White Motor Corp., In re

• Decision Date: 13 October 1987
• Docket Number: No. 86-3564,86-3564
• Parties: 17 Collier Bankr.Cas.2d 1077, Bankr. L. Rep. P 72,026 In re WHITE MOTOR CORPORATION, Debtor, EMPLOYEE TRANSFER CORPORATION, Plaintiff-Appellant, v. John T. GRIGSBY, Jr., Disposition Assets Trustee, Defendant-Appellee.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 106

831 F.2d 106

17 Collier Bankr.Cas.2d 1077, Bankr. L. Rep. P 72,026

In re WHITE MOTOR CORPORATION, Debtor EMPLOYEE TRANSFER CORPORATION, Plaintiff-Appellant, v. John T. GRIGSBY, Jr., Disposition Assets Trustee, Defendant-Appellee.

No. 86-3564.

United States Court of Appeals, Sixth Circuit.

Argued May 22, 1987.

Decided Oct. 13, 1987.

Joseph C. Domiano, Cleveland, Ohio, Michael S. Tucker (argued), for plaintiff-appellant.

Pat E. Morgenstern-Clarren (argued), Hahn, Loeser, Freedheim, Dean & Wellman, Cleveland, Ohio, for defendant-appellee.

Before KEITH and NORRIS, Circuit Judges, and PECK, Senior Circuit Judge.

KEITH, Circuit Judge.

Appellant Employee Transfer Corporation ("ETC") appeals from a judgment by the district court in favor of White Motor Corporation ("WMC"), holding that ETC's claim for post-petition expenses relating to pre-petition obligations were not administrative priority expenses pursuant to 11 U.S.C. Sec. 503(b)(1)(A). 64 B.R. 586. For the reasons set forth below, we AFFIRM the decision of the Honorable Ann Aldrich, United States District Court for the Northern District of Ohio.

On November 11, 1971, ETC entered into a contract ("First Contract") with WMC to provide relocation services to WMC. Under the terms of the First Contract, ETC agreed to acquire and resell the residence of any WMC employee who was transferred and who accepted ETC's offer to buy his property. When informed about their transfers, WMC employees were provided with information about ETC's services. WMC then notified ETC if the employee wanted to utilize that service. ETC became obligated upon such notification to commence the process of establishing a fair price for the property and offering to buy it.

Through the offer process, ETC contacted the employee to arrange for appraisal of the property, ordered two independent appraisals, computed a fair market value and made an offer to buy the employee's residence at that fair market valuation. The employee then had fifteen days to accept the offer. If the offer was accepted, ETC paid the employee for his equity in the house and took title.

ETC was thereafter obligated to manage the property and to make payments for maintenance, the mortgage, insurance and utilities. Upon resale of the property, ETC billed WMC for all direct costs, including management and maintenance expenses, loss on resale, interest and service charges.

The parties operated under the original contract until approximately July 30, 1980. On May 28, 1980, ETC mailed WMC notice that the First Contract would be cancelled sixty days from that date. ETC and WMC then undertook efforts to negotiate a new contract, and ETC continued to perform the same services through October 10, 1980, the date of the new contract.

On September 4, 1980, WMC filed a petition for reorganization under Chapter 11 of the Bankruptcy Code. The bankruptcy court authorized WMC to remain in possession and control of the property as debtor-in-possession, and to manage and operate its business affairs pursuant to 11 U.S.C. Secs. 1107 and 1108. Between July 28, 1980, and September 4, 1980, ETC purchased approximately eleven properties on an ad hoc basis. The present controversy concerns expenses incurred or accrued by ETC after the filing date with respect to these eleven properties purchased before the September filing date.

On or about October 10, 1980, the parties, without seeking Bankruptcy Court authority, signed a new agreement ("Second Contract") which purported to be effective the same date. ¹ The Second Contract reaffirmed the working relationship between ETC and WMC. Section (E)(6), however, modified the terms upon which ETC billed WMC:

6. The terms of this agreement shall be applicable to each transaction initiated by ETC's purchase of employee property subsequent to July 31, 1960; provided, however, that the application of the 20% Fee Payment described in C.1 above shall be limited to those properties purchased by ETC on or after September 4, 1980; and those properties purchased by ETC subsequent to July 31, 1980 and prior to September 4, 1980 on which no 20% Fee Payment was made, expense incurred on or after September 4, 1980 including interest charged, by ETC, in connection with such properties shall be reimbursed on a monthly basis. All the transactions initiated by ETC purchases prior to August 1, 1980, shall continue to be governed by the prior agreement between the Company and ETC, except that effective September 4, 1980, expense, including interest charged, incurred by ETC in connection with such properties, shall be reimbursed on a monthly basis.

Joint Appendix at 61.

The district court determined that in essence Sec. (E)(6) of the Second Contract provided that WMC was to continue to reimburse ETC for expenses arising after WMC's filing of the bankruptcy petition even for residences purchased by ETC pre-petition.

The parties further stipulated that:

8. The bankruptcy court did not ever specifically authorize WMC to enter into a Second Contract and such authority was not needed.

9. ETC acquired legal title to most of the parcels purchased by it under both the First Contract and the Second Contract, subject in some cases to the employee's mortgage and certain contractual restrictions. ETC acquired legal title prior to September 4, 1980, on all parcels listed on Exhibit C. ²

10. ETC entered into contracts relative to each parcel listed on Exhibit C attached hereto prior to September 4, 1980.

11. The total amount expended and/or accrued by ETC prior to September 4, 1980 with respect to the parcels listed on Exhibit C is $573,751.16, exclusive of the interest to which ETC purports to be entitled.

12. The total amount expended and/or accrued by ETC after September 4, 1980 with respect to the parcels listed on Exhibit C [and not paid by WMC] is $236,146.38, exclusive of the interest to which ETC purports to be entitled.

13. Subsequent to September 4, 1980, WMC paid $843,034.47 to ETC for amounts expended and/or accrued by ETC in connection with the parcels listed on Exhibit C.

14. All amounts due to ETC by WMC under the Second Contract with respect to parcels acquired by ETC after September 4, 1980 has been paid in full. These amounts total approximately $800,000.00 exclusive of unpaid interest to which ETC purports to be entitled.

Joint Appendix at 62.

On May 5, 1981, ETC filed a proof of claim, and on November 9, 1982, it filed a motion to pay administrative expenses in the amount of $153,333.79. This motion was amended to seek recovery of $923,930.40 in administrative expenses. The claim was tried to the bankruptcy court on ETC's amended motion. At trial, ETC further amended its claim to seek recovery of $236,146.38 as administrative expenses and $573,751.16 as general unsecured debt. The trustee for WMC ("Trustee") contended that all amounts owed were general unsecured debt and that such debt had to be reduced by the amount incorrectly paid to ETC after WMC filed its petition in bankruptcy.

The bankruptcy court held that (1) the Second Contract could not effectively convert post-petition payments for pre-petition houses as expenses of administration; (2) post-petition payments expended or accrued by ETC on parcels purchased pre-petition were not administrative expenses; and (3) "ETC is entitled to a general, unsecured claim for $1,652,932, ignoring momentarily WMC's improper payments. The claim consists of the undisputed $573,751.16 for payments accrued pre-petition, $236,146.38 accrued in unpaid post-petition and $843,034.47 accrued and improperly paid post-petition." Joint Appendix at 50 and 51. The bankruptcy court then held that "[g]eneral, unsecured claims represented as Class II under WMC's confirmed [bankruptcy] plan had paid 43.5%". Thus, since ETC's receipt of $843,034.47 was 51% payment of its allowed claim, ETC was "entitled to no additional payment under the plan unless and until Class II claims have been paid 51%." Joint Appendix at 51.

ETC appealed to the United States District Court for the Northern District of Ohio, Eastern Division. On May 27, 1986, the district court affirmed the decision of the bankruptcy court, holding that the debt was not entitled to administrative priority. The court noted that (1) the debt did not arise from a transaction with the debtor-in-possession; and (2) the post-petition contract entered into by ETC and the debtor-in-possession could not effectively convert ETC's pre-petition debt into administrative expense entitled to priority payment.

On appeal, ETC initially contends that all post-petition expenses relating to pre-petition houses ³ are administrative expenses pursuant to 11 U.S.C. Sec. 503(b)(1)(A), ⁴ and are therefore entitled to priority under 11 U.S.C. Sec. 507(a)(1). ⁵ ETC asserts that its claim is entitled to priority as an administrative expense because it arose from a transaction with WMC as a debtor-in-possession. ETC contends that after the filing of the petition, WMC, as debtor-in-possession requested that it continue to perform its service. It argues that this action created a new obligation, and its continued performance supplied consideration to the debtor-in-possession. ETC thus contends that the district court was clearly erroneous in finding that it had an obligation to WMC and its transferred employees after the date of WMC's filing to continue performing services on the employee's houses which had been sold prior to the filing. ETC also contends that it conferred a series of benefits upon WMC, including saving WMC maintenance, tax and insurance costs and improving employee relations.

The Trustee argues that ETC's interpretation of the Bankruptcy Code would convert pre-petition obligations into post-petition administrative expenses. He argues that ETC neither provided new consideration to the debtor-in-possession nor conferred specific and substantial benefits upon the debtor-in-possession. Although we feel that the...