Case Information
*0 EOD IN THE UNITED STATES BANKRUPTCY COURT FOR THE EASTERN DISTRICT OF TEXAS LUFKIN DIVISION
12/19/2017 IN RE: §
§
TEXAS PELLETS, INC . [1] § JOINTLY ADMINISTERED
§ under Case No. 16-90126 §
§ Debtors § Chapter 11 MEMORANDUM OF DECISION
This matter came before the Court upon hearing of the Request for Allowance and Payment of Administrative Claim (the “Motion”) filed by J Riley Enterprises, LLC d/b/a
JB Industries (“JBI”) and the objections filed to such Motion by Texas Pellets, Inc. and
German Pellets Texas, LLC, Debtors and Debtors-in-Possession (the “Debtors”), and by
NAPCO [2] in this jointly-administered Chapter 11 case. The Motion seeks the payment of
an administrative expense under § 503(b)(1)(A). After hearing, the Court took the matter
under advisement. Upon due consideration of the evidence submitted and the applicable
legal authorities, the Court concludes that the Motion must be granted in part and denied
in part. This memorandum of decision disposes of all issues pending before the Court. [3]
Background
Many of the facts are not in dispute. Indeed, the parties submitted a stipulation of agreed facts regarding the circumstances surrounding the procurement and rendition of
services for which JBI now seeks an administrative expense award. [4] On February 27,
2017, a fire which damaged the Debtors’ ship-loading mechanism occurred at the
Debtors’ pellet storage facility in Port Arthur, Texas while a ship was being loaded with
wood pellets from the Debtors’ silos. Once the fire was under control, the Debtors
determined that they needed to unload the pellets that had been previously loaded on the
ship and JBI was procured to provide trucking services to facilitate the removal. [5] Such
trucking services were to be tendered on a 24/7 basis until the removal process was
completed. Though the contractual arrangement began on March 1, 2017 on a per-load
basis, the Debtors continually experienced significant delays in the pellet extraction
process, primarily due to ongoing fires, which limited the trucks which were loaded.
After two days of severely limited truck usage due to the Debtors’ continued struggle to
provide pellets available to be transported, the contract was altered at the truckers’
insistence to a payment basis of $160 per hour. That limitation occurred with varying
frequency throughout the eight (8) days in which JBI provided trucking services to the
Debtors under the contract. In that period, JBI and its subcontractors transported 668
loads of undamaged pellets to Woodville and six loads of damaged pellets to
Deweyville. [6]
JBI subsequently submitted a series of revised invoices for services rendered totaling $767,007.38. [7] Within 30 days of the completion of services, the Debtors made a
partial payment of $303,000 to JBI. The Debtors admitted during the hearing that, of the
remaining $464,007.38 requested by JBI in its final invoice, $161,287.38 is uncontested
by the Debtors and is due and owing. However, controversy among the parties remains
as to the additional compensation of $302,720.00 requested by JBI. The disputed amount
represents 1,892 hours of “stand-by time” in which the trucks supplied by JBI were
purportedly sitting in line at the Port Arthur and Woodville facilities awaiting access to,
or acceptance of, the pellets. JBI contends that all such hours are compensable because it
was under a duty to supply trucks on a 24/7 basis as the Debtors attempted with varying
success to unlade the ship and that the invoiced stand-by hours reflect delays in that
extraction process for which the Debtors are solely responsible. The Debtors claim that
such stand-by time conferred no benefit upon the estate and that the downtime primarily
occurred due to the truckers’ unilateral decision to convoy together on trips which
unnecessarily worsened an accretion of unused trucks, particularly at the Port Arthur
facility.
Discussion
When assets of a bankruptcy estate are distributed to the creditors of a debtor,
claims for administrative expenses are among the very first unsecured claims that are
paid. “To be entitled to administrative claim status, the claim must arise from a debt
incurred post-petition, in connection with a transaction between the claimant and the
trustee or debtor-in-possession, and which benefits the debtor in the operation of its
business.” In re J.A.V. AG, Inc ., 154 B.R. 923, 929 (Bankr. W.D. Tex. 1993). Among
various statutory categories, such a payment priority is awarded for “the actual, necessary
costs and expenses of preserving the estate.” 11 U.S.C. § 503(b)(1)(A). The “conceptual
justification” for this payment priority status is that “creditors must pay for those
expenses necessary to produce the distribution to which they are entitled.” Tex. v. Lowe
(In re H.L.S. Energy Co., Inc .), 151 F.3d 434, 437 (5th Cir. 1998). Such priority status is
designed “to encourage post-petition conduct that will assist the debtor’s efforts to
rehabilitate the estate or organize the estate’s assets in an orderly fashion to ensure an
efficient sale.” In re Am. Coastal Energy, Inc ., 399 B.R. 805, 815 (Bankr. S.D. Tex.
2009).
An “actual and necessary” cost or expense is one which conferred a benefit upon the bankruptcy estate. H.L.S. Energy Co., 151 F.3d at 437 [concluding that “the benefit
requirement . . . is merely a way of testing whether a particular expense was truly
‘necessary’ to the estate . . . if it was no ‘benefit,’ it cannot have been ‘necessary.’”]; In re
Lovay , 205 B.R. 85, 86 (Bankr. E.D. Tex. 1997) [finding that the benefit bestowed by a
creditor must be “concrete” and not just a “mere possibility”]. Notwithstanding such a
test, courts recognize that, because the benefit requirement is “simply a gloss on the
underlying concept of what is necessary,” it is not restricted to goods or services that lead
to a direct economic enhancement of the estate. H.L.S. Energy, 151 F.3d at 438 [finding a
benefit to the bankruptcy estate by fulfilling its duty under state law to plug its
unproductive oil and gas wells]. “Although the estate receives a benefit that often can be
measured by the actual cost of necessary goods or services supplied, the estate also
receives other less readily calculable benefits, such as the ability to continue to conduct
business as usual.” Toma Steel Supply, Inc. v. GHR Energy Corp. (In re TransAmerican
Natural Gas Corp.) , 978 F.2d 1409, 1420 (5th Cir. 1992).
However, because of the priority status granted by its terms, § 503(b) is narrowly construed in order to hold administrative expenses to a minimum amount and thus
preserve the estate assets for the benefit of all creditors. Brickley v. Scattered Corp. (In re
H & M Oil & Gas, LLC) , 514 B.R. 790, 825 (Bankr. N.D. Tex. 2014) (citing NL Indus.,
Inc. v. GHR Energy Corp ., 940 F.2d 957, 966 (5th Cir. 1991)); In re Lovay , 205 B.R. at
86. The burden of proof rests upon the administrative expense applicant to demonstrate
that its cost or expense was actual and necessary. Specifically, “a prima facie case under
§ 503(b)(1) may be established by evidence that (1) the claim arises from a transaction
with the debtor-in-possession; and (2) the goods or services supplied enhanced the ability
of the debtor-in-possession’s business to function as a going concern. After the movant
has established a prima facie case, the burden of producing evidence shifts to the
objector; but the burden of persuasion, by a preponderance of the evidence, remains with
the movant. TransAmerican, 978 F.2d at 1416.
This administrative expense request is clearly rooted in the movant’s transaction with the Debtors-in-Possession. It is also unquestioned that, to the degree to which the
pellets could actually be relocated from the port facility, such relocation would enhance
the Debtors’ efforts to restore its ordinary course operations. However, the issue
regarding which party was responsible for the repeated delays that forced lines of trucks
to wait for loading for considerable periods of time is more problematic. Though the
Court has carefully reviewed a substantial amount of documentary evidence submitted by
the parties, such evidence offers limited insight into the actual cause of the disputed
stand-by hours.
JBI has failed to establish that the Debtors were in any way responsible for the delays occurring in the delivery of pellets to the Woodville facility. In fact, JBI has failed
to offer any credible evidence to explain the charging of stand-by hours in Woodville.
The Debtors presented credible evidence without contradiction that convoying by the
truckers was, in fact, occurring on the Woodville trips and none of the proffered evidence
indicated that any delay occurring on-site at the Woodville facility was caused by any
internal process occasioned by the Debtors’ normal transportation operations. With no
other credible explanation offered, JBI has failed to establish by a preponderance of the
evidence that the 167 hours which it billed as stand-by hours in Woodville occurred due
to the conduct of the Debtors and for which the Debtors’ estates should be held justly
accountable.
Consideration of the stand-by hours at the Port Arthur facility is a bit more convoluted. The Court is compelled to acknowledge the financial pressures imposed
upon the Debtors by the accruing demurrage charges and the then-existing imperative that
the Debtors “clear the decks” in order to restore normal plant and shipping operations.
These pressures drove the Debtors to demand that JBI supply trucking services on a 24/7
basis — i.e., at any time that the Debtors were capable of producing extracted pellets for
transport at the port facility. Contrary to the Debtors’ position, that scenario creates not
just the possibility, but the probabilities that significant stand-by hours incurred by JBI
were, in fact and in law, actual and necessary because of the Debtors’ demands that trucks
be available to them on a round-the-clock basis. Though some credence must
undoubtedly be given to the evidence of the truckers’ convoying efforts and, while it is
true that such convoying would have created more significant delays in Port Arthur than it
did in Woodville, a greater degree of responsibility for the Port Arthur delays must be laid
upon the Debtors based upon their inability to extract the pellets from the ship and to
make them available to the truckers on a consistent basis. The Debtors contend that the
only delays that can be legitimately charged to them are those that are documented by
their personnel in various Vessel Activity Reports and Port Logs. However, an analysis
of the entirety of the evidence presented at the hearing reveals that the Debtors’ internal
documents do not supply a reliable, comprehensive chronology of all of the intermittent
delays that constantly plagued the extraction process and delayed the utilization of the
trucks. Thus, upon review of the evidence submitted, and imposing some degree of
responsibility upon JBI for the excessive accrual of stand-by hours arising from its failure
to control undue convoying of loaded trucks by its subcontractors, the Court finds that
JBI has established, by a preponderance of the evidence, that 1,256.25 of the 1,892 stand-
by hours billed by JBI should be allowed.
Timing of Payment
The Debtors and NAPCO object to JBI’s demand for immediate payment of the remaining amount of its allowed administrative expense claim. The timing of payment of
administrative expenses is clearly within the Court’s discretion. Courts within this circuit
have cited a three-factor test for use in determining the appropriate timing of payment of
administrative expense claims: “(1) the prejudice to the debtor; (2) the hardship to the
claimant; and (3) potential detriment to other creditors.” In re ATP Oil & Gas Corp ., 2014
WL 1047818, at *10 (Bankr. S.D. Tex. Mar. 18, 2014) (citing In re UTEX Commc’ns
Corp. , 457 B.R. 549, 569 (Bankr, W.D. Tex. 2001)). “In most situations, the courts
prefer to postpone payment of the administrative claim until after confirmation of a plan
or the distribution in a liquidation. However, once a claimant has requested payment, the
court may exercise its discretion whether circumstances warrant immediate response.” 3
N ORTON B ANKR . L. & P RAC . 3d § 49:16 at 49-106 (3d ed. 2010).
In a review of the equities surrounding the parties’ transaction, JBI necessarily employed a number of small, independent truckers to accommodate the Debtors’
transportation request. The Court is sympathetic to their plight. Nevertheless, $303,000
has already been tendered to JBI for itself and its subcontractors and the series of casualty
events which have plagued this estate has cast a greater degree of doubt upon the
Debtors’ realistic prospects for achieving a successful conclusion to this case. This has
created a greater concern among administrative claimants regarding the ultimate payment
of their claims. Taking into consideration the financial effect upon the claimant and its
subcontractors, the financial status of the estates, the possibility that certain insurance
proceeds have been received, or are anticipated, by the Debtors with regard to these
casualty events, and the legitimate concerns of other administrative claimants regarding
payment, the Court finds that the Debtors should immediately tender an additional
payment of $125,000 to JBI, with the remaining $237,287.38 of the allowed
administrative claim of JBI to be paid pursuant to the terms of any confirmed plan or such
other distribution mechanism as may be authorized in this case.
Accordingly, for the foregoing reasons, the Court finds that the Request for Allowance and Payment of Administrative Claim filed by J Riley Enterprises, LLC d/b/a
JB Industries in the above-referenced case must be granted in part and denied in part.
This memorandum of decision constitutes the Court’s findings of fact and conclusions of
law pursuant to F ED . R. C IV . P. 52, as incorporated into contested matters in bankruptcy
cases by F ED . R. B ANKR . P. 7052 and 9014. A separate order shall be entered consistent
with this opinion.
Signed on 12/19/2017 THE HONORABLE BILL PARKER CHIEF UNITED STATES BANKRUPTCY JUDGE requested by any party.
[1] The jointly-administered Chapter 11 Debtors, along with the last four digits of each such Debtor’s federal tax identification number, are: Texas Pellets, Inc. (3478), and German Pellets Texas, LLC (9084). The corporate headquarters and service address for the jointly-administered Debtors is: 164 CR 1040, Woodville, Texas 75979.
[2] NAPCO’s objection relates only to the timing of the payment of any administrative expense awarded by the Court, rather than a substantive objection regarding the allowance of the requested administrative expense claim.
[3] This Court has jurisdiction to consider the motion pursuant to 28 U.S.C. § 1334 and 28 U.S.C. § 157(a). The Court has the authority to enter a final order in this contested matter since it constitutes a core proceeding as contemplated by 28 U.S.C. §157(b)(2)(A), (B), and (O).
[4] Ex. 75. The stipulated facts are incorporated herein by reference and specific factual references based upon the stipulation are included as needed.
[5] Undamaged pellets were to be transported 75 miles to the Debtors’ manufacturing facility in Woodville and damaged pellets would be transported 43 miles to a disposal facility in Deweyville. Id. at ¶ 5, 7-8.
[6] Id. at ¶ 15.
[7] Ex. 9.
[8] See, e.g ., Ex. D-F.
[9] To the extent that any finding of fact is construed to be a conclusion of law, it is hereby adopted as such. To the extent any conclusion of law is construed to be a finding of fact, it is hereby adopted as such. The Court reserves the right to make additional findings and conclusions as necessary or as may be