In re Precision Carwash Corp.
| Decision Date | 11 August 1988 |
| Docket Number | Bankruptcy No. 087-70059-21. |
| Parties | In re PRECISION CARWASH CORP., Debtor. |
| Court | United States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — Eastern District of New York |
Pinks, Brooks, Stern & Arbeit by Robert Arbeit, Hauppauge, N.Y., for debtor.
Otterbourg, Steindler, Houston & Rosen, P.C. by Stuart Gordon, New York City, for Bill Engle Co.
Precision Carwash Corp. ("Precision" or "Debtor") is moving for summary judgment on its motion to reclassify the claim of William Engle as a general, unsecured claim. William Engle has filed a claim for $50,000 as an administration expense. Re-classification is requested on the ground that the services for which Engle seeks payment were all rendered prior to January 22, 1987, the date on which the Chapter 11 proceeding began, and, therefore, should not be classified as an administration expense covered by Section 503(b) of the Bankruptcy Code.
An objection to a claim is a "contested matter" governed by Bankruptcy Rule 9014, which makes applicable Bankruptcy Rule 7056 which, in turn, makes FRCP 56 applicable. This is a core proceeding because it concerns the "allowance or disallowance of claims against the estate." 28 U.S.C. § 157(b)(2)(B).
In accordance with Local Rule 22(b), the Debtor filed a statement as to the facts which the Debtor deemed not to be in dispute. No answering Rule 22(b) statement was filed by Engle, but in a reply affidavit, Engle claimed a need for discovery as to certain issues,1 and in a post-hearing "Memorandum of Law in Opposition to Debtor's Motion for Summary Judgment," Engle set forth some additional facts which it describes as undisputed.
Accepting as true whatever facts either party claims to be undisputed and supplementing them by the record herein, the critical facts can be briefly stated.
On December 16, 1986, Precision entered into a "Brokerage Agreement" with Engle wherein it committed itself to pay Engle $50,000 if Dr. Alexander Kaganowicz or his assigns purchased Precision's car wash business and property. The agreement provided that: "If a sale is not consummated for any reason whatsoever, the undersigned Broker agrees no Commission shall be due or payable to them."
On December 17, 1986, Dr. Kaganowicz and one Renee Jacobs entered into a contract to buy Precision's business. The contract provided that the closing was to take place on December 30, 1986. Because it was recognized that this date did not allow sufficient time to obtain a title insurance policy, it was agreed that all sums paid pursuant to the agreement, as well as the documents executed pursuant thereto, would be held in escrow until free and clear title could be conveyed.
The closing took place on December 30, 1986, at which time the purchasers delivered $500,000 cash to Precision's attorneys and various deeds, bills of sale, mortgages, chattel mortgages, security agreements were executed, all of which were placed in escrow.
The same day, December 30, 1986, RJAK Enterprises, Inc. ("RJAK") (Dr. Kaganowicz's assign) entered into possession of the premises and since that date has been operating the business formerly belonging to Precision.
On January 22, 1987, Precision filed for relief under Chapter 11. Shortly thereafter it submitted, and the Court signed, an order entitled "Order Scheduling Hearing to Consider Sale of Debtor's Property Pursuant to 11 U.S.C. § 363."2 The hearing called for by the order was one to "confirm contract and offer made by RJAK" and to consider "other, further, higher or better offers."
At the hearing held on February 24, 1987, Mr. Pinks, Counsel for Precision, in announcing the terms of the sale, added:
I have one more fact that has to be brought before the Court in regard to the figures. Although $1,300,000 is the sale price, the debtor as a result of certain work performed by the broker in an agreements, provide in agreements with the broker which were executed prior to the filing of the petition, is indebted to the broker as a result of this sale in the sum of $50,000, so the net sum that\'s going to be obtained by Precision as a result of this sale is $1,250,000.
During the course of the hearing the Court first learned the facts regarding the pre-petition transfer of Precision's assets to RJAK and RJAK's continued possession of those assets since December 30th. The Court concluded that under the circumstances it was impossible to proceed with a sale under § 363 and so advised all persons present in the courtroom, saying:
Transcript, 2/24/88, pp. 63-64.3
However, despite what the Court said at the hearing, the Order subsequently submitted and signed by the Court was captioned "Order Authorizing Sale of Property Free and Clear of Liens." The Order authorized the debtor to sell all its personal and real property to RJAK. The Order said nothing respecting Engle although it directed various disbursements to be made out of the proceeds of the sale. Around April 20, 1987, a title insurance policy was obtained, at which time the escrow terminated and the title documents were recorded.
On November 23, 1987, Engle filed an administration claim in the amount of $50,000. No objection was made to the claim until May 4, 1988 when the hearing on confirmation of the debtor's plan of reorganization was held.
Engle contends, and the Court accepts as undisputed, that Engle is recognized by Precision as the broker whose efforts were responsible for the sale of the debtor's assets to RJAK. Precision has never moved to assume the contract with Engle.
Because of the priority given administration creditors by § 503(b), recognition of Engle's claim as an administration expense will ensure its payment and at an early date. If it is reclassified as a general pre-petition debt, its payment is speculative, although the debtor's plan calls for payment in full of all its debts.
Precision's motion for summary judgment is limited to requesting reclassification of Engle's claim as a general unsecured claim. Precision has apparently abandoned any effort to expunge the claim in its entirety and, as Engle claims, appears to acknowledge that it is liable to Engle for being the procuring cause of the sale of its assets to RJAK. Therefore, the only question before the Court is whether that $50,000 debt is entitled to payment ahead of all other debts as an administration claim covered by § 503(b).
Administrative expenses are defined in Section 503(b) of the Bankruptcy Code as "the actual, necessary costs and expenses of preserving the estate, including wages, salaries, or commissions for services rendered after the commencement of the case." (Emphasis added).
The reasons underlying the priority given administrative expenses were cogently set forth in In re Jartran, Inc., 732 F.2d 584, 586 (7th Cir.1984):
The policies underlying the provisions of § 503 () are not hard to discern. If a reorganization is to succeed, creditors asked to extend credit after the petition is filed must be given priority so they will be moved to furnish the necessary credit to enable the bankrupt to function. See In re Mammoth Mart, Inc., 536 F.2d 950, 954 (1st Cir.1976) (Coffin, Chief Judge). Thus, "when third parties are induced to supply goods or services to the debtor-in-possession . . . the purposes of § 503 plainly require that their claims be afforded priority." Id (emphasis added; footnote omitted). Without a provision like § 503, efforts to reorganize would be hampered by the necessity of advance payment for all goods and services supplied to the estate since presumably no creditor would willingly assume the status of a non-priority creditor to a debtor undergoing reorganization.
As the same opinion goes on to point out, priority must be denied where to accord it would not further the statutory purpose.
For an expense to be entitled to administrative priority, the creditor's performance must be induced by the debtor-in-possession. Id. at 587. In re White Motor Corporation, 831 F.2d 106, 110 (6th Cir.1987); In re Jartran, Inc., 732 F.2d 584, 586 (7th Cir. 1984). Where the liability for the services in question is irrevocably incurred before the petition is filed, such services are not induced by the debtor-in-possession and do not qualify for administration status.
If the liability is incurred pre-petition, the fact that payment may be dependent upon a post-petition contingency is irrelevant. Denton & Anderson Co. v. Induction Heating Corp., 178 F.2d 841 (2d Cir.1949) (...
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