In re Jartran, Inc.

• Decision Date: 31 March 1987
• Docket Number: Bankruptcy No. 86 B 3691.
• Citation: 71 BR 938
• Parties: In re JARTRAN, INC., Debtor.
• Court: U.S. Bankruptcy Court — Northern District of Illinois

71 B.R. 938 (1987)

In re JARTRAN, INC., Debtor.

Bankruptcy No. 86 B 3691.

United States Bankruptcy Court, N.D. Illinois, E.D.

March 31, 1987.

Gerald Munitz of Nachman, Munitz & Sweig, Ltd., Chicago, Ill., for Jartran, Inc.

Nancy Alquist of Winston & Strawn, Chicago, Ill., for Frank B. Hall.

Sara E. Cook of McKenna, Storer, Rowe, White & Farrug, Chicago, Ill., for Fruehauf Corp.

Donald R. Cassling of Jenner & Block, Chicago, Ill., for U-Haul Corp.

AMENDED

Memorandum and Order

JOHN D. SCHWARTZ, Bankruptcy Judge.

This matter comes before the Court on the motion of Fruehauf Corporation ("Fruehauf") for allowance of administrative claims, as more fully described below. The Debtor in this case has also filed a motion for summary judgment in its favor as respects the Fruehauf motion.¹ Fruehauf has responded with its own cross-motion for partial summary judgment or in the alternative, a motion to dismiss Jartran II pursuant to § 1112 of the Bankruptcy Code (11 U.S.C. § 101 et seq. (1986). All statutory references herein are to the Bankruptcy Code unless otherwise noted.)

The parties do not contest the salient facts. A summary of these facts together with a recapitulation of the history of the Jartran cases is necessary to an understanding of the Court's ruling.

History

Jartran, Inc. was organized in 1978 and commenced operations in 1979. Jartran, Inc. was in the business of renting and leasing trucks and trailers on a nationwide basis through independent dealer agents ("Agents") in both the retail and commercial markets. In 1979, Fruehauf and Jartran, Inc. entered into two Master Leases dated March 21, 1979 and November 21, 1979, respectively. Pursuant to the terms of the Master Leases, Jartran, Inc. leased approximately 19,650 vehicles from Fruehauf for use by Jartran, Inc.'s Agents. By the end of December, 1981, Jartran, Inc. owed Fruehauf over $7,036,000 under the Master Leases. (Disclosure Statement of Jartran I, November 15, 1982, Section III, hereinafter called "Disclosure Statement".)

On December 31, 1981 Frank B. Hall & Co. ("Hall") acquired 92% of the common stock of Jartran, Inc. On that same day, Jartran, Inc. filed for relief under Chapter 11 of the Bankruptcy Code (81 B 16118). (Disclosure Statement, Part I § C and Part IV § B.)

Under Jartran I's Fifth Amended Plan of Reorganization as thrice modified ("Plan"), Fruehauf was treated as a Class 3 creditor. Fruehauf's and Jartran's obligations under the Plan were set forth in the "Obligation Restructuring Agreement" ("ORA") which was entered into on January 21, 1985, the effective date of the Plan. Under the ORA, the terms and obligations set forth in the Master Leases remained in full force and effect except those obligations dealing with the payment of monies due or to become due to Fruehauf. (Third Modification to the Plan, Exhibit F § II(c).)

The ORA provides for Fruehauf's claim of $54,700,000.09² to be discharged by monthly payments from Jartran to Fruehauf of $200,000 per month for 72 months, plus 2% of the rental revenue received by Jartran over a seven year period. Hall, as party to the ORA, also agreed to pay Fruehauf approximately $7,000,000 on the effective date of the Plan representing "advance lease payments".³ (Third Modification to the Plan, December 5, 1983. Schedule B, Exhibit F. See also Exhibit D § 2.3(a)(1).)

Jartran I's Plan was confirmed on September 29, 1984. This Court has heretofore determined that Jartran I's Plan has been substantially consummated under the provisions of § 1101(2) for, among other reasons, distributions provided by the Plan had commenced. Jartran, subject to the terms of the Plan, operated its business from and after September 29, 1984 free of the Bankruptcy Code and of this Court's supervision.

On October 24, 1985, Jartran I entered into a compromise agreement with Fruehauf regarding Jartran's obligations to pay for vehicles lost, damaged, or destroyed prior to December 31, 1983. This agreement was approved by the Court on December 20, 1985. This Court retained jurisdiction under Article 16 of the Plan,

To require the performance of any act that is necessary for the consummation of the Plan including, without limitation, the jurisdiction to hear and determine all claims against Jartran I and to enforce all causes of action which may exist in its favor . . . and to enter such orders regarding the disbursement of funds under the Plan or the consummation thereof as may be necessary to protect the interests of Jartran I and its creditors.

(Jartran II's Reply Memorandum raises the question of this Court's jurisdiction to convert Jartran I to a Chapter 7 case under § 1112(b). See P. 941 infra.)

On March 4, 1986, Jartran commenced a new case under the Bankruptcy Code, creating a new debtor in possession, Jartran II, the Debtor who is the subject of the proceedings now before the Court.

Fruehauf's Motion

Fruehauf's motion for allowance of administrative priority encompasses three separate claims. The first claim is for the entire amount due under the Master Leases, as amended by the ORA (further references to the "Master Leases" will, unless otherwise noted, refer to the Master Leases as amended). The second claim arises out of the breach of the October 24, 1985 agreement respecting lost and damaged vehicles. The third claim is for costs of repossessing leased Fruehauf equipment subsequent to March 4, 1986. These three claims are discussed below.

The gravemen of Fruehauf's motion rests on its assertion that the Master Leases with Jartran, Inc. were assumed within the Jartran I proceedings by virtue of confirmation of the Plan. These Master Leases will be rejected within the Jartran II proceedings, a fact acknowledged by Jartran II. Fruehauf argues that it is entitled to an administrative priority under § 365 for the entire balance due it under the Master Leases, since they were assumed and will be rejected in the same case; the two Jartran cases being in effect the same case.

Alternatively, Fruehauf requests the Court find that Jartran I entered into a new contractual obligation by virtue of the ORA. Consequently, Fruehauf maintains it is entitled to priority under § 503(b)(1)(A) for the balance due under the Master Leases, since the leased equipment was necessary for preserving the estate of Jartran I, and the operations of Jartran after confirmation of the Plan. Again, no distinction has been made between the two Jartran cases.

Fruehauf also claims priority for the amount of $145,525.00 due under the October 24, 1985 agreement on the basis that this agreement was either (i) a further modification of the existing Master Leases, assumed and rejected in the same case, triggering priority under § 365, or (ii) a newly negotiated post-petition contract, triggering priority under § 503(b)(1)(A).

Finally, Fruehauf is seeking administrative priority for the cost of repossessing equipment covered by the Master Leases, which under the ORA, Jartran became obligated to recover in the event of default.

Jartran II, U-Haul, and Hall's Responses

Jartran II moved for a summary judgment with respect to all three of Fruehauf's claims. Jartran II argues that Fruehauf is not entitled to an administrative priority for any of its claims since (i) the Master Leases were assumed in the Jartran I proceedings and will be rejected in the Jartran II proceedings, a separate proceeding; (ii) the estate of Jartran II has received no benefit from Fruehauf's equipment, consequently recovery under § 503(b)(1)(A) is inappropriate; (iii) granting Fruehauf's reimbursement for Jartran II's failure to marshall equipment would result in preferential treatment of Fruehauf over other creditors of Jartran II; and (iv) Fruehauf's claim from Jartran II's breach of the October 24, 1985 agreement gives rise to only an unsecured claim.

U-Haul International Inc. ("U-Haul") and Hall also filed memoranda challenging Fruehauf's position. Each takes issue with Fruehauf's claim that it is entitled to administrative priority in a subsequent case for an obligation incurred in a prior case. Hall argues that § 365(g)(2)(A) only applies to converted cases and Jartran II is not a conversion of Jartran I, but is a separate case. U-Haul adds that Fruehauf is essentially acting in its own self interest by repossessing equipment which it has a security interest in, and therefore, should not receive priority for that claim.

Fruehauf's Reply

Fruehauf subsequently responded with a cross-motion for partial summary judgment arguing that it is entitled to an administrative priority as a matter of law, or in the alternative, asking the Court to dismiss Jartran II. Fruehauf argues that after this Court found that the Plan in Jartran had been substantially consummated, the commencement of an entirely new Chapter 11 case can not be used to effect a modification of an existing Plan. Rather, Fruehauf maintains that Jartran II should be dismissed and Jartran I should be converted to Chapter 7 pursuant to § 1112. Put another way, this Court's failure to convert would be an abuse of its discretion under § 1112 of the Bankruptcy Code.

Jartran II's Reply

Jartran II's reply addressed the propriety of filing successive Chapter 11 cases that are filed in good faith as well as the retained jurisdiction of the Court under the Jartran I Plan. Additionally, Jartran II points to the procedural defect of Fruehauf's motion to dismiss.⁴

Discussion

Contrary to Fruehauf's assertion, the Court does not consider Jartran II as a continuation of Jartran I, but considers the two as separate cases characterized by different objectives, assets and claims. The Court is not abusing its discretion by refusing to dismiss the Jartran II case and then converting the Jartran I case to one under Chapter 7 liquidation.

The objectives of Jartran I were to reorganize and continue Jartran, Inc.'s pre-petition nationwide trailer and truck rental business under restructured financial...