United Trucking Service, Inc., In re

• Decision Date: 07 July 1988
• Docket Number: No. 87-1065,87-1065
• Citation: 18 B.C.D. 64,851 F.2d 159
• Parties: 19 Collier Bankr.Cas.2d 542, 18 Bankr.Ct.Dec. 64, Bankr. L. Rep. P 72,367 In re UNITED TRUCKING SERVICE INC., a Michigan corporation, Debtor. UNITED TRUCKING SERVICE, INC., Plaintiff-Appellant, v. TRAILER RENTAL COMPANY, INC., Defendant-Appellee.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 159

851 F.2d 159

19 Collier Bankr.Cas.2d 542, 18 Bankr.Ct.Dec. 64,

Bankr. L. Rep. P 72,367

In re UNITED TRUCKING SERVICE INC., a Michigan corporation, Debtor UNITED TRUCKING SERVICE, INC., Plaintiff-Appellant, v. TRAILER RENTAL COMPANY, INC., Defendant-Appellee.

No. 87-1065.

United States Court of Appeals Sixth Circuit.

Argued Dec. 7, 1987.

Decided July 7, 1988.

Thomas B. Radom (argued), Birmingham, Mich., for plaintiff-appellant.

Sidney L. Frank (argued), Troy, Mich., for defendant-appellee.

Before KEITH and WELLFORD, Circuit Judges, and HULL ^*, Chief District Judge.

WELLFORD, Circuit Judge.

In 1977 Great Dane Trailers, Inc., entered into an eight-year equipment lease with plaintiff-appellant United Trucking Service, Inc. ("United"), for the rental of fifty-five Great Dane trailers. The lease included a provision requiring United, the lessee, to maintain the trailers in good condition and to make repairs at its own expense. Defendant Trailer Rental Company ("TRC") is the successor in interest of Great Dane Trailers, which is not a party to this controversy.

In 1983, United filed a voluntary petition for reorganization under Chapter 11 of the Bankruptcy Code. Shortly thereafter, TRC filed a petition in the bankruptcy court to compel United either to assume or reject the equipment lease. TRC asserted that United, the debtor in possession, had failed to maintain the trailers in good condition and repair and that United's continued possession of the trailers would result in even greater deterioration and damage to TRC. In late December 1983 the bankruptcy court gave United thirty days in which to assume or reject the lease; United failed to respond. TRC then filed a second petition expressing its concern about the trailers' condition and seeking action to protect its asserted interests.

In early May 1984 the bankruptcy court ordered United to produce the trailers for inspection and to provide proof of insurance. United provided only four trailers for inspection. The bankruptcy court then entered a stipulated order, later amended, that required United to make all the trailers available for inspection, or the lease would be deemed rejected under 11 U.S.C. Sec. 365 and United ordered to return all the trailers to TRC. United's failure to make the trailers available for inspection triggered what was deemed an automatic rejection, and during the next two months United returned all but two of the trailers (which United claimed were stolen before the Chapter 11 filing) to TRC. The trailers were in a state of disrepair, and TRC claims some had been stripped.

TRC then filed with the bankruptcy court applications for payment of administrative expenses in the aggregate amount of $98,166.41, including repair estimates for fifty-three trailers, the casualty loss value of the two stolen trailers, and the cost of replacing certain tires deemed to be commercially valueless. In March 1985 one of the stolen trailers was located and returned to TRC, which modified its claim with regard to that trailer.

After evidentiary hearings regarding TRC's applications, which were resisted by United, the bankruptcy judge rendered a decision allowing TRC an administrative expense claim in the principal amount of $72,010.00 ($65,264.31 for repairs to fifty-four trailers, $1,950.00 to replace tires, and $4,795.69 as the casualty loss value of the stolen trailer). Later, the court made an additional award to TRC of interest on the principal award accruing from September 30, 1984, which the court designated "the date Trailer Rental ... filed its Application for Payment of Administrative Expenses." ¹

United appealed the bankruptcy court's decision to district court. The district court, without oral argument, rendered a memorandum opinion and order affirming the bankruptcy court's decision, and this appeal ensued. We remand certain aspects of this case, and reverse as to others.

1. Post-petition damages as an administrative expense

Section 503 of the Bankruptcy Code, 11 U.S.C. Sec. 503, establishes criteria for the allowance of administrative expenses:

Sec. 503. Allowance of administrative expenses

....

(b) After notice and a hearing, there shall be allowed, administrative expenses, ... including--

(1)(A) the actual, necessary costs and expenses of preserving the estate, ... ²

A creditor such as TRC seeks to characterize its claim against the debtor as an administrative expense in order to enjoy first priority in payment under Sec. 507(a)(1). See, e.g., In re Baldwin-United Corp., 43 B.R. 443 (S.D.Ohio 1984). The purpose of these provisions of the Bankruptcy Code is to facilitate the rehabilitation of insolvent businesses by encouraging third parties to provide those businesses with necessary goods and services. In re Mammoth Mart, Inc., 536 F.2d 950, 954 (1st Cir.1976). Only those debts, however, that arise after the filing of the bankruptcy petition may be accorded administrative expense status. See id. at 954-55; Baldwin, 43 B.R. at 453.

In order to qualify a claim for payment as an administrative expense

a claimant must prove that the debt (1) arose from a transaction with the debtor-in-possession as opposed to the preceding entity (or, alternatively, that the claimant gave consideration to the debtor-in-possession); and (2) directly and substantially benefitted the estate. [In re Mammoth Mart, Inc., 536 F.2d] at 954.

A creditor provides consideration to the bankrupt estate only when the debtor-in-possession induces the creditor's performance and performance is then rendered to the estate. If the inducement came from a pre-petition debtor, then consideration was given to that entity rather than to the debtor-in-possession. In re Jartran, Inc., 732 F.2d 584 (7th Cir.1984). However, if the inducement came from the debtor-in-possession, then the claims of the creditor are given priority. Id. at 586.

In re White Motor Corp., 831 F.2d 106, 110 (6th Cir.1987) (footnote omitted). Application of the White Motor test to this case would impose upon TRC the burden of proving its entitlement to priority under Sec. 503. United, as debtor in possession, did not induce any action on TRC's part after its bankruptcy filing on November 1, 1983. United merely continued to possess the trailers pursuant to the pre-petition contract with TRC, effective September 29, 1977.

We must decide whether the test established by Mammoth Mart and followed in White Motor Corp. is applicable to these facts. Mammoth Mart, In re Jartran, Inc., 732 F.2d 584 (7th Cir.1984), and White Motor Corp. all dealt with claims arguably arising from goods or services actively sought and provided by the claimant-creditor to the bankrupt estate. In each of these cases, it was contended that the creditor's post -petition action brought about the liability. The proper focus was on the inducement involved in causing the creditor to part with its goods or services. Cf. Mammoth Mart, 536 F.2d at 954-55 & n. 4. In contrast, this case involves a claim arising from United's post-petition continued use of leased equipment that allegedly was not in accordance with the terms of the pre-petition lease agreement. We therefore do not believe the key inquiry is on inducement as in Mammoth Mart, Jartran, and White Motor.

American Anthracite & Bituminous Coal Corp. v. Leonardo Arrivabene, S.A., 280 F.2d 119 (2d Cir.1960), we believe, articulated the appropriate rationale in a case of this kind:

The right to priority in the event the trustee or debtor in possession receives benefits under the [executory] contract during the interval between the filing of the debtor's petition and the rejection of the contract "is an equitable right based upon the reasonable value" of the benefits conferred, rather than upon the contract price.

....

... [T]he purpose of according priority in these cases is fulfillment of the equitable principle of preventing unjust enrichment of the debtor's estate, rather than the compensation of the creditor for the loss to him.

Id. at 124, 126. Thus, administrative expenses under Sec. 503 in this case, if allowable, should reflect actual value conferred on the bankrupt estate by reason of wrongful acts or breach of agreement. In re Dixie Fuels, Inc., 52 B.R. 26, 27 (Bankr.N.D.Ala.1985).

In light of the Act's purpose of enabling the continued operation of insolvent businesses, we conclude that the bankruptcy court was correct in treating TRC's post-petition damages claim as an administrative expense under Sec. 503. United's asserted failure to maintain and repair the trailers in accord with the lease obligation allowed United, the debtor, to use the money saved and not paid for TRC's benefit as contemplated under the lease, to continue its operations. This breach and misuse of TRC's trailers did benefit the bankrupt estate. Accordingly, the damages under the breached lease covenant, to the extent that they occurred post-petition, provided benefits to the bankrupt estate and were properly accorded priority under Sec. 503 to TRC. Accord In re International Coins & Currency, Inc., 18 B.R. 335 (Bankr.D.Vt.1982) (damages to rented real property allowed as administrative expense).

Having decided that priority as an administrative expense is appropriate for TRC's claim reflecting post-petition breach of contract in United's failure to maintain the leased trailers, we must next decide how much in administrative expense is proper on this record.

The bankruptcy court found that TRC's claim based on the casualty loss value of the unrecovered stolen trailer and the repair estimates for the recovered stolen trailer should be allowed as an administrative expense. The district court affirmed this decision, finding that United had not provided evidence that the trailers were stolen pre-petition. Neither court noted, however, that United and Trailer Rental had stipulated in May 1985, as part of a pretrial statement, that the two trailers were "stolen prior to the inception...