In re Haynes

• Decision Date: 20 July 2017
• Docket Number: Case No. 15 B 39945
• Citation: 569 B.R. 733
• Parties: IN RE: Glenn Alan HAYNES and Catherine Mary Haynes, Debtors.
• Court: U.S. Bankruptcy Court — Northern District of Illinois

569 B.R. 733

IN RE: Glenn Alan HAYNES and Catherine Mary Haynes, Debtors.

Case No. 15 B 39945

United States Bankruptcy Court, N.D. Illinois, Eastern Division.

Signed July 20, 2017

Kevin Rouse, George Michael Vogl, Ledford Wu and Borges, LLC, Chicago, IL, for Debtors.

David Paul Holtkamp, City of Chicago, Department of Law, Chicago, IL, for City of Chicago.

Gerald Mylander, Lisle, IL, for Trustee, Glenn B. Stearns.

MEMORANDUM OPINION

PAMELA S. HOLLIS, United States Bankruptcy Judge

This matter comes before the court on the City of Chicago's Motion under § 503(a) for Allowance and Payment of Administrative Expense Claim. For the reasons stated below, the court denies the motion.

BACKGROUND

Glenn and Catherine Haynes filed for relief under Chapter 13 of the Bankruptcy Code on November 23, 2015. Their plan was confirmed on March 18, 2016. The Order Confirming Plan provides that:

All property of the estate, as specified by the [sic] 11 U.S.C. section 541 and 1306, will continue to be property of the estate following confirmation, unless (1) the plan provides for surrender of the property, or (2) the property is sold pursuant to the plan or court order.

Case No. 15 B 39945, EOD 36 (March 18, 2016).

The City of Chicago filed a proof of claim in the amount of $2,749.60 based on parking tickets that were issued between September 2010 and June 2014. This claim is scheduled to be paid pro rata with other general unsecured creditors.

While the Hayneses' Chapter 13 case was pending, the City issued two tickets for parking at an expired meter (the "Expired Meter Tickets") and one ticket for a red light violation (the "Red Light Ticket"). Glenn and Catherine do not dispute that these tickets were issued. The City did not submit copies of the tickets, and provided no information regarding who was operating the vehicle at the time each violation was committed.

According to the City's motion, the Expired Meter Tickets were issued pursuant to Municipal Code of Chicago ("MCC") Section 9–64–190(b) and the Red Light Ticket was issued pursuant to MCC Section 9–102–020.

By its motion, the City seeks administrative expense status for the claim based on the Expired Meter Tickets and the Red Light Ticket.

LEGAL DISCUSSION

The Standard for Determining Whether a Claim is an Administrative Expense .

11 U.S.C. § 503 provides the standard for determining whether a creditor's postpetition claim is classified as an administrative expense. For purposes of this opinion, the relevant portion of the statute is found at subsection (b)(1)(A):

(b) After notice and a hearing, there shall be allowed administrative expenses, other than claims allowed under section 502(f) of this title, including—

(1)(A) the actual, necessary costs and expenses of preserving the estate ... The City is asking the court to determine that the claim based on the Expired Meter Tickets and the Red Light Ticket is an "actual, necessary cost[ ] and expense[ ] of preserving the estate."

A successful reorganization (as opposed to liquidation) benefits prepetition creditors. In return for providing that benefit, and in light of the role they play in making a reorganization succeed, certain postpetition creditors are given priority over prepetition creditors, known as administrative expense priority. In fact, administrative expense claims are second in priority only to certain domestic support obligations and trustee expenses. 11 U.S.C. § 507(a)(1)(2).

In light of this superior position enjoyed by administrative expense claimants, the Seventh Circuit warns that when determining whether a claim warrants such treatment, courts must be mindful of the underlying purpose of the statute—rewarding those who facilitate a reorganization. Since the general rule in bankruptcy court is equality of distribution, "[a]ny 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." Matter of Jartran, Inc. , 732 F.2d 584, 586 (7th Cir. 1984) (citations omitted).

Therefore, the burden is on the party seeking an administrative expense to show, by a preponderance of the evidence, that its claim is entitled to that priority treatment. See In re DeMert & Dougherty, Inc. , 227 B.R. 508, 512 (Bankr. N.D. Ill. 1998). "Administrative expense claims should be narrowly construed in order to keep administrative expenses at a minimum and thus preserve the estate for the benefit of all creditors" Id. at 513 (citations omitted).

To further the underlying statutory purpose of encouraging a successful reorganization while concurrently being mindful of the general rule of equality in distribution, the Jartran panel adopted a two part test for reviewing purported administrative expense claims: "Under these criteria a claim will be afforded priority under § 503 if the debt both (1) arises from a transaction with the debtor-in-possession and (2) is beneficial to the debtor-in-possession in the operation of the business." 732 F.2d at 587 (quotation omitted).

The City argues that because it is an involuntary creditor, a different test should be used to determine whether its claim is entitled to administrative expense priority. This different test was first discussed in Reading Co. v. Brown , 391 U.S. 471, 88 S.Ct. 1759, 20 L.Ed.2d 751 (1968).

The question before the Supreme Court in Reading was whether to treat a tort claim arising during an arrangement (the precursor to Chapter 11) as an actual and necessary cost of the arrangement—thus giving it priority treatment—or as a general postpetition liability of the debtor.

The Reading Court held that "damages resulting from the negligence of a receiver acting within the scope of his authority as receiver give rise to ‘actual and necessary costs' of a Chapter XI arrangement." Id. at 485, 88 S.Ct. 1759. The reasons such damages were awarded administrative expense priority were that the claim arose from a transaction with the debtor-in-possession and that payment of the claim before all other creditors would satisfy the notion of "fundamental fairness".

The Seventh Circuit explained the importance of Reading :

Tort liability is an expense of doing business, like labor or material costs, and should be treated the same way. Businesses operating in bankruptcy that were excused from tort liability would have an inefficient competitive advantage over their solvent competitors—and deficient incentives to use due care in the operation of the business. It could indeed be argued that in the interest of safety, insolvent firms, not being deferrable by threat of tort suits, should not be allowed to operate at all. Reading strikes a compromise between the safety interest and the interest in saving bankrupts from premature liquidation: the bankrupt that continues to operate (normally under Chapter 11) must give its tort victims priority access to such assets as the bankrupt estate retains.

In re Resource Technology Corp. , 662 F.3d 472, 476–77 (7th Cir. 2011) (citations omitted).

The City argues that Reading 's holding has been expanded beyond tort claims, and applies generally to all involuntary post-petition creditors of the estate. In support of its position, the City cites several Circuit-level cases. With one exception, all of these cases are from outside the Seventh Circuit and thus are not binding on this court.

The one Seventh Circuit case that the City puts forth to support this extension of Reading is Yorke v. N.L.R.B. , 709 F.2d 1138 (7th Cir. 1983), cert. denied , 465 U.S. 1023, 104 S.Ct. 1276, 79 L.Ed.2d 680 (1984).¹ In Yorke , the Circuit recognized that a Chapter 11 Trustee has a duty to bargain over the effects of a decision to terminate operations. The panel found that duty to be "critical to protect employees from the ravages of economic dislocation." Id. at 1143 (citations omitted).

Since the obligation to bargain arises only with the Trustee's decision to terminate operations in the overall interests of the creditors, the costs concomitant with that decision properly can be attributed to the Trustee's efforts to "preserve the estate" on the creditors' behalf. As the bankruptcy court here determined, therefore, costs stemming from "effects" bargaining can be considered administrative expenses and thus fall within the ambit of the Trustee's authority. Cf. Reading Co. v. Brown , 391 U.S. 471, 482–84 [88 S.Ct. 1759, 20 L.Ed.2d 751] (1968) (those injured during administration of estate by Trustee entitled to priority claim as administrative expense)....

Id.

The Yorke panel focused on injury or loss as the crucial factor—the employees' back pay awards were an effect of the Trustee's efforts to preserve the estate, and thus were accorded administrative priority. The Circuit compared the employees' losses to the injuries suffered by the tort claimants in Reading , and found it appropriate to allow administrative expense priority to those losses even though no tort had been committed.

In this case, while the representative of the estate may have acted negligently or illegally (or neither, since we do not know who operated the vehicle when the tickets were incurred), the other half of the equation is missing. The City has suffered no discernable injury or loss that would compel expanding Reading to encompass this claim. This is not to give short shrift to the fact that someone violated the City's ordinances. It is instead an acknowledgement that no monetary loss was suffered.

Although other Circuits may have focused on the involuntary nature of the claim, this court is not bound by those decisions. By contrast, when it relied on Reading to allow an administrative expense priority, the Seventh Circuit was interested not just in the creditor's involuntary status, but also the nature of its claim. See Corporate Assets, Inc. v. Paloian , 368 F.3d 761, 773 (7th Cir. 2004) ("This court has recognized that fundamental fairness may, in appropriate circumstances, demand that a party injured in some manner by...