In re Rancher's Legacy Meat Co.
| Decision Date | 03 June 2021 |
| Docket Number | Case No. 19-32928 |
| Citation | 630 B.R. 308 |
| Court | U.S. Bankruptcy Court — District of Minnesota |
| Parties | IN RE: RANCHER'S LEGACY MEAT CO., Debtor. |
Cameron A. Lallier, Thomas Lallier, Foley & Mansfield P.L.L.P., Minneapolis, MN, for Debtor.
Michael E. Ridgway Chief United States Bankruptcy Judge
At Minneapolis, Minnesota, June 3, 2021.
This chapter 11 case came before the Court on a motion for payment of administrative expense claim filed by Blue Grace Logistics, LLC ("Blue-Grace") (ECF No. 348), along with an objection by Rancher's Legacy Meat Co. (the "debtor-in-possession" or "Rancher's") (ECF No. 349) and Blue-Grace's reply thereto. (ECF No. 351). A hearing was held on March 17, 2021. Appearances were as noted on the record. At the conclusion of the hearing, the Court took this matter under advisement. It is now ready for resolution.
This is a core proceeding under 28 U.S.C. § 157(b)(2), and this Court has jurisdiction pursuant to 28 U.S.C. §§ 157(a) and 1334. This memorandum decision is based on all the information available to the Court and constitutes the Court's findings of fact and conclusions of law under Fed. R. Bankr. P. 7052, made applicable to this contested matter by Fed. R. Bankr. P. 9014(c).
For the reasons stated herein, Blue-Grace's motion for payment of administrative expense claim is DENIED . The funds Blue-Grace seeks for payment in its claim have already been settled in the ordinary course of business, and equity demands denial of the motion in accordance with the fundamental tenets of the Bankruptcy Code.
Rancher's Legacy Meat Co. filed for relief under chapter 11 of the Bankruptcy Code on September 20, 2019. For nearly 17 months, the case was pending without a confirmed plan, with a litany of acrimonious issues, adversary proceedings, and appeals along the way. On February 16, 2021, the Official Committee of Unsecured Creditors, the debtor-in-possession, and the creditor whose claim constitutes approximately 71% of the general unsecured claims pool filed an expedited motion to approve a global settlement agreement (ECF No. 344). The expedited hearing for approval of the settlement agreement was scheduled for February 25, 2021. Three days before the hearing, on February 22, 2021, attorneys for Blue-Grace Logistics, LLC, filed notices of appearance (ECF No. 346 and 347), a motion for administrative expense (ECF No. 348) and a limited objection to the global settlement agreement (ECF No. 349).1
Blue-Grace's limited objection was the only objection raised to the global settlement agreement. The objection was based on Blue-Grace's concern that the settlement agreement would leave Rancher's administratively insolvent and unable to pay Blue-Grace's newly filed administrative expense claim, which Blue-Grace concluded would have priority over all unsecured claims. Blue-Grace's administrative expense claim was based on transactions that occurred approximately eight months prior, in June 2020.
Rancher's and Blue-Grace established a business relationship well before Rancher's filed its chapter 11 bankruptcy case. Blue-Grace is a third-party shipping and logistics company that arranges for shipment of its clients' products. Rancher's began working with Blue-Grace in April 2018. The relationship between the two entities continued post-petition, with Blue-Grace continuing to arrange shipping services for Rancher's products. From the petition date, September 20, 2019, through July 30, 2020, the entities continued their operations, with Blue-Grace arranging for Rancher's shipping needs and Rancher's consistently and timely paying Blue-Grace's invoices.
In June 2020, one of the shipments went wrong ("the June 2020 shipment"). Blue-Grace arranged for one of its many contract carriers to haul a load of Rancher's product, and the carrier failed to timely deliver the product. The buyer rejected the product, resulting in damages to the estate of $126,800.00. Following this incident, Rancher's unsuccessfully attempted to work with Blue-Grace to resolve the issue. Meanwhile, the parties conducted their business as usual, with Blue-Grace arranging shipping services and billing Rancher's for those services. Blue-Grace invoiced Rancher's for post-petition services provided between July 31, 2020, and September 4, 2020, in the amount of $97,952.00. Rancher's opted to offset those invoiced amount against the $126,800.00 in damages it had sustained as a result of Blue-Grace's contract carrier's late delivery (this extrajudicial self-help remedy will be referred to herein as "Rancher's setoff action").
Blue-Grace attempted to resolve the damages issue with its contract carrier, but, to date, has been unsuccessful. On August 27, 2020, Blue-Grace sent a letter to Rancher's in which it purported to assign to Rancher's its claim and rights against the contract carrier. In response, Rancher's rejected the assignment and sent a letter on October 6, 2020, in which it explained its setoff action. There is nothing on the record to indicate that either party took any further action on the matter until more than four months later, when Blue-Grace filed its notices of appearance, administrative expense claim, and limited objection to the global settlement agreement.
At the February 25, 2021 hearing on the global settlement agreement, the Court granted expedited relief and approved the agreement, but also ordered that other than two specific payments, no distributions would be completed under the agreement until the resolution of the Blue-Grace administrative expense claim.
Blue-Grace asserted and defended its priority claim for administrative expense under the standards of 11 U.S.C. § 503(b)(1)(A). As will be discussed herein, however, the unique facts of this case show that this is not an issue under 11 U.S.C. § 503(b)(1)(A). Rather, the facts on the record before the Court suggest this is an issue of whether a debtor-in-possession can assert a common law right to setoff in the ordinary course of business, and whether Rancher's, as debtor-in-possession, did so successfully. Still, because Blue-Grace attempted to assert its claim on the basis of 11 U.S.C. § 503(b)(1)(A), the Court will first address that section of the Code and its accompanying standards.
Administrative expenses under 11 U.S.C. § 503(b)(1)(A) are "actual, necessary" costs and expenses of preserving the estate post-petition. In re TransAmerican Nat. Gas Corp., 978 F.2d 1409 (5th Cir. 1992). In order to encourage creditors to extend credit to debtors in bankruptcy, thereby enabling the debtor to continue to conduct business and generate funds from which prepetition creditors can be paid, administrative claims are entitled to priority status under 11 U.S.C. § 507(a)(2). TransAmerican Natural Gas Corp., 978 F.2d at 1420. However, granting priority status to a post-petition expense – and thereby limiting the already-limited "pool" of resources to be distributed to creditors – is an action courts do not take lightly; the terms "actual" and "necessary" in 11 U.S.C. § 503(b)(1)(A) are interpreted strictly and narrowly in order to ensure preservation of the estate for the benefit of all creditors. In re Tama Beef Packing, Inc., 290 B.R. 90 (B.A.P. 8th Cir. 2003) ; In re Patch Graphics, 58 B.R. 743, 745 (Bankr. W.D. Wis. 1986) ; see also In re Baldwin-United Corp., 43 B.R. 443 (S.D. Ohio 1984). Therefore, when a party seeks priority status via an administrative expense claim, it carries the burden to prove by a preponderance of the evidence that it is entitled to such claim. In re Food Barn Stores, Inc., 175 B.R. 723 (Bankr. W.D. Mo. 1994). Similarly, a creditor claiming a post-petition administrative claim for services rendered is entitled to that claim "only to the extent [the creditor] has benefitted the debtor-in-possession in operating the business." United States v. Dewey Freight Sys., Inc., 31 F.3d 620 (8th Cir. 1994) (citing NLRB v. Bildisco & Bildisco, 465 U.S. 513, 104 S.Ct. 1188, 79 L.Ed.2d 482 (1984) ).
Bankruptcy courts have broad discretion to determine whether a claim is a proper administrative expense and whether or not to allow the claim. Ford Motor Credit v. Bankr. Estates of Benn, 362 B.R. 1, 5 (E.D. Mich. 2007) ; Nat'l Labor Relations Board v. Walsh (In re Palau Corp.), 139 B.R. 942 (9th Cir. B.A.P. 1992), aff'd, 18 F.3d 746 (9th Cir. 1994). In making that determination, courts have considered whether a creditor has proven that: (1) it has a claim against the estate due to a transaction with the bankruptcy estate, and (2) the claim arose as a cost of administration and conferred an actual and demonstrable benefit on the debtor's estate and creditors. In re Athens/Alpha Gas Corp., 332 B.R. 578, 580 (8th Cir. B.A.P. 2005) (citing In re Tama Beef Packing, Inc., 290 B.R. 90, 95 (B.A.P. 8th Cir. 2003) ); Sanchez v. Nw. Airlines, Inc., 659 F.3d 671, 677 (8th Cir. 2011). In other words, "[a] court must consider whether the expense arose from a transaction with the estate and whether it tangibly benefitted the estate." In re Athens/Alpha Gas Corp., 332 B.R. at 580 (citing In re Williams, 246 B.R. 591, 594 (B.A.P. 8th Cir. 1999) ); see also In re McK, Ltd., 14 B.R. 518, 520 (Bankr. D. Colo. 1981). Courts have applied dramatically different standards for determining the appropriate application of each factor.
At the outset, the Court notes that – on the record currently before it – there remain serious issues with Blue-Grace's ability to establish both factors needed for a successful claim under 11 U.S.C. § 503(b)(1)(A). For example, there is nothing to indicate the actual value of the services Blue-Grace provided to the estate. Blue-Grace itself stated that it finances all shipping costs for its customers by invoicing customers after...
To continue reading
Request your trial