R. Hoe & Co., Inc., In re, 121

• Decision Date: 17 December 1974
• Docket Number: D,No. 121,121
• Citation: 508 F.2d 1126
• Parties: In the Matter of R. HOE & CO., INC., Debtor. In proceedings for the Reorganization of a Corporation ABARTA CORP.(d/b/a Press Publishing Co.), Claimant-Appellant, v. James B. KILSHEIMER, III, and Robert M. Corrao, as Trustees, Appellees. ocket 74-1493.
• Court: U.S. Court of Appeals — Second Circuit

Page 1126

508 F.2d 1126

In the Matter of R. HOE & CO., INC., Debtor In proceedings for the Reorganization of a Corporation ABARTA CORP.(d/b/a Press Publishing Co.), Claimant-Appellant, v. James B. KILSHEIMER, III, and Robert M. Corrao, as Trustees Appellees.

No. 121, Docket 74-1493.

United States Court of Appeals, Second Circuit.

Argued Nov. 15, 1974.

Decided Dec. 17, 1974.

Theodore Gewertz, New York City (Wachtell, Lipton, Rosen & Katz, Leonard M. Rosen, Charles I. Poret, New York City, on the brief), for claimant-appellant.

A. Edward Grashof, New York City (Winthrop, Stimson, Putnam & Roberts, Marie L McCann, New York City, on the brief), for appellees.

Before FRIENDLY, FEINBERG and GURFEIN, Circuit Judges.

FEINBERG, Circuit Judge:

Abarta Corp., doing business as Press Publishing Co., appeals from a decision of the United States District Court for the Southern District of New York, Sylvester J. Ryan, J., disallowing Abarta's claim of $177,028 as an administration expense or, alternatively, as a general unsecured claim in a Chapter X proceeding for the reorganization of R. Hoe & Co., Inc., debtor. ¹ The amount claimed represents the difference between the original contract price for a printing press ordered by Abarta from the debtor prior to the Chapter X proceeding and the increased price Abarta eventually paid the debtor's trustee, ² appellee before us, to obtain delivery of the press. We hold that, on the unusual facts of this case, Abarta's claim as a general unsecured creditor is valid. Accordingly, we reverse the order of the district court.

I

In November 1968, appellant was the publisher of a newspaper in Atlantic City, New Jersey, and Hoe was a manufacturer of rotary printing presses and other machinery. At that time, the parties contracted in writing for the manufacture and sale by Hoe of a printing press to Abarta for a price of $836,679. ³ The press was designed for Abarta's specific needs and contained features Abarta could not have obtained from other manufacturers. Delivery was anticipated during the following summer. The contract called for installment payments. and by July 7, 1969, Abarta had paid Hoe over $595,000. On that date, Hoe filed a petition for reorganization under Chapter X of the Bankruptcy Act.

Shortly thereafter, the petition was approved by Judge Ryan and a trustee was appointed. As is frequently the case in Chapter X proceedings, the trustee was immediately confronted with a cash crisis; the debtor needed several million dollars to enable it to continue in operation. If the immediate crisis could be met, however, prospects for reorganization did not seem out of the question. To generate cash immediately, the trustee proposed that the debtor use its principal efforts to complete the manufacture and delivery of printing presses for those customers who agreed both to prepay balances still due under their contracts and also to pay additional amounts over the contract price.

Over 70 customers of the debtor, including Abarta, were affected by this proposal, on which hearings were held that same month. Not unexpectedly. the hearings were well attended and spirited. Most of the creditors seemed willing to cooperate, apparently assuming that the alternative of liquidation might not be very satisfactory, particularly for those who had already paid substantial amounts on their contracts. The creditors were concerned with a number of aspects of the proposal. Considerable attention was given to the status of any sums to be prepaid on balances due or to be paid as premiums if the trustee thereafter could not complete and deliver the presses. Some creditors also suggested that, even if the machines were delivered under the new arrangement, the extra amount paid over the contract price be considered as a loan to the trustee, eventually to be repaid by him. Others, as will be seen below, were content to accept the status of general unsecured creditors for the amount of this premium.

On July 22, 1971, the judge signed an order ⁴ authorizing the debtor to work principally on the presses of nine customers scheduled for delivery before September 8, upon their prepayment of the balance due under their contracts with the debtor, and to deliver the presses upon payment of an additional ten percent of the original contract price. Until delivery, any amounts prepaid were to be treated as administration expenses, secured by non-interest-bearing trustee's certificates. The order was silent on what the status of any preminum would be after a press had been delivered, although, as will be seen below, this issue had been raised at the hearings. The order also authorized the trustee to negotiate with other customers whose orders had scheduled delivery times after September 8 'to determine the amount of prepayment and additional sum to be paid to the trustee.'

Abarta was in this second group, and in the ensuing months the trustee negotiated with it as well as with others. The discussions culminated in an order on November 3, 1969, ⁵ which was similar to the earlier blanket order. Under this later order, the debtor would 'devote its principal efforts' to work on Abarta's machine upon payment of $423,493, of which $342,787 would be protected by a trustee's certificate until delivery of the press. ⁶ It is stipulated by the parties that $177,028 of this sum represented 'an increase . . . in the purchase price of the press.' ⁷ The press was subsequently delivered, and Abarta filed its proof of claim for $177,028, relying on two theories. The first was that this sum was allowable as an administration claim, because

the payment of said premium over and above the contract price constitutes actual and necessary expenses of preserving the Estate of the Debtor subsequent to the filing of the peition herein. ⁸

Abarta's alternative theory was that the $177,028 should be allowed as a general unsecured claim, because

the payment of said premium constitutes damages to the claimant arising from what was in substance the rejection by the Trustee of an executory contract between the Debtor and the claimant. ⁹

The trustee objected to the claim, arguing that Abarta ahd renegotiated its original contract whith the debtor and no longer had nay rights under it. Judge Ryan appointed United States Magistrate Harold J. Raby as special master to hear and report upon this claim, along with others. After a hearing, the special master reported in March 1971. The master first pointed out:

The importance of this claim lies, not only in the intrinsically substantial amount of the claim itself, but also in the fact that this claim constitutes a 'test case', upon the ultimate determination of which will depend the propriety of a number of substantial claims of similar nature.

The master recommended that Abarta's claim be allowed in full, but only as a general unsecured claim. The master rejected the trustee's argument that the later agreement eliminated any claim for breach of the original contract, concluding that:

From the colloquy between counsel for the various claimants whose position was identical to that of this claimant . . ., it seems quite clear to me that, contrary to the position of the trustee, the claimants did not agree to relinquish their right to file a claim against the debtor for breach of its original contract.

The trustee thereafter moved before the district judge to reject that part of the master's report favorable to Abarta. In a memorandum decision, dated January 10, 1974, the judge accepted the trustee's contentions and disallowed the claim in full. The heart of the court's reasoning was as follows:

At the date of the reorganization petition, claimant faced the loss of more than a half million dollars previously paid for a press that Debtor could not deliver; more important to (Abarta), it faced non-delivery of its much needed equipment, which it could not receive if the Trustee had no funds to complete the manufacture. Claimant was faced with a business decision: (1) either to pay no more and to assert an unsecured claim for the money it had paid on account to the Debtor; or (2) to agree with the Trustee to pay immediately the balance of the purchase price plus an additional negotiated amount to enable the Trustee to complete the press. (Abarta) chose the latter alternative. It cannot now have the benefit of its choice to acquire its press and, at the same time, assert a claim for the money it agreed to pay to enable the Trustee to manufacture it.

To support this result, the judge also referred to two statements made at one of the July 1969 hearings in the district court.

II

On this appeal, Abarta argues principally that the refusal of the trustee to deliver the press ordered by Abarta at the original price was a breach of contract entitling Abarta to damages, which its later agreement to pay a premium for delivery, even if valid, did not eliminate. Abarta also contends that its rights under the original contract could not be destroyed by the later agreement because it was a product of 'economic duress.' Finally, Abarta argues that its claim for $177,028 should have been allowed as an expense of administration. In response, the trustee claims that as a matter of law he did not breach the debtor's contract with Abarta and that, even if he did, the later agreement, which was perfectly valid, extinguished any claim by Abarta, no matter how denominated.

We find the case to be a troublesome one, but after a careful review of the record and the applicable law, we believe that Abarta's claim should have been allowed as a general unsecured claim, as the special master recommended. As Abarta points out, ordinarily an unjustified failure to perform all or any part of what is promised in a contract-- here, delivery of the press at a specified price-- is a breach for which the aggrieved party is entitled to compensatory damages. The law is also clear that a repudiation of a contract communicated...