In re El Paso Refinery, LP

• Decision Date: 15 April 1998
• Docket Number: Bankruptcy No. 94-30051-C.
• Citation: 220 BR 37
• Parties: In re EL PASO REFINERY, L.P., Debtors.
• Court: U.S. Bankruptcy Court — Western District of Texas

220 B.R. 37 (1998)

In re EL PASO REFINERY, L.P., Debtors.

Bankruptcy No. 94-30051-C.

United States Bankruptcy Court, W.D. Texas, El Paso Division.

April 15, 1998.

Kyung S. Lee, Verner, Liipfert, Bernard, McPherson and Hand, Chartered, Houston, TX, for Chapter 7Trustee.

Peter J. Riley, G. Martin Green, Thompson & Knight, Dallas, TX, for UOP.

DECISION ON OBJECTION OF TRUSTEE TO CLAIM # 887 OF UNITED STATES OF AMERICA, DEFENSE FUEL SUPPLY CENTER

LEIF M. CLARK, Bankruptcy Judge.

CAME ON for hearing the objection of Andrew B. Krafsur, Trustee, to the claim of the United States of America, on behalf of the Defense Fuel Supply Center.After hearing initial arguments, the court rejected the contention of the DFSC that it might hold an administrative priority claim.The court then heard evidence from the parties, and entertained briefing on a significant legal issue raised by the somewhat unique procedural history of this claim.This decision now disposes of all outstanding issues.

This contested matter raises the question of the circumstances under which a nondebtor party to an executory contract can recover for an estate's post-petition non-performance of the debtor's obligations under that contract.In other words, what, if any, claim is raised in favor of the non-debtor party when the estate fails to perform the debtor's obligations post-petition?And is the answer to that question in any way altered by the fact that the non-debtor party, rather than seeking a ruling on assumption or rejection of the executory contract,¹ has instead sought and obtained an order granting relief from stay and unilaterally terminated the contract post-petition?

Factual Overview

Although this bankruptcy case has a long and fascinating history, the procedural facts relevant to the matter presently under consideration are relatively simple and undisputed.The Defense Fuel Supply Center (DFSC) is the federal agency charged with procuring fuel for the nation's armed forces.DFSC contracts with various refineries to furnish product, especially jet fuel, to various military installations.²Prior to the October 23, 1992 filing of El Paso Refinery's Chapter 11 petition, EPR had entered into a contract (the Contract) with DFSC to provide certain quantities of jet-grade fuel to particular military installations for a date certain.The Contract included a clause providing that, upon non-performance by EPR, the DFSC contracting officer could, by written notice of default to EPR, terminate the Contract, and reprocure the fuel elsewhere, and that EPR would be liable for any reprocurement costs in excess of the Contract price.The Contract also incorporated a standard emergency power permitting DFSC to seek "cover" in the event of default, to assure that military installations counting on delivery of fuel would not be left wanting.This provision of course assures that the nation's military forces will not be left without fuel in the event of a national emergency.

Shortly after the commencement of EPR's Chapter 11 proceeding, EPR was required by court order to engage in a 75-day warm shut-down,³ effectively suspending its operations and temporarily preventing it from supplying any of its customers.As a result, EPR informed DFSC that it would be temporarily unable to meet the terms of the Contract on a timely basis.DFSC scrambled to replace the immediate needs of the military installations which were relying on shipment within the next two weeks or so, under its emergency powers, then subsequently sought and received relief from the stay in order to formally terminate its contract with EPR and to pursue an administrative judgment against EPR for breach of the Contract.Later, DFSC timely filed a proof of claim for the excess costs incurred in reprocurement, basing its claim not on rejection of the executory contract, but instead on EPR's post-petition breach and the remedies afforded by the termination clause in the Contract.

The parties put on evidence regarding the amount of damages alleged to have been suffered by DFSC as a result of its having had to "cover" the estate's inability to perform.

We address first the legal question regarding whether DFSC even has a claim at all against the estate.If it does, then we must next determine what sort of priority (if any) the claim has against the estate.Finally, we address what the amount of that claim might be, based on the evidence presented and the legal principles applicable.

Analysis

At the outset, we must determine whether DFSC even has a claim against the estate.The normal route for the nondebtor party to an executory contract to obtain and assert a claim against a bankruptcy estate is via the assumption/rejection mechanism in section 365.See11 U.S.C. § 365(a);see also11 U.S.C. § 502(g);NLRB v. Bildisco and Bildisco,465 U.S. 513, 104 S.Ct. 1188, 79 L.Ed.2d 482(1984);In re Monarch Capital Corp.,163 B.R. 899, 907(Bankr.D.Mass.1994);United States Postal Service v. Dewey Freight System, Inc.,31 F.3d 620, 624-25(8th Cir.1994).In this case, the executory contract in question was neither assumed nor rejected.Instead, DFSC obtained relief from the automatic stay, and proceeded to terminate the contract post-petition, based upon the estate's post-petition default.The Bankruptcy Code does not address what, if any, claim a nondebtor party who elects to terminate an executory contract later has against the bankruptcy estate.⁴

Neither party disputes the proposition established by the Fifth Circuit in Austin Development that "termination" and "rejection" of an executory contract are not identical concepts.SeeIn the Matter of Austin Development Company,19 F.3d 1077(5th Cir.1994).And both parties recognize that EPR neither rejected nor assumed the contract, and that no "deemed rejection" took place.⁵The dispute thus focuses squarely on the consequences of a creditor's choosing to seek termination in lieu of forcing the estate to the assumption/rejection choice, and the larger question whether, in reality, a non-debtor party to an executory contract should ever be able to obtain unilateral "termination" of an executory contract as an alternative to awaiting the estate's decision whether to assume or reject.⁶

The Bankruptcy Code expressly provides a structure for processing executory contracts in 11 U.S.C. § 365.Under § 365, the trustee may assume or reject an executory contract on behalf of the estate; the decision to assume or reject is effective upon confirmation of a plan.If the executory contract is rejected, the act of rejection is deemed to equal a breach of the contract occurring the day prior to the filing of the bankruptcy petition, and the non-debtor is given a prepetition claim for damages arising from such a breach, measured (in the usual case) by the terms of the contract and applicable state (or federal) law.11 U.S.C. § 502(g).SeeMatter of Continental Airlines,981 F.2d 1450-51;NLRB v. Bildisco and Bildisco,465 U.S. 513, 531, 104 S.Ct. 1188, 1199, 79 L.Ed.2d 482(1984).⁷If, on the other hand, the estate elects to assume the executory contract, then it takes on the burdens associated with that contract, agreeing to cure any outstanding defaults, and committing to perform on a going-forward basis.If the estate, following assumption, fails to perform, then the non-debtor party to the contract will hold a claim against the estate which enjoys administrative priority.See11 U.S.C. §§ 365(g)(2)(A),503(b), and507(a)(1).Thus, in the usual circumstance, the non-debtor party to the contract will hold either a pre-petition unsecured claim (in the event of rejection) or a post-petition administrative priority claim (in the event of assumption).

Of course, while the assume-or-reject mechanism is the statutory device by which the non-debtor party ascertains and asserts any claim it may have against the estate arising from the debtor's pre-bankruptcy contracts, the claim is actually rooted in the moment of the debtor's petition.⁸Code§ 101(5) defines as a claim any "right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured."11 U.S.C. § 101(5)(1994).The purpose of this broad definition is to ensure that the full range of the debtor's obligations are resolved in the bankruptcy proceeding.⁹Furthermore, the legislative history of the claims allowance process in 11 U.S.C. § 502 remarks that bankruptcy functions "as the acceleration of the principal amount of all claims against the debtor."¹⁰This comports with the pre-Code understanding of the claims of non-debtor parties to executory contracts articulated in Central Trust Co. v. Chicago Auditorium Assoc.,240 U.S. 581, 592-93, 36 S.Ct. 412, 415, 60 L.Ed. 811(1916), which held that the commencement of bankruptcy proceedings is "the equivalent of an anticipatory breach of an executory agreement."Although practice under the Code focuses on assumption-or-rejection under § 365, the conceptual structure is the same.The non-debtor party has a claim pending against the debtor as of the moment of the petition.It is then simply a matter of time and procedural maneuvering until the estate, represented by the trustee or debtor-in-possession, forces the liquidation of such a claim as a pre-petition liability by rejecting the contract, or assumes the contract and its attendant liabilities as post-petition administrative obligations of the estate.This result in turn resonates with the general purposes of the Code by allowing creditors a claim while allowing the debtor a discharge.¹¹

This analysis would be incomplete without a consideration of whether or not a debtor's contracts pending at the time of petition become property of the estate, and courts are not in total harmony on this point.Our inclination lies with those decisions holding that executory contracts are...