In re EA Nord Co., Inc., Bankruptcy No. 86-01113.

• Citation: 78 BR 289
• Decision Date: 10 August 1987
• Docket Number: Bankruptcy No. 86-01113.
• Parties: In re E.A. NORD COMPANY, INC., Debtor.
• Court: United States Bankruptcy Courts. Ninth Circuit. U.S. Bankruptcy Court — Western District of Washington

78 B.R. 289 (1987)

In re E.A. NORD COMPANY, INC., Debtor.

Bankruptcy No. 86-01113.

United States Bankruptcy Court, W.D. Washington.

August 10, 1987.

Jack J. Cullen and John R. Rizzardi, Hatch & Leslie, Seattle, Wash., for E.A. Nord Co., Inc.

Bruce D. Corker, Perkins Coie, Seattle, Wash., for Bd. of Trustees of the Western Council PLIW — Timber Operators Council Pension Fund.

OPINION ON MOTION TO ENFORCE ARBITRATION AWARD AND TO CLASSIFY CLAIMS AS UNSECURED

SAMUEL J. STEINER, Chief Judge.

FACTS AND ISSUES

The debtor, E.A. Nord, was a party to a collective bargaining agreement with LPIW Local 1054 which expired in June of 1983, at which time Nord ceased making contributions to the Western Council LPIW-Timber Operators Council Pension Fund (the Fund). Thereafter the Fund assessed a withdrawal liability against Nord in the sum of $3,664,501.51. Nord contested the liability and on December 11, 1985, initiated an arbitration proceeding under the Employment Retirement Security Act, 29 U.S.C. § 1401 et. seq., as amended by the Multiemployers Pension Plan Amendments Act of 1980, 29 U.S.C. §§ 1381-1405.

This Chapter 11 case was filed on February 18, 1986. The Fund filed its claim in the sum of $3,664,501.51. On July 8, 1986, the debtor's plan of reorganization, which in part involved a sale of its assets, was confirmed. On July 29, 1986, Nord objected to the Fund's claim.

Thereafter the Court granted the Fund relief from the automatic stay to proceed with the arbitration in order to liquidate the claim. On April 11, 1987, the arbitrator made his written findings and award in which he sustained the Fund's position for the full amount of its claim.

In addition, the arbitrator found that Nord's contentions as outlined in its demand for arbitration were legally frivolous when initially raised. The arbitrator also found that for four years Nord contended that it improperly made contributions to the Fund on behalf of non-bargaining unit employees because no written agreement existed which required such contributions. Nord's attorney discovered such an agreement in Nord's files on February 18, 1986. The arbitrator found that because of Nord's position that an agreement did not exist, the Fund was forced to spend time and money to respond. In short, the arbitrator found and concluded that Nord's position was frivolous throughout the proceeding and for that reason exercised the discretion given to him by 29 U.S.C. § 1401(b)(2) by awarding attorney's fees and costs to the Fund.

The Fund has moved to confirm the arbitration award. There is no issue as to the principal of the claim. Accordingly, that portion of the award will be confirmed, and the claim of the Fund is approved and allowed as an unsecured claim in the sum of $3,664,501.51.

The Fund is also seeking to have its attorney's fees and costs totalling $21,159, all of which accrued post filing, as well as the arbitrator's costs of $1,398 be adjudged administrative expenses. In response, Nord has moved that the attorney's fees and costs as well as the arbitrator's expenses be established as unsecured claims.

The precise issue before the Court is whether an award of fees and costs as a result of frivolous claims litigation by a debtor-in-possession is an administrative expense or an unsecured claim.

The Fund contends that Nord made a conscious decision to pursue frivolous litigation which resulted in the imposition of fees and costs pursuant to the statutory authority of the arbitrator, and that such an award must be deemed to be in the interest of the estate and is therefore an administrative expense. The Fund also urges that frivolous contentions made by a debtor-in-possession under Title 29 of the United States Code must be discouraged, and that the best way of doing so is to make an award of fees and costs an expense of administration. Finally, the Fund argues that the award should be adjudged an administrative expense as a matter of equity.

On the other hand, Nord contends that by proceeding with the arbitration it was merely exercising its right to determine the amount of a pre-petition claim. Nord also argues that as to claims litigation in bankruptcy the status of ancillary obligations such as attorney's fees and costs depends on the status of the primary debt. In short, if the litigation involved a pre-filing claim, an ancillary award such as attorney's fees assumes the same character; that is, it is part of the pre-filing claim and cannot therefore be an expense of administration. In support, Nord cites In re Hunter, 771 F.2d 1126 (8th Cir.1985). Finally, Nord contends that the award of fees and costs is of no benefit to the estate and therefore cannot be considered an expense of administration.

DISCUSSION

Section 503(b) of the Code defines administrative expenses as "actual, necessary costs of preserving the estate". Such expenses are entitled to a first priority of distribution. § 507(a). The policy of granting an administrative expense priority, particularly in the Chapter 11 context, is to encourage third parties to provide goods and services to a bankruptcy estate and to compensate those who have done so and who have expended new resources in an effort to rehabilitate the estate.

It is clear that the fees and costs of the Fund and the expenses of the arbitrator did nothing toward the preservation of Nord's estate. It is also clear that the Fund did not expend its resources to facilitate reorganization. Nord's other contentions that a debtor-in-possession has a fiduciary obligation to adjudicate claims and that awards ancillary to a claim assume the same character as the claim (pre- or post-filing) are...