GNED THIS: April 9, 2012
______________________________
Thomas L. Perkins
United States Chief Bankruptcy Judge
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business as a debtor-in-possession until the case converted to chapter 7 on June 10, 2011.
Through R.J. Powers, one of its subsidiaries, the DEBTOR employed union electricians
pursuant to certain collective bargaining agreements (CBAs) with IBEW Locals 34, 146, 193
and 601. The DEBTOR took no action to reject or modify the CBAs, under section 1113 or
otherwise.
The wages due the electricians for their postpetition, preconversion services have
been fully paid by the DEBTOR. The CBAs required the DEBTOR to make contributions
to the FUNDS. The DEBTOR failed to pay the required contributions when due, thus
incurring interest and penalties. Whether the interest and penalties should be accorded
administrative priority status is at issue.
The FUNDS claim priority under Bankruptcy Code sections 507(a)(2) and
503(b)(1)(A). Under the latter section, there shall be allowed administrative expenses,
including “the actual, necessary costs and expenses of preserving the estate including
wages, salaries, and commissions for services rendered after the commencement of the
case.” 11 U.S.C. § 503(b)(1)(A). The services must have provided a postpetition benefit to
the estate. In re A.C.E. Elevator Co., Inc., 347 B.R. 473, 481 (Bankr.S.D.N.Y. 2006). The
categories of administrative expenses listed in section 503(b) are intended to be illustrative,
not exhaustive. In re Supermarket Investors, Inc., 441 B.R. 333, 343 (Bankr.E.D.Ark. 2010).
Administrative priority claims are strictly construed so as not to unjustifiably dissipate
limited estate assets. In re SpecialtyChem Products Corp., 372 B.R. 434, 440 (E.D.Wis. 2007).
The creditor bears the burden of showing an entitlement to administrative priority by a
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preponderance of the evidence. Id.
The FUNDS rely upon In re World Sales, Inc., 183 B.R. 872 (9th Cir.BAP 1995), where
the debtor closed its doors eighteen days after filing chapter 11. The union employees’
benefit fund sought administrative priority for the full monthly contribution to the health
plan, plus damages due on default under the unrejected collective bargaining agreement.
The bankruptcy court allowed only 18/31 of the monthly contribution as an administrative
expense. Relying upon section 1113(f), as well as its determination that any amount of
work during a month entitled an employee to health insurance coverage during the entire
month, the bankruptcy appellate panel reversed the bankruptcy court, holding that a full
month’s contribution for each employee who worked during the month was entitled to
administrative priority. The appellate panel determined that liquidated damages, interest
and attorney fees, all due under the CBA, were to be accorded the same priority.
This Court disagrees with the World Sales court’s conclusion that consequential
damages that accrue under a collective bargaining agreement are entitled to administrative
priority treatment. Although the Seventh Circuit has not spoken, a majority of circuit
courts of appeal have held that a debtor’s obligation to comply with the terms of a
collective bargaining agreement under section 1113 does not preempt the priority scheme
of section 507. Peters v. Pikes Peak Musicians Ass’n., 462 F.3d 1265 (10th Cir. 2006); Adventure
Resources Inc. v. Holland, 137 F.3d 786 (4th Cir. 1998); Air Line Pilots Association International
v. Shugrue (In re Ionosphere Clubs, Inc.), 22 F.3d 403 (2nd Cir. 1994); In re Roth American, Inc.,
975 F.2d 949 (3rd Cir. 1992). Contra, United Steelworkers of America v. Unimet Corp. (In re
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Unimet Corp.), 842 F.2d 879 (6th Cir. 1988). This Court has previously expressed agreement
with the majority rule. In re Fleming Packaging Corp., 2004 WL 2106579 (Bankr.C.D.Ill. 2004).
Postpetition liabilities arising from the breach of a collective bargaining agreement may be
accorded priority status only if they qualify for priority treatment under section 507. In re
Stokes Excavating, Inc., 2011 WL 6176585 (Bankr.N.D.Ill. 2011). The World Sales decision is
contrary to the majority rule and the FUNDS’ reliance on the fact that the CBAs are
“unrejected” is misplaced.
It is difficult to see how liquidated damages in the nature of a penalty could qualify
as an expense necessary to preserve the estate. The compensation for the postpetition
services performed by the electricians, their wages and benefits, has been paid by the
DEBTOR. The liquidated damages provision penalizes the DEBTOR for its failure to pay
its contributions to the FUNDS on a timely basis. An interest obligation is assessed
separately, so the liquidated damages are not compensation for an involuntary loan – they
are a true penalty. In this Court’s view, liquidated damages in the nature of a penalty are
not a form of compensation for a benefit to the estate, and thus may not be accorded
administrative priority status. This is the conclusion reached in In re Fred Swain, Inc., 97
B.R. 660 (Bankr.S.D.Fla. 1989), with which this Court agrees.
Unlike liquidated damages, interest is compensation for the use of money and, as
such, is usually considered to be a fair quid pro quo for a debtor’s failure to pay its
obligations on a timely basis, which failure is financially beneficial to the estate and
detrimental to the creditor. As such, an obligation to pay interest may qualify for
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administrative priority status under section 503(b)(1). The interest rate imposed by the
Welfare Fund of twice the prime interest rate on the amount of each month’s delinquent
contributions, compounded annually, shall be allowed, subject to the limitation discussed
below.
The Court reaches a different result with respect to the interest rate imposed by the
Pension Fund. The appropriate rate of interest to be applied during the pendency of a
bankruptcy case is a matter of discretion for the court. In re SW Hotel Venture, LLC, 460 B.R.
4 (Bankr.D.Mass. 2011). The rate sought by the Pension Fund of twenty percent
significantly exceeds the prime rate plus a reasonable risk premium.1 Not only does that
rate compensate the Pension Fund for the use of its money, it includes a punitive aspect,
contrary to the purpose of interest. The separate penalty imposed by the Pension Fund is
punishment enough. The Pension Fund will be allowed interest at the same rate allowed
the Welfare Fund, subject to the same limitation.
Conversion of a chapter 11 case to one under chapter 7, however, impacts the
priority entitlement. This Court agrees with In re Colortex Industries, Inc., 19 F.3d 1371 (11th
Cir. 1994), where the debtor operated its business in a chapter 11 case for several months
before converting to chapter 7. After conversion, several trade creditors that had provided
services to the debtor while in chapter 11 sought administrative priority treatment of the
cost of the services plus interest. Relying on the Supreme Court’s rational in Nicholas v.
U.S., 384 U.S. 678, 86 S.Ct. 1674, 16 L.Ed.2d 853 (1966), the Eleventh Circuit held that
interest on trade debts incurred as administrative expenses during chapter 11 enjoys the
1This Court does not regard the interest rate of twice the prime imposed by the Welfare Fund as unreasonable, given
that the prevailing rate is inordinately low.
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same priority as the administrative expense itself, but only until conversion. Interest that
accrues after conversion to chapter 7 does not enjoy administrative expense priority, but
is entitled only to the fifth level priority under section 726(a)(5). Colortex, 19 F.3d at 1384.
Accord, In re Olympia Holding Corp., 250 B.R. 136 (Bankr.M.D.Fla. 2000).
Applying the Colortex rule here means that only the interest that accrued on the
unpaid contributions due the FUNDS while the DEBTOR was in chapter 11 is entitled to
administrative priority status. Interest that accrued after conversion is not entitled to
administrative expense priority under sections 507(a)(2) and 503(b)(1).
The burden is on the FUNDS to recalculate the priority interest in accordance with
this Opinion. That calculation should state:
(1) the amount of each contribution that came due after the chapter 11 petition
was filed on April 22, 2010, that was not timely paid;
(2) the date that each such contribution became payable, which will be the
starting date for interest accrual unless otherwise indicated;
(3) the ending date for the accrual of interest, which should be the date of
conversion, June 10, 2011, unless the delinquent contribution was paid
earlier;
(4) the applicable interest rate, as alleged by the Welfare Fund to be twice the
prime rate, presumably 6.5% per annum,2 which shall also be applied by the
Pension Fund ;
(5) the total amount of interest accrued for each such contribution during the
pendency of the chapter 11 case; and
(6) the total aggregate amount of interest claimed to be due each of the FUNDS
2The U.S. Prime Rate went to 3.25% on December 16, 2008, and has remained there since. In this Court’s view, an
interest rate of 6.5% in the current interest rate environment represents reasonable compensation for the time value of
the funds in question here. A substantially higher rate could be viewed as an impermissible penalty.
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as an administrative expense priority.
The FUNDS will be ordered to file this calculation within twenty-eight days and the
TRUSTEE will be given twenty-one days to object.
This Opinion constitutes this Court’s findings of fact and conclusions of law in
accordance with Federal Rule of Bankruptcy Procedure 7052. A separate Order will be
entered.
AI
