In re Norwalk Furniture Corp., 08-35222.

• Decision Date: 22 April 2009
• Docket Number: No. 08-35222.,08-35222.
• Citation: 418 B.R. 631
• Parties: In re NORWALK FURNITURE CORPORATION, Debtors.
• Court: U.S. Bankruptcy Court — Northern District of Ohio

418 B.R. 631

In re NORWALK FURNITURE CORPORATION, Debtors.

No. 08-35222.

United States Bankruptcy Court, N.D. Ohio.

April 22, 2009.

Jean R. Robertson, Calfee, Halter & Griswold LLC, Cleveland, OH, for Debtor.

Louis J. Yoppolo, Toledo, OH, Trustee.

DECISION AND ORDER

RICHARD L. SPEER, Bankruptcy Judge.

This cause is before the Court after a Hearing on the Trustee's Objection to the Motion of Donald Bealer, Creditor, for Payment of Administrative Expenses or, Alternatively, for the Allowance of Priority Claim. (Doc. No. 176 & 177). At the conclusion of the Hearing, the Court took the matter under advisement so as to afford the opportunity to thoroughly review the legal issues raised by the Parties. The Court has now had this opportunity, and finds, for the reasons set forth herein, that the Trustee's Objection should be Sustained.

DISCUSSION

Mr. Donald Bealer performed prepetition professional services for the Debtor, Norwalk Furniture Corporation. For his work, Mr. Bealer claims that he is owed $5,742.27 for his fees and expenses. In his Objection before the Court, the Trustee, Louis Yoppolo, did not contest Mr. Bealer's entitlement to make a claim against the Debtor's estate for his services. Rather, the Trustee's Objection centers on Mr. Bealer's position that his claim is entitled to be paid from the estate as an administrative expense under 11 U.S.C. § 503 or, in the alternative, that his claim is entitled to priority treatment under 11 U.S.C. § 507.

Section 503 of the Bankruptcy Code allows for the payment of administrative expenses. Under § 507(b)(2), administrative expenses allowed under § 503 are afforded priority status. In a case, such as this, proceeding under Chapter 7 of the Bankruptcy Code, a claim with priority status is afforded the right to receive a distribution of estate assets ahead of the debtor's general body of unsecured creditors. 11 U.S.C. § 726.

Generally, an administrative expense may be defined as a cost incurred by the bankruptcy estate after the commencement of the bankruptcy case. To determine if a claim arose after the commencement of the case, the Sixth Circuit Court of Appeals explained, "that a claimant must prove that the debt (1) arose from a transaction with the debtor-in-possession as opposed to the preceeding entity (or, alternatively, that the claimant gave consideration to the debtor-in-possession); and (2) directly and substantially benefitted the estate." In re White Motor Corp., 831 F.2d 106, 110 (6th Cir.1987).

Section 503(b) contains nine enumerated paragraphs, specifying the types of claims that are deemed to be allowable administrative expenses. The party requesting an administrative expense bears the burden of proving that its expense falls within one the allowable categories. In re Hemingway Transp., Inc., 954 F.2d 1, 5 (1st Cir.1992). Also, so as to maximize the funds available for distribution to a debtor's general body of unsecured creditors, the administrative expense provision of § 503 is narrowly construed. In re Key Auto Liquidation Center, Inc., 384 B.R. 599, (Bankr.N.D.Fla.2008).

In this matter, Mr. Bealer cited to § 503(b)(1)(A) as the basis for his claim of an administrative expense. This provision provides, in relevant part:

(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 ...

Upon review of his brief filed with the Court, and based upon his arguments made at the Hearing, Mr. Bealer's basis for the allowance of a claim under this provision is predicated on this underlying fact: his professional service accorded a tangible benefit to the Norwalk Furniture Corporation-namely that he saved the company $250,000.00. (Doc. No. 176).

Insofar as it concerns the matters presently before it, the Court does not question that Mr. Bealer's services conferred upon the Norwalk Furniture Corporation a substantial economic benefit. But, this fact alone does not entitle Mr. Bealer to an administrative expense claim. By its express terms, a creditor is only entitled to an administrative expense under § 503(b)(1)(A) if their services helped to "preserve" the bankruptcy estate.

Pursuant to § 541(a), however, the bankruptcy estate only comes into existence when a case is commenced. A case is commenced by the filing of a bankruptcy petition with the Court. 11 U.S.C. §§ 301-303. Consequently, Mr. Bealer's services, having been performed prior to the filing of a petition in bankruptcy by Norwalk Furniture, could not have accorded a direct benefit upon the Debtor's estate as, by definition, no bankruptcy estate existed.

The Supreme Court of the United States, including in the case of Lamie v. United States Trustee, as cited by Mr. Bealer, has repeatedly stressed that "when the statute's language is plain, the sole function of the courts — at least where the disposition required by the text is not absurd — is to enforce it according to its terms." 540 U.S. 526, 124 S.Ct. 1023, 157 L.Ed.2d 1024 (2004), citing Hartford Underwriters Ins. Co. v. Union Planters Bank, N.A, 530 U.S. 1, 6, 120 S.Ct. 1942, 147 L.Ed.2d 1 (2000). As a result, the Court must apply § 503(b)(1)(A) as written and deny Mr. Bealer an administrative expense against the bankruptcy estate of the Debtor, Norwalk Furniture.

While Mr. Bealer perceives this as producing an inequitable result, this is not the intent of § 503. Almost always, when a party seeks bankruptcy relief there are insufficient financial resources to pay all prepetition creditors in full. The intent of allowing administrative expense is to maximize, to the extent possible, returns to a debtor's prepetition creditors.

To this end, administrative expenses are accorded priority distribution status to encourage parties to provide goods and services to the estate, and to compensate those who expend new resources attempting to rehabilitate the estate. In re Jartran, Inc., 732 F.2d 584, 586 (7th Cir.1984). Without this incentive, the trustee would be hampered in his effort to recover and preserve estate assets because parties would be unlikely to perform services for the estate if they would only receive in return a general unsecured claim. The conceptual justification for the allowance of a priority administrative claim has, thus, been described as...