In re Massetti

• Decision Date: 01 February 1989
• Docket Number: Bankruptcy No. 82-02608F.
• Citation: 95 BR 360
• Parties: In re Leonard J. MASSETTI a/k/a Massetti, Leonard and Malamut, Steven, Co-Partners, also trading as Grandaddy's and Massetti and Malamut, a Partnership, Debtors.
• Court: U.S. Bankruptcy Court — Eastern District of Pennsylvania

95 B.R. 360 (1989)

In re Leonard J. MASSETTI a/k/a Massetti, Leonard and Malamut, Steven, Co-Partners, also trading as Grandaddy's and Massetti and Malamut, a Partnership, Debtors.

Bankruptcy No. 82-02608F.

United States Bankruptcy Court, E.D. Pennsylvania.

February 1, 1989.

Howard Gershman, Alan E. Boroff, Boroff, Harris & Heller, P.C., Plymouth Meeting, Pa., for applicants/debtors, Leonard J. Massetti and Steven Malamut.

Paul D. Keenan, Mary F. Walrath, Clark, Ladner, Fortenbaugh & Young, Philadelphia, Pa., for Frank Tambone, objector.

Eric M. Hocky, Rubin Quinn Moss & Heaney, Philadelphia, Pa., for Trustee, Fred Zimmerman.

OPINION

BRUCE I. FOX, Bankruptcy Judge:

Leonard J. Massetti and Steven Malamut have filed an application for "reimbursement of expenses" to which the chapter 7 trustee objects and also "counterclaims." This dispute is made triangular by the position of Frank A. Tambone, a judgment creditor of Messrs. Massetti and Malamut who has filed a writ of garnishment against the trustee. In essence, the respective positions are these: the applicants assert an administrative expense claim; the trustee challenges the existence of any claim; alternatively, the trustee maintains that he has a claim against the applicants pursuant to 11 U.S.C. § 723 which should be set-off against any claim possessed by the applicants; and the garnishor contends that the applicants have a valid claim to which the trustee is not entitled to set-off. This contention takes shape through the following factual scenario, to which all parties have stipulated.

I.

On June 7, 1982, the debtors, two partnerships, filed a voluntary petition in bankruptcy under chapter 11. On February 28, 1984 the chapter 11 case was converted to chapter 7. The applicants, Massetti and Malamut, are the general partners of the partnership debtors. Among the assets of the partnerships' estate was real property located at 1715 Easton Road, Doylestown, Pennsylvania. In November, 1982, prior to conversion, various mortgage holders sought relief from the automatic stay to foreclose upon the property. A stipulation was then reached and approved by the court which allowed, inter alia, the partnership debtors' a finite time to sell the property. While seeking a buyer, the debtors were obligated to make payments to the mortgagees. If the property were not sold within the specified time, or if the requisite payments were not made, the mortgagees were granted relief from the stay to resume foreclosure.

In fact, the property was timely sold and, after payment of all liens, the estate received proceeds in the amount of $56,504.47. This dispute arises because the applicants, during the period of time covered by the stipulation, paid $8,000.00 to the mortgagees, $5,240.63 in property insurance, and $108.48 in utility charges connected with the property. No prior notice was given to any party in interest that the applicants were planning to make these payments, nor did the then chapter 11 debtors provide creditors with any notice or opportunity for a hearing regarding the payment of these sums by the applicants. In addition, there was no court approval given for these payments.

Shortly after the above-mentioned stipulation was approved, Tambone obtained a state court judgment against both Massetti and Malamut as individuals in the amount of $22,230.30. In August 1984, Tambone followed Pennsylvania procedure, Pa.R.Civ. P. 3101 et seq., and began garnishment proceedings against the chapter 7 trustee. These proceedings have not yet resulted in a judgment against the garnishee trustee. Pa.R.Civ.P. 3146.

The parties agree that total claims against the debtor-partnerships are $116,335.24. Total assets, though, are only $65,221.42, leaving a shortfall of $51,113.82. Moreover, counsel to the trustee expects to assert an administrative claim in excess of $5,000.00. Mr. Malamut filed his own chapter 7 bankruptcy petition in June 1986 and received his discharge in April 1987. Mr. Massetti, though, has not filed any bankruptcy petition. As a result, the trustee only asserts his counterclaim for the deficiency against Mr. Massetti. 11 U.S.C. § 723(b). The trustee has also agreed as follows:

The sums expended by Applicants constituted actual, necessary costs and expenses of preserving the estate, which would, if authorized, be allowable under Sections 503(b)(1) and 507(a)(1).

Stipulation of Facts ¶ 7.

II.

A.

The first issue which should be addressed is whether the general partners hold an allowable administrative expense claim¹ against the partnership estate for payments they made to the mortgagees, along with insurance and utility payments. If not, then Mr. Tambone has no garnishment claim against the trustee, and the question of set-off of the trustee's claim against the partners' claim does not arise.

Both the general partners (as well as the garnishor) contend that the approximately $13,000.00 in payments they made yielded a tangible benefit to the partnership estate: viz, $56,504.47 in proceeds from the sale of the partnership realty. Without such payments, they argue, the mortgagees would have foreclosed and the estate would never have received any proceeds from the sale of this asset. As a result, they assert that the plain language of 11 U.S.C. § 503(b)(1), along with basic principles of equity and fairness, support their application for allowance of a priority claim.

The trustee acknowledges that the partners' payments represent "actual, necessary costs and expenses of preserving the estate." (Stipulation ¶ 7).² Accord, e.g., In re Gamma Fishing Co., 70 B.R. 949 (Bankr.S.D.Cal. 1987) (insurance coverage categorized an administrative expense). Nonetheless, he argues that the partners' failure to comply with 11 U.S.C. § 364(b) deprives them of any administrative claim.

11 U.S.C. § 364(b) states:

(b) The court, after notice and a hearing, may authorize the trustee to obtain unsecured credit or to incur unsecured debt other than under subsection (a) of this section, allowable under section 503(b)(1) of this title as an administrative expense.

Thus, one who extends unsecured credit to a debtor, postpetition, may have a valid claim for recovery on a priority basis. See, e.g., In re Hartley, 39 B.R. 273 (Bankr.N. D.Ohio 1984).

This subsection, though, requires that a postpetition loan to the debtor be preceded by bankruptcy court approval, after notice, and an opportunity for a hearing, to parties in interest, when the extension of credit is not in the ordinary course of the debtor's business. See In re John Deskins Pic Pac, Inc., 59 B.R. 809 (Bankr. W.D.Va. 1986). As no notice was given to creditors or bankruptcy court approval obtained in connection with the payments made by these general partners, the trustee contends that no priority under § 503(b)(1) may be allowed. Accord, e.g., Matter of London, Inc., 70 B.R. 63 (Bankr. E.D.Wisc.1987); In re Glover, Inc., 43 B.R. 322 (Bankr.D.N.M.1984); Matter of Alafia Land Dev. Corp., 40 B.R. 1 (Bankr.M.D. Fla.1984).

Although not clearly expressed, the partners here offer three alternative responses to the trustee's argument. First, they contend that the loan was made in the ordinary course of the debtor's business and so 11 U.S.C. § 364(a) rather than § 364(b) applies. Section 364(a) permits the extension of credit in the ordinary course of business to be undertaken without notice or court approval. See generally In re John Deskins Pic Pac, Inc.

The partners assert (although the record is silent on the issue) that the partnership was in the real estate business and therefore payments of mortgage, insurance, and utility expenses were in the ordinary course of the partnership's business. Assuming this to be true,³ this response misconstrues the question. The issue is not whether the payment of expenses was in the ordinary course of business but whether the credit extension was. See generally In re Dant & Russell, Inc., 853 F.2d 700 (9th Cir.1988); In re Clinton Centrifuge, Inc., 85 B.R. 980, 986-87 (Bankr.E. D.Pa.1988); In re Johns-Manville Corp., 60 B.R. 612 (Bankr.S.D.N.Y.1986). There is nothing in the record before me to demonstrate that real estate partnerships in general, or this one in particular, typically borrow funds from their general partners (or other lenders) to pay their operating expenses. As it is the partners who seek the allowance of priority status, it is they who have the burden of proof on this issue. See Matter of Patch Graphics, 58 B.R. 743, 745 (Bankr.W.D.Wis.1986). Thus, I cannot conclude that § 364(a) is applicable.

B.

The partners also suggest that section 364 should be ignored and only the language of 11 U.S.C. § 503(b)(1) be considered. To do so would overlook the clear language of a specific code provision as well as the purpose behind § 503(b)(1).

Section 503(b)(1) represents congressional recognition that, in chapter 11, the best opportunity for a business to reorganize occurs when postpetition suppliers of goods and services do not demand immediate payment. Such suppliers are highly unlikely to extend credit to an entity in bankruptcy unless they are granted priority of payment over prepetition unsecured creditors. See Matter of Jartran, 732 F.2d 584, 586 (7th Cir.1984); In re Mammoth Mart, Inc., 536 F.2d 950, 954 (1st Cir.1976). Generally speaking, then, an administrative claim arises from a transaction with the debtor-in-possession which is beneficial to the continued operation of the debtor's business. In re Mammoth Mart, Inc. Accord, e.g., In re White Motor Corp., 831 F.2d 106, 110 (6th Cir. 1987). Since the allowance of priority claims reduces the amount of the estate available to prepetition creditors, what constitutes an administrative expense is narrowly construed. See, e.g., Matter of Jartran; In re Great Northeastern Lumber & Milwork Corp., 64 B.R. 426, 427 (Bankr.E.D.Pa. 1986). Courts have allowed administrative claims only to those suppliers who were "induced"...