In Re United Trucking Service Inc., a Michigan Corporation, Debtor. United Trucking Service, Inc. v. Trailer Rental Company, Inc.In Re United Trucking Service Inc., a Michigan Corporation, Debtor. United Trucking Service, Inc. v. Trailer Rental Company, Inc.
In 1977 Great Dane Trailers, Inc., entered into an eight-year equipment lease with plaintiff-appellant United Trucking Service, Inc. (“United”), for the rental of fifty-five Great Dane trailers. The lease included a provision requiring United,- the lessee, to maintain the trailers in good condition and to make repairs at its own expense. Defendant Trailer Rental Company (“TRC”) is the successor in interest of Great Dane Trailers, which is not a party to this controversy.
In 1983, United filed a voluntary petition for reorganization under Chapter 11 of the Bankruptcy Code. Shortly thereafter, TRC filed a petition in the bankruptcy court to compel United either to assume or reject the equipment lease. TRC asserted that United, the debtor in possession, had failed to maintain the trailers in good condition and repair and that United’s continued possession of the trailers would result in even greater deterioration and damage to TRC. In late December 1983 the bankruptcy court gave United thirty days in which to assume or reject the lease; United failed to respond. TRC then filed a second petition expressing its concern about the trailers’ condition and seeking action to protect its asserted interests.
TRC then filed with the bankruptcy court applications for payment оf administrative expenses in the aggregate amount of $98,-166.41, including repair estimates for fifty-three trailers, the casualty loss value of the two stolen trailers, and the cost of replacing certain tires deemed to be commercially valueless. In March 1985 one of the stolen trailers was located and returned to TRC, which modified its claim with regard to that trailer.
After evidentiary hearings regarding TRC’s appliсations, which were resisted by United, the bankruptcy judge rendered a decision allowing TRC an administrative expense claim in the principal amount of $72,010.00 ($65,264.31 for repairs to fifty-four trailers, $1,950.00 to replace tires, and $4,795.69 as the casualty loss value of the stolen trailer). Later, the court made an additional award to TRC of interest on the principal award accruing from September 30, 1984, which the court designаted “the date Trailer Rental ... filed its Application for Payment of Administrative Expenses.” 1
United appealed the bankruptcy court’s decision to district court. The district court, without oral argument, rendered a memorandum opinion and order affirming the bankruptcy court’s decision, and this appeal ensued. We remand certain aspects of this case, and reverse as to others.
1. Post-petition damages as an administrative expense
Section 503 of the Bankruptcy Code,
§ 503 . Allowance of administrative expenses
(b) After notice and a hearing, there shall be allowed, administrative expenses, ... including—
(1)(A) the actual, necessary costs and expenses of preserving the estate, ... 2
A creditor such as TRC seeks to characterize its claim against the debtor as an administrative expense in order to enjoy first priority in payment under § 507(a)(1).
See, e.g., In re Baldwin-United Corp.,
In order to qualify a claim for payment as an administrative expense
a claimant must prove that the dеbt (1) arose from a transaction with the debtor-in-possession as opposed to the preceding entity (or, alternatively, that the claimant gave consideration to the debtor-in-possession); and (2) directly and substantially benefitted the estate. [In re Mammoth Mart, Inc., 536 F.2d] at 954.
A creditor provides consideration to the bankrupt estate only when the debt- or-in-possession induces the creditor’s performance and performance is then rendered to the estate. If the inducement came from a pre-petition debtor, then consideration was given to that entity rather than to the debtor-in-possession. In re Jartran, Inc.,732 F.2d 584 (7th Cir.1984). However, if the inducement came from the debtor-in-possession, then the claims of the creditor are given priority. Id. at 586.
In re White Motor Corp.,
We must decide whether the test established by
Mammoth Mart
and followed in
White Motor Corp.
is applicable to these facts.
Mammoth Mart, In re Jartran, Inc.,
American Anthracite & Bituminous Coal Corp. v. Leonardo Arrivabene, S.A.,
The right to priority in the event the trustee or debtor in possession receives benefits under the [executory] contract during the interval between the filing of the debtor’s petition and the rejection of the contract “is an equitable right based upon the reasonable value” of the bеnefits conferred, rather than upon the contract price.
... [T]he purpose of according priority in these cases is fulfillment of the equitable principle of preventing unjust enrichment of the debtor’s estate, rather than the compensation of the creditor for the loss to him.
Id.
at 124, 126. Thus, administrative expenses under
In light of the Act’s purpose of enabling the continued operation of insolvent businesses, we conclude that the bankruptcy court was correct in treating TRC’s post-petition damages claim as an administrative expense under
Having decided that priority as an administrative expense is appropriate for TRC’s claim reflecting post-petition breach of contract in United’s failure to maintain the
The bankruptcy court found that TRC’s claim based on the casualty loss value of the unrecovered stolen trailer and the repair estimates for the recovered stolen trailer should be allowed as an administrative expense. The district court affirmed this decision, finding that United had not provided evidence that the trailers were stolen pre-petition. Neither court noted, however, that United and Trailer Rental had stipulated in May 1985, as part of a pretrial statement, that the two trailers were “stolen prior to the inception of bankruptcy” and that one was “found and returned to Trailer Rental” in March 1985. This stipulation was binding on the parties and on the court. The only issues remaining regarding the two stolen trailers, after giving effect to the stipulation, were the exact dates of the thefts, whether United continued to pay rent on the stolen trailers, and the casualty loss value of the unrecovered trailer.
The bankruptcy court erred in allowing claims arising from the stolen trucks as an administrative expense. As indicated in our prior discussion,
2. Calculation of Damages
In considering which of the damages sustained by the TRC trailers should be deemed to have occurred post-petition for the purpose of сalculating damages entitled to
Regardless of the extent to which the creditor may have a claim arising from the breach of the duty to repair arising pre-petition, it also has that same claim arising post-petition.
Moreover, the evidence overwhelmingly indicates that the vast and substantial majority of the injuries themselves actually occurred post-petition.
And in the circumstances, the Court is not quite sure that it is fair to put the burden of proof on the creditor to establish when the injuries occurred, pre or post-petition, in light of the fact that the Debtor would have essentially all of the evidence of that in its possession.
Nevertheless, without directly holding that the burden of proof should thereby shift, the Court concludes that as a matter of law the claim is a post-petition claim and pursuant to the stipulation and the language of the statute, the cases and the equities and policy, the claim should be accorded an administrative status.
The district court affirmed this ruling, blaming United in large part for failing to provide the trailers for earlier inspection.
In reviewing the bankruptcy court’s factual determination regarding when the damages to the remaining trailers occurred, we apply a “cleаrly erroneous” standard. Bankruptcy Rule 8013 provides in part: “Findings of fact shall not be set aside unless clearly erroneous, and due regard shall be given to the opportunity of the bankruptcy court to judge the credibility of the witnesses.”
See also Slodov v. United
States,
In view of this evidence, we are satisfied that the bankruptcy court erred in concluding that TRC’s
entire
claim in this respect was a post-petition claim. Unitеd had operated the trailers under the lease for six years prior to its bankruptcy filing and for only eight or nine months following its filing. While some evidence may be construed to support a finding that a substantial part or even a majority of the damages occurred post-petition, there is no basis for finding TRC’s claim qualifies as an administrative expense in its entirety.
After deciding to treat all the injuries or damagеs to the trailers as arising post-petition, the bankruptcy court determined that the measure of damages should reflect the reasonable cost of making the repairs required under the lease, limited by the amount of the trailers' diminution in value. The bankruptcy court deemed irrelevant the cost of the repairs actually made by TRC, basing its award instead on repair estimates, based essentially on thе reliability of Nowatzke’s testimony.
Giving due regard to the bankruptcy court’s credibility findings, we conclude that the bankruptcy court’s acceptance of the repair estimates, instead of the cost of actual repairs made, was not clearly erroneous. We remand this issue to the bankruptcy court to determine and allocate the damages that occurred after the filing of the petition. On remand, the court should take into account the proof demonstrating that the estimated cost of making repairs was economically unjustified in some instances.
3. Allowance of Interest
In contesting the award of interest on the administrative expenses, United relies on several cases denying such interest. We have not previously addressed this issue.
Interest on unpaid post-petition taxes was found entitled to first priority as an administrative expense in
In re Thompson,
grant the debtors an interest free loan at the expense of the government. If the debtors choose to finance their reorganization effort with funds that would otherwise be used to pay their taxes, then interest on the taxes may fairly be considered as an actual and necessary cost and expense of preserving the estate allowable as an administration expense undersection 503(b)(1)(A) . Indeed, section 364 of the Bankruptcy Code specifically recognizes that the cost of unsecured credit is allowable as an administrative expеnse undersection 503(b)(1) .
Id.
(citation omitted).
See also United States v. Friendship College,
Interest on administrative expense claims, however, has been denied in
In re Lumara Foods of America, Inc.,
We are remanding this case for reallocation of damagеs, concluding that some of the loss in value of the trailers that the bankruptcy court awarded as damages in fact arose pre-petition as a result of six years heavy use prior to the bankruptcy filing. We remand also the interest question for the bankruptcy court’s further consideration of the case law or other authority dealing with the question of interest on administrative expense claims, pаrticularly those involving non-tax claims. Every administrative expense claimant may well claim that his loss, his deprivation of revenues, or his damage has “cost him money,” or caused him to spend money he might not otherwise have elected or been forced to spend. We agree with the bankruptcy court that allowance of interest is usually not “appropriate”; 3 we simply require a more reasoned statement for treating this case as the unusual one in which equity might impel an award of interest despite the corresponding detriment to unsecured, unpreferred general creditors of United.
Accordingly, we AFFIRM the decision of the bankruptcy court, affirmed by the district court, that the claim of TRC may be treated as an administrative expense claim under
Notes
. In fact, the record shows that Trailer Rental filed its application on September 10, 1984.
. Neither party on appeal challenges the applicability of
. We do not decide at this point whether allowance of interest on a non-tax administrative expense claim is justified at all under