In rе: EAGLE-PICHER INDUSTRIES, INC., Debtor. CARADON DOORS AND WINDOWS, INC., Respondent-Appellee, v. EAGLE-PICHER INDUSTRIES, INC., Movant-Appellant.
No. 04-3747
United States Court of Appeals for the Sixth Circuit
Decided and Filed: May 5, 2006
06a0152p.06
Before: SILER, SUTTON, and COOK, Circuit Judges.
RECOMMENDED FOR FULL-TEXT PUBLICATION Pursuant to Sixth Circuit Rule 206. Appeal from the United States District Court for the Southern District of Ohio at Cincinnati. No. 02-00589—Sandra S. Beckwith, Chief District Judge. Argued: January 25, 2006.
COUNSEL
OPINION
SUTTON, Circuit Judge. Eagle-Picher Industries emerged from Chapter 11 bankruptcy in November 1996, and in this case seeks to stay a $20 million patent-infringement action filed by Caradon Doors and Windows against it in May 1997. After considerable collateral skirmishing, the merits of the stay motion focused on the following disagreement. Eagle-Picher contends that the patent-infringement claim cannоt proceed because the confirmation of the 1996 reorganization plan discharged Caradon‘s claim. Caradon responds that the patent-infringement claim arose in the ordinary course of doing business with the debtor and that the plan by its terms excepted this kind of claim from discharge. The bankruptcy court agreed with Eagle-Picher while the district court agreed with Caradon. We agree with the district court and affirm.
I.
Caradon manufactures artificial-wood doors. In 1989, Caradon (in truth, its
Meanwhile, in the midst of this patent-infringement litigation, Eagle-Picher filed for Chapter 11 bankruptcy relief on January 7, 1991. Five and a half years later, on November 18, 1996, the bankruptcy court confirmed Eagle-Picher‘s reorganization plan. The bankruptcy court entered the confirmation order roughly one month before Caradon and Therma Tru settled their patent infringement lawsuit in December 1996.
On May 8, 1997, Caradon filed a lawsuit against Eagle-Picher in the District Court for the Northern District of Georgia, claiming contributory patent infringement and breach of contract (among other claims) and seeking contribution and indemnity arising from the settlement of Therma Tru‘s patent-infringement claims. Caradon confined its prayer for relief to postpetition damages, which is to say damages stemming from sales between Caradon and Eagle-Picher after Eagle-Picher petitioned for bankruptcy relief in 1991. On June 6, 1997, Eagle-Picher moved for a stay of Caradon‘s action in the Bankruptcy Court for the Southern District of Ohio, claiming that the reorganization plan and confirmation order discharged the claim.
On Dеcember 24, 1997, the bankruptcy court concluded that Caradon had abandoned any right to assert a prepetition or preconfirmation claim by not raising the claim before confirmation of the reorganization plan. The district court, however, reversed the bankruptcy court‘s decision, holding that Caradon did not abandon its claim. The case then underwent lengthy discovery and several additional hearings before the bankruptcy court.
On May 9, 2002, the bankruptcy court granted the stay motion on the independent ground that Caradon did not have a cognizable claim to bring in the Northern District of Georgia. Construing § 2.1 of the reorganization plan, which preserves administrative expenses for “liabilities incurred in the ordinary course of business by any of the Debtors in possession,” JA 104, the bankruptcy court reasoned that “[c]laims for contributory patent infringement, breach of contract and warranty of non-infringement, common law contribution and common law indemnification were not part of [the] day-to-day interaction” between the parties and thus “are not within the exception of [§] 2.1 of the Plan.” Bankr. Ct. Op. at 30. The district court reversed. As it saw the matter, Caradon‘s claims arose from Eagle-Picher‘s core business and thus amounted to “liabilities incurred in the ordinary course of business.” D. Ct. Op. at 12-13.
II.
In a bankruptcy case on appeal from a district court, we owe no special deference to the district court‘s decision and review “the bankruptcy court‘s legal conclusiоns de novo and uphold its factual findings unless clearly erroneous.” Crowell v. United States, 305 F.3d 474, 476 (6th Cir. 2002). There is some debate between
The parties appear to share considerable common ground in their framing of this dispute. First, under the Bankruptсy Code, all claims against the debtor are discharged upon the confirmation of a Chapter 11 reorganization plan except as otherwise indicated in the plan of reorganization. See
Second, the Bankruptcy Code defines administrative expenses incurred during the pendency of the bankruptcy and payable by the debtor as the “actual, necessary costs and expenses of preserving the estate.”
Applying Reading and this two-part test, courts have concluded that the following claims fall within the Code‘s definition of administrative expenses: tort, Reading, 391 U.S. at 485; trademark infringement, Houbigant, Inc. v. ACB Mercantile (In re Houbigant, Inc.), 188 B.R. 347, 356 (Bankr. S.D.N.Y. 1995); patent infringement, Carter-Wallace, Inc. v. Davis-Edwards Pharmacal Corp., 443 F.2d 867, 874 (2d Cir. 1971); and breach of contract, United Trucking Serv. v. Trailer Rental Co. (In re United Trucking Serv.), 851 F.2d 159, 162-63 (6th Cir. 1988); Nostas Assocs. v. Costich (In re Klein Sleep Prods.), 78 F.3d 18, 26 (2d Cir. 1996). Under these precedents, Caradon‘s claims satisfy the traditional definition of “administrative expenses” so long as they arose from transactions that occurrеd between it and Eagle-Picher after the petition for bankruptcy—which indeed they did. See Pension Benefit Guar. Corp., 126 F.3d at 816 (noting that a claim must arise “from a transaction with the bankruptcy estate” to be an administrative expense).
Third, most confirmed Chapter 11 plans, if not all of them, provide mechanisms by which the reorganized company will assume the administrative expenses of the debtor that arose during the bankruptcy and that were not paid upon confirmation of the plan. See
In this instance, § 2.1 of the Eagle-Picher reorganization plan permits certain administrative expense claims to be filed after the confirmation date of the plan. Rather than set an explicit bar date for the payment of all such claims, § 2.1 says that they must be “assumed and paid” by the “Reorganized Debtor[]” “in accordance with the terms and conditions of the particular transactions.” JA 104. Section 2.1 reads in relevant part:
The Allowed Amount of each Allowed Administrative Exрense shall be paid in full, in cash, on the Effective Date; provided, however, that (i) Administrative Expenses representing (a) liabilities incurred in the ordinary course of business by any of the Debtors in Possession . . . shall be assumed and paid by the respective Reorganized Debtors in accordance with the terms and conditions of the particular transactions and any agreements relating thereto . . . .
Id. (emphasis removed and added).
The rub in this case is whether the definition of recoverable administrative-expense claims in § 2.1 covers Caradon‘s claims. We think that it does. The provision says that “Administrative Expenses representing (a) liabilities incurred in the ordinary course of business by any of the Debtors in Possession” will be assumed by the reorganized debtors. It thus incorporates the plan‘s general definition of “administrative expense,” which сovers “[a]ny Claim constituting a cost or expense of administration in the Chapter 11 Cases under
The problem for Eagle-Picher, it seems to us, is that any narrowing of the definition of recoverable administrative expenses accomplished by § 2.1 does not apply to Caradon‘s claims. While the provision says that recoverable administrative expenses must be ordinary-course liabilities, Eagle-Picher fails to explain why contract, tort or patent-infringement claims arising from postpetition sales would exceed the scope of that requirement. The sales between Caradon and Eagle-Picher arose from the ordinary course of the debtor‘s business—selling door skins. And the liabilities at issue arose directly from those ordinary-course sales, whether because the products were defective, whether because the terms of the contracts were not followed or whether because the products infringed an existing patent.
In reaсhing a contrary conclusion, the bankruptcy court determined “that matters not part of the day-to-day interaction between the parties are not within the exception of [§] 2.1 of the Plan” and held that Caradon‘s claims did not amount to day-to-day expenses. Bankr. Ct. Op. at 30. As support for this conclusion, the court invoked Black‘s Law Dictionary‘s definition of “ordinary course of business”
But this analysis reads the “liabilities incurred in” language out of § 2.1, artificially limits qualifying claims to the immediate expenses of the transactions themselves and in the end leaves us with the “firm conviction that a mistake has been committed,” Anderson v. Bessemer City, 470 U.S. 564, 573 (1985). While “ordinary course of business” may indeed refer to the daily transactions between the parties, “liabilities incurred in” those transaсtions extends not just to Eagle-Picher‘s duty to deliver these goods to Caradon but also to any failure on its part to perform its explicit and implicit obligations under the contracts governing these transactions. See Black‘s Law Dictionary 925 (7th ed. 1999) (defining “liability” as “[t]he quality or state of being legally obligated or accountable; legal responsibility to another . . . enforcеable by civil remedy“). While in one sense it was not part of the daily business of the parties to infringe patents, patent-infringement liability plainly represents a legal responsibility that may arise from that daily business—and no one disputes that this claim arose from the door skins that Eagle-Picher sold to Caradon on a daily basis.
In Reading, when the Supreme Court determined that a negligence сlaim falls within the Bankruptcy Code‘s general definition of administrative expenses, it held that tort claims were “costs ordinarily incident to operation of a business.” 391 U.S. at 483. Even to the extent § 2.1 narrows the general definition of administrative expenses found in
Other courts, construing language from a plan that defined administrative expenses in the way that § 2.1 does, have reached similar conclusions. See Fieber‘s Dairy, Inc. v. Purina Mills, Inc., 331 F.3d 584, 587 n.1 (8th Cir. 2003) (concluding that the following language—“Administrative Claims based on liabilities incurred by a debtоr in the ordinary course of its business . . . will be paid by the applicable Reorganized Debtor pursuant to the terms and conditions of the particular transaction giving rise to such Administrative Claims“—may encompass tort claims and remanding the case to allow the district court to interpret this phrase in the bankruptcy plan which it had not done previously); Goldman, Sachs & Co. v. Esso Virgin Island, Inc. (In re Duplan Corp.), 212 F.3d 144, 155 (2d Cir. 2000) (concluding that the following language—“Administrative claims representing the Trustee‘s liabilities incurred in operating the business of the Debtors in the ordinary course,” In re Duplan Corp., 209 B.R. 324, 331 (Bankr. S.D.N.Y. 1997)—covered claims for contribution stemming from joint responsibility for environmental fines).
Bolstering this interpretation, the administrative rules of the Internal Revenue Service for companies in Chapter 11 bankruptcy define “ordinary course indebtedness” as
aris[ing] in the ordinary course of the loss corporation‘s trade or business only if the indebtedness is incurred by the loss corporation in connection with the normal, usual, or customary conduct of business . . . . For example, indebtedness (other than indebtedness acquired for a principal purpose of being exchanged for stock) arises in the ordinary course of thе loss corporation‘s trade or business if it is trade debt; a tax liability; a liability arising from a past or present employment relationship, a past or present business relationship with a supplier, customer, or competitor of the loss corporation, a tort, a breach of warranty, or a breach of statutory duty . . . .
In addition to the bankruptcy court‘s rationale for its decision, Eagle-Picher makes several other arguments for holding that § 2.1 does not apply to Caradon‘s claims. It notes for example that “administrative expenses” under § 2.1 must be paid “in accordance with the terms and conditions of the particular transactions and agreements relating thereto,” language that Eagle-Picher submits is inconsistent with Caradon‘s claims. But why that is so remains to be seen. The “terms and conditions” of most sales transactions explicitly and implicitly contemplate that the products will be paid for (a contract claim), that the products will not be defective (a tort claim) and that the products will not violate another‘s patent (a patent-infringement claim). And surely to the extent further legal proсeedings prove that any of these claims against Eagle-Picher are valid, Caradon at a minimum will have the right to the return of one of the terms and conditions of the sales—the price it paid for the door skins.
Eagle-Picher further argues that Caradon has not shown that its claims constitute “allowed” administrative expenses. We agree with two premises of this argument but not its cоnclusion. It is true, for example, that § 2.1 refers to the payment of “allowed” administrative expenses. And it is true that § 1.1.6 of the plan defines “allowed” expenses in a way that does not apply to Caradon‘s claims because it requires that they be approved by the bankruptcy court before the confirmation of the plan. The problem, however, is that § 2.1 speсifies several exceptions to the payment of allowed administrative expenses on the effective date, one of which applies here. Namely: “[a]dministrative expenses representing liabilities incurred in the ordinary course of business . . . shall be assumed and paid by the Reorganized Debtors in accordance with the terms and conditions of the particular transactions.” Id. Debts falling within this exception need not have been paid on the effective date and are assumed by the reorganized debtor. And, most importantly, this exception says nothing about being “allowed.” In fact, it would not make sense if it had because excepted expenses are no longer the responsibility of the bankrupt estate but are liabilitiеs of the reorganized company. Instead of requiring the bankruptcy court to approve the recovery of these expenses, the plan specifies that they are to be dealt with like all other debts of non-bankrupt companies—“in accordance with the terms and conditions of the particular transactions.”
Finally, and quite understandably, Eagle-Pichеr argues that the assumption of potential liability for these claims could pose an acute problem for the reorganized company. No doubt, in a Chapter 11 case in which the working capital provided for in the 1996 plan of reorganization for the reorganized company is $15 million, a $20 million claim (even one that has yet to be
III.
For these reasons, we affirm the judgment of the district court.