Matter of TransAmerican Natural Gas Corp.

UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
___________________________
No. 91-2550
___________________________
IN THE MATTER OF: TRANSAMERICAN NATURAL GAS CORP.,
Debtor.
TOMA STEEL SUPPLY, INC.,
Appellant,
versus
TRANSAMERICAN NATURAL GAS CORPORATION, ET AL.,
Appellees.
___________________________
Nos. 91-2716,
91-2717 and 91-2718
___________________________
IN THE MATTER OF: TRANSAMERICAN NATURAL GAS CORP.,
Debtor.
TOMA STEEL SUPPLY, INC.,
Appellant,
versus
GHR ENERGY CORP.,
Appellee.
___________________________
No. 91-2915
___________________________
IN THE MATTER OF: TRANSAMERICAN NATURAL GAS CORPORATION,
Debtor.
TOMA STEEL SUPPLY, INC.,
Appellee,
versus
TRANSAMERICAN NATURAL GAS CORPORATION,
f/k/a GHR ENERGY CORPORATION,
Appellant.
_________________________________________________________________
Appeals from the United States District Court for the
Southern District of Texas
_________________________________________________________________
(November 25, 1992)
Before REAVLEY, JOLLY, and HIGGINBOTHAM, Circuit Judges.
E. GRADY JOLLY, Circuit Judge:
These over-litigated consolidated appeals, which have been
characterized by unnecessary contentiousness since their inception
in the bankruptcy court in 1987, arise out of Toma's sale of well
casing, post-petition, to TransAmerican, a Chapter 11 debtor-in-
possession. TransAmerican objected to Toma's administrative
expense claim, alleging that the bankruptcy estate received no
benefit, because some of the casing was defective and caused
damages in excess of the amount of Toma's claim. In 1987, the
bankruptcy court allowed Toma's claim in its entirety and ordered
immediate payment. In 1989, the district court vacated the
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bankruptcy court's orders, and remanded the case for findings of
fact and conclusions of law on TransAmerican's objection. On
remand, the bankruptcy court denied Toma's claim, and the district
court affirmed. We hold that Toma satisfied its burden of proving
that the casing benefited the estate, and that the bankruptcy court
adequately considered TransAmerican's objection when it initially
allowed Toma's claim. We therefore REVERSE the judgment of the
district court, and REMAND the case for further proceedings
consistent with this opinion.
I
A brief summary of the lengthy procedural history of these
appeals is in order. TransAmerican filed a voluntary bankruptcy
petition under Chapter 11 in 1983. In 1985, during the pendency of
TransAmerican's reorganization proceedings, Toma and TransAmerican
entered into a contract pursuant to which Toma sold well casing to
TransAmerican. In August or September of 1986, TransAmerican
stopped paying Toma's invoices. Nevertheless, over the next
several months, Toma continued to supply casing to TransAmerican,
until the balance due was $2,288,683.45 (nearly Toma's entire net
worth).
In the fall of 1986, TransAmerican experienced five successive
well failures. Four of the wells contained casing supplied by
Toma; the fifth contained casing supplied by another distributor.
After these failures, casing supplied by Toma was retrieved from
another well that had not been completed.
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In February 1987, Toma filed in the bankruptcy court emergency
motions for allowance of administrative expenses of approximately
$2.3 million for casing supplied to TransAmerican pursuant to the
contract. TransAmerican opposed the motion.
On March 11, 1987, the bankruptcy court conducted an
evidentiary hearing on Toma's administrative expense claim.
TransAmerican asserted that Toma had provided no benefit to the
estate, because some of the casing supplied by Toma was defective,
causing well failures and damages exceeding the balance
TransAmerican owed Toma. Although the bankruptcy court stated that
the hearing was limited to determining administrative expense
priority, and not to whether Toma had supplied defective casing,
both parties introduced evidence relevant to TransAmerican's
objection. At the conclusion of the hearing, the bankruptcy court
found that Toma had satisfied its burden of proving that the
expenses were reasonable and necessary for the preservation of the
estate. It allowed Toma's administrative expense claim in full,
and directed TransAmerican to pursue its claims for defective
casing in another court of competent jurisdiction within 60 days.
Toma then filed amended and supplemental motions regarding the
emergency nature of its need for immediate payment. It emphasized
the availability of insurance sufficient to satisfy any damages
TransAmerican might be awarded if it eventually proved that the
casing was defective. The bankruptcy court conducted a hearing on
the supplemental motions on April 9. At that hearing,
TransAmerican argued that the bankruptcy court should postpone
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ruling on Toma's motion for immediate payment "until the court in
which the action should be filed has determined the precise amount
of Toma's liability to [TransAmerican]." On April 11,
TransAmerican complied with the bankruptcy court's earlier order
and filed suit against Toma in Texas state court.
On May 11, 1987, the bankruptcy court entered an order
granting Toma's motion for immediate payment. It found that Toma
had introduced evidence of severe financial hardship. It further
found that Toma had submitted proof of insurance in an amount
sufficient to cover any damages caused by defects in the casing.
It therefore ordered TransAmerican immediately to pay Toma
$2,288,634.45, the balance due. When TransAmerican failed to pay,
and failed to take any steps to stay execution of the bankruptcy
court's order, Toma garnished its bank accounts. After another
hearing on June 15, the bankruptcy court ordered Toma to escrow
$500,000 in an interest-bearing account to protect TransAmerican
from third-party liens by Toma's suppliers. It further ordered
Toma to assign to TransAmerican its interest under its product
liability insurance policies to protect TransAmerican in the event
that TransAmerican succeeded on its claim for damages allegedly
caused by defective casing. The unescrowed portion of the
garnished amount, approximately $1.8 million, was released to Toma.
After the bankruptcy court denied its motion for a new trial,
TransAmerican appealed the bankruptcy court's May 11 payment order,
as modified by the June 15 order, to the district court. In the
meantime, on September 4, 1987, the bankruptcy court entered an
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order confirming TransAmerican's plan of reorganization. The plan
provided that each holder of an allowed administrative expense
claim was to "be paid the full amount of such expense or claim when
due (but not earlier than the consummation date) except to the
extent the Bankruptcy Court orders otherwise." Toma's allowed
administrative expense claim was not treated separately in the
confirmation order.
On June 30, 1989, the district court vacated the bankruptcy
court's orders and remanded the case for findings of fact and
conclusions of law on TransAmerican's objection to Toma's
administrative expense claim. On August 30, 1989, the bankruptcy
court ordered the parties to file motions regarding TransAmerican's
motion for new trial, which it considered to have been revived by
the district court's judgment. It further directed both parties to
submit proposed findings of fact and conclusions of law regarding
the March 11, 1987 hearing.
On September 13, 1989, TransAmerican filed an amended motion
for new trial.1 On September 29, both parties submitted proposed
findings of fact and conclusions of law regarding the March 1987
hearing. TransAmerican requested that payment be delayed until
"final adjudication of all issues." Toma argued that equitable
1
In its original motion for new trial filed in 1987,
TransAmerican had urged the bankruptcy court to refrain from
ordering immediate payment in order to permit it to establish its
defenses to Toma's claim, "preferably" in state court. However,
during the pendency of its appeal to the district court,
TransAmerican's state court pleadings had been stricken as
sanctions for discovery abuses. In its 1989 amended motion for new
trial, TransAmerican urged adjudication of the defective casing
issue in the bankruptcy court.
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grounds supported allowance of payment prior to adjudication of
TransAmerican's defective casing claim. Toma urged the bankruptcy
court to make findings of facts and conclusions of law based upon
the existing record from the March 1987 hearing.
On October 2, 1989, the bankruptcy court ordered Toma to
return the escrowed $500,000 to TransAmerican, but denied without
prejudice TransAmerican's request that the $1.8 million obtained by
Toma through the garnishment be returned to TransAmerican (the
"Escrow Dissolution Order"). On February 20, 1990, it entered
findings of fact and conclusions of law, denying Toma's
administrative expense claim (the "Administrative Expense Order").
Based on the evidence at the March 11, 1987 hearing, the bankruptcy
court found that Toma supplied defective casing to TransAmerican,
and that Toma had failed to prove that it rendered a benefit to the
estate. Although it acknowledged that causation and damages were
being litigated in state court, it nevertheless found that the
casing was defective, that "TransAmerican did not receive what it
contracted to buy from Toma," and that "it is more probable than
not that the defective casing caused the well failures."
TransAmerican then renewed its motion seeking disgorgement,
and on January 10, 1991, the bankruptcy court ordered that Toma
disgorge the $1.8 million it received in the 1987 garnishment (the
"Disgorgement Order"). Toma appealed the Administrative Expense
Order, the Escrow Dissolution Order, and the Disgorgement Order to
the district court, which affirmed all three orders on April 22,
1991.
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Toma filed a notice of appeal on May 22, 1991.2 Toma then
sought, in the district court, to obtain approval of a supersedeas
bond in order to stay execution of the district court's judgment
affirming the bankruptcy court's Disgorgement Order. TransAmerican
objected, contending that Toma had not properly appealed the
Disgorgement Order and that Toma was not entitled to stay execution
of that order by posting a supersedeas bond. TransAmerican also
sought permission from the district court to register the district
court's April 24, 1991 judgment in Colorado, where Toma's place of
business is located, so that it could seek enforcement of the
Disgorgement Order and execute on Toma's assets. The district
court denied TransAmerican's motion for registration, and approved
Toma's proposed supersedeas bond, staying execution of the
Disgorgement Order during the pendency of Toma's appeal to this
court. TransAmerican has appealed from both of these orders.
We consolidated all matters on appeal. Before us are (1)
Toma's appeal from the district court's April 24, 1991 judgment
(affirming the bankruptcy court's Administrative Expense Order,
Escrow Dissolution Order, and Disgorgement Order); (2) Toma's
appeal from the district court's June 30, 1989 judgment (remanding
for findings on TransAmerican's objection); (3) TransAmerican's
appeal from the district court's July 19, 1991 order (denying
TransAmerican's motion to permit registration of the April 24, 1991
2
Toma also appealed from the district court's June 30, 1989
order vacating the bankruptcy court's allowance of immediate
payment of its claim and remanding the case to bankruptcy court for
findings of fact and conclusions of law.
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judgment); and (4) TransAmerican's appeal from the district court's
August 12, 1991 order (approving Toma's supersedeas bond and
permitting Toma to stay execution of the April 24, 1991 judgment).
II
We directed the parties to brief the issues of whether the
orders from which Toma has appealed are final and, if so, whether
the notices of appeal are proper. We are satisfied that all of the
orders appealed from are final. However, TransAmerican contends
that Toma did not properly appeal the district court's April 24,
1991 judgment in its entirety. That judgment affirmed the
bankruptcy court's orders entered October 2, 1989 (Escrow
Dissolution Order), February 20, 1990 (Administrative Expense
Order), and January 10, 1991 (Disgorgement Order). In its notice
of appeal, Toma stated that it appealed from "the Final Order and
Judgment of the District Court . . . entered in this case on April
24, 1991, affirming the Bankruptcy Court Order of February 20,
1990, denying Toma['s] . . . Emergency Request for Immediate
Payment of Administrative Expense . . . ." According to
TransAmerican, because Toma expressly referred only to the
Administrative Expense Order, Toma did not properly perfect an
appeal of the district court's judgment insofar as it affirmed the
Disgorgement Order.
The Federal Rules of Appellate Procedure require that a notice
of appeal "designate the judgment, order or part thereof appealed
from." Fed. R. App. P. 3(c). We construe this portion of Rule
3(c) broadly. Osterberger v. Relocation Realty Service Corp., 921
- 9 -
F.2d 72, 74 (5th Cir. 1991). "If there is an error in designating
a judgment appealed, the error should not bar an appeal if the
intent to appeal a particular judgment can be fairly inferred, and
if the appellee is not prejudiced or misled by the mistake." Friou
v. Phillips Petroleum Co., 948 F.2d 972, 974 (5th Cir. 1991).
We can easily infer Toma's intent to appeal the district
court's affirmance of the bankruptcy court's Disgorgement Order.
Contrary to TransAmerican's argument, the Disgorgement Order
clearly is dependent upon the disposition of Toma's administrative
expense claim. If we reverse either the district court's April 24,
1991 judgment affirming the denial of Toma's administrative expense
claim, or its June 30, 1989 judgment vacating the bankruptcy
court's orders and remanding the case, it necessarily follows that
the Disgorgement Order must be vacated; and we have no doubt that
we have jurisdiction to do so.
We also conclude that TransAmerican has not been prejudiced or
misled. Within ten days following the filing of its notice of
appeal, Toma filed a statement of issues to be presented on appeal
and an application for approval of supersedeas bond, both of which
identified the affirmance of the Disgorgement Order as having been
appealed. Obviously, Toma would not have considered it necessary
to post a supersedeas bond if it had not intended to appeal the
district court's affirmance of the bankruptcy court's Disgorgement
Order. Furthermore, we note that TransAmerican has fully briefed
the issue.
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Accordingly, we hold that Toma properly perfected an appeal
from the district court's April 24, 1991 judgment in its entirety.
III
Toma first challenges the district court's June 30, 1989 order
remanding the case to the bankruptcy court for findings of fact and
conclusions of law on TransAmerican's objection. It contends that
the bankruptcy court adequately considered TransAmerican's
objection, made appropriate findings of fact and conclusions of
law, and properly directed TransAmerican to pursue its claim for
damages allegedly caused by defective casing in another forum.
Next, Toma contends that the bankruptcy court's denial of its
administrative expense claim on remand from the district court was
improper. Toma argues that the bankruptcy court failed to focus on
whether Toma had provided a benefit to the estate, but instead
based its decision solely on a substantive determination that Toma
breached its contract by supplying defective pipe to TransAmerican.
Toma further argues that it was deprived of due process to the
extent the bankruptcy court made a substantive determination that
Toma had supplied defective casing, based solely on the restricted
evidence from the March 11, 1987 hearing. It also contends that
the bankruptcy court's finding that the casing was defective is
clearly erroneous, because it was based on insufficient evidence
and an improper allocation of the burden of proof.3 Because we
3
Toma also contends that confirmation of TransAmerican's plan
of reorganization in September 1987 mooted TransAmerican's appeal
of the allowance of Toma's administrative expense claim. This
contention, based on Toma's position that TransAmerican appealed
only the timing of payment, and not the allowance, of Toma's claim,
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hold that the bankruptcy court adequately considered
TransAmerican's objections in its first ruling, and the district
court erred in remanding the case, we do not address the issues
regarding the proceedings following remand.
A
The bankruptcy court's findings of fact "will not be set aside
unless clearly erroneous." Matter of Delta Towers, Ltd., 924 F.2d
74, 76 (5th Cir. 1991). However, "when a finding of fact is
premised on an improper legal standard, that finding loses the
insulation of the clearly erroneous rule." Matter of Fabricators,
Inc., 926 F.2d 1458, 1464 (5th Cir. 1991). "Conclusions of law, on
the other hand, are subject to plenary review on appeal." Id.The Bankruptcy Code provides that "[a]n entity may file a
request for payment of an administrative expense." 11 U.S.C. §
503(a). Section 503(b) provides that, "[a]fter notice and a
hearing, there shall be allowed, administrative expenses, . . .
including--(1)(A) the actual, necessary costs and expenses of
preserving the estate. . . ."
The purpose of Section 503 is to permit the
debtor's business to operate for the benefit of its
prepetition creditors. In order to effectuate a
successful reorganization, third parties must be
willing to furnish postpetition goods or services
on credit. Third parties might refuse to extend
credit to debtors-in-possession for fear that their
claims would not be paid, but an advance payment
requirement would impede the debtor's business.
Section 503 requires that such claims be given
priority, therefore inducing third parties to
is meritless.
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extend credit and enhancing the likelihood of a
successful reorganization.
In re Coastal Carriers Corp., 128 B.R. 400, 403 (Bankr. D. Md.
1991).
As the district court correctly noted, TransAmerican's
objection to Toma's administrative expense claim gave rise to a
"contested matter" governed by Bankruptcy Rule 9014. Rule 9014
provides:
In a contested matter in a case under the Code
not otherwise governed by these rules, relief shall
be requested by motion, and reasonable notice and
opportunity for hearing shall be afforded the party
against whom relief is sought. No response is
required under this rule unless the court orders an
answer to a motion. The motion shall be served in
the manner provided for service of a summons and
complaint by Rule 7004, and, unless the court
otherwise directs, the following rules shall apply:
7021, 7025, 7026, 7028-7037, 7041, 7042, 7052,
7054-7056, 7062, 7064, 7069, and 7071. The court
may at any stage in a particular matter direct that
one or more of the other rules in Part VII shall
apply. . . . The clerk shall give notice to the
parties of the entry of any order directing that
additional rules of Part VII are applicable or that
certain of the rules of Part VII are not
applicable. The notice shall be given within such
time as is necessary to afford the parties a
reasonable opportunity to comply with the
procedures made applicable by the order.
Unlike adversary proceedings, which we have described as "full
blown federal lawsuits within the larger bankruptcy case," and
which are governed by all of the rules in Part VII of the
Bankruptcy Rules, contested matters are "subject to the less
elaborate procedures specified in Bankruptcy Rule 9014." Matter of
Wood & Locker, Inc., 868 F.2d 139, 142 (5th Cir. 1989). Contested
matter proceedings are generally designed for the adjudication of
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simple issues, often on an expedited basis. 9 Collier on
Bankruptcy, ¶ 9014.05 (15th ed. 1992). Rule 9014 specifically
provides that Bankruptcy Rule 7052, which incorporates Fed. R. Civ.
P. 52, applies in contested matters. The bankruptcy court was,
therefore, required to enter findings of fact and conclusions of
law on whether there was a benefit to the estate. However, Rule
9014 does not provide for the automatic application of Bankruptcy
Rule 7008, incorporating Fed. R. Civ. P. 8 (affirmative defenses)
or Bankruptcy Rule 7013, incorporating Fed. R. Civ. P. 13
(counterclaims). Those rules apply only if the bankruptcy court so
directs, and the parties are notified in accordance with Rule 9014.
Toma had the burden of proving that its claim was for "actual,
necessary costs and expenses of preserving the estate." The words
"actual" and "necessary" have been construed narrowly: "the debt
must benefit [the] estate and its creditors." NL Indus., Inc. v.
GHR Energy Corp., 940 F.2d 957, 966 (5th Cir. 1991), cert. denied,
___ U.S. ___, 112 S. Ct. 873 (1992). 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. See
Coastal Carriers, 128 B.R. at 404-05; In re Buttes Gas & Oil Co.,
112 B.R. 191, 193 (Bankr. S.D. Tex. 1989). Mere allegations,
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unsupported by evidence, are insufficient to rebut the movant's
prima facie case.
B
At the March 11, 1987 hearing, Toma introduced evidence that
on September 10, 1985, it entered into a requirements contract with
TransAmerican as debtor-in-possession; that pursuant to the
contract, it supplied approximately 1,500,000 feet of casing to
TransAmerican; that TransAmerican used the casing in conducting its
business of well drilling, completion, and operation; and that the
unpaid balance owed Toma by TransAmerican was $2,288,683.45. Toma
thus established a prima facie case under § 503(b)(1).
TransAmerican produced the following evidence in support of
its objection. In the fall of 1986, five of TransAmerican's wells
failed. Four of the wells contained pipe supplied by Toma, which
apparently had been manufactured at four separate mills; the fifth
contained pipe supplied by another distributor. After these
failures, casing supplied by Toma was retrieved from La Perla No.
73, a well that had not yet been completed, and had not failed.
(It was not feasible to retrieve the casing from the four failed
wells containing casing supplied by Toma, because the casing had
already been cemented in place.) The casing from La Perla No. 73
was inspected, and two joints were found to be rejectable. Three
joints from La Perla No. 73 were sent to a laboratory for
metallurgical testing, which confirmed that two of the three joints
were defective or rejectable. TransAmerican's quality control
inspector testified that he had not yet concluded his investigation
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into the cause of the well failures. It was only based on the
defects found in two of the joints from La Perla No. 73, that he
assumed that there were defects in the rest of the casing string.
Brookins, a TransAmerican vice president responsible for completion
procedures, testified that he did not think TransAmerican's
procedures caused the well failures. Because TransAmerican had
used the same procedures in drilling 700 wells without failure,
Brookins testified that it was his opinion that the failures were
caused by defective casing supplied by Toma. TransAmerican had
incurred $1,797,104.36 in repair costs for the failed wells as of
the date of the hearing, and it estimated that it would incur an
additional $800,000.
There was evidence that casing supplied by Toma had been
inspected at least twice prior to being placed in the wells; that
casing supplied by Toma had been used in approximately 50 other
TransAmerican wells without incident; and that none of Toma's other
customers had complained of casing failures. An expert witness for
Toma reviewed the records from the failed wells and inspected all
of the casing that had been removed from La Perla No. 73. He
testified that the well failures were caused by imprudent operating
practices and completion procedures by TransAmerican, rather than
defective casing.
At the conclusion of the March 11 hearing, the bankruptcy
court allowed Toma's administrative expense claim in its entirety,
finding that:
[T]here was not a[n] . . . overwhelming amount of
evidence by Toma to show that these goods . . .
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supplied were actual and necessary for preservation
of the estate. . . . I think it barely tipped the
burden of proof by preponderance of evidence . . .
[T]here's enough in the record to say that it
certainly didn't supply the tubular products other
than to be placed in the wells, which were used by
[TransAmerican] for -- at least intended by
[TransAmerican] to generate revenues. The
reasoning behind that -- what I'm trying to say, I
guess in a way is, that okay I realize that Toma
didn't present just an overwhelming amount of
evidence to show that they were actual and
necessary, but there's enough in there for me to go
ahead and be persuaded that the supplying of the
tubular goods were actual and necessary for the
Debtor to use.
The bankruptcy court had the following to say regarding
TransAmerican's objection:
I don't know whether this casing entitles
[TransAmerican] to compensation of some form and if
such form would be placed as an offset against the
amount owing Toma, and I don't know what theory the
Debtor would seek recovery under, since I have no
pleadings appropriately before me. The Debtor, as
I see it, could choose any number of remedies:
suit on a contract; suit on warranty; . . .
possibly sounding in tort. [B]ut until . . .
[TransAmerican] steps forward as a Plaintiff in
some court and seeks an actual recovery under some
theory of law and gets a determination . . . from a
court of competent jurisdiction, there's nothing I
can do, other than to go ahead and allow this as an
administrative expense . . . .
The burden is on [TransAmerican] . . . to . . .
attack that claim by Toma, on whatever legal theory
they want to recover on. I don't know what legal
theory they're going to -- I cannot try in the
503(b)(1)(a) claim matter their --I don't know, is
it sounding in contract; is it sounding under
warranty? What part? I mean, I don't know. How
will they know? They say that they don't owe you
any money because your client supplied them bad
product. That's not enough.
In its May 11, 1987 order, the bankruptcy court, after noting
that it had previously allowed Toma's administrative expense claim,
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held that Toma was entitled to immediate payment. The bankruptcy
court found that the equities favored Toma, because it supplied
goods to TransAmerican post-petition; there was no evidence that
the parties agreed to postpone payment until plan confirmation; the
casing supplied by Toma could not be recovered; Toma had introduced
evidence of the devastating financial effect that TransAmerican's
non-payment had on its business because of the size of the debt in
comparison to its overall operations; and Toma had submitted proof
of insurance in an amount sufficient to cover any damages suffered
by TransAmerican as a result of any defects in the casing. With
respect to TransAmerican's objection, the bankruptcy court stated:
[TransAmerican] has asked that this court
defer an order of payment of Toma's administrative
claim until it can pursue an offsetting claim
against Toma for alleged defects in the goods.
This court notes that there is case law to support
Debtor's request. [Citations omitted.] However,
until [TransAmerican]'s claim against Toma for
defective pipe is determined by a court of
appropriate jurisdiction, this court cannot apply
an offset to Toma's claim for administrative
expenses. Therefore, since the time of payment of
this claim is a matter within this court's
discretion, and as elaborated upon above, the
equities of the matter weigh in Toma's favor, this
court concludes that Toma's motion should be
granted. Debtor is free to come back to this court
with its offsetting claim when that claim has been
liquidated in the appropriate court.
TransAmerican filed a motion for new trial, requesting the
bankruptcy court to permit it to establish its defenses to Toma's
claim in state court before ordering payment. TransAmerican stated
that the Texas state courts were "much better equipped to handle"
the dispute. On June 15, 1987, the bankruptcy court denied
TransAmerican's motion, but modified its May 11 order by requiring
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that $500,000 of the $2,300,000 be escrowed in an interest-bearing
account. Furthermore, the court required Toma to assign to
TransAmerican all rights under its product liability insurance
policies "as a result of the claims of Debtor for defective
casing."
In its June 30, 1989 judgment, the district court held that
the bankruptcy court did not have discretion to refuse to make
findings on TransAmerican's objection, which it characterized as
"an affirmative defense to liability on the underlying contract
upon which Toma sought to recover," notwithstanding the fact that
the bankruptcy court had not directed that Bankruptcy Rule 7008
would apply in the contested matter involving Toma's administrative
expense claim. Concluding that Toma's right to reimbursement could
not be determined until such findings were made, the district court
vacated the bankruptcy court's orders and remanded for findings of
fact and conclusions of law on TransAmerican's objection.
C
We hold that the bankruptcy court adequately considered
TransAmerican's objection in allowing Toma's administrative expense
claim, and in ruling that Toma was entitled to immediate payment.
We further hold that its May 11 and June 15, 1987 orders contain
sufficient findings of fact and conclusions of law reflecting such
consideration.
The district court erred in holding that the bankruptcy court
had no discretion to refuse to make findings of fact and
conclusions of law on the substantive merits of TransAmerican's
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"affirmative defense." Because the bankruptcy court did not direct
that Bankruptcy Rule 7008 would apply in the contested matter
involving Toma's administrative expense claim, it acted well within
its discretion when it refused to make findings of fact on the
merits of TransAmerican's defective casing claims.4 In a
commendable effort to prevent this contested matter from expanding
into a "full blown" trial, that needlessly would have consumed its
scarce resources, the bankruptcy court directed TransAmerican to
litigate the merits of its state law claims in another forum. The
fact that Toma's administrative expense claim was based on an
underlying contract did not automatically transform that claim into
an adversary complaint seeking recovery on the underlying contract,
nor did it expand the scope of the contested matter into a "full-
blown" trial of counterclaims or affirmative defenses based on
state contract law.
The sole issue before the bankruptcy court was whether Toma
met its burden of proving that the casing benefited the bankruptcy
4
TransAmerican maintains that, if its recoupment defense
cannot be given effect in a § 503 contested matter proceeding, it
will suffer worse treatment as a Chapter 11 debtor than it would
have suffered as a non-debtor, in contravention of 11 U.S.C. § 558,
which provides that "[t]he estate shall have the benefit of any
defense available to the debtor as against any entity other than
the estate. . . ." This argument is specious. First, it overlooks
the substantial benefits that TransAmerican received as a Chapter
11 debtor--benefits that are not available to non-debtors.
Moreover, nothing in § 558 gives TransAmerican the right to have
the merits of its defective casing claims or its recoupment defense
adjudicated in a § 503 contested matter. TransAmerican did not ask
the bankruptcy court to direct that Rule 7008 apply, did not appeal
the bankruptcy court's direction to litigate its defective casing
claim in state court, and was perfectly content to have the issue
tried in that forum until it received an unfavorable ruling as the
result of its own conduct.
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estate. Although TransAmerican's objection and supporting evidence
are relevant and must be considered in making that determination,
the bankruptcy court properly exercised its discretion in refusing
to rule on the merits of TransAmerican's defective casing claims.
See Matter of Strause, 40 B.R. 110, 113 (Bankr. W.D. Wis. 1984)
(refusing to consider debtor's potential counterclaims raised in
opposition to § 503(b)(1) administrative expense claim); see also
In re Gellert, 55 B.R. 970 (Bankr. D.N.H. 1985) (holding that court
can "consider" affirmative defenses or counterclaims raising
"extraneous" issues in deciding whether to exercise its equitable
discretion in granting relief from automatic stay, but "such
consideration . . . does not authorize proceeding to a res judicata
determination of such allegations on the merits").
The total amount of Toma's administrative expense claim is
$2,288,683.45. TransAmerican's damages allegedly caused by
defective casing total approximately $2,500,000. Relying on state
law,5 TransAmerican maintains that, because its repair costs exceed
the amount of Toma's claim, there was no benefit to the estate. It
insists that the benefit to TransAmerican's estate "can only be
determined by the amount of money TransAmerican was to have paid
Toma, offset by the damage incurred by TransAmerican's estate due
to the defective casing." We disagree. The purpose of the benefit
analysis under § 503 is to determine whether the estate received a
5
TransAmerican's recoupment defense is based on § 2.717 of the
Texas Business and Commerce Code, which provides that, upon notice
to the seller, a purchaser of goods may deduct from the amount owed
to the seller all or any part of damages resulting from the
seller's breach of contract.
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benefit--not whether the estate was harmed. See Matter of Strause,
40 B.R. at 113 ("the principal purpose of according administrative
priority to claims for benefit to the estate is to prevent unjust
enrichment of the debtor's estate, rather than simply to compensate
the creditor"). Toma introduced evidence at the March 1987
hearing, including copies of its invoices, that the cost of the
entire casing string in each well was approximately $80,000 per
well. Thus, invoices for allegedly defective casing total, at
most, approximately $400,000 ($80,000 each for the four failed
wells, plus $80,000 for the casing in La Perla No. 73, which did
not fail).
Although the amount to be allowed as an administrative expense
must be measured in dollars and cents, (thus satisfying §
503(b)(1)'s requirement that the costs or expenses be "actual"),
the question whether the estate has been benefited cannot be so
narrowly confined. As we have already noted, the purpose of the
priority treatment afforded by § 503 is to encourage third parties
to provide necessary goods and services to the debtor-in-possession
so that it can continue to conduct its business, thus generating
funds from which prepetition creditors can be paid. 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. See In re
Coastal Carriers, 128 B.R. at 404.
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The district court apparently agreed with TransAmerican's
argument that the benefit analysis must focus solely on the amount
of Toma's invoices and the amount of TransAmerican's alleged
damages. Such an analysis is incomplete, because it ignores the
fact that TransAmerican had no complaints regarding over 80% of the
casing upon which Toma's claim was based. Furthermore, it
disregards evidence that casing supplied by Toma had been used
successfully in approximately 50 other profitable wells. In short,
consideration of the damages allegedly caused by a small portion of
the casing supplied by Toma is only part of the analysis. Section
503 also requires consideration of the fact that Toma's willingness
to undertake the risk of supplying goods to TransAmerican as
debtor-in-possession enabled TransAmerican to continue conducting
its business, as well as the fact profits from wells in which Toma-
supplied casing was successfully used were available for payment of
prepetition creditors, and enhanced the likelihood of successful
reorganization. We agree with TransAmerican's assertion that the
profitability of a well cannot be attributed solely to the casing.
Nevertheless, it is clear that casing is an essential part of a
well: In the absence of third parties such as Toma, who were
willing to undertake the risks of doing business with TransAmerican
as debtor-in-possession, there would be no casing, thus no wells,
thus no profits, and thus no payment to the creditors.
Applying these principles to the evidence presented at the
March 11, 1987 hearing, it is clear that the bankruptcy court
correctly held that Toma satisfied its burden of proving that the
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casing it supplied to TransAmerican benefited the estate.
TransAmerican made no claim that all of the casing was defective,
and produced direct evidence that, at most, two joints of casing
removed from La Perla No. 73, a well which had not failed, were
defective. Even if the entire strings of casing in all five of the
Toma-supplied wells about which TransAmerican complained are
assumed to be defective, that casing represents only approximately
$400,000 out of Toma's total claim of approximately $2,300,000.
With the exception of the casing used in those five particular
wells, TransAmerican does not dispute that it used the remainder of
the casing supplied by Toma to conduct its business of drilling,
completing, and operating wells, which generated revenue to fuel
its reorganization.
In conducting its 1987 benefit analysis, the bankruptcy court
adequately considered TransAmerican's objection. To protect
TransAmerican, the bankruptcy court ordered that $500,000 of the
approximately $2.3 million claim be placed in an escrow account to
protect TransAmerican from third-party liens by Toma's suppliers.
It further ordered Toma to assign its rights under its product
liability insurance policies to TransAmerican. Because such steps
would have been unnecessary in the absence of an objection to
Toma's claim, they obviously reflect a consideration of the
possibility that TransAmerican might succeed in proving its
allegation that some of the casing was defective. The course
chosen by the bankruptcy court was well within its discretion.
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To sum up, we conclude that the bankruptcy court adequately
considered TransAmerican's objections and correctly held that Toma
met its burden of proving that its sale of casing benefited
TransAmerican's estate. Because the bankruptcy court entered
adequate findings of fact and conclusions of law in accordance with
Bankruptcy Rules 9014 and 7052, the district court erred in
vacating its orders and remanding the case for findings of fact and
conclusions of law on the merits of TransAmerican's objections.
IV
TransAmerican has appealed from the district court's order
approving Toma's supersedeas bond and allowing Toma to stay
execution of the Disgorgement Order pending appeal, and from the
district court's order denying TransAmerican's motion to permit
registration of the April 24, 1991 judgment. In the light of our
ruling on the administrative expense claim, these issues are moot
for the purposes of this appeal.
V
The April 24, 1991 judgment of the district court is VACATED.
The June 30, 1989 judgment of the district court is REVERSED, and
the case is REMANDED to the district court. The district court is
instructed to vacate the bankruptcy court's Escrow Dissolution
Order, Administrative Expense Order, and Disgorgement Order, and to
reinstate the bankruptcy court's May 11, 1987 order, as modified by
its June 15, 1987 order. The district court is authorized to order
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such further proceedings as may be necessary to effectuate the
reinstated orders, in a manner consistent with this opinion.
REVERSED and REMANDED.
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REAVLEY, Circuit Judge, concurring:
Toma Steel had sold more than a million feet of pipe to
TransAmerican during the Chapter 11 reorganization. The pipe was
used in the completion and operation of over 50 TransAmerican
wells. It is uncontroverted that the sale of pipe was beneficial
and necessary to the operations of TransAmerican and to the
preservation of the debtor estate, and the bankruptcy judge so
found. In 1986 TransAmerican ceased payment of Toma Steel
invoices; the explanation was given at a later time that there were
questions about the quality of the pipe. Toma Steel continued the
sales and, in 1987, sought administrative expense allowance and
payment for 315,000 feet of pipe.
TransAmerican objected to the allowance of the administrative
expense, not because the pipe for which those sales were made )) or
any portion of those sales )) was defective, but solely on the
ground that TransAmerican had a damage claim against Toma Steel
that was greater than the price of the subject 315,000 feet of
pipe.
The bankruptcy court could have put this entire controversy
into an adversary proceeding or applied the adversary rules in the
pending proceeding. However, the court was not required to do
that, and under the pressure of its oppressive docket, chose not to
do so. It clearly excluded any consideration of the TransAmerican
damages claim in allowing the administrative expense after a
hearing pursuant to 11 U.S.C. § 503(b). See D-1 Enterprises Inc.
v. Commercial State Bank, 864 F.2d 36, 39 (5th Cir. 1989).
However, when immediate payment was ordered, the bankruptcy court
protected TransAmerican by the escrow and by assuring that
insurance covered its damages claims.
I concur in this court's holding that the bankruptcy court
committed no error and that the district court erred in remanding
for further findings. I emphasize that TransAmerican's defense was
not that a certain portion of the pipe, for which Toma Steel sought
allowance and payment, was defective. The counterclaim or defense
was based upon a wholly separate damages claim.
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