In re MacDonald, Bankruptcy No. 88-54028-C.

• Decision Date: 31 May 1991
• Docket Number: Bankruptcy No. 88-54028-C.
• Parties: In re George Granger MacDONALD, Debtor.
• Court: United States Bankruptcy Courts. Fifth Circuit. U.S. Bankruptcy Court — Western District of Texas

128 B.R. 161 (1991)

In re George Granger MacDONALD, Debtor.

Bankruptcy No. 88-54028-C.

United States Bankruptcy Court, W.D. Texas, San Antonio Division.

May 31, 1991.

Barry P. Broughton, Broughton & Kyser, P.C., Austin, Tex., for debtor.

Bruce H. Beck, Russell & Hoffman, Inc., San Antonio, Tex., for creditors.

DECISION AND ORDER ON ESTIMATION OF POST-PETITION ADMINISTRATIVE CLAIM

LEIF M. CLARK, Bankruptcy Judge.

CAME ON for hearing the application of William C. Cole, Richard L. Jones, Mark D. Volrath, Arthur N. Bruner, Jack W. Tautkus, Ronald L. Benters, and Larry M. Waldrop for payment of post-petition administrative tort claim. The court determined that it would not be possible to determine final allowance of the claim prior to the hearing on confirmation of the debtor's plan, scheduled two weeks thereafter. The court scheduled a hearing two days later for the limited purpose of claims estimation pursuant to 11 U.S.C. § 502(c), deferring formal adjudication to another day. This decision and order arises out of that claims estimation hearing.

JURISDICTION

This court has original jurisdiction over this matter by virtue of 28 U.S.C. §§ 1334(a), (b), and 157(b)(2), and 11 U.S.C. § 502(c).

BACKGROUND FACTS AND PROCEDURAL POSTURE OF THE CASE

William C. Cole, et al. claim that G. Granger MacDonald participated in a scheme to defraud them, both individually and in collusion with an entity known as S.K.C.I., Inc., and certain other individuals.¹ According to the claimants, MacDonald, S.K.C.I., and these individuals agreed that they could obtain loans for H.U.D. projects in excess of 100% of appraised value, meaning they could pass on the excess loan proceeds to investors, with repayment at the favorable loan terms associated with the H.U.D. projects. In their agreement, S.K.C.I. would find the financing while MacDonald would find the likely projects. MacDonald would get brokerage fees and his company, FBN, would earn additional fees for due diligence work.

Continue the claimants, S.K.C.I. and MacDonald decided to look for investors. S.K.C.I. evidently found the claimants, convincing them to invest over $392,000. Claimants maintain that S.K.C.I. was acting both individually and as agent for MacDonald. The approach is alleged to have taken place in July 1989 — after MacDonald was in bankruptcy. MacDonald and his company are supposed to have used some of these funds to pay for completing due diligence on some projects.

Then, the H.U.D. scandals hit the national press and the prospects for the investment scheme evaporated overnight. S.K.C.I. ceased further communication with all parties. According to the claimants, MacDonald convinced Cole, et al. that he would find alternative sources of funding, as well as subsequent purchasers for projects to whom to "flip" the properties. Claimants maintain that MacDonald represented he had a buyer for a property in Las Colinas (a development near Dallas/Fort Worth International Airport), that a certain $35,000 letter of credit put up would be refunded, and that another $15,000 would be needed for further due diligence. They also charge that MacDonald obtained the unauthorized release of $50,000, converting partnership funds, and that he used investor funds to pay a legal bill for which only MacDonald was liable. Finally, claimants contend that MacDonald never told them that, during the entire time, MacDonald was (and still is) in bankruptcy, something they did not learn until after MacDonald and his company, FBN, sued them to recover fees alleged owed and unpaid by the investors and they took his deposition in the litigation.

The claimants counterclaimed for fraud, violations of the RICO statute, violations of the securities laws, and real estate fraud. There has been extensive discovery in the case, with MacDonald's deposition having been taken and over 6000 documents having been produced. While discovery is not yet complete, the claimants acknowledge that they have the majority of their case assembled.

At the hearing on estimation of this claim, claimants offered no affidavits, depositions, or exhibits (other than the litigation pleadings), and no testimony other than the expert testimony of the attorney for the claimants, who stated that the plaintiff had made a settlement offer of $125,000 to S.K.C.I. He added that he believed that number fairly represented the value of the litigation against MacDonald as well, adding that the claimants would be happy to walk away with that amount from either S.K.C.I. or MacDonald. He also acknowledged, upon examination by opposing counsel, that both liability and damages are hotly contested by MacDonald, and that no settlement offer had to date been made to MacDonald. A proposal had been made that, as between FBN and the claimants, the parties would both walk away from their respective claims, but MacDonald was not a party to that proposal. Counsel for the claimants maintains that the facts presented state a strong RICO action, but that the facts are weak with respect to who is responsible for the wrongful conduct.

Counsel for the debtor also put on no evidence, and maintained in closing that the claimants had failed to support their claims estimation with any competent evidence to enable the court to estimate the claim. They urged the court to value the claim, for plan purposes, at zero. Counsel for the claimants, while not urging a specific amount on the court, repeated the $125,000 amount proposed in its settlement with S.K.C.I.

ANALYSIS

The broad definition of claim in Section 101(4) includes of necessity post-petition obligations incurred by the trustee or debtor-in-possession. 11 U.S.C. § 101(4); see Reading Co. v. Brown, 391 U.S. 471, 88 S.Ct. 1759, 20 L.Ed.2d 751 (1968); In re Charlesbank Laundry, Inc., 755 F.2d 200, 202 (1st Cir.1985). Section 1141(d) in turn says that plan confirmation discharges "the debtor from any debt that arose before the date of such confirmation." 11 U.S.C. § 1141(d)(1)(A); see Matter of Baldwin-United Corp., 55 B.R. 885, 898 (Bankr.S.D. Ohio 1985) ("the combined effect of § 101(4) and § 502(c) is to bring all claims of whatever nature into the bankruptcy estate, and to give all claimants the same opportunity to share in any distribution from the estate").

Section 503(a) authorizes any entity to file a request for payment of an "administrative expense." 11 U.S.C. § 503(a). The plain language of Section 503 also emphasizes that any entity with an administrative claim that wants to share in the estate has to request payment, or risk being discharged without further recourse. Subsection (b) sets up the process for allowance of such "requests" ("after notice and a hearing, there shall be allowed administrative expenses . . . including— "). See 11 U.S.C. § 503(b); see also 124 Cong Rec H11094-95 (daily ed. September 28, 1978) (remarks of Rep. Edwards). The term "including" in Section 503(b) indicates that administrative expenses are not limited to those listed in the statute, while case law confirms that "damages for a post-petition tort become an administrative expense under 11 U.S.C. § 503(b)(1)(A)." In re Dennis Ponte, Inc., 61 B.R. 296, 299 (Bankr. 9th Cir.1986), citing Reading Co. v. Brown, 391 U.S. 471, 88 S.Ct. 1759, 20 L.Ed.2d 751 (1968); In re Charlesbank Laundry, Inc., 755 F.2d 200, 202 (1st Cir.1985); In re Chicago Pacific Corp., 773 F.2d 909, 913-14 (7th Cir.1985); In re Hemingway Transport, Inc., 73 B.R. 494, 503-04 (Bankr.D.Mass.1987) (CERCLA liability); In re Pettibone Corp., 90 B.R. 918, 934 (Bankr.N.D.Ill.1988) (defective product liability); see In re Dant & Russell, Inc., 853 F.2d 700, 707 (9th Cir.1988) (lease expenses).

The estimation of an unliquidated or contingent administrative claim such as the post-petition tort claim is essential prior to the hearing on confirmation of a plan, in order for the court to evaluate the feasibility of the plan without unduly delaying the confirmation process. In re Pizza of Hawaii, Inc., 761 F.2d 1374, 1382 (9th Cir. 1985); In re Dennis Ponte, Inc., 61 B.R. 296, 299 (Bankr. 9th Cir.1986). This is so because any finding of feasibility that failed to take into account the possibility of the allowance of administrative claim that would have to paid in full would be clearly erroneous. Pizza of Hawaii, 761 F.2d at 1382; see 11 U.S.C. § 1129(a)(9)(A);²see also 11 U.S.C. § 1129(a)(11) ("confirmation of the plan is not likely to be followed by the liquidation, or the need for further financial reorganization, of the debtor . . ."). A court must therefore have some idea of the allowed amount of the "claim of a kind specified in Section 507(a)(1)."³ By the same token, the same reasons that justify estimation of pre-petition claims for plan purposes (avoiding delay in the confirmation of process) also warrant estimation of post-petition administrative expense for plan purposes.

Section 502(c) immediately commends itself as the appropriate vehicle for estimating post-petition claims such as the one here under discussion. However, the section facially applies only to pre-petition claims.⁴ Post-petition claims and their allowance are governed by Section 503. See 11 U.S.C. § 503(a), (b), and discussion supra. Courts have nonetheless assumed that the estimation process in Section 502(c) may be equally employed for estimating post-petition claims, when necessary to avoid delaying the administration of the bankruptcy case (especially when it comes to the confirmation process). Dennis Ponte, supra; Pizza of Hawaii, supra; see Bittner v. Borne Chemical Co., 691 F.2d 134, 137 n. 9 (3rd Cir.1982); see also Matter of U.S. Truck Co., Inc., 42 B.R. 790, 793 (Bankr.E.D.Mich.1984).

Given that the Bankruptcy Rules offer no guidance on how even the allowance of administrative expense claims are to be handled,⁵ much less their estimation for plan purposes, courts must fashion their own procedures, under the general authority conferred by Rule 16 of the Federal...