Boruff v. Cook Inlet Energy LLC (In Re Cook Inlet Energy LLC) ( 2018 )

FILED
APR 24 2018
1 SUSAN M. SPRAUL, CLERK
U.S. BKCY. APP. PANEL
OF THE NINTH CIRCUIT
2 ORDERED PUBLISHED
3 UNITED STATES BANKRUPTCY APPELLATE PANEL
OF THE NINTH CIRCUIT
4
5 In re: ) BAP No. AK-17-1285-JuBL
)
6 COOK INLET ENERGY LLC, ) Bk. No. 15-00236
)
7 Debtor. )
______________________________)
8 )
SCOTT M. BORUFF, )
9 )
Appellant, )
10 v. ) O P I N I O N
)
11 COOK INLET ENERGY LLC; U.S. )
TRUSTEE; and CHARLES GEBHARDT,)
12 Trustee for the Miller Energy )
Creditors Liquidation Trust, )
13 )
Appellees. )
14 ______________________________)
15 Argued and Submitted on March 22, 2018
at Pasadena, California
16
Filed - April 24, 2018
17
Appeal from the United States Bankruptcy Court
18 for the District of Alaska
19 Honorable Gary A. Spraker, Chief Bankruptcy Judge, Presiding
20 _____________________________________
21 Appearances: William D. Sullivan of Sullivan, Hazeltine,
Allinson, LLC, argued for Appellant Scott M.
22 Boruff; David A. Zdunkewicz of Andrews Kurton
Kenyon LLP argued for Appellees Cook Inlet Energy
23 LLC and consolidated Debtors.
______________________________________
24
25 Before: JURY*, BRAND, and LAFFERTY, Bankruptcy Judges.
26
27
28
*
Bankruptcy Judge Meredith Jury, Central District of
California, sitting by assignment.
1 JURY, Bankruptcy Judge:
2
3 Appellant Scott M Boruff (Boruff), former executive
4 chairman, board member, and majority shareholder of Miller
5 Energy Resources, Inc. (Miller), one of several related Chapter
6 112 debtors whose cases were jointly administered under the lead
7 caption of Cook Inlet Energy, LLC., filed an application for an
8 administrative expense claim for his prorated contractual salary
9 for the four-month period between the filing date and plan
10 confirmation, when his contract was rejected. The bankruptcy
11 judge awarded him far less than the prorated salary, determining
12 that Boruff had not proved that the reasonable value of the
13 benefit to the estate of his postpetition services was more than
14 the amount paid to other directors on the Miller board. Boruff
15 asserts on appeal that the bankruptcy court applied the wrong
16 legal standard in its analysis, imposing an incorrect burden of
17 proof. We conclude that the court applied a correct legal
18 standard and properly allocated the burden of proof. Therefore,
19 we AFFIRM.
20 I. FACTUAL BACKGROUND AND PROCEDURAL HISTORY3
21 On August 6, 2015, an involuntary chapter 11 petition was
22 filed against Cook Inlet Energy, LLC (Cook), a subsidiary of
23
24 2
Unless otherwise indicated, all chapter and section
references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, and
25 Rule references are to the Federal Rules of Bankruptcy Procedure.
26 3
Most of the material facts are undisputed and are taken
27 from the Memorandum on Application of Scott M. Boruff For
Administrative Expense Claim entered by the bankruptcy court on
28 September 13, 2017.
-2-
1 Miller. Cook consented to entry of an order for relief under
2 Chapter 11 on October 1, 2015, and on the same day Miller and
3 several other related subsidiaries filed their own chapter 11
4 petitions, all of which were jointly administered. Miller and
5 its subsidiaries (collectively, Debtors) were independent oil
6 and natural gas exploration and production companies that
7 focused on developing oil and gas properties in Alaska. Miller
8 was a publicly traded holding company that owned, directly or
9 indirectly, the subsidiaries. A significant drop in the price
10 of oil, Miller’s default on a credit agreement with its secured
11 lenders, and an unsuccessful attempt to raise capital or sell
12 some of the assets combined to cause financial distress for the
13 Debtors. To assist it in finding buyers or creating a financial
14 restructure, before filing Miller had employed investment
15 bankers at Seaport Global Securities (SGS), whose continued
16 employment was approved by the bankruptcy court.
17 Boruff was part of Miller’s senior management group,
18 holding the position of executive chairman when the petition was
19 filed. He had been hired by Miller in August 2008 as its chief
20 executive officer (CEO), a position he held until September
21 2014, when he was replaced by Carl Giesler and assumed the newly
22 created position of executive chairman. Per Boruff’s testimony,
23 Giesler was brought in to manage the operations of the growing
24 company while Boruff focused on the “big picture stuff,”
25 including putting financial deals together and overseeing the
26 company’s future development. He was employed under an
27 employment contract (the Contract), which at the time of filing
28
-3-
1 paid him $795,000 a year or $66,250 per month.4 The Contract’s
2 description of Boruff’s job functions was imprecise, but it
3 emphasized oversight of future development, including mergers
4 and acquisitions. He worked primarily from his home in
5 Tennessee, with occasional travel to Alaska and to Houston,
6 where the Miller headquarters were located. After the drop in
7 oil prices, he focused on seeking joint venturers or buyers of
8 assets.
9 Prior to filing its voluntary petition, Miller formed a
10 Restructuring Committee to solicit offers to purchase the
11 company or its assets. Boruff was not initially included on
12 this committee, which was made up of Giesler and the independent
13 members of the board of directors. Per Giesler’s testimony, as
14 Miller’s largest shareholder Boruff was excluded from the
15 committee. Eventually, during the plan confirmation process,
16 Boruff was added to the Restructuring Committee.
17 Soon after filing, Debtors filed Notices of Intent to Take
18 Compensation for its officers, but did not include Boruff on that
19 list. Although the Notices were not served on Boruff, he soon
20 learned that he was not going to be paid in the chapter 11.
21 Debtors moved expeditiously toward confirmation, filing their
22 disclosure statement and plan just two and one half months
23 postpetition. Soon after, they filed a Notice of Intent to Assume
24 or Reject Executory Contracts and Unexpired Leases as part of
25 confirmation. The Notice was served upon Boruff; his Contract
26 was listed among those being rejected. Under the terms of the
27 plan confirmed at a hearing on January 27, 2016, the Contract was
28
4
Giesler earned $800,000 per year as CEO.
-4-
1 rejected. Boruff received no portion of his contractual salary
2 postpetition.
3 On April 28, 2016, Boruff filed a timely Application for
4 Administrative Expense Claim, seeking payment as an
5 administrative priority claim under § 503(b)(1)(A)(i) of his
6 contractual salary prorated over the four months between the
7 petition date and the confirmation date. The Application
8 asserted Boruff was entitled to be paid his full salary because
9 he remained employed under the Contract while the chapter 11 was
10 pending until rejection of the Contract at confirmation. The
11 Application contained scant legal argument other than reference
12 to the statute itself.
13 Debtors opposed the Application, citing numerous cases,
14 including NLRB v. Bildisco and Bildisco, 465 U.S. 513 (1984) and
15 In re Bryant Universal Roofing, Inc., 218 B.R. 948 (Bankr. D.
16 Ariz. 1998), for the principle that although the wages
17 established in a prepetition employment contract may be probative
18 evidence on an administrative priority claim, the claimant must
19 prove the value of the benefit to the estate by a preponderance
20 of the evidence. They asserted that Boruff failed to show how
21 his role as executive chairman had benefitted Debtors any more
22 than the services of other board members, who had been paid less
23 than $15,000 each.
24 Boruff replied, arguing that because Debtors did not
25 terminate the Contract until the confirmation date, he continued
26 to perform the duties of executive chairman valued at the
27 contractual rate and these services were presumed beneficial to
28 the estate. He construed Bildisco and Bryant Universal Roofing
-5-
1 to support his assertion that the benefit was set by the contract
2 rate paid to an employee, so long as the employee continued
3 working for the debtor, until the contract was rejected. The
4 gist of his argument was that an employee was not required to
5 prove the benefit to the estate beyond the contractual salary.
6 The bankruptcy court determined that an evidentiary hearing
7 would be necessary to rule on the amount of the administrative
8 claim, and after almost a year for discovery and other
9 preparation,5 that hearing took place on May 17, 2017. Boruff
10 and Giesler testified at the hearing. Exhibits, all admitted by
11 stipulation, included declarations and deposition transcripts of
12 other witnesses as well as pertinent documents. Boruff’s
13 testimony described in general the services he performed both
14 pre- and post petition, which included his efforts to find a
15 buyer for assets and his participation on the Restructuring
16 Committee. Giesler also described the scope of his own
17 postpetition duties and the general reorganization efforts which
18 led to plan confirmation. He testified that the salaried
19 management personnel who were listed in the Notices to be paid
20 postpetition, and whose contracts were assumed, were specified by
21 the lenders, who excluded Boruff. He also described the efforts
22 by SGS to procure buyers, which substantially overlapped with any
23 efforts of Boruff.
24 At the close of testimony and oral argument, the bankruptcy
25 court requested another round of briefing. In his Post-Hearing
26
27
5
Much of the delay was caused by scheduling issues of the
28 parties and the court.
-6-
1 Memorandum of Law, Boruff argued for the first time that the
2 statute itself, § 503(b)(1)(A)(i), provided that wages, salaries,
3 and commissions for services rendered after the commencement of
4 the case were de facto “actual, necessary costs and expenses of
5 preserving the estate” and that beyond showing that claimant
6 worked postpetition, no further proof in support of a § 503(b)
7 administrative claim was necessary. He then cited Bryant
8 Universal Roofing and other cases which he believed supported his
9 assertion that a contractual salary was presumed to be the value
10 of the benefit to the estate without further proof.
11 Debtors’ simultaneous brief emphasized that the statute and
12 case law gave Debtors an express right to assume or reject
13 contracts through the time of confirmation without the obligation
14 to pay for contracts that did not benefit the estate. Contrary
15 to Boruff’s view, the majority of courts placed the burden on the
16 claimant under the rejected contract to establish the beneficial
17 value of the services to the estate. They urged the court to
18 adopt the analysis in a factually similar case, In re Health
19 Diagnostic Laboratory, Inc., 557 B.R. 885 (Bankr. E.D. Va. 2016).
20 That case emphasized the “heavy burden” on the administrative
21 claimants to show an “actual benefit to the estate and that such
22 costs and expenses were necessary to preserve the value of the
23 estate assets.” Id. at 898. Debtors argued that the admitted
24 evidence fell far short of proving that the reasonable value of
25 Boruff’s postpetition services should be measured at the Contract
26 rate. They suggested that he be reimbursed at the same rate as
27 other board members.
28 The bankruptcy court issued its Memorandum on Application of
-7-
1 Scott M. Boruff for Administrative Expense Claim in September
2 2017, concluding that Boruff had failed to demonstrate that the
3 reasonable value of his postpetition services was more than would
4 be paid to him as a board member and member of the Restructuring
5 Committee. In the Memorandum the court recounted the scope of
6 work Boruff performed for Debtors, which included his efforts to
7 negotiate with potential buyers of the assets, a service being
8 primarily provided by Debtors’ investment banker SGS, his
9 chairman’s role at three board meetings, and his attendance at
10 Restructuring Committee meetings. It noted there was little
11 concrete evidence of the time actually expended on these tasks,6
12 and Boruff had not independently proved a reasonable value for
13 his services other than to point to the contractual salary.
14 After a review of the case law, the court concluded that
15 “[Miller] has rebutted any presumption that the pre-petition
16 employment contract states the reasonable value of Boruff’s post-
17 petition services.”7 Although it found that Boruff’s efforts to
18 find a buyer were of some value, his prepetition salary had no
19 relation to those benefits and no other evidence supported an
20 award greater than the sum received by other board members,
21 $15,000.
22 The court entered an order consistent with the conclusions
23 in the Memorandum, which Boruff timely appealed.
24
25
26 6
Phone records showed only a few hours of actual time on
27 calls. The meeting time was also estimated at a few hours.
28 7
Memorandum on Application of Scott M. Boruff for
Administrative Expense Claim, p. 20.
-8-
1 II. JURISDICTION
2 The bankruptcy court had jurisdiction over this proceeding
3 under 28 U.S.C. §§ 1334 and 157(b)(2)(A) and (B). We have
4 jurisdiction under 28 U.S.C. § 158.
5 III. ISSUES
6 A. Did the bankruptcy court apply the proper legal standard
7 to Boruff’s application for an administrative claim for wages and
8 salary under § 503(b)(1)(A)(i) when it determined that the
9 Contract salary rate was not binding and that Boruff had the
10 ultimate burden of proving the benefit to the estate and the
11 reasonable value of his postpetition services?
12 B. Is the contractual salary in a rejected executory
13 employment contract the presumptive value of services rendered
14 postpetition for an administrative claim under § 503(b)(1)(A)(i)?
15 C. Did the bankruptcy court abuse its discretion in
16 partially granting Boruff’s application and awarding him $15,000
17 rather than the contract rate of $252,657.63?
18 IV. STANDARDS OF REVIEW
19 We review the bankruptcy court’s order allowing or
20 disallowing an administrative claim for abuse of discretion.
21 Gonzalez v. Gottlieb (In re Metro Fulfillment, Inc.), 294 B.R.
22 306, 309 (9th Cir. BAP 2003), citing Teamsters Indus. Sec. Fund
23 v. World Sales, Inc. (In re World Sales, Inc.), 183 B.R. 872, 875
24 (9th Cir. BAP 1995). A bankruptcy court abuses its discretion if
25 it applies the wrong legal standard or its findings are
26 illogical, implausible or without support in the record.
27 TrafficSchool.com, Inc. v. Edriver Inc., 653 F.3d 820, 832 (9th
28 Cir. 2011).
-9-
1 We review legal issues de novo and factual issues for clear
2 error. See Veal v. Am. Home Mortg. Servicing, Inc. (In re Veal),
3 450 B.R. 897, 918 (9th Cir. BAP 2011). However, where the facts
4 are undisputed, the issue is purely one of law subject to de novo
5 review. Kipperman v. IRS (In re 800Ideas.com), 496 B.R. 165, 171
6 (9th Cir. BAP 2013) (citing Elliott v. Four Seasons Props. (In re
7 Frontier Props., Inc.), 979 F.2d 1358, 1362 (9th Cir. 1992).
8 Whether the bankruptcy court identified and applied the
9 correct burden of proof is a question of law we review de novo.
10 Margulies Law Firm v. Placide (In re Placide), 459 B.R. 64, 71
11 (9th Cir. BAP 2011) (citing People’s Ins. Co. Of China v. M/V
12 Damodar Tanabe, 903 F.2d 675, 682 (9th Cir. 1990)). We also
13 review issues of statutory interpretation de novo. Allen v. U.S.
14 Bank, N.A. (In re Allen), 472 B.R. 559, 564 (9th Cir. BAP 2012).
15 We may affirm on any ground supported by the record,
16 regardless of whether the bankruptcy court relied upon, rejected
17 or even considered that ground. Fresno Motors, LLC v. Mercedes
18 Benz USA, LLC, 771 F.3d 1119, 1125 (9th Cir. 2014).
19 V. DISCUSSION
20 Recognizing that the clearly erroneous standard of review of
21 the bankruptcy court’s factual findings is an unsurmountable
22 barrier to success in this appeal, Boruff seeks de novo review,
23 asserting that the court applied the wrong legal standard for two
24 separate and distinct reasons. First, he argues that the
25 construction of the statute whereby wages and salaries are
26 specifically enumerated as included in “the actual, necessary
27 costs and expenses of preserving the estate” should end the
28 inquiry; all he needed to demonstrate to the bankruptcy court for
-10-
1 an administrative priority claim was that he worked for Debtors
2 postpetition until confirmation and had an employment contract
3 which set his salary. In the alternative, he submits that
4 Bildisco, when referencing payment for postpetition performance
5 under an executory contract, holds that the contract price is the
6 presumptively reasonable value of services; Debtors must rebut
7 that presumption with contrary evidence. Further, he argues that
8 subsequent case law supports this interpretation of Bildisco.
9 The effect of this second argument is a burden shift contrary to
10 that normally applied in claims litigation, such that the
11 ultimate burden of persuasion falls upon the objecting party. As
12 our analysis below shows, we disagree with both assertions.
13 Before tackling Boruff’s theories, however, it is helpful to
14 review the well-established burden shifts in claims litigation
15 and specific application of these standards to allowance of
16 administrative expense claims. Addressing allowance of claims in
17 general, a claim is deemed allowed absent objection from a party
18 in interest. § 502(a). A mere formal claim objection, without
19 evidence, cannot defeat a claim if the claim is presumed to be
20 valid under Rule 3001(f). Lundell v. Anchor Constr. Specialists,
21 Inc., 223 F.3d 1035, 1039 (9th Cir. 2000). To overcome this
22 presumption, the objecting party must present evidence with
23 probative value equal to that of the proof of claim to rebut the
24 claim. Id. If the objecting party successfully rebuts the
25 presumption, the claimant bears the burden of proof to show by a
26 preponderance of the evidence that its claim is valid, and the
27 “ultimate burden of persuasion remains at all times upon the
28 claimant.” Id. at 1039.
-11-
1 Administrative priority claims under § 503(b)(1)(A) are held
2 to a stricter standard. Because they must be presented to the
3 court by motion, they are not deemed allowed as priority claims.
4 The statute provides as follows:
5 (b) After notice and a hearing, there shall be allowed,
administrative expenses. . .including-–
6
(1)(A) the actual, necessary costs and expenses of
7 preserving the estate including-–
8 (i) wages, salaries, and commissions for
services rendered after the commencement of
9 the case;
10 (emphasis added).
11 As noted in the seminal Ninth Circuit case on administrative
12 claims, Burlington Northern Railroad Co. v. Dant & Russell, Inc.
13 (In re Dant & Russell, Inc.), 853 F.2d 700, 706 (9th Cir. 1988):
14 The statute is explicit. Any claim for administrative
expenses and costs must be the actual and necessary costs
15 of preserving the estate for the benefit of its
creditors. [citations omitted] The terms “actual” and
16 “necessary” are construed narrowly so as “to keep fees
and administrative costs at a minimum.” [citations
17 omitted] An actual benefit must accrue to an estate.
[citations omitted] Additionally, keeping costs to a
18 minimum serves the overwhelming concern of the Code:
Preservation of the estate. [citations omitted] This
19 limitation is necessary to protect the limited assets of
the estate for the benefit of the unsecured interests and
20 is particularly important in a Chapter 11 case where a
partial liquidation is necessary to facilitate
21 reorganization.
22 Dant & Russell and the statute itself make it clear that an
23 administrative claimant must present its claim at a noticed
24 hearing and, like any other moving party, bear the burden of
25 persuasion by a preponderance of the evidence to meet the strict
26 standards set, keeping in mind the policy behind the allowance of
27 such claims. See Shin v. Altman (In re Desert Springs Fin. LLC),
28 No. CC-16-1374-KuFL, 2017 WL 1434403 (9th Cir. BAP Apr. 20, 2017)
-12-
1 (citing Lundell, 223 F.3d at 1039 for the burden and
2 preponderance of the evidence standards).
3 Against this backdrop, Boruff asserts that the statute
4 itself has carved out wages and salaries as automatically
5 entitled to administrative expense priority, without more. He
6 cites no case law for this novel argument8, nor does he present a
7 statutory construction analysis of the statute to arrive at that
8 conclusion. Rather, he merely asserts that since the statute
9 says wages and salaries for postpetition services are included in
10 the actual, necessary costs of preserving the estate, the value
11 of those services is measured by the terms of a prepetition
12 employment contract which was not assumed. No other court has
13 read § 503(b) in that manner, nor do we. The words alone do not
14 take us there, and the policy which requires that such expenses
15 be limited to those of actual benefit to the estate mandates
16 against such interpretation.
17 Beyond common sense, this assertion fails for additional
18 reasons, particularly when considering wages set by a prepetition
19 employment contract which has been rejected under § 365(a).
20 First, if Congress had meant the rejecting debtor or trustee
21 would be bound to pay the contract rate until rejection, it would
22 have said so explicitly, as it did for rents due under an
23 unexpired lease. Section 365(d)(4) was added to the Code by the
24 Bankruptcy Amendments and Federal Judgeship Act of 1984, Pub. L.
25
8
26 None of the cases cited by Boruff nor by Debtors even
ponder this argument and we could find no authorities that
27 suggest that the question of “if” and “how much” postpetition
wages are entitled to priority treatment is simply answered by
28
the statute itself.
-13-
1 98-353, 98 Stat. 333 (1984). That bill required a trustee to
2 perform all the obligations of the debtor under a lease of
3 nonresidential real property at the time required in the lease
4 while the trustee decided whether to assume or reject the lease.
5 130 Cong. Rec. S8, 994-95 (daily ed. June 29, 1984) There is no
6 parallel provision for wages and salaries under an operative
7 employment contract prior to assumption or rejection. If
8 Congress had intended such result, it would have said so
9 explicitly.
10 In addition, such reading would eviscerate a significant
11 advantage to a debtor in possession provided by § 365(a), which
12 is a breathing space to determine whether continuing to pay an
13 employee at a potentially onerous prepetition salary will be a
14 benefit to the estate. If a debtor is required to pay that
15 contract rate pending rejection even if the contract is not
16 eventually assumed, a rush to early rejection without the
17 attributes of a full analysis is likely to occur. Nothing
18 requires a debtor in possession to decide whether to assume or
19 reject prior to the confirmation date, and this section of the
20 Code cannot be read to mandate an earlier decision.
21 Having addressed this novel statutory argument, we now turn
22 to the issues with which the bankruptcy court tussled when ruling
23 on the administrative claim application: did Bildisco and its
24 progeny create a presumption that the contract rate is the
25 reasonable value of Boruff’s postpetition services which must be
26 rebutted by Debtors and if so, did Debtors rebut it, or is the
27 Contract accorded some lesser weight? The bankruptcy court
28
-14-
1 found, equivocally,9 that if there was a presumption, Debtors had
2 rebutted it. We choose a cleaner view: although the rate for
3 payment under a rejected executory contract has some bearing on
4 the court’s discretionary determination of the benefit of
5 postpetition services to the estate, such rate is not presumptive
6 as the reasonable value, and a debtor in possession need not
7 rebut it. The burden falls upon the applicant to prove the
8 value.
9 We begin, as we should, with the Supreme Court’s decision in
10 Bildisco, then proceed to the subsequent cases, mostly at
11 bankruptcy court level, which have interpreted and applied that
12 ruling. In Bildisco, the Court held that a collective bargaining
13 agreement, like any other executory contract, was subject to
14 rejection by a debtor in possession and that the debtor in
15 possession did not commit an unfair labor practice when, before
16 the court-ordered rejection, it unilaterally modified or
17 terminated a provision of the agreement. In addressing an
18 argument of the NLRB about the effect of § 365(g)(1)10 the Court
19 stated that the rejection was a breach, creating an unsecured
20
21 9
“Rather, the court concludes that [Miller] has rebutted
22 any presumption that the pre-petition employment contract states
the reasonable value of Boruff’s post-petition services.”
23 Memorandum at 20 (emphasis added).
24 10
Section 365(g)(1) provides “except as provided in
25 subsections (h)(2) and (i)(2) of this section, the rejection of
an executory contract or unexpired lease of the debtor
26 constitutes a breach of such contract or lease – (1) if such
contract or lease has not been assumed under this section or
27 under a plan confirmed under chapter 9, 11, 12, or 13 of this
title, immediately before the date of the filing of the
28
petition.”
-15-
1 prepetition claim. However, “[i]f the debtor-in-possession
2 elects to continue to receive benefits from the other party to an
3 executory contract pending a decision to reject or assume the
4 contract, the debtor-in-possession is obligated to pay for the
5 reasonable value of those services. . . , which, depending on the
6 circumstances, may be what is specified in the contract.”
7 Bildisco, 465 U.S. at 531.
8 The Court was addressing the evidentiary impact of the terms
9 of such rejected contracts on the value of postpetition
10 performance in the broadest context, accounting for the entire
11 panoply of possible agreements. Such contracts would range from
12 employment contracts, leases of residential property, supplier or
13 executory sales contracts and others. The evidence which might
14 be presented to establish the reasonable value of that
15 performance could vary considerably, depending on what the
16 contract covered. The Court gave the trial courts unlimited
17 discretion to determine whether such postpetition services were
18 “actual, necessary costs and expenses of preserving the estate”
19 and how to measure the value of such services in light of the
20 benefit to the estate. Recognizing the breadth of potential
21 evidence, the Court provided only a generic road map by saying
22 “depending on the circumstances” and “may be what is specified in
23 the contract.” The language used allowed a court tasked with
24 determining the value of goods delivered postpetition, where
25 there was no real debate about the level of performance under the
26 contract and where arms’ length parties had negotiated the value
27 of such goods, to use the contract for considerable evidentiary
28 weight in valuing the benefit to the estate. On the flip side,
-16-
1 where the performance of an executory contract was more
2 subjective and measuring the postpetition benefit to the estate
3 more nuanced, such as a management employment contract, the trial
4 court could put the contract price in the mixer with other
5 evidence and accord it whatever weight it deserved.
6 Not surprisingly, the subsequent case law, when applying the
7 Court’s direction in the context of a rejected employment
8 agreement, has almost uniformly ruled that although the contract
9 wages are probative, they are not binding, and courts have not
10 given them presumptive weight. The Ninth Circuit has not
11 addressed this precise issue in a published opinion,11 but the
12 analysis in a First Circuit opinion is compelling. In Mason v
13 Official Committee of Unsecured Creditors (In re FBI Distribution
14 Corp.), 330 F.3d 36 (1st Cir. 2003), the court turned away a
15 former executive’s argument that the termination benefits
16 (severance pay) in her rejected prepetition employment and
17 retention agreement should be accorded administrative priority
18 status. Id. at 48. In arriving at this conclusion, the court
19 first looked to the widely accepted standard for awarding an
20 administrative expense: (1) it must have arisen from a
21 transaction with the debtor in possession postpetition and
22 (2) the consideration supporting the claim must have benefitted
23 the estate in some demonstrable way. Id. at 42, see Cramer v.
24 Mammoth Mart, Inc. (In re Mammoth Mart), 536 F.2d 950, 954 (1st
25 Cir. 1976). Then, recognizing that Mammoth Mart left open how
26 the terms of the prepetition contract affected the measure of
27 benefit to the estate, it looked to the broad language of
28
11
Or any unpublished one that we could locate.
-17-
1 Bildisco for direction. Id. at 43-44.
2 Following that direction, it explicitly rejected the
3 assertion that the prepetition contract controlled the amount of
4 such claim because of Bildisco’s ruling that the rejected
5 employment agreement was unenforceable against the debtor in
6 possession. At most, it found that the contract had probative,
7 not presumptive weight and was not dispositive on the value of
8 the benefit. Id. In so ruling, it noted, as we did above, that
9 Congress had specifically provided in § 365 that the contractual
10 rent in an unexpired lease of nonresidential real property was
11 determinative of the administrative claim before rejection but
12 had not so provided for any other executory contract, including
13 an employment contract. Id. at 44-45. It also opined that if it
14 accepted the executive’s argument that he was entitled to an
15 administrative claim for severance pay, it would be blessing an
16 “implicit assumption” of the executory contract, something which
17 § 365 forbids. Id. at 45.
18 In a case factually similar to the case at hand, where the
19 former CEO and a board member had filed administrative priority
20 claims based on rejected prepetition contracts, In re Health
21 Diagnostic Laboratory, Inc., 557 B.R. 885 (Bankr. E.D. Va. 2016),
22 the court ruled that insofar as the claimants sought
23 administrative priority payment for postpetition services,12 they
24
25
12
The case was complex because it considered applications
26 for administrative expenses for (a) the prepetition value of the
contracts without providing postpetition services, (b) expenses
27
potentially arising from indemnification claims under the
28 contracts, (c) compensation for postpetition services, and
(d) attorney’s fees. Only the compensation for postpetition
services is relevant to our ruling.
-18-
1 carried a “‘heavy burden of demonstrating that the [postpetition
2 services for which they seek compensation] provided an actual
3 benefit to the estate and that such costs and expenses were
4 necessary to preserve the value of the estate assets.’” Id. at
5 898 (quoting In re Bernard Technologies, Inc., 342 B.R. 174, 177
6 (Bankr. D. Del. 2006)). Such proof must be made by a
7 preponderance of the evidence. Id. The motion before the court
8 was brought on summary judgment by the Liquidating Trustee, so
9 the bankruptcy court found that factual disputes as to the
10 reasonable value of the services prevented a final merits ruling.
11 However, in addressing the evidence which might be pertinent to
12 its final ruling, it gave no weight to the terms of the
13 prepetition contract and made no mention of Bildisco at all. The
14 only presumption applied by the court was that a debtor’s limited
15 resources should be distributed equally among its creditors such
16 that administrative priority status should be strictly construed.
17 Id. at 893.
18 The bankruptcy court in In re Kaber Imaging, Inc., 262 B.R.
19 187 (Bankr. D.N.H. 2001), construed Bildisco to specifically hold
20 that a rejected contract could not be the proper measure of
21 value. It ruled that because the former chief financial officer’s
22 contract was not assumed by the debtor in possession, he was only
23 entitled to the quantum meruit value of his postpetition
24 services. Id. at 191. The court placed no presumptive weight on
25 the wages and vacation pay specified in the rejected contract.
26 In addition, because the CFO’s executory contract was not
27 enforceable until assumed, that the debtor in possession had
28 delayed in making its decision to reject the contract until
-19-
1 confirmation had no bearing on the effect of the contract on the
2 amount of the claim given administrative priority. Id. at 190.
3 Not citing Bildisco but following closely the First Circuit
4 ruling in FBI Distrib. Corp., the court in In re Bernard
5 Technologies, Inc., 342 B.R. 174 (Bankr. D. Del. 2006) found that
6 a debtor’s CEO was not entitled to his contract rate of pay
7 because his employment contract was never assumed, giving it only
8 “minimal probative value.” Id. at 178. The CEO was only
9 entitled to the reasonable value of his services to the extent
10 they resulted in an actual benefit to the estate. Id. at 179.
11 The only Ninth Circuit case which gave presumptive weight to
12 a cost specified in a contract rejected under § 365 dealt with an
13 entirely different measure of monetary value: the monthly rental
14 value of farm equipment. Thompson v. IFG Leasing Co. (In re
15 Thompson), 788 F.2d 560 (9th Cir. 1986). The court ordered
16 remand because the bankruptcy court had made inadequate factual
17 findings on whether specific pieces of equipment were actually
18 used to the benefit of the estate. In so doing, the court stated
19 that the rent reserved in the lease was the presumptive evidence
20 of fair and reasonable value which could be rebutted. The court
21 of appeals then clarified that the bankruptcy court was not bound
22 by the terms of the lease:
23 When a lease is ultimately rejected but its interim
continuance was an actual and necessary cost and expense
24 of the estate, the allowable administrative expense is
valued not according to the terms of the lease, but cf.
25 Mathews v Butte Machinery Co.,286 F. 2d 801, 805-06 (9th
Cir. 1923); Dayton Hydraulic Co. v Felsenthall, 116 F.
26 961, 966, 969, (6th Cir. 1902), but under an objective
worth standard that measures the fair and reasonable
27 value of the lease.
28 Id. at 563.
-20-
1 Despite the reference to a presumption in Thompson, we do
2 not believe the Ninth Circuit would extend such presumption to a
3 rejected employment contract because the measure of value of
4 management services as a benefit to the estate is substantially
5 different from calculating the rental value of equipment. An
6 objective marketplace would control the contracted lease prices
7 for the equipment whereas no such marketplace would exist for
8 management services. Under the broad guise of Bildisco, a
9 court’s discretion to value the benefit of management services
10 should be unfettered by any presumption.
11 Boruff cites two bankruptcy court cases, one published and
12 one unpublished, to support his argument that his employment
13 contract should be given presumptive weight in determining the
14 value of his postpetition service. Digging into these cases,
15 however, shows that neither actually helps his argument. In
16 Bryant Universal Roofing, 218 B.R. 948, chapter 7 debtor’s former
17 chairman of the board moved in pertinent part to compel payment
18 of his administrative claims for salary owing under his
19 employment agreement. In the context of a summary judgment
20 motion, after citing Dant & Russell for the accepted Ninth
21 Circuit standard that a claim for administrative priority is
22 construed narrowly against the applicant, the bankruptcy court
23 tussled with whether the services provided by movant should be
24 allowed as an administrative claim based on the contract or upon
25 the basis of quantum meruit. Id. at 955. After considering the
26 applicable language from Bildisco, and recognizing “[t]here is a
27 paucity of authority on the extent to which the terms of an
28 unassumed pre-petition employment contract govern the amount of
-21-
1 compensation due to an employee as an administrative expense,”
2 the court decided to use the contract rate as “persuasive”, not
3 presumptive. Id. at 956. In other words, the court put that
4 evidence in the hopper along with other evidence to consider when
5 making the factual ruling on value which could not be determined
6 in a summary judgment motion. Therefore, Bryant Universal
7 Roofing at best demonstrates that the weight to be given to the
8 contract has not been determined in the Ninth Circuit.
9 In an unpublished decision, the bankruptcy court in the
10 District of Columbia ruled the prepetition employment contract
11 was “probative” on the issue of the value of postpetition
12 services, but not dispositive. In re Ellipso, Inc., No. 09-
13 00148, 2012 WL 827103, *4 (Bankr. D.D.C. 2012). However, the
14 court explicitly cited Kaber for its holding that the terms of
15 the contract do not determine the amount of the priority claim;
16 the reasonable value was determined by all the evidence before
17 the court. This case has limited value to support the
18 presumption Boruff would have us accord his Contract.
19 After this review of the relevant authorities, we are of the
20 firm conviction that the bankruptcy court here did not apply the
21 wrong legal standard in a dispositive manner. The bankruptcy
22 court equivocally found a presumption, but also found that
23 Debtors overcame it. We hold more definitively that the contract
24 price in a rejected employment contract is not presumptive of
25 value in the first place. Neither the statute nor relevant case
26 law supports the notion that the evidentiary weight of such terms
27 creates a burden shift requiring Debtors to rebut the contractual
28 wage. The Ninth Circuit in Dant & Russell ruled that such claims
-22-
1 are subject to high scrutiny, consistent with preserving the
2 estate for distribution to general unsecured creditors. Lundell
3 and a plethora of subsequent authorities make it clear that the
4 ultimate burden of persuasion on any claim lies with the
5 claimant. Absent some mandate to shift that burden where the
6 claim is one for administrative priority - a highly scrutinized
7 claim which can only be paid if the services provided a
8 substantial benefit to the estate - we will not do so here.
9 Bildisco says only that the bankruptcy court may consider the
10 terms of the contact, depending on the circumstances of the
11 particular case. At most, that statement gives the contract
12 probative, not presumptive, value.
13 Boruff did not challenge the bankruptcy court’s factual
14 findings, where it weighed the sparse and indefinite evidence of
15 the value of his postpetition services. We will not disturb its
16 conclusion that he should be compensated at a rate comparable to
17 what the other board members were paid. The court did not abuse
18 its discretion.
19 VI. CONCLUSION
20 The terms of a rejected prepetition employment contract are
21 not presumptive on the value of postpetition services, creating a
22 burden shift. Accordingly, we AFFIRM.
23
24
25
26
27
28
-23-