In Re Jartran, Inc.
AMENDED
Memorandum and Order
This mаtter comes before the Court on the motion of Fruehauf Corporation (“Fruehauf”) for allowance of administrative claims, as more fully described below. The Debtor in this case has also filed a motion for summary judgment in its favor as respects the Fruehauf motion. 1 Frue-hauf has responded with its own cross-motion for partial summary judgment or in the alternative, a motion to dismiss Jartran II pursuant to § 1112 of the Bankruptcy Code (11 U.S.C. § 101 et seq. (1986). All statutory references herein are to the Bankruptcy Code unless otherwise noted.)
The parties do not contest the salient facts. A summary of these facts together with a recapitulation of the history of the Jartran cases is necessary to an understanding of the Court’s ruling.
History
Jartran, Inc. was organized in 1978 and commenced operations in 1979. Jartran, Inc. was in the business of renting and leasing trucks and trailers on a nationwide basis through independent dealer agents (“Agents”) in both the retail and commercial markets. In 1979, Fruehauf and Jar-tran, Inc. entered into two Master Leases dated March 21, 1979 and November 21, 1979, respectively. Pursuant to the terms of the Master Leases, Jartran, Inc. leased approximately 19,650 vehicles from Frue-hauf for use by Jartran, Inc.’s Agents. By the end of December, 1981, Jartran, Inc. owed Fruehauf over $7,036,000 under the Master Leases. (Disclosure Statement of Jartran I, November 15, 1982, Section III, hereinafter called “Disclosure Statement”.)
On December 31, 1981 Frank B. Hall & Co. (“Hall”) acquired 92% of the common stock of Jartran, Inc. On that same day, Jartran, Inc. filed for relief under Chapter 11 of the Bankruptcy Code (81 B 16118). (Disclosure Statement, Part I § C and Part IV § B.)
Under Jartran I’s Fifth Amended Plan of Reorganization as thrice modified (“Plan”), Fruehauf was treated as a Class 3 creditor. Fruehauf’s and Jartran’s obligations under the Plan were set forth in the “Obligation Restructuring Agreement” (“ORA”) which was entered into on January 21, 1985, the effective date of the Plan. Under the ORA, the terms and obligations set forth in the Master Leases remained in full force and effect except those obligations dealing with the payment of monies due or to become due to Fruehauf. (Third Modification to the Plan, Exhibit F § 11(c).)
The ORA provides for Fruehauf’s claim of $54,700,000.09
2
to be discharged by
Jartran I’s Plan was confirmed on September 29, 1984. This Court has heretofore determined that Jartran Fs Plan has been substantially consummated under the provisions of § 1101(2) for, among other reasons, distributions provided by the Plan had commenced. Jartran, subject to the terms of the Plan, operated its business from and after September 29, 1984 free of the Bankruptcy Code and of this Court’s supervision.
On October 24, 1985, Jartran I entered into a compromise agreement with Frue-hauf regarding Jartran’s obligations to pay for vehicles lost, damaged, or destroyed prior to December 31, 1983. This agreement was approved by the Court on December 20,1985. This Court retained jurisdiction under Article 16 of the Plan,
[T]o require the performanсe of any act that is necessary for the consummation of the Plan including, without limitation, the jurisdiction to hear and determine all claims against Jartran [I] and to enforce all causes of action which may exist in its favor ... and to enter such orders regarding the disbursement of funds under the Plan or the consummation thereof as may be necessary to protect the interests of Jartran [I] and its creditors.
(Jartran IFs Reply Memorandum raises the question of this Court’s jurisdiction to convert Jartran I to a Chapter 7 case under § 1112(b). See P. 941 infra.)
On March 4, 1986, Jartran commenced a new case under the Bankruptcy Code, creating a new debtor in possession, Jartran II, the Debtor who is the subject of the proceedings now before the Court.
Fruehaufs Motion
Fruehauf’s motion for allowance of administrative priority encompasses three separate claims. The first claim is for the entire amount due under the Master Leases, as amended by the ORA (further references to the “Master Leases” will, unless otherwise noted, refer to the Master Leases as amended). The second claim arises out of the breach of the October 24, 1985 agreement respecting lost and damaged vehicles. The third claim is for costs of repossessing leased Fruehauf equipment subsequent to March 4, 1986. These three claims are discussed below.
The gravemen of Fruehauf’s motion rests on its assertion that the Master Léas-es with Jartran, Inc. were assumed within the Jartran I proceedings by virtue of confirmation of the Plan. These Master Leases will be rejected within the Jartran II proceedings, a fact acknowledged by Jar-tran II. Fruehauf argues that it is entitled to an administrative priority under § 365 for the entire balance due it under the Master Leases, since they were assumed and will be rejected in the same case; the two Jartran cases being in effect the same case.
Alternatively, Fruehauf requests the Court find that Jartran I entered into a new contractual obligation by virtue of the ORA. Consequently, Fruehauf maintains it is entitled to priority under § 503(b)(1)(A) for the balance due under the Master Leases, since the leased equipment was necessary for preserving the estate of Jartran I, and the operations of Jartran after confirmation of the Plan. Again, no distinction has been made between the two Jartran cases.
Fruehauf also claims priority for the amount of $145,525.00 due under the October 24, 1985 agreement on the basis that this agreement was either (i) a further
Finаlly, Fruehauf is seeking administrative priority for the cost of repossessing equipment covered by the Master Leases, which under the ORA, Jartran became obligated to recover in the event of default.
Jartran II, U-Haul, and Hall’s Responses
Jartran II moved for a summary judgment with respect to all three of Frue-hauf s claims. Jartran II argues that Frue-hauf is not entitled to an administrative priority for any of its claims since (i) the Master Leases were assumed in the Jar-tran I proceedings and will be rejected in the Jartran II proceedings, a separate prоceeding; (ii) the estate of Jartran II has received no benefit from Fruehauf s equipment, consequently recovery under § 503(b)(1)(A) is inappropriate; (iii) granting Fruehauf s reimbursement for Jartran II’s failure to marshall equipment would result in preferential treatment of Frue-hauf over other creditors of Jartran II; and (iv) Fruehauf’s claim from Jartran II’s breach of the October 24, 1985 agreement gives rise to only an unsecured claim.
U-Haul International Inc. (“U-Haul”) and Hall also filed memoranda challenging Fruehauf s position. Each takes issuе with Fruehauf s claim that it is entitled to administrative priority in a subsequent case for an obligation incurred in a prior case. Hall argues that § 365(g)(2)(A) only applies to converted cases and Jartran II is not a conversion of Jartran I, but is a separate case. U-Haul adds that Fruehauf is essentially acting in its own self interest by repossessing equipment which it has a security interest in, and therefore, should not receive priority for that claim.
Fruehauf s Reply
Fruehauf subsequently responded with a cross-motion for partial summary judgment arguing that it is entitled tо an administrative priority as a matter of law, or in the alternative, asking the Court to dismiss Jartran II. Fruehauf argues that after this Court found that the Plan in Jartran had been substantially consummated, the commencement of an entirely new Chapter 11 case can not be used to effect a modification of an existing Plan. Rather, Frue-hauf maintains that Jartran II should be dismissed and Jartran I should be converted to Chapter 7 pursuant to § 1112. Put another way, this Court’s failure to convert would be an abuse of its discretion under § 1112 of the Bankruptcy Code.
Jartran IPs Reply
Jartran II’s reply addressed the propriety of filing successive Chapter 11 cases that are filed in good faith as well as the retained jurisdiction of the Court under the Jartran I Plan. Additionally, Jartran II points to the procedural defect of Frue-hauf s motion to dismiss. 4
Discussion
Contrary to Fruehauf s assertion, the Court does not consider Jartran II as a continuation of Jartran I, but considers the two as separate cases characterized by different objectives, assets and claims. The Court is not abusing its discretion by refusing to dismiss the Jartran II case and then converting the Jartran I case to one under Chapter 7 liquidation.
The objectives of Jartran I were to reorganize and continue Jartran, Inc.’s pre-petition nationwide trailer and truck rental business under restructured financial obligations. To this end, the Master Leases with Fruehauf were modified, and the financial obligations thereunder were restructured, as more fully described in the ORA and the Plan. Hall, the parent of Jartran, Inc., made an initial payment of $7,000,000 to Fruehauf pursuant to the terms of the ORA. 5
Upon confirmation of the Plan, Jartran, Inc. was discharged of its pre-petition debts and in consideration thereof Jartran as
Jartran II, on the other hand, is a new case with assets, liabilities, and objectives different than those of Jartran I. Jartran II is not an attempt to modify the terms of the Plan, but rather is a good faith admissiоn that Jartran was unable to continue operating as a going concern. Jartran II and Hall have submitted a Joint Plan (“Joint Plan”) which calls for selling the assets of Jartran II pursuant to § 1123(b)(4) and making distributions to holders of claims. 6 See R. Ginsberg, Bankruptcy ¶ 13,457 (1985). Jartran II does not intend to reorganize its business of nationwide truck and trailer rentals and therefore is not assuming or renegotiating any of the contracts or agreements that existed at the commencement of this case. Specifically, there is no intention on the part of Jartran II to modify any of the agreements with Fruehauf or any other of its creditors. No successor to the nationwide truck and trailer rental business will emerge through the Joint Plan. The result of a confirmation of the Joint Plan will not be a discharge of Jartran II from its pre-petition debts. Under § 1141(d)(3)(A) confirmation of a plan that provides for liquidating all, or substantially all, of an estate’s property does not discharge the debtor of its pre-petition debts.
It is this aspect of Jartran II that distinguishes it from the two cases Fruehauf relies on for its contention that the instant case is a serial filing and an attempt to circumvent the prohibition against amending a Plan once it has been substantially consummated.
In
In re Northampton Corp.,
Similarly, in
In re AT of Maine,
In AT of Maine and Northampton, the debtors sought to use the automatic stay provisions to hold off their creditors while proposing a second plan which was intended to cure defaults arising from the inabilities of the debtors to meet the terms of their first plans. AT of Maine and Northampton unquestionably stand for the proposition that, following “substantial consummation”, a plan may not be modified by the commencement of a new Chapter 11 case under the Bankruptcy Code. This Court agrees in substance with those two cases. However, that conclusion does not require that Jartran II be dismissed, or that every subsequent request for relief under the Bankruptcy Code by a reorganized entity must be dismissed and the prior case converted to a Chapter 7 liquidation.
Since this Court has found and determined that Jartran II is a separate and distinct case from Jartran I, Frue-hauf’s claim for priority treatment of its breach of contract claims under § 365(g)(2)(A) must fall. It is a fundamental principle in bankruptcy law that a debt- or in possession (Jartran II) does not become a party to an executory contract unless such debtor assumes the contract in the manner provided by statute (§ 365).
In re Bildisco,
The Court must also address Fruehauf s motion to dismiss the instant case and convert the prior case to a Chapter 7 liquidation. Fruehauf contends that since the Plan under the prior case was substantially consummated and then failed, the only alternative is liquidation of the prior case under Chapter 7. Fruehauf points to § 1112(b) to support its argument.
Aside from the alleged procedural defects in Fruehauf’s suggestion,
9
Frue-hauf overlooks the discretionary nature of § 1112(b). By no means does § 1112(b) require a court to convert a case when the post-confirmation entity is unable to fulfill the obligations cоntained in a confirmed plan. Rather, this Court may convert or dismiss such a case for cause if it is in the best interest of the creditors and the estate.
10
The Court must balance equities and consider the interests of creditors and the estate in determining whether conversion is appropriate.
In re Macon Prestressed Concrete Co.,
The conversion of Jartran I would raise a myriad of administrative problems that are mind-boggling. Over six years have elapsed since the original Jartran I
As Judge Robert D. Martin reasoned in
In re Ford,
On conversion of Jartran I, to a Chapter 7 liquidation one of the questions which would arise is which, if any, of the pre-con-version claims against Jartran Inc., Jartran I, Jartran and now Jartran II would be granted administrative priority. Administrative claims survive dismissal. Section 348(d) provides:
(d) A claim against the estate or the debtor that arises after the order for relief but before conversion in a case that is converted under section 1112, 1307, or 1208 of this title, other than a claim specified in section 503(b) of this title, shall be treated for all purposes as if such claim had arisen immediately before the date of the filing of the petition.
Section 503(b)(1)(A) allows priority treatment for claims for the “actual, necessary cost of preserving the estate”.
Conversion of Jartran I would create a Chapter 7 estate as of December 31, 1981 (§ 348(a)). The trustee of the Chapter 7 estate would have the powers provided under § 549(a) to “avoid a transfer of property of the estate ... that occurs after the commencement of the case [December 31, 1981]; and that is not authorized under [the Bankruptcy Code] or by the court” (§ 549(a)). 12 However, subsection (d) of § 549 limits the powers of the trustee to avoid such transfers to a рeriod two years after the date of the transfer sought to be avoided. 13
Upon the conversion of the Jartran I case to Chapter 7 parties who transacted business with an entity who was operating under a confirmed plan of reorganization free of Bankruptcy Court supervision could find their transactions might well be subject to the avoidance powers of § 549 and their claims limited by § 348(d).
Jartran I’s trustee’s avoidance powers under the preference provisions of § 547 and the fraudulent conveyance provision of § 548 would be ineffective as respects the operations of Jartran under the Plan as those provisions of the law look retrospectively at a debtor’s dealing commencing with the date of filing (December 31, 1981).
This Court is of the opinion that both § 348(d) and § 549 were not designed, nor intended, to apply to an entity such as Jartran which had operated under a confirmed, non-amendable plan of reorganization. 14
Resolving thе foregoing and other administrative problems which could arise upon a conversion of an entity operating for several years under a confirmed plan of reorganization would consume enormous resources that could and should be otherwise distributed to creditors.
An orderly liquidation within the Jartran II proceedings would be more in keeping with the purposes of the Bankruptcy Code than a conversion of Jartran I.
Therefore, Fruehauf s motion to dismiss the instant case pursuant § 1112(b) will be denied.
Finally, Fruehauf has asked for administrative priority for costs it estimates to be $1,500,000 incurred in marshalling and repossessing leased equipment. Frue-hauf claims that these expenses have been incurred since the filing of the instant case and repossessing its equipment was necessary to minimize this estate’s expense in that regard. As was stated in
In re Patch Graphics,
As an undersecured creditor, Fruehauf is clearly acting in its own best interest by marshalling and repossessing equipment which it owns. Fruehauf s actions do not benefit the estate as a whole, therefore, its claim for administrative priority must be denied.
NOW THEREFORE IT IS ORDERED that Fruehauf s motion for administrative priority for its three claims, (i) breach of contract under the Master Leasеs; (ii) breach of the October 24, 1985 Agreement; and (iii) costs incurred in marshalling the leased property hereby are denied.
IT IS FURTHER ORDERED that Frue-hauf s motion to dismiss the instant case is denied.
IT IS FURTHER ORDERED that the parties motions for summary judgment are dismissed as moot.
IT IS FURTHER ORDERED that counsel for the Debtor serve a copy of this Order on all parties of record within five (5) days of its receipt.
Notes
. At the outset, it is necessary for the Court to identify the four stages of "Jartran” as it is referred to in this Memorandum and Order. Each Jartran is to some extent an entity with its own attributes.
See In re Chattanooga Wholesale Antiques, Inc., 67
B.R. 899, 901 (Bankr.E.D. Tenn.1986). "Jаrtran, Inc.” shall refer to the debtor prior to the filing of the first petition in bankruptcy on December 31, 1981. "Jartran I” shall refer to Jartran as debtor in possession during the first bankruptcy case, covering the period from December 31, 1981 to the date Jartran I’s Fifth Amended Plan of Reorganization as thrice modified was confirmed, September 29, 1984,
. This amount represented the total amount of Jartran, Inc.'s obligations under the Master Leases prior to the ORA.
. Fruehauf, in its motion for administrative claims, characterized this $7,000,000 payment as "an amount which cured the pre-petition default of the debtor”. It is not necessary in reaching a decision in the instant dispute to decide whether the $7,000,000 payment was made to cure Jar-tran Inc.’s pre-petition defaults, or whether it was for adequate assurances of future performance.
. Rule 2002(a)(5) requires that this Court hold a hearing, on 20 days notice, prior to determining whether or not to dismiss a pending bankruptcy proceeding or convert a case to Chapter 7 from Chapter 11. To date, Fruehauf has not requested such a hearing.
. See fn. 3, supra.
. Fruehauf mistakingly argues that since the instant case will liquidate the estate's assets, it should be treated as a Chapter 7 case. This argument ignores the fact a liquidation under Chapter 11 is often preferable when the liquidation can proceed in a more orderly, expeditious, and less expensive manner under the control of the debtor.
Cf. In re L.S. Good & Co.,
. The reasoning of both
AT of Main
and
Northampton
suggest that the prohibition on serial Chapter 11 filings is to prevent debtors from abusing the court’s protection to modify contracts from previously confirmed plans “by filing chapter 11 petition
ad infinitum". In re Northampton,
. Fruehauf argues that it is entitled to priority under § 365(g)(2)(A), which allows priority to a claimant who is a party to a contract that has been assumed and subsequently rejected in the same case. Since this Court has determined that the instant case is a different case than the prior case, § 365(g)(2)(A) is inapplicable.
But see In re Multech,
. See fn. 4, supra. This alleged defect has no substantiative barring on the Court’s decision.
. The issue of whether this Court retains jurisdiction over Jartran to enter an order converting it to a Chapter 7 liquidation under § 1112(b) is raised in Jartran II's Reply, P. 941. The Court need not address this issue as it has determined not to convert Jartran I.
. Though not applicable in all parts to a conversion of Chapter 11 to a Chapter 7, cases dealing with the conversion of a Chapter 13 to a Chapter 7 shed light on the problems to be encountered. Some courts have held that wages and property acquired by a Chapter 13 debtor during the Chapter 13 estate, but prior to conversion to Chapter 7 are not part of the converted estate.
See, e.g., In re Bullock,
. Section 549 was derived from sections 70d and 63b of the Bankruptcy Act and was intended to protect a bona fide post petition transferees. See generally 4 King, Collier on Bankruptcy ¶ 549.01 (1986).
. Are not the trustee’s § 549 avoidance powers further limited to violations of the confirmation order and the plan since upon confirmation the debtor is free of the court and the Code except as provided in the order and plan?
. The Court notes that the remedial provisions of the Code, §§ 547 and 548 regarding preferences and fraudulent conveyances, do not apply as to transactions that occur while an entity has been operating under a confirmed plan of reorganization if that entity then converts the case to a case under Chapter 7. In those situations the trustee would have only state created powers to avoid fraudulent transfers and preferences. Congress apparently never anticipated the conversion to Chapter 7 of a reorganized debtor after substantial operations under a confirmed plan. Though a plan might specifically provide for a conversion upon the failure to complete the plan, (for example in order to preserve preference claims,
see e.g., In re Iberis International, Inc.,