In re Food Barn Stores, Inc.
| Decision Date | 15 December 1994 |
| Docket Number | Bankruptcy No. 93-40012-2-11. |
| Citation | 175 BR 723 |
| Parties | In re FOOD BARN STORES, INC., Debtor. |
| Court | U.S. Bankruptcy Court — Western District of Missouri |
Henry J. Kaim, Sheinfeld, Maley & Kay, Houston, TX, Laurence M. Frazen, Bryan Cave, Kansas City, MO, for debtor.
Jeffrey R. Lang, Kansas City, MO, for American Drug Stores.
S. Margie Venus, Akin, Gump, Hauer & Feld, Houston, TX, for Official Unsecured Creditors Committee.
Jacqueline Marcus, Weil, Gotshal & Manges, New York City, for Prudential Ins. Co.
ORDER DENYING REQUEST FOR PAYMENT OF ADMINISTRATIVE EXPENSE FILED BY AMERICAN DRUG STORES, INC. AND DENYING MOTION FOR RECONSIDERATION OF DISALLOWANCE OF GENERAL UNSECURED CLAIM
This matter is before the Court on the request for payment of administrative expense filed by American Drug Stores, Inc. d/b/a Osco Drug Stores (American Drug) and the objection to the request filed by Food Barn Stores, Inc. (Food Barn). American Drug further moves the Court to reconsider the disallowance of its general unsecured claim as untimely filed.
At one time, American Drug leased space adjacent to a Food Barn store. Apparently, there was a problem with water leaking under the common wall from Food Barn's produce section into the Osco Drug Store. On December 27, 1988, Corine Randle, a customer in the Osco Drug Store, slipped and fell in water that allegedly had accumulated on the drug store's floor as a result of the water leak.
Food Barn filed its voluntary Chapter 11 bankruptcy petition on January 5, 1993. The Court ordered creditors to file proofs of claim by May 21, 1993. The Court established August 22, 1994, as the bar date for administrative expense claims.
On December 23, 1993, Randle filed suit against American Drug, Food Barn, and Safeway, Inc., Food Barn's lessor, in the Circuit Court of Jackson County, Missouri.1 Randle sought damages in excess of $15,000. Randle's prior written demands were in excess of $100,000. Randle did not seek to lift the automatic stay prior to filing suit against Food Barn.
On December 24, 1993, American Drug settled with Randle for $18,000. Food Barn had not been served prior to the settlement, had no notice of the lawsuit, and was not a party to the settlement. American Drug's insurance company paid the settlement amount.
American Drug filed a proof of claim on March 17, 1994, in the amount of $18,000. American Drug described the basis for its general unsecured nonpriority claim as "indemnification."
On August 3, 1994, Food Barn filed a motion to deny late claims, which included the $18,000 claim for indemnification filed by American Drug. On August 23, 1994, American Drug filed an objection to the denial of its claim as late contending its claim for indemnification arose post-petition and after the claims bar date when it actually paid the settlement amount on or about December 26, 1993. On August 23, 1994, American Drug also filed a request for payment of an administrative expense pursuant to 11 U.S.C. § 503 asserting that it was entitled to indemnification from Food Barn for the $18,000 paid post-petition to settle Randle's lawsuit.
At a hearing held August 24, 1994, the parties focused their arguments on the prepetition versus post-petition status of the March 17, 1994, proof of claim. The Court and the parties agreed that if the claim was prepetition, the proof of claim was filed late. American Drug stated that it had no problem with the Court denying the claim as a prepetition claim. Food Barn conceded that as a practical matter American Drug had complied with the bar date for administrative expense claims with the March 17, 1994, proof of claim, but objected to allowance of such a claim. The Court postponed resolution of the substantive issue of whether American Drug's claim was a valid post-petition administrative expense claim.
Food Barn filed its objection to American Drug's request for payment on October 13, 1994. Further arguments were held on the matter on October 20, 1994. Supplemental briefs were filed by the parties on November 4, 1994, and November 14, 1994.
In support of its request for payment of the $18,000 claim as an administrative expense, American Drug asserts that the claim did not arise prepetition because American Drug had no right of payment against Food Barn until it paid the settlement amount post-petition. American Drug argues that the basis of the claim is indemnification and that Missouri law is clear that a claim for indemnification arises when payment has been made under compulsion by the indemnitee, citing American Bank of Richmond v. Missouri Farmers Ass'n, Inc., 695 S.W.2d 150 (Mo.App.1985). American Drug further relies on In re M. Frenville Co., Inc., 744 F.2d 332 (3d Cir.1984), cert. denied 469 U.S. 1160, 105 S.Ct. 911, 83 L.Ed.2d 925 (1985), to support its proposition that this Court must look to the law of Missouri to determine when the indemnification claim arose for bankruptcy purposes. American Drug argues that because its claim for indemnification against Food Barn arose post-petition, the claim is entitled to treatment as an administrative expense pursuant to 11 U.S.C. § 503.
If the Court determines that the $18,000 indemnification claim arose prepetition, American Drug requests pursuant to Fed. R.Bankr.P. 3008 that the Court reconsider the disallowance of its general unsecured claim as untimely filed. American Drug advances two grounds upon which it asserts the Court may allow the proof of claim filed on March 17, 1994, as timely: (1) the timely filed administrative expense request relates back under Fed.R.Civ.P. 15 as incorporated by Fed.R.Bankr.P. 7015; or (2) excusable neglect under Fed.R.Bankr.P. 9006 applies.
In response, Food Barn contends that American Drug's claim must satisfy a two-part test before it can qualify as an administrative expense under 11 U.S.C. § 503. Food Barn asserts that American Drug must prove that the claim arose from a transaction that occurred post-petition and that the payment was beneficial to Food Barn in the operation of its business post-petition. Under the first prong of the test, Food Barn argues that the majority of case law supports its contention that American Drug's request is not based on a post-petition transaction, but rather is based on a prepetition claim. Food Barn notes that the Frenville opinion has been highly criticized and that virtually all courts which have considered the issue of when a claim arises agree that in spite of state law to the contrary, for purposes of bankruptcy an indemnification claim arises at the time of the conduct giving rise to the claim, which in this case would be when the underlying tort occurred prepetition.
Food Barn contends that American Drug has not satisfied the second prong of the test because it failed to provide any evidence demonstrating that payment of the $18,000 conferred a beneficial interest to Food Barn's bankruptcy estate. Food Barn argues there is no logical basis to assume that the payment in any way benefitted the bankruptcy estate.2
Section 503 of the Bankruptcy Code provides in relevant part that:
Administrative expenses allowed under section 503 have first priority in the distribution of the estate under 11 U.S.C. § 507(a)(1). "The policy underlying administrative expense priority is that `the estate as a whole is benefited if general creditors subordinate their pre-bankruptcy claims in order to secure goods and services necessary to an orderly and economical administration of the estate after the petition is filed.'" In re Christian Life Ctr., 821 F.2d 1370, 1373 (9th Cir.1987) (quoting Yermakov v. Fitzsimmons (In re Yermakov), 718 F.2d 1465, 1470 (9th Cir.1983)). "An administrative expense claim is a kind of priority granted `to those who either help preserve and administer the estate or who assist with the rehabilitation of the debtor so that all creditors will benefit.'" In re Tri-L Corp., 65 B.R. 774, 776 (Bankr. D.Utah 1986) (quoting In re Coal-X Ltd. "76", 60 B.R. 907, 912 (Bankr.D.Utah 1986)).
"The costs and expenses of preserving an estate are not restricted to the categories specified in section 503 but include other necessary costs and expenses incurred in running a business during the pendency of a chapter 11 case." In re Patch Graphics, 58 B.R. 743, 745 (Bankr.W.D.Wis.1986). In In re Hemingway Transp., Inc., 954 F.2d 1, 5 (1st Cir.1992), the First Circuit Court of Appeals opined:
As a general rule, a request for priority payment of an administrative expense pursuant to Bankruptcy Code § 503(a) may qualify if (1) the right to payment arose from a postpetition transaction with the debtor estate, rather than from a prepetition transaction with the debtor, and (2) the consideration supporting the right to payment was beneficial to the estate of the debtor.
Both criteria must be met to mandate allowance of an administrative expense priority claim. In re Zook, 83 B.R. 447, 449 (Bankr.W.D.Mich.1988).
Patch Graphics, 58 B.R. at 745. The party seeking an administrative expense claim has the burden to prove by a preponderance of the evidence that it is entitled to such claim. In re TransAmerican Natural Gas Corp., 978 F.2d 1409, 1416 (5th Cir.1992); Patch Graphics, 58 B.R. at 745.
"The terms `actual' and `necessary' contained in 11 U.S.C. § 503(b)(1)(A) must be narrowly construed in order to keep administrative expenses at a minimum and thus preserve the...
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