USBC - SD - Decisions - 1994

1994 #09, Van Dyke, 6-10-94

In re: JOHN W. VAN DYKE, JR., Bankr. Case No. L-88-01173S,Chapter 11

MEMORANDUM OF DECISION RE: MOTIONS FOR PAYMENT OF ADMINISTRATIVE EXPENSE CLAIM

The matters before the Court are the Motion for Payment of Administrative Expense filed by Davenport & Associates, Inc., and Richard J. Salem and the Motion for Payment of Administrative Expense filed by I.L.L., Inc., and the responses thereto. These are core proceedings under 28 U.S.C. з 157(b)(2). This Memorandum Decision and accompanying Order shall constitute findings and conclusions as required by F.R.Bankr.P. 7052.

Debtor John W. Van Dyke filed a Chapter 11 petition on September 12, 1989. A plan of reorganization was confirmed on November 20, 1988. The plan provided that if Debtor did not make certain payments by certain dates, a trust of estate assets would be created for the benefit of creditors. The deadline imposed by the plan was not met and the trust was activated by Order entered May 14, 1992.

The trust described the co-trustees' powers:

The Trustees shall have the following express powers, exercisable in their discretion with respect to all property whether principal or income at any time, coming into their hands, whether by purchase or in any other manner and the powers of the Trustees shall be an extension of but not a limitation of any powers otherwise possessed by the Trustees as provided in the Iowa Probate Code. However, in the event of a dispute between the Trustees concerning the administrative of assets in the estate, including the timing of a sale or the sale price for an asset, the Court shall control the outcome of the dispute. In no event, shall any single Trustee have the authority to administer any asset contained in this Trust without the consent of the other Trustee. An act by a single Trustee with regard to any asset will be considered void ab initio.

The Trustees shall have the following powers with regard to the assets they will administer for this Trust:

1. To sell, exchange, lease, or otherwise dispose of any asset for terms within the terms of the Trust.

2. To determine what is principal and what is income of the Trust and in their discretion to allocate or apportion receipts and disbursements between principal and income;

3. To employ agents.

4. To borrow money for any purpose, including from a corporate trustee's own commercial banking department, or from any other lending agency, and to secure the loan or loan by a pledge or mortgage of the assets of the Trust. The Trustees may incur indebtedness only upon receiving a bankruptcy court order approving such borrowings.

5. To continue, for the life of the Trust, either as a going concern or for the purposes of liquidation, without liability for errors in judgment, any business; to delegate duties, with requisite powers to any employee, manager or partner as it may deem proper without liability for such delegation except for the Trustee's own negligence; to elect any of the officers or employees of a corporate trustee as officers or directors of a business; to be compensated for services directly by the business, estate or trust; to use in the conduct of the business only the capital investment previously made by John W. Van Dyke, Jr.; to deposit securities with voting trustees; to vote stock for or against any proposition submitted at any shareholders' meeting including charter renewals for any period of time; to sell or liquidate any business interest on such terms as shall be in the best interest of Trust and its beneficiaries; and generally to exercise their discretion with respect to the continuation, management, sale or liquidation of any business interest John W. Van Dyke may have had prior to the filing of his Chapter 11 Petition.

6. To set aside from income, amounts deemed advisable to pay any taxes resulting from the sale of property in the Trust. Any reserved funds unexpended at the termination of the Trust shall be distributed first to unpaid creditors on a pro rata basis and then to John W. Van Dyke.

7. To develop, subdivide, sell on any terms, to grant or release easements and interest in any real property that the Trust may own; generally, to deal with any real property the same as John W. Van Dyke could have prior to the filing of his Chapter 11 Bankruptcy Petition.

The co-trustees entered into an agreement with Davenport & Associates, Inc., through Davenport's agent Richard Salem. The agreement gave Davenport a sole and exclusive right to sell some of the trust's real property known as the Consolidated Freightways property. The agreement provided:

The said property shall remain in the hands of [Davenport] exclusively, [until May 31, 1993] and if same is sold or exchanged by [Davenport] or [the co-trustees] to anyone within said time, at price and terms which [the co-trustees] accept, or if later it is sold or exchanged by [the co-trustees] to any person who [was] referred to [the co-trustees] by [Davenport], at price and terms which [the co-trustees] accept, [the co-trustees] will pay [Davenport], the commission of seven percent (7%) of the total selling price. . . . Such compensation shall also be paid if property is sold or conveyed or otherwise wise [sic] transferred within 180 days after termination of this authority . . . to anyone with whom [Davenport] has presented the property to prior to final termination, provided [that the co-trustees] have received notice in writing, including the names and addresses of prospective purchasers, prior to the termination of this agreement. . . .

The agreement was signed by Mr. Salem and Vernon H. Henjes, a co-trustee. Mr. Henjes' signature was dated December 4, 1992.

I.L.L. Corporation presented a purchase agreement to the co-trustees on February 4, 1993. I.L.L. offered to buy the Consolidated Freightways property for $107,000.00 with Davenport acting as the broker. The purchase agreement provided that possession was to be given to I.L.L. by April 15, 1993. The purchase agreement also stated that the offer was contingent on I.L.L.'s "acceptance and consummation of lease with Consolidated Freightways Co." Co-trustee Henjes timely accepted the purchase agreement on February 11, 1993. Through negotiations with Mr. Smith of Davenport, Consolidated Freightways extended their lease of the real property in April 1993. All conditions of the purchase agreement with I.L.L. were thus fulfilled.

On June 23, 1993, the co-trustees filed a Motion for Authority to Sell Real Property Free and Clear of Liens in which they sought court approval of the sale of the Consolidated Freightways property to I.L.L. Creditors John Tokheim and Mary Tokheim objected on July 19, 1993. They argued the proposed sale was for an inadequate price and was not in the best interests of the estate or creditors. The co-trustees responded to the objection on August 4, 1993, and contended the sale price was adequate.

A hearing on the Motion to Sell was held August 27, 1993. The Tokheim's stated they would meet the bid of I.L.L. Consequently, the Court ordered the co-trustees to notice to all creditors an in-court auction for September 20, 1993 with the minimum bid to be $110,000.00.

On September 16, 1993, Davenport and Mr. Salem filed a request to be heard at the sale. They wanted the Court to approve their sales commission even if the Consolidated Freightways property was sold to someone other than I.L.L. On September 16, 1993, I.L.L. filed a request to be heard at the sale. It contended it had incurred costs in clearing title and negotiating with the lessee. I.L.L. asked that its purchase offer be approved.

A hearing on the co-trustee's Motion to Sell was held September 20, 1993. John Tokheim successfully bid $115,000.00 for the property. An Order approving the sale was entered October 6, 1993.

On October 22, 1993, Davenport and Mr. Salem filed a Motion for Payment of Administrative Claim. They sought payment of their sales commission of $7,490.00 because they had procured I.L.L. as a buyer for the co-trustees. They argued the co-trustees had authority to sell the property without court approval and, therefore, the property should have been sold to I.L.L. Alternatively, Davenport and Mr. Smith argued that, but for the purchase offer of I.L.L. that the broker had procured, the Tokheims would not have become involved in the sale and ultimately bought the property.

I.L.L. also filed a Motion for Payment of Administrative Claim on October 22, 1993. I.L.L. sought reimbursement of $1,458.25 it spent clearing title to the Consolidated Freightways property.

The Tokheims filed a general objection to the Motions for Payment of Administrative Claim on November 4, 1993. The co-trustees and Unsecured Creditors Committee also filed a joint, general objection on November 19, 1993.

A telephonic pre-hearing conference on the Motions for Payment of Administrative Claim was held December 20, 1993. Appearances included Rosemary Sheehan for the movants, Terry M. Anderson for the Tokheims, Jeffrey M. Lamberti for the Unsecured Creditors Committee, L. Jay Irwin, III, for the co-trustees. The parties agreed that Attorney Sheehan could circulate her professional resume prior to the evidentiary hearing for any objections as to its admissibility. On January 3, 1994, Attorney Sheehan filed a resume regarding her experience examining titles under the Iowa Land Title Standards.

An evidentiary hearing was held February 4, 1994. Appearances included Rosemary Sheehan for the movants, Terry M. Anderson for the Tokheims, Jeffrey M. Lamberti for the Unsecured Creditors Committee, L. Jay Irwin, III, for the co-trustees. The parties stipulated that the title services performed by Attorney Sheehan, I.L.L.'s counsel, benefitted the estate, that the amount of those legal fees sought were reasonable, and that I.L.L. was ready, willing, and able to consummate the sale with the co-trustees in April 1993. The parties were given an opportunity to file post-hearing briefs and the matter was taken under advisement.

II.

A claim may be paid as an administrative priority if it meets the criteria of 11 U.S.C. з 503(b)(1)(A). In re Pauling Auto Supply, Inc., 158 B.R. 789, 793 (Bankr. N.D. Iowa 1993); White Front Feed & Seed, Division of Paul Lammers & Sons, Inc., v. State National Bank of Platteville (In re Ramaker), 117 B.R. 959, 962 (Bankr. N.D. Iowa 1990); In re Dakota Industries, Inc., 31 B.R. 23, 26 (Bankr. D.S.D. 1983). Under 11 U.S.C. з 503(b)(1)(A), a party may be allowed an administrative expense for the "actual, necessary costs and expenses of preserving the estate, including wages, salaries, or commissions for services rendered after the commencement of the case[.]" The request is subject to notice and hearing upon motion filed by the entity seeking payment of the expense. 11 U.S.C. зз 503(a) and 503(b)(1)(A); Dakota Industries, Inc., 31 B.R. at 26. If allowed under з 503(b), an administrative expense claim has first priority, along with certain fees, over all other claims. 11 U.S.C. з 507(a)(1).

Courts have generally construed narrowly the terms "actual" and "necessary" as set forth in з 503(b)(1). NL Industries, Inc. v. GHR Energy Corp., 940 F.2d 957, 966 (5th Cir. 1991)(citing In re Dant & Russell, Inc., 853 F.2d 700, 706 (9th Cir. 1988); In re White Motor Corp., 831 F.2d 106, 110 (6th Cir. 1987); and Trustees of the Amalgamated Ins. Fund v. McFarlin's, Inc., 789 F.2d 98, 101 (2d. Cir. 1986)). Consequently, not all debt incurred post-petition is entitled to priority as an administrative expense.

The threshold requirement, that the expense incurred be "actual" and "necessary" to the preservation of the estate, . . . indicates Congress' intent that priority status be awarded parsimoniously to unsecured creditors who are also a party to an executory contract with the debtor over other unsecured creditors. It would be contrary to the purpose of the statute to saddle debtors with burdensome post-petition obligations or give preferential treatment to select creditors by creating a broad category of administrative expenses.

In re ICS Cybernetics, 111 B.R. 32, 36 (Bankr. N.D.N.Y. 1989). A two-part test is often employed to determine whether the expense meets the criteria of з 503(b)(1). First, did the expense obligation arise post-petition? Second, did the expense benefit the debtor-in-possession in the operation of its business? Pauling Auto Supply, Inc., 158 B.R. at 793; Ramaker, 117 B.R. at 962 (cites therein); ICS Cybernetics, 111 B.R. at 37. The key issue is whether the transaction was beneficial to the estate, not whether a creditor should be compensated for a loss it incurred during the case. See Ramaker, 117 B.R. at 962; ICS Cybernetics, 111 B.R. at 36.

The claimant must show that other unsecured creditors received tangible benefits from the services or goods provided by the claimant. In re Jack Winter Apparel, Inc., 119 B.R. 629, 633 (E.D. Wisc. 1990); Kinnan & Kinnan Partnership v. Agristor Leasing, 116 B.R. 162, 166 (D. Neb. 1990); In re Herrick, Bankr. No. 184-00041, slip op. at 2 (Bankr. D.S.D. May 9, 1988). Incidental benefit to the estate or extensive participation in the case, standing alone, is not a sufficient base for an administrative status. Jack Winter Apparel, Inc., 119 B.R. at 633. A creditor's efforts undertaken solely to further its own self-interest is not compensable. Id.

The burden of persuasion always remains with the claimant. ICS Cybernetics, 111 B.R. at 36-37. The claimant must show his entitlement to the administrative priority by a preponderance of evidence. Firearms Import and Export Corp. v. United Capitol Insurance Co. (In re Firearms Import and Export Corp.), 131 B.R. 1009 (Bankr. S.D. Fla. 1991)(cases cited therein); Jack Winter Apparel, Inc., 119 B.R. at 632; In re Buttes Gas & Oil Co., 112 B.R. 191, 193 (Bankr. S.D. Tex. 1989). The burden of production shifts to the objector if the claimant presents a prima facie case. ICS Cybernetics, 111 B.R. at 36.

III.

Davenport and Mr. Smith's Administrative Expense Claim. The Court concludes that Davenport and Mr. Smith should receive their 7% sales commission as an administrative expense. The trust gave the co-trustees authority to sell the trust's real property and to employ agents. Thus, the co-trustees had authority to enter into the exclusive listing agreement with Davenport and the authority to sell the Consolidated Freightways property. There was nothing within the terms of the trust or plan that put Davenport and Mr. Smith on notice that any sale, and thus their commission, was subject to court approval. Moreover, Davenport and Mr. Smith fulfilled their obligations by presenting the co-trustees with a qualified buyer and by obtaining a suitable lessee for the property. Finally, the services rendered by Davenport and Mr. Smith benefitted the estate. A buyer was found and, most important, a continued lease of the subject property was obtained. The fact that the co-trustees sought but were denied an order approving the sale to I.L.L. does not dislodge the obligation that the co-trustees assumed under the listing agreement. Accordingly, the Court concludes Davenport and Mr. Smith are entitled to their agreed-upon sales commission as an administrative expense.

I.L.L.'s Administrative Expense Claim. The parties agree that the title work performed by I.L.L.'s attorney benefitted the estate and that the amount sought for the legal services was reasonable. The tougher question is whether that work was performed for I.L.L. at its behest solely to further its own self-interest or for the benefit of the estate. While it is true that I.L.L. had the title work done to foster its purchase of the I.L.L. property, the title work was necessary before any sale could take place. Therefore, the estate benefitted because the co-trustees were aided in fulfilling their obligation to provide a purchaser with clear title. The benefit to the estate was more than incidental.

Appropriate orders will be entered granting Davenport & Associates, Inc., and Richard J. Salem's and I.L.L., Inc.,'s Motions for Payment of Administrative Expense.

Dated this 10th day of June, 1994.