Wolf Creek Collieries Co. v. GEX Kentucky, Inc., No. 89-CV-0001.

• Court: U.S. District Court — Northern District of Ohio
• Writing for the Court: SAM H. BELL
• Citation: Wolf Creek Collieries Co. v. GEX Kentucky, Inc., 127 B.R. 374 (N.D. Ohio 1991)
• Decision Date: 04 April 1991
• Docket Number: No. 89-CV-0001.
• Parties: WOLF CREEK COLLIERIES CO., Plaintiff, v. GEX KENTUCKY, INC., et al., Defendant.

127 B.R. 374 (1991)

WOLF CREEK COLLIERIES CO., Plaintiff, v. GEX KENTUCKY, INC., et al., Defendant.

No. 89-CV-0001.

United States District Court, N.D. Ohio, E.D.

April 4, 1991.

Timothy A. Barry, John A. Schwemler, Brouse & McDowell, Akron, Ohio, R. Terrance Rodgers, King, Betts & Allen, Charleston, W.Va., for appellant.

Jeffrey Baddeley, Porter, Wright, Morris & Arthur, Cleveland, Ohio, for appellee GEX Kentucky, Inc.

Michael L. Geller, Dallas, Tex., for appellees T.T. Colley and P.W. Gifford.

Stephen C. Rodeheffer, Kimble, Stevens, Young, Clark & Rodeheffer, Portsmouth, Ohio, for appellee Jack J. Blazer.

ORDER

SAM H. BELL, District Judge.

Presently pending before this court is an appeal filed by Wolf Creek Collieries Company from a Memorandum of Decision of the Bankruptcy Court for the Northern District of Ohio, Case No. 686-00506, Matter of GEX Kentucky, Inc., 103 B.R. 863 (Bkrtcy.N.D.Ohio 1988). In the case below, the bankruptcy court held that Wolf Creek's advancement of funds to the appellee debtor GEX Kentucky, Inc. (hereinafter GEX) was not entitled to administrative expense priority under 11 U.S.C. § 503(b)(1)(A) and § 507(a) because the funds were advanced primarily in furtherance of Wolf Creek's own interests rather than those of the estate. Appellees GEX, P.W. Gifford, and T.T. Colley have filed briefs in support of affirmance of the bankruptcy court's decision.

I. BACKGROUND

On April 18, 1986, GEX and other related entities filed for relief under Chapter 11 of Title 11 of the United States Code. GEX continued its operations as debtor in possession but did not submit a plan of reorganization. On September 1, 1987, GEX ceased its operations because, from this day forward, it was without funds.

On December 1, 1987, Pikeville National Bank and Trust Company (hereinafter PNB) filed plans of reorganization for GEX. PNB was the major secured creditor in the amount of approximately $3,300,000. As part of the plans, PNB and Wolf Creek agreed that Wolf Creek would acquire all of the assets of GEX and some assets of its parent corporation, General Exploration Company, for $9,750,000. The plans provided for this transaction which was manifested in a letter of intent entered into between PNB and Wolf Creek in October of 1987.

PNB had been advancing certain funds to GEX for payment of certain postpetition expenses of the bankruptcy estate until the end of 1987. The payments covered mine maintenance, payroll, insurance, utilities, property taxes, lease payments, and other expenses related to the assets of GEX. As part of the agreement between PNB and Wolf Creek, however, Wolf Creek assumed payment of these expenses on January 1, 1988. From this date until May 20, 1988, the date the plan of reorganization was confirmed by the bankruptcy court, Wolf Creek advanced the sum of $369,548.24 to GEX. On May 20, 1988, the control of GEX's assets was transferred to Wolf Creek. The parties stipulated that the advances made by Wolf Creek "were actually made and were incurred for the protection and preservation of the debtor's assets." 103 B.R. at 864.

On June 24, 1988, Wolf Creek filed a motion requesting reimbursement for its advances in the form of administrative expenses under 11 U.S.C. § 503(b)(1)(A). The bankruptcy court held a hearing on this issue on September 29, 1988. At the hearing, GEX argued that the Wolf Creek payments were not entitled to administrative expense priority because the advances were made primarily out of Wolf Creek's self-interest rather than for the estate's benefit. Wolf Creek argued that the estate indisputably benefitted and that the payments were made as an actual and necessary cost of preserving the estate.

The bankruptcy court stated the issue in the following manner:

The sole issue before this court is whether Wolf Creek undertook these payments in order to benefit the estate as a whole or to further its own interests. It is therefore necessary to ascertain Wolf Creek\'s motivation.

103 B.R. at 864. The court found it difficult "to find any reason for Wolf Creek to have paid these expenses beyond the protection of its own self-interest." Id., 103 B.R. at 864-65. The court did not deny that the estate benefitted by the Wolf Creek payments, but found on the whole that this was not the primary motivation behind the advances and, thus, the payments were not administrative expenses within the meaning of § 503(b)(1)(A). The court found the following facts to be, on balance, dispositive of the self-interest issue.

1. Wolf Creek did not begin advancing money until January 1, 1988, after a plan of reorganization had been filed that contemplated Wolf Creek\'s purchase of the protected assets. 103 B.R. at 865.

2. Wolf Creek had the most to gain by the maintenance and protection of the assets. The letter of intent obligated Wolf Creek to purchase the assets and obviously, it would be beneficial to assure their operational readiness at such time as Wolf Creek would assume possession. Id.

3. The letter of intent absolved PNB of any warranties as to the assets and their condition. Id.

In addition, the bankruptcy court noted the rule that "expenses incurred to preserve a debtor's estate must benefit all creditors to be compensable as administrative expenses." Id. (citation omitted). With this in mind, the court found that the payments made did not benefit the unsecured creditors of GEX because Wolf Creek was obligated to pay $9,750,000 for the assets whether they were maintained or left idle. Id. In other words, the $9,750,000 was to be paid to creditors of GEX regardless of the assets' condition; thus, payments which maintained the assets did not bestow any benefit upon the creditors.

Wolf Creek filed its notice of appeal on December 12, 1988, and a brief in support on January 19, 1989. The appellees filed briefs on February 3, 1989, and Wolf Creek filed a reply brief on February 17, 1989.

II. ANALYSIS

The standard to be applied when reviewing findings of fact entered by a bankruptcy court is that such findings will not be set aside unless clearly erroneous. See Bankruptcy Rule 8013. In other words, a bankruptcy court's findings of fact are not to be disturbed unless there is "most cogent evidence of mistake or miscarriage of justice." McDowell v. John Deere Indus. Equip. Co., 461 F.2d 48, 50 (6th Cir.1972), rev'd on other grounds, 436 U.S. 238, 98 S.Ct. 1778, 56 L.Ed.2d 251 (1978). See also In re Edward M. Johnson and Associates, Inc., 845 F.2d 1395, 1401 (6th Cir.1988). Further, "due regard shall be given to the opportunity of the bankruptcy court to judge the credibility of the witnesses." Bankruptcy Rule 8013. The clearly erroneous standard was explained by the Supreme Court in United States v. United States Gypsum Co., 333 U.S. 364, 395, 68 S.Ct. 525, 542, 92 L.Ed. 746 (1948), as follows:

A finding is "clearly erroneous" when although there is evidence to support it, the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed.

See also In re Southern Industrial Banking Corp., 809 F.2d 329, 331 (6th Cir.1987). The Supreme Court has further enunciated this principle as follows:

This standard plainly does not entitle a reviewing court to reverse the finding of the trier of fact simply because it is convinced that it would have decided the case differently. The reviewing court oversteps the bounds of its duty under Rule 52(a) if it undertakes to duplicate the role of the lower court. "In applying the clearly erroneous standard to the findings of a district court sitting without a jury, appellate courts must constantly have in mind that their function is not to decide factual issues de novo." Zenith Radio Corp. v. Hazeltine Research, Inc., 395 U.S. 100, 123 89 S.Ct. 1562, 1576, 23 L.Ed.2d 129 (1969). If the district court\'s account of the evidence is plausible in light of the record viewed in its entirety, the court of appeals may not reverse it even though convinced that had it been sitting as the trier of fact, it would have weighed the evidence differently. Where there are two permissible views of the evidence, the factfinder\'s choice between them cannot be clearly erroneous. United States v. Yellow Cab Co., 338 U.S. 338, 342 70 S.Ct. 177, 179, 94 L.Ed. 150 (1949); see also Inwood Laboratories, Inc. v. Ives Laboratories, Inc., 456 U.S. 844 102 S.Ct. 2182, 72 L.Ed.2d 606 (1982).

Anderson v. City of Bessemer City, North Carolina, 470 U.S. 564, 573-74, 105 S.Ct. 1504, 1511-12, 84 L.Ed.2d 518 (1984).

A bankruptcy court's conclusions of law, on the other hand, are subject to de novo review on appeal. In re Edward M. Johnson, 845 F.2d at 1398. Also, "if a finding of fact is premised upon an improper legal standard, or a proper one improperly applied, that finding loses the insulation of the clearly erroneous rule." In re Missionary Baptist Foundation of America, Inc., 712 F.2d 206, 209 (5th Cir.1983).

Wolf Creek appeals five conclusions drawn by the bankruptcy court. Wolf Creek designates the issues as follows:

1. The bankruptcy court erred as a matter of law in the denial of allowance on a priority basis of the Wolf Creek claim.

2. The bankruptcy court erred in a clearly erroneous sense in the finding of fact that Wolf Creek advanced its own interests and not those of the estate with its advances.

3. The bankruptcy court erred as a matter of law in the order appealed which adopts an erroneous view that a proposed purchaser may not recover advances made by it prior to an asset sale.

4. The bankruptcy court erred in its finding that on the one hand the Wolf Creek advances were actual and for the preservation and protection of the estate; and on the other hand that such advances did not benefit the estate.

5. The bankruptcy court erred in a clearly erroneous sense in its finding of fact that Wolf Creek would be obliged to purchase the estate assets whether maintained or left idle and thus Wolf Creek is not entitled

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