transacting or conducting any business; between two or more persons; negotiation; that which is done; an affair. An act, agreement, or...