In Re Philadelphia Newspapers LLC.

• Decision Date: 15 July 2010
• Docket Number: No. 09-11204 SR.,09-11204 SR.
• Citation: 433 B.R. 164
• Parties: In re PHILADELPHIA NEWSPAPERS, LLC., et al., Debtors.
• Court: U.S. Bankruptcy Court — Eastern District of Pennsylvania

433 B.R. 164

In re PHILADELPHIA NEWSPAPERS, LLC., et al., Debtors.

No. 09-11204 SR.

United States Bankruptcy Court E.D. Pennsylvania.

July 15, 2010.

COPYRIGHT MATERIAL OMITTED

Neal Goldstein, Equire, Philadelphia, PA, for the Newspaper Guild of Greater Philadelphia Local 10 and Stephen Smith.

Anne M. Aaronson, Esquire, Philadelphia, PA, for Debtors.

George Conway, Esquire, Office of the United States Trustee, Philadelphia PA, for United States Trustee.

Nancy Mulvehill, for Courtroom Deputy to Judge Raslavich.

Opinion

STEPHEN RASLAVICH, Chief Judge.

Introduction

Before the Court is an application (the “Application”) filed by the Newspaper Guild of Greater Philadelphia Local 10 (the “Guild”), on behalf of Stephen A. Smith (“Smith”), a journalist, for an Order allowing and compelling the payment of an administrative expense claim, pursuant to 11 U.S.C. § 503(b)(1)(A)(ii). The Debtors filed an objection (“Objection”) to the Application and a hearing was held on the matter. At the hearing, the parties presented oral argument. Upon consideration of the matter, the Court denies the Application.

Background ¹

Prior to January 25, 2008, Smith was employed as a sports columnist with the Philadelphia Inquirer. Smith's employment was governed by a collective bargaining agreement (the “CBA”) which existed between the Guild and Philadelphia Newspapers, LLC (the “Newspaper”).

On January 25, 2008, Smith's employment was terminated. Application ¶ 2. The Guild filed a grievance on his behalf pursuant to the grievance-arbitration procedure contained in the CBA. Id. The Guild alleged that Smith's termination violated the CBA because the termination was not for “good and reasonable cause.” Id. Because the parties were unable to resolve the matter, it was referred to an arbitrator for a decision. Id. ¶ 3.

While the aforementioned arbitration was pending, Debtors, which own and operate the Philadelphia Inquirer, commenced their bankruptcy cases under Chapter 11 of the Bankruptcy Code. See Declaration of Richard R. Thayer, Executive Vice President, Finance of the Debtors in Support of First Day Motions at ¶ 7; see also Bankruptcy Case No. 09-11204, Docket Entry No. 1. The filings occurred on February 22, 2009.

On October 27, 2009, the arbitrator entered an award (the “Award”). See Award, dated Oct 27, 2009 (attached as Exhibit 1 to Application). Neither Smith nor Debtors contested the Award.

Pursuant to the Award, the Newspaper is/was obligated to, inter alia: (i) “reinstate Mr. Smith within the next fifteen (15) days to his position”; and (ii) continue his salary at $225,000.00. Id. The Award also directed the Newspaper to continue Smith's health and dental benefits through the Guild “as accorded a full-time employee.” Id. Insofar as Smith's claim for back-pay, the Award stated:

[Mr. Smith] was demoted without “good and reasonable cause” on or about August 21, 2007. Had Mr. Smith accepted this reassignment, he would have earned approximately $110,000 per year. It is also clear, as noted in the August 31, 2009 Opinion and Interim Award in this case, that Mr. Smith failed to declare his intentions regarding returning to work. Therefore his claim for back pay will be mitigated to the extent that the Inquirer shall compensate him in the amount of $100,000 in terms of back pay.

Id. Thus, the arbitrator reduced Smith's claim for back wages to $100,000 based on mitigating circumstances.

Based on the Award, the Guild argues that Smith is entitled to, and should be granted, an allowed administrative claim, pursuant to § 503(b)(1)(A)(ii), for $44,303.37 which consists of $25,726.50 allegedly owed for post-petition wages and $18,576.87 for post-petition healthcare premiums which he paid. Application ¶ 8; Transcript, dated May 18, 2010 (hereinafter referred to as “ Tr.”) at 4 (representation by counsel for the Guild that Smith was amending/reducing his claim for health care benefits from $23,400, as stated in its Application, to $18,576.87 “due to the fact that that was the post petition amount that [Smith] paid in his healthcare premiums.”).² The Debtors contend that Smith is not entitled to an administrative claim for these amounts because: (i) his back pay award of $100,000 covers a period of time during which he rendered no service to the Debtors; ³ and (ii) he was similarly not rendering any service to the Debtors when his healthcare premiums were incurred. Objection at ¶¶ 6-9, 11-13.

Discussion

Section 507 of the Code “sets forth 10 categories of claims that are entitled to priority in bankruptcy cases.” 4 Collier on Bankruptcy ¶ 507.01, at 507-0 (16th ed.) Based on § 507(a)(2),⁴ administrative expenses allowed under § 503(b) have “priority” over most other claims “when assets of the estate are distributed to creditors.” ⁵Kaler v. Bala In re Racing Services, Inc., 571 F.3d 729, 731 (8th Cir.2009). See also National Union Fire Insurance Co. v. VP Buildings, Inc. 606 F.3d 835, 837-38 (6th Cir.2010) (quoting Hartford Underwriters, Ins. Co. v. Union Planters Bank, N.A., 530 U.S. 1, 5, 120 S.Ct. 1942, 147 L.Ed.2d 1 (2000)) (noting that administrative claims under § 503(b) “ ‘are, as a rule, entitled to priority over pre petition unsecured claims[.]’ ”); Park National Bank v. University Centre Hotel, Inc., 2007 WL 604936, at *5 (N.D.Fla. Feb. 22, 2007) (“[A]dministrative claims are accorded the first level of priority and are paid in full before claims in a lower category.”).

The parties' dispute in the instant matter focuses specifically on § 503(b)(1)(A)(ii) which was added to the Code as part of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”). In re Powermate Holding Corp., 394 B.R. 765, 772 (Bankr.D.Del.2008). Before BAPCPA, § 503(b)(1)(A) did not have any subsections. Instead, the provision stated, in its entirety:

(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, including wages, salaries, or commissions for services rendered after the commencement of the case[.]

11 U.S.C. § 503(b)(1)(A) (2004). With the enactment of BAPCPA, subsection (1)(A) was divided into two subsections, namely subsection (i), wherein the text from the former provision was kept intact, and subsection (ii), which was newly added (not having existed before).

Section 503(b)(1)(A) now provides, in pertinent part:

(b) After notice and a hearing, there shall be allowed administrative expenses, other than the claims allowed under section 502(f) of this title, including-

(1)(A) the actual, necessary costs and expenses of preserving the estate including-

(i) wages, salaries, and commissions for services rendered after the commencement of the case; and

(ii) wages and benefits awarded pursuant to a judicial proceeding or a proceeding of the National Labor Relations Board as back pay attributable to any period of time occurring after commencement of the case under this title, as a result of a violation of Federal or State law by the debtor, without regard to the time of the occurrence of unlawful conduct on which such award is based or to whether any services were rendered, if the court determines that payment of wages and benefits by reason of the operation of this clause will not substantially increase the probability of layoff or termination of current employees, or of nonpayment of domestic support obligations, during the case under this title[.]

11 U.S.C. § 503(b)(1)(A) (2010).

Meaning of “the actual, necessary costs and expenses of preserving the estate” in § 503(b)(1)(A)

In Pennsylvania Department of Environmental Resources v. Tri-State Clinical Laboratories, Inc., 178 F.3d 685 (3d Cir.1999), the Third Circuit was called upon to interpret the meaning of § 503(b)(1)(A). In doing so, it stated that “for a claim to be given priority as an administrative expense under this provision of the Code, it must be (1) a ‘cost’ or ‘expense’ that is (2) ‘actual’ and ‘necessary’ to (3) ‘preserving the estate.’ ” Id. at 689. In construing the meaning of these words, the Third Circuit relied upon the Supreme Court's decision in Reading Company v. Brown, 391 U.S. 471, 88 S.Ct. 1759, 20 L.Ed.2d 751 (1968).⁶ In Reading, the Supreme Court observed that “actual and necessary costs” are those “costs ordinarily incident to operation of a business” but are “not [ ] limited to costs without which rehabilitation would be impossible.” Id. at 483, 88 S.Ct. 1759. With regard to the words “preserving the estate,” the Supreme Court construed the words as referring to the “larger objective” that is common to reorganization cases, namely that of “operating the debtor's business with a view to rehabilitating it.' ” Id. at 475, 88 S.Ct. 1759.

Bearing this discussion in mind, this Court shall now turn its attention to the provision at issue, namely subsection (ii) of § 503(b)(1)(A), focusing first on its legislative history (or, more specifically, the lack thereof) and then on the case law construing it. Legislative History on § 503(b)(1)(A)(ii)

The legislative history on the amendment to § 503(b)(1)(A) is sparse. In re Powermate Holding Corp., 394 B.R. 765, 777-78 n. 73 (Bankr.D.Del.2008) (observing that the legislative history of § 503(b)(1)(A)(ii) is “nearly silent” and that the legislative history which does exist “is more of a restatement of the language [of the provision] than an explanation [of it].”); see also Thomas Salerno & Jordan Kroop, Bankruptcy Litigation and Practice: A Practitioner's Guide § 4.08 n. 323 (current through 2010-1 Supplement); (observing that there is “utter lack of legislative history” on § 503(b)(1)(A)(ii)). The bankruptcy court in In re First Magnus Financial Corporation, 390 B.R. 667 (Bankr.D.Ariz.2008), noted that the “legislative history” for § 503(b)(1)(A)(ii) consists of “only one comment, which, for the most part simply paraphrases the statutory language[.]” Id. at 674...