In Re Mechanical Maintenance, Inc.
MEMORANDUM OF DECISION
These are consolidated appeals from an order of the bankruptcy court dismissing the Chapter 11 bankruptcy case of debtor Mechanical Maintenance, Inc. At issue is whether that court incorrectly interpreted section 1112(b) of the Bankruptcy Code and, if it did, whether the dismissal was consequently improper. Jurisdiction is based on
I.
As the operator of a mechanical contracting business, the debtor employed members of the appellant unions. 1 Under various collective bargaining agreements, the debtor agreed not only to pay those employees hourly wages but also to contribute to the unions’ fringe benefit funds, which are also appellants, 2 a fixed sum for each hour that the employees worked.
In 1989, the debtor experienced financial difficulties, and on October 26,1989, it filed a voluntary petition for reorganization under Chapter 11. It remained in business as a debtor in possession. Notwithstanding the company’s troubles, the unionized employees continued to work, and their work resulted in accounts receivable from various property owners.
3
According to appellants, many of those accounts receivable have been fully collected. Nevertheless,
Appellants filed two proofs of claim for the unpaid contributions to the unions’ benefit funds: one claim for $18,505.93 was filed on January 9, 1990; another claim for $67,733.04 was filed on May 1, 1990.
On August 9, 1990, Continental Bank (Continental) moved for relief from the automatic stay pursuant to
Concurrently, the debtor filed a motion to dismiss the Chapter 11 case pursuant to 11 Ú.S.C. § 1112(b). The debtor averred the following: that its business operations had ceased on July 31, 1990; that all of its assets were subject to Continental’s perfected security interest; that Continental was undersecured; and that, therefore, no assets were available for unsecured creditors, and conversion of the case to a case under Chapter 7 would incur needless administrative costs with no benefit to any creditor. Record, Exhibit 5.
Appellants objected to both motions. Essentially, they argued that their members’ work created the accounts receivable that Continental sought to collect. As a consequence, they contended, their claims were entitled to superpriority under section 506(c) of the Bankruptcy Code, 4 and any action by the court dismissing the case or providing Continental relief from the stay would frustrate their ability to collect those claims. Record, Exhibits 7, 8.
Oral argument was held before the bankruptcy court on September 12, 1990. Because it granted the debtor’s motion to dismiss, the court did not address Continental’s motion. Record, Exhibit 9 at 11. As support for its bench ruling, the court relied upon its decision in
In re Geller,
should be able to get out [of bankruptcy] unless ... [the creditors] can show ... plain legal prejudice, which is a pretty— it has to be a pretty serious thing that’s going to happen to you if the case is dismissed, as opposed to staying in bankruptcy. I don’t know whether you can show that....
Record, Exhibit 9 at 7.
The court rejected appellants’ argument that, because their claims were entitled to superpriority under section 506(c), dismissal was improper. Specifically, the court concluded that any priority to which appellants’ claims were entitled under bankruptcy law would be equivalent to the priority and remedies that they possessed under state law. Hence, dismissal would not result in plain legal prejudice to appellants. Id. at 5, 7-8, 10.
The debtor subsequently turned its accounts receivable over to Continental. Appellants’ claims remain unpaid.
II.
On appeal, appellants contend that the bankruptcy court misinterpreted section 1112(b).
5
They argue that a creditor opposing the motion to dismiss of a debtor who filed a voluntary Chapter 11 petition should not be required to demonstrate “plain legal prejudice.” Rather, they assert, there is no presumption in the Bankruptcy Code that a debtor should ordinarily be permitted to dismiss a case voluntarily filed. To the contrary, a court may dismiss a case pursuant to section 1112(b) only if dismissal is in the best interest of creditors and the estate. In this case, appellants submit, their superpriority rights under section 506(c) are not matched under state law,
6
and
III.
The appellants raise only questions of law; thus this court’s scope of review is plenary.
J.P. Fyfe, Inc. v. Bradco Supply Corp.,
Section 1112(b) of the Bankruptcy Code states in part:
[O]n request of a party in interest or the United States trustee, and after notice and a hearing, the court may convert a case under [Chapter 11] to a case under chapter 7 of this title or may dismiss a case under [Chapter 11], whichever is in the best interest of creditors and the estate, for cause....
A list of ten grounds that constitute “cause” is then set forth in the statute. Those ten grounds are non-exclusive. A court may consider other factors as they arise and may “use its equitable powers to reach an appropriate result in individual cases.” S.Rep. No. 989, 95th Cong., 2d Sess. 117,
reprinted in
1978 U.S.Code Cong. & Admin.News 5787, 5903;
In re Gonic Realty Trust,
When ruling on a
Once the threshold is passed and cause is found to exist, the decision whether to convert to Chapter 7 or to dismiss is committed to the discretion of the bankruptcy court. S.Rep. No. 989, 95th Cong., 2d Sess. 117,
reprinted in
1978 U.S.Code Cong. & Admin.News 5787, 5903;
see also Hall v. Vance,
Although the bankruptcy court treated its earlier interpretation of
Involved in Geller were debtors’ motions to dismiss voluntarily both a voluntary Chapter 11 case and a voluntary Chapter 7 case. The cases had been jointly administered. The trustee and one creditor objected to the motions.
Unable to “find ... pertinent cases” construing
The court may dismiss a case under this chapter only after notice and a hearing and only for cause....
Unlike
Central to the court’s analysis, moreover, was an anticipation of several ironies and asymmetries that would arise if voluntary motions to dismiss voluntary Chapter 7 and Chapter 11 cases were regularly denied.
7
None of those purported contradictions was based upon the flush language in
Relying upon
In re Hall,
[Chapter 7] cases in which a debtor’s request for a voluntary dismissal has been rejected upon the objection of a creditor hold that such a request should generally be granted unless some “plain legal prejudice ” to creditors will otherwise result.... While we believe that all creditors and the Trustee should clearly have an opportunity to convince the Court that “cause” in the form of “plain legal prejudice” for refusing to allow a debtor to voluntarily dismiss a bankruptcy case exists, we must confess that, when the ironies which come into play when a court interprets§ 707(a) strictly and denies such a motion are considered, we would be hard-pressed to articulate just what circumstances could constitute such “plain legal prejudice” ... to justify the result of a denial of a request to voluntarily dismiss a voluntary case. Hence, we would grant such a motion in all but extraordinary situations.
Id.
at 690 (emphasis added) (citations omitted). ... Such reasoning, the
Geller
court stated, applied to
Apparently, the
Geller
court concluded that a creditor opposing a debtor’s voluntary
As noted above, the
Geller
court relied on
In re Hall
to support its reasoning. That Bankruptcy Appellate Panel case, in turn, relied on
Matter of International Inn Partnership,
Significantly, the Court of Appeals’ pre-code creation of a “plain legal prejudice” standard for voluntary bankruptcy dismissals in
Matter of International Inn Partnership
was based entirely on two commentators’ perception of the standard for voluntary dismissals of civil actions under
I conclude that the
Getter
court and the bankruptcy court in this case misread
In reaching that conclusion, I do not mean to intimate that the bankruptcy court abused its discretion by finding, at the threshold, that cause existed to convert or dismiss the case. To be sure, the fact that the debtor’s business operations had ceased on July 31, 1990, for example, provided reasonable grounds for cause.
See
But the court was wrong to hold that a debtor’s voluntary motion to dismiss is reflexively to be granted whenever cause exists but is not negated by a showing of “plain legal prejudice” to creditors.
Rather, once cause is ascertained,
Analyzed in the light of the “best interest of creditors and the estate” test, the appellants’ compelling legal argument that their claims were entitled to superpriority under section 506(c) and that the debtor’s case should, consequently, have been converted to a case under Chapter 7 deserved the bankruptcy court’s full consideration.
9
See generally In re Gonic Realty Trust,
IV.
Because Continental was underse-cured on the debtor’s accounts receivable and other assets, the bankruptcy court properly rejected appellants’ argument that they were entitled to recover on their claims pursuant to
Section 506(c), on the other hand, when it applies, provides a creditor priority even over secured creditors for preservation or disposition expenses incurred post-petition.
Section 506(c) states:
(c) The trustee may recover from property securing an allowed secured claim the reasonable, necessary costs and expenses of preserving, or disposing of, such property to the extent of any benefit to the holder of such claim.
Generally, administrative expenses in bankruptcy must be charged to the estate and not to equity or assets belonging to secured creditors. The
The question remains: when does
The following language from the legislative history of the Bankruptcy Reform Act suggests that, when the value of secured property is less than the amount of the secured claim, and when the secured creditor is thus undersecured (as in the instant case), a recovery under
[Section 506(c) ] ... codifies current law by permitting the trustee to recover from property the value of which is greater than the sum of the claims secured by a lien on that property the reasonable, necessary costs and expenses of preserving, or disposing of, the property.
S.Rep. No. 989, 95th Cong., 2d Sess. 68, reprinted in 1978 U.S.Code Cong. & Admin.News 5787, 5854; H.R.Rep. No. 595, 95th Cong., 1st Sess. 357, reprinted in 1978 U.S.Code Cong. & Admin.News 5963, 6313.
Yet, as the Court of Appeals for the Seventh Circuit recognized in
Matter of Trim-X, Inc.,
In order for a secured creditor to be charged with expenses under
Whether expenses are reasonable, necessary, and have benefitted the secured party are factual issues that rest with the sound discretion of the trial judge.
See, e.g., Radtke Heating and Sheet Metal Co. v. State Bank of Cherry,
The remaining legal issue is whether claimants like the appellants may pursue a
The legislative history to
Any time the ... debtor in possession expends money to provide for the reasonable and necessary cost and expenses of preserving or disposing of a secured creditor’s collateral, the ... debtor in possession is entitled to recover such expenses ....
1978 U.S.Code Cong. & Admin.News 5787, 6451. One court, relying upon this language, held that debtor-farmers were not permitted to recover under
But the inequities that are involved when debtors are permitted to recover the value of their postpetition labor are not present when creditors are permitted such recovery. Especially where, as here, the debtor in possession
should have
expended money to contribute fringe benefits to the appellant funds, but did not do so, the appellants should be able to recover those unpaid sums. Of course, such a recovery is contingent upon the withheld sums being reasonable and necessary expenses for labor that created postpetition accounts receivable that directly benefitted Continental.
See Meinhard Greeff & Co. v. Edens,
V.
For the foregoing reasons, the order dismissing the debtor’s petition will be vacated, and the case remanded and reinstated on the bankruptcy court’s docket. On remand, the court should determine whether the unpaid fringe benefits were reasonable, necessary expenses for labor that created postpetition accounts receivable that inured to Continental’s direct benefit. If the court determines that appellants’ claims have priority under
An appropriate order follows.
ORDER
AND NOW, this 10th day of June, 1991, upon consideration of the appellants’ briefs and the record, and for the reasons stated in the accompanying memorandum, it is ORDERED that Bankruptcy Judge David A. Scholl’s order of September 12, 1990 dismissing the Chapter 11 case of debtor Mechanical Maintenance, Inc. is VACATED and this case is REMANDED to the bankruptcy court for further proceedings not inconsistent with this court’s memorandum.
Notes
. Millwrights and Machinery Erectors Local No. 1906 and Steamfitters Local Union No. 420.
. Carpenters Health and Welfare Fund of Philadelphia and Vicinity, Carpenters Pension and Annuity Fund of Philadelphia and Vicinity, Steamfitters Local Union No. 420 Welfare Fund, Steamfitters Local Union No. 420 Pension Fund, Steamfitters Local Union No. 420 Supplemental Retirement Fund, Steamfitters Local Union No. 420 Apprenticeship Training Fund, Steamfitters Local Union No. 420 Vacation Fund, Pipe Fund of Steamfitters Local Union No. 420, and Scholarship Fund of Steamfitters Local Union No. 420.
. It is not clear from the record whether these accounts receivable were generated prepetition or postpetition. That factual issue should be resolved on remand. For purposes of this appeal, the court assumes that individual accounts were created on both sides of the bankruptcy line.
. Appellants asserted that they were entitled to recover on their
. Neither the debtor nor Continental has filed a brief in this appeal.
.Appellants express doubt that they could pursue a quantum meruit remedy under Pennsylvania law, which they conclude would apply to their claims. Moreover, to have standing to bring a claim under the Pennsylvania mechanics lien statute, they assert, they would have to have privity of contract with the owners of the
. The court stated, for example, that it would be asymmetrical as well as illogical to permit a Chapter 7 case to be voluntarily initiated, yet to hinder its voluntary dismissal. Opining that the code should be interpreted to avoid such illogic, the court stated that creditors objecting to a dismissal would be fairly treated notwithstanding such an interpretation. Specifically, such creditors could simply file an involuntary case after dismissal of the voluntary case. Id. at 689. The court’s facile discussion overlooks, however, the creditor priorities and other rights that are directly related to the petition date and that would be lost if a new, later petition date were set.
.
Accord In re Turboff,
. Even if