Dymond Construction Group, Inc.

OCR transcription for search; preserved printed pages are authoritative

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AUTHENTICAT
U.S. GOVERNMENT,
INFORMATION

GPO

Entered on Docket
October 13, 2006

GLORIA L. FRANKLIN, CLERK
U.S BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA

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UNITED STATES BANKRUPTCY COURT

NORTHERN DISTRICT OF CALIFORNIA

In re Case No. 04-53596-ASW

DYMOND CONSTRUCTION GROUP, INC., Chapter 11

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MEMORANDUM DECISION
DENYING CREDITOR’S MOTION FOR ALLOWANCE
AND PAYMENT OF ADMINISTRATIVE CLAIM
Before the Court, in the above-captioned chapter 111 case, is

Carpenter Funds Administrative Office of Northern Californié’s

(“Creditor”)? Motion For Allowance and Payment of Administrative

1 Unless otherwise noted, all statutory references are to
Title 11, United States Code (the Bankruptcy Code), as it existed
when Debtor filed its bankruptcy petition on June 4, 2004.

2 creditor performs administrative services for Carpenters
Health and Welfare Trust for California, Carpenters Pension Trust
Fund of Northern California, Northern California Carpenters
Vacation and Holiday Plan, Carpenters Annuity Trust Fund for
Northern California, Carpenters Contract Work Preservation Trust
Fund, Carpenters Apprenticeship and Training Trust Fund for

MEMORANDUM DECISION
DENYING CREDITOR’S MOTION FOR ALLOWANCE

AND PAYMENT OF ADMINISTRATIVE CLAIM

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Claim Against Debtor Dymond Construction Group, Inc. (“Debtor”),
seeking allowance and payment of administrative expenses pursuant
to 11 U.Ss.c. § 507(a) (1) for actual and necessary expenses of
preserving and protecting property of the estate of the debtor,
Dymond Construction Group, Inc. (“Allowance Motion”). Debtor filed
a response, opposing Creditor’s Allowance Motion on the grouzads
that: (1) Creditor filed duplicate claims; (2) Creditor overstated
its claims; and (3) Creditor is not entitled to an administrative
claim (“Opposition”).

This matter was briefed and argued and the parties submitted
post-hearing briefs. Debtor is represented by Sean M. Jacobson,
Esq. of the Law Offices of Cohen and Jacobson; Creditor was
previously represented by David A. Bohl, Esq. of Weinberg, Roger
and Rosenfeld, a Professional Corporation, and is now represented
by Christian L. Raisner, Esq. and Alan G. Crowley, Esq. of
Weinberg, Roger & Rosenfeld, a Professional Corporation. The
Official Committee of Unsecured Creditors (“Creditors’ Committee”)
is represented by Charles E. Logan, Esq. of the Law Offices of
Charles E. Logan. Secured creditor Steve Williams (“Williams”) is
represented by Kathryn S. Diemer, Esq. of Diemer & Whitman, LLP.

After oral argument, the Court requested that the parties
submit post-hearing briefs addressing the issue of whether, under

the specific facts presented here, a pre-petition priority claim

Northern California and the Carpenters Industry Advancement Trust
Fund (collectively, “Carpenter Funds”). The Carpenter Funds are
all employee benefit plans established by collective bargaining and
trust agreements and are governed by the Employee Retirement: Income
Security Act of 1974 (“ERISA”) § 3(3). Hereinafter, since
“Creditor” filed the pleadings on behalf of the “Carpenter Funds,”

references to “Creditor” includes the “Carpenter Funds.”

MEMORANDUM DECISION
DENYING CREDITOR’S MOTION FOR ALLOWANCE
AND PAYMENT OF ADMINISTRATIVE CLAIM 2

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can be transformed into an administrative claim when the contract,
which forms the basis for the claim, was not assumed. The Court
identified relevant case law for the parties to address in their
briefs.

At the time this matter was submitted the only disputed issue
remaining for this Court to decide was whether Creditor was
entitled to an administrative claim or a pre-petition priority
claim. The parties stipulated at the January 20, 2006, hearing
that the amount of Creditor’s claim, whether determined to be a

priority claim or an administrative claim, was $58,251.40.°?

3Creditor filed two proofs of claim in Debtor’s bankruptcy
case. On July 28, 2004, Creditor filed a claim in the amount of
$203,843.07 (“First Claim”). The First Claim states that it is a
priority claim under §§ 507(a) (3) and (a) (4) in the amount of
$185,311.88 and an unsecured claim in the amount of $18,531.19. Of
the $185,311.88 priority amount, the claim indicates that
$30,427.10 represents a claim under 11 U.S.C. § 507(a) (3) and
$154,884.78 under § 507(a) (4). On September 28, 2004, Creditor
filed a second priority claim in the amount of $149,284.75 (“Second
Claim”).

After credit was given for payments made by the Debtor, the
parties resolved the issues regarding the amount of Creditor’s
claim and stipulated at the hearing that the actual amount of the
Claim is $58,251.40. Creditor retreated from this position
somewhat in its post-hearing brief, stating that:

while the Carpenters Trust Funds agreed that if their

claim was determined to be a 507(a) (4) priority claim,

then, and only then, would they agree that such a pre-

petition priority claim would be for $58,251.40.

However, if the Court determines that the Carpenters

Trust Funds’ claim should be allowed as an Administrative

Claim, then the Carpenters Funds’ claim of unpaid

contributions, for which new consideration was given, is

for $98,359.93 plus the attorneys’ fees incurred in

arguing this Motion before the Court.

Creditor’s post-hearing brief at 6:17-22. Because the Court finds
that Creditor’s claim is entitled to priority, rather than
administrative status, the amount of the claim remains undisputed
at $58,251.40.

MEMORANDUM DECISION
DENYING CREDITOR’S MOTION FOR ALLOWANCE

AND PAYMENT OF ADMINISTRATIVE CLAIM 3

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This Memorandum Decision constitutes the Court's findings of
fact and conclusions of law, pursuant to Rule 7052 of the Federal

Rules of Bankruptcy Procedure.

I.
STATEMENT OF FACTS

On June 4, 2004, Debtor filed a voluntary petition under
chapter 11 of the Bankruptcy Code.

Debtor is engaged in the construction business, and employs
carpenters on construction jobs. Prior to filing its petition,
Debtor entered into a collective bargaining agreement (“CBA”) with
Carpenters 46 Northern California Counties (“Union”) under which
the Union agreed to provide Debtor with carpenters to work on
Debtor’s construction projects. Debtor paid the Union certain dues
and benefits in exchange for the Union providing health care
insurance and benefits to Debtor’s carpenters.*

On July 28, 2004, Debtor filed a motion to assume the CBA
(“Assumption Motion”). In the Assumption Motion, Debtor explained
that it had failed to pay pre-petition dues and benefits called for
by the CBA for the months of February, March, April and May of
2004, resulting in the Union’s suspension of the health care
benefits of Debtor’s employees. Debtor sought to assume the CBA
/ / /

/ / /

4The Union provides these benefits to Debtor’s employees
through Creditor, its servicing agent. Debtor makes payments
pursuant to the CBA directly to Creditor. Creditor filed the claim
at issue in this case.

MEMORANDUM DECISION
DENYING CREDITOR’S MOTION FOR ALLOWANCE

AND PAYMENT OF ADMINISTRATIVE CLAIM 4

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because, Debtor contended, the contract was critical to its
continued operations.?

Debtor’s Assumption Motion was opposed by both Williams and the
Creditors’ Committee, and a hearing on the Assumption Motion
occurred on August 2, 2004. Williams opposed the motion
specifically to prevent the creation of an administrative claim for
Creditor.® At the hearing, Debtor, Creditor, Williams and the
Creditors’ Committee entered into an interim agreement whereby the
Debtor agreed to remain current on the post-petition union dues’
payments and make one additional monthly payment to be applied to
the February 2004 delinquency, and the hearing on the Assumption
Motion was continued to September 2, 2006. The Court instructed
the parties to attempt to reach a mutually agreeable resolution
prior to the continued hearing.

At the September 2, 2004, hearing, Debtor, Creditor, Williams
and the Creditors’ Committee announced that they wished to enter
into a stipulation to resolve the Assumption Motion

(“Stipulation”). At the hearing, Debtor stated that the payments

5 See July 28, 2004, Declaration of Kent Caskey in support of
the Assumption Motion (“Caskey Declaration”) at 2:18-21.

6 See February 3, 2006, Declaration of Kathryn Diemer in
support of Debtor’s Opposition (“Diemer Declaration”), @ 2, and the
February 3, 2006, Declaration of Lawrence A. Jacobson in support of
Debtor’s Opposition, f 2.

7 The parties, both in their papers and at the hearings on
this matter, used the terms “union dues” and “fund contributions”
interchangeably. It appears to the Court that the proper term for
the payments at issue is “fund contributions.” However, because
the language of the Stipulation and Order refers to “union clues,”
for the sake of consistency, this decision will refer to the
payments owed by Debtor to Creditor pursuant to the CBA as “union

dues.”

MEMORANDUM DECISION
DENYING CREDITOR’S MOTION FOR ALLOWANCE

AND PAYMENT OF ADMINISTRATIVE CLAIM 5

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pursuant to the Stipulation were to be applied toward Creditor’s
claim as filed and as scheduled by the Debtor as a priority claim
under § 507(a) (3) and (4). Mr. Bohl, counsel for Creditor,
specifically assented to such treatment of Creditor’s claim.? At
the hearing, Counsel for Williams articulated on the record that
the negotiations leading to the Stipulation (involving herself,
counsel for Debtor, Creditor and the Creditors’ Committee)
specifically did not contemplate assumption of the CBA. In fact,
according to the declaration of Williams’ counsel, this was the key
point in the negotiations, and neither Williams nor the Creditors’
Committee would have agreed to any resolution that gave Creditor an
administrative claim.’ The consent of secured creditor Will:ams
was required because the Debtor used Williams’ cash collateral to
pay Creditor pursuant to the Stipulation.’® The parties, including
counsel for Creditor, signed off on the Stipulation.

On or about September 3, 2004, this Court entered an order
approving the Stipulation (“Order”), pursuant to which the

Assumption Motion was resolved as follows:

®’See Exhibit “E” to the November 1, 2005, declaration of Alan
Crowley in support of Creditor’s Allowance Motion (“Crowley
Declaration”), which is a copy of the transcript from the
September 2, 2004, hearing (“September 2, 2004, Transcript”) at
4:11-23.

° See September 2, 2004, Transcript at 6:16-25. See also
Diemer Declaration at 2:19-25.

0 Williams agreed only to the use of his cash collateral for
the purpose of making payment for the first month of delinquent
pre-petition union dues. The parties understood that any other
payment toward the delinquency would be made out of profits.
Diemer Declaration at 2:10-12.

MEMORANDUM DECISION

DENYING CREDITOR'S MOTION FOR ALLOWANCE
AND PAYMENT OF ADMINISTRATIVE CLAIM 6

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(1) the [CBA] will not be assumed at this time as requested
by the [Assumption Motion]; (2) Debtor will stay current on
payment of the union dues; (3) Debtor is permitted to cure
the pre-petition arrearages in the union dues over a period
of three months, with one delinquent payment to be made

each month along with the current dues; and (4) that

benefits will be restored on an ongoing basis, with full

restoration of all benefits to occur upon receipt of the

final cure payment.

Order at 2:2-7 (emphasis added). Debtor remained current on
payment of the post-petition union dues. However, Debtor was
unable to make all of the permitted payments on the pre-petition
arrearage.

Although the terms of the Stipulation and Order stated that
health benefits for the pre-petition period would be restored only
upon Debtor making the final cure payment, Creditor in fact,
because of its own internal mistake, granted credit to Debtor’s
employees in September 2004, for health care coverage for the pre-
petition months of March, April, May and June 2004, for which
Creditor had not received full payment. Creditor estimated that
Debtor’s carpenters submitted claims for benefits totaling
$18,051.00 for May and $15,539.00 for June.*’ Creditor did not
supply any figures for the months of March and April.

Creditor’s Allowance Motion stated that Creditor gave credit to

Debtor’s employees for health care benefits because of Debtor’s

repeated representations that it would make double payments” to

" gee Crowley Declaration, ¢ 12. In support of these
estimates, Creditor attached an untitled spreadsheet to the Crowley
Declaration as Exhibit ‘G’ stating the figures for the estimated
benefits provided to Debtor’s employees.

"For example, when the August 2004 payment was due, Debtor
would pay Creditor the equivalent of two monthly dues payments --
one for the current month (August) and one to be applied to the
delinquent monthly payments (March 2004).

MEMORANDUM DECISION
DENYING CREDITOR'S MOTION FOR ALLOWANCE
AND PAYMENT OF ADMINISTRATIVE CLAIM 7

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cure the arrearage.'? However, this was directly contradicted by
the statement of Creditor’s counsel during the January 20, 2006,
hearing, when he explained that the credit was given due to an
internal error on the part of Creditor.‘* Creditor’s Allowance
Motion argued that the credited health coverage caused Debtor’s
employees to continue working for Debtor, which enabled Debtor to

remain in business.’

3 See Crowley Declaration, § 10. As evidence of Debtor’s
representations that it would cure, Creditor cites to a letter from
Debtor’s counsel to the parties dated August 17, 2004 (“Letter”).
The Letter is attached to the Crowley Declaration as Exhibit ‘D’.
In the Letter, Debtor’s counsel stated: “Debtor will stay current
with the dues and cure the arrearages over the next three months,
with the union releasing the hour banks upon payment of the
delinquent months.”

4 at the January 20, 2006, hearing, the following conversation
occurred between the Court and Creditor’s Counsel Alan Crowley:

Crowley: The Trust Funds released the banked hours, which allowed
the Debtor’s employees to have health care benefits. If
they had only released one month of hours, then Debtor
would have been back here before the court, asking you
for more cash collateral or asking for the exact same
motion to reoccur. So it was only because the Trust
Funds released four months of banked hours for health
care coverage that enabled their employees to continue to
get health care coverage, to keep their employees around,
to keep in business. Only because of that was the Debtor
kept from coming back to strike the same deal for the
next month, or from paying over the next few months. So
that’s a little bit different than these cases, which I
haven’t briefed, and I understand there’s a difference...

Court: Have you read them?

Crowley: Admittedly no. But that’s the difference here. They got
the benefit of four months of health care coverage...

Court: But why did you do that?

Crowley: That was an error on the part of the Trust Funds with
respect to the way their computer system credits hours to
employees.

'S Debtor admitted before entering into the Stipulation that
some agreement with the Union concerning payment for employee

MEMORANDUM DECISION
DENYING CREDITOR‘S MOTION FOR ALLOWANCE
AND PAYMENT OF ADMINISTRATIVE CLAIM 8

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Debtor asserted that, in addition to the clear language of the
Stipulation and Order, Creditor consistently maintained that it
would not release the pre-petition benefits until Debtor cured the
entire delinquency.'® Debtor explained that (1) it did not know
that Creditor had credited any employees for health care benefits
until Creditor filed the Allowance Motion,*’ (2) Debtor drafted its
disclosure statement to explain that the pre-petition health care

benefits would be released upon payment of Creditor’s priority

benefits was necessary for Debtor to remain in business. The
Debtor stated that:

The union has suspended the health care benefits of the
union carpenters working for Debtor because the dues have
not been paid. Two carpenters left employment with
Debtor on June 26, 2004, due primarily to the suspensicn
of the health benefits, and one more has given notice cf
his intent to terminate his employment. Additionally,
Debtor is unable to employ other or replacement
carpenters through the union hall assignment system
because the union will not send those workers until
arrangements are made for cure of the arrearages. Due to
the fact that Debtor is engaged in the construction
industry, the continued employment of carpenter employees
that are represented by the union is critical to the
continued operation of Debtor’s business.

Caskey Declaration, I 4-5 (emphasis added).

6 according to Debtor: “During the negotiations, Mr. Bohl,
counsel for [Creditor], made it very clear that no back benefits
would be restored until payment was received on priority portions
of the arrears.” February 3, 2006, Declaration of Lawrence
Jacobson, @ 4.

"The period of time between Creditor’s crediting of the health
benefits for the pre-petition period and the filing of the
Allowance Motion, during which Debtor was unaware of the credit,
was more than a year. Creditor granted the credit sometime in
September 2004. The Allowance Motion was filed on November 11,
2005.

MEMORANDUM DECISION
DENYING CREDITOR‘S MOTION FOR ALLOWANCE
AND PAYMENT OF ADMINISTRATIVE CLAIM 9

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18 and (3) Debtor paid in full for all post-petition benefits

claim,
it received from Creditor.’? Creditor does not challenge these
factual assertions.

Creditor now seeks allowance of an administrative claim for
delinquent pre-petition union dues.’° Debtor objects to Creditor’s
claim. While conceding that Creditor has a valid claim for the
unpaid, pre-petition union dues, Debtor contends that the full
claim should be treated as an unsecured priority claim pursuant to
§507(a) (3) and (4).

Debtor’s chapter 11 plan (*Plan”) was confirmed on February 1,

2006. The Plan did not provide for assumption of the CBA.

Creditor did not object to confirmation of the Plan.

'8 Debtor’s counsel stated: “Indeed, Dymond was not aware that
those benefits were released until review of the Motion, and
accordingly had drafted its Disclosure Statement to include that
those back benefits would be released upon payment of the priority
claim.” November 21, 2005, Declaration of Lawrence Jacobson in
Support of Debtor’s Opposition, f 8.

“Debtor stated that:

The only benefit [sic] conferred by [Creditor] during tre
post-petition period are the benefits which have been
provided to the carpenters on an ongoing basis. Debtor
has paid the dues to [Creditor] as they have become due
in the post-petition period. Due to the fact that these
funds have been current during the post-petition period,
no administrative claim exists, as payment has been made
for any benefit.

November 21, 2005 Declaration of Diane McKee in support of Debtor’s
Opposition, f 6.

0 See n.7, supra, regarding the interchangeable use of che
terms “union dues” and “fund contributions.”

MEMORANDUM DECISION
DENYING CREDITOR’S MOTION FOR ALLOWANCE

AND PAYMENT OF ADMINISTRATIVE CLAIM 10

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Il.
ARGUMENTS

A. Creditor’s Arguments

Creditor argued that Debtor implicitly assumed the CBA by not
rejecting it under 11 U.S.c. § 1113 and by continuing to make
payments under the CBA. Creditor asserted that, due to Debtor’s
repeated insistence that it would make double payments to cure the
arrears and its continued operation under the terms of the CBA, the
terms of the Stipulation and Order are inconsequential in
determining whether Creditor’s claim is entitled to administrative

status. Creditor cited In re Roth American, Inc., 975 F.2d 949 (3d

Cir. 1992) and In re Adventure Resources, Inc., 137 F.3d 786 (4th

Cir. 1994) in support of its assertion that a debtor can impliedly
assume a collective bargaining agreement. In Roth American, the
Third Circuit agreed with the union’s argument that the debtor’s
failure to reject the collective bargaining agreement in accordance
with § 1113 resulted in assumption by operation of law.** 975 F.2d
at 957. In Adventure Resources, the Fourth Circuit followed the
decision in Roth American, holding that the collective bargaining
agreement was assumed due to the debtor’s failure to reject
pursuant to § 1113. 137 F.3d at 798.

According to Creditor, since the CBA was assumed under its
implied assumption theory, “the expenses and liabilities incurred

may be treated as administrative expenses.” Id. (citing NLRB v.

"| However, the Third Circuit immediately cautioned that “it

Simply does not follow, as the Union contends, that all claims
under unrejected collective bargaining agreements are entitled to
first priority.” Roth American, 975 F.2d at 957.

MEMORANDUM DECISION
DENYING CREDITOR‘S MOTION FOR ALLOWANCE

AND PAYMENT OF ADMINISTRATIVE CLAIM 11

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Bildisco and Bildisco, 465 U.S. 513, 532 (1984)). Creditor argued

that these benefits were necessary expenses to preserve Debtor’s
estate and therefore should be treated as administrative expenses
under §§ 503(b) (1) (A) and 507(a)(1). Section 507(a)(1) assigns
first priority to “administrative expenses allowed under section
503(b) of this title, and any fees and charges assessed against the
estate under chapter 123 of title 28.” 11 U.S.C. § 507(a) (1).
Section 503(b) (1) (A) provides: “[{a]fter notice and a hearing, there
shall be allowed administrative expenses, other than claims allowed
under section 502(f) of this title, including -- (1) (A) the actual,
necessary costs and expenses of preserving the estate, including
wages, Salaries, or commissions for services rendered after the
commencement of the case[.]” 11 U.S.C. § 503(b) (1) (A).

In addition, citing the Ninth Circuit BAP decision in In_re
World Sales, Inc., 183 B.R. 872, 877 (B.A.P. 9th Cir. 1995),
Creditor argued that it provided Debtor with “new consideration”
when it credited Debtor’s employees with health benefits. The
debtor in World Sales was party to a collective bargaining
agreement that was in effect at the time it filed its chapter 11
petition. 183 B.R. at 873. Eighteen days after filing, the debtor
laid off its employees and sold its operation. Id. The debtor
never attempted to modify or reject its collective bargaining
agreement. Id. The services for which the creditor sought an
administrative claim related to post-petition employee benefits.
Id. at 874. The BAP stated that, in determining whether a claim is
entitled to administrative status, the court “must look not only to
the benefit to the estate, but also to the consideration due the
creditor for providing such benefit.” Id. at 877. Where the

MEMORANDUM DECISION
DENYING CREDITOR’S MOTION FOR ALLOWANCE

AND PAYMENT OF ADMINISTRATIVE CLAIM 12

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benefit for which payment is sought was rendered post-petition,
“the payment owing by the estate must be afforded administrative
priority.” Id. Following the BAP’s reasoning, Creditor contended
that it provided post-petition value to Debtor through the credited
health benefits, which constitutes “new consideration,” entitling
its claim to administrative status under § 507(a) (1). According to
Creditor, the credit enabled Debtor to retain its carpenters, thus
providing a substantial benefit to Debtor.

Creditor attempted to distinguish the current matter from In re

Certified Air Technologies, Inc., 300 B.R. 355 (Bankr. C.D. Cal.
2003). In that case, the bankruptcy court held that pre-petition
claims for wages and benefits arising from an unrejected collective
bargaining agreement were not administrative expenses. 300 B.R. at
369. Creditor argued that the creditor in Certified Air, unlike in
this case, did not provide the debtor with a post-petition kenefit.
Creditor maintained that it provided a post-petition benefit to
Debtor by covering Debtor’s employees’ pre-petition health
benefits, including payment of insurance claims arising during the
unpaid pre-petition period. Creditor asserted that the credit
amounted to a post-petition loan that was extended to Debtor based
on Debtor’s representations that it would cure the pre-petition
arrearage. Creditor argued that the credit was an actual ard
necessary expense of preserving and protecting the property of the
Debtor pursuant to § 503(b) (1) (A) because, without the credit,
Debtor would have lost its carpenters.

In a Similar vein, Creditor contended that its reimbursement
for the credited benefits should be treated as an administrative
expense due to the “necessity of payment” doctrine. Generally

MEMORANDUM DECISION
DENYING CREDITOR’S MOTION FOR ALLOWANCE
AND PAYMENT OF ADMINISTRATIVE CLAIM 13

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speaking, this doctrine may be invoked to permit payment by the
debtor on pre-petition claims prior to confirmation where the
payment is deemed essential to the debtor’s continued operation.
Nextwave Personal Comm., Inc. v. FCC, 254 F.3d 130, 136 (D.C. Cir.
2001). Consistent with its argument under § 503(b) (1) (A),
Creditor asserts that the pre-petition health care coverage it
provided to Debtor was essential to Debtor’s continued operation,
and should be treated as an administrative expense pursuant to the
“necessity of payment” doctrine.
B. Debtor’s Arguments

Debtor asserted that: (1) Creditor’s mistake in releasirg the
benefits for the pre-petition months was not an “actual or
necessary” expense to preserve and protect its property; and (2)
the parties specifically agreed that the benefits that Creditor
released, and with which Debtor’s employees were credited, were
only to be released if Debtor cured all its delinquent pre-petition
payments under the CBA. The language of the Stipulation
“permitted,” but did not require, Debtor to cure. Debtor was, in
fact, unable to do so. Debtor explained that it paid for all of
the post-petition benefits it received. Debtor argued that if, as
Creditor contended, the provision of benefits conferred any benefit
upon Debtor, then it was an incidental benefit and “[a]n incidental

benefit is not a sufficient basis to grant an administrative

27Tn support of this contention, Creditor cited a number of
bankruptcy court decisions outside the Ninth Circuit. See In re

Equalnet Comm. Corp., 258 B.R. 368 (Bankr. S.D. Tex. 2000); In re
Cajun Elec. Power Co-op., Inc., 230 B.R. 715 (Bankr. M.D. Lé.

1999); In re Gulf Air, Inc., 112 B.R. 152 (Bankr. W.D. La. 1989);
In re Columbia Packing Co., 35 B.R. 447 (Bankr. D. Mass. 19&3).

MEMORANDUM DECISION
DENYING CREDITOR’S MOTION FOR ALLOWANCE
AND PAYMENT OF ADMINISTRATIVE CLAIM 14

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priority.” In re D.W.G.K. Restaurants, Inc., 84 B.R. 684, 689

(S.D. Cal. 1988).22. Debtor’s counsel stated in his declaration that
the Debtor was not even aware of Creditor’s mistake** (and Creditor
has not alleged that the Debtor was aware) and Debtor therefore
argued that an unnoticed mistake could not constitute a substantial
contribution and was in no way necessary for preserving the estate.
Debtor maintained that no case law exists that supports
transformation of Creditor’s pre-petition claim into an
administrative claim under the facts presented here.

Debtor asserted that the facts of the instant case are similar
to the facts in Roth American, where a collective bargaining
agreement was neither rejected nor assumed. The Third Circuit in
Roth American determined that claims for wages and benefits could
be granted administrative status only to the extent that the wages
and benefits were: (1) for a period of time between the
commencement of the bankruptcy case and the termination of
employment; and (2) compensation for services rendered post-
petition. 975 F.2d at 957-958. Debtor asserted that the benefits

at issue here accrued pre-petition and therefore, under Roth

3 Dp W.G.K. Restaurants involved a creditor’s claim for
attorney’s fees as an administrative expense under § 503 (b) (3) (D).
The court refused to grant administrative status to creditor’s
claim, holding that the services creditor’s counsel provided
“satisfied neither the ‘substantial contribution’ nor the ‘actual
and necessary’ requirements of § 503(b).” 84 B.R. at 689. The
court commented that, “[t]he integrity of § 503(b) can only be
maintained by strictly limiting compensation to extraordinary
creditor actions which lead directly to significant and tangible
benefits to the creditors, debtor, or the estate.” Id. at 690.

4 See, e.g., the November 21, 2005, Declaration of Lawrence
Jacobson in support of Debtor’s Opposition, @ 8.

MEMORANDUM DECISION
DENYING CREDITOR’S MOTION FOR ALLOWANCE
AND PAYMENT OF ADMINISTRATIVE CLAIM 15

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American, Creditor’s claim would only be entitled to priority
status and not administrative status.

Debtor acknowledged that the Fourth Circuit’s opinion in
Adventure Resources ig somewhat supportive of Creditor’s position,
but distinguished that case on the facts. There, the debtor was
held to have assumed a collective bargaining agreement by failing
to modify or reject it in accordance with § 1113(f). 137 F.3d at
798. By assuming the collective bargaining agreement, the debtor
undertook an obligation to cure all existing defaults under the
agreement. Id. The post-petition assumption of the contract
effectively transformed the pre-petition claims thereunder into
post-petition claims entitled to administrative status. Id.
Debtor insists that most important factual distinction is that the
contract in Adventure Resources had been assumed -- something that
the parties in this matter specifically agreed not to do, as
evidenced in the Stipulation and Order. Therefore, Debtor argued
that Adventure Resources is inapposite to the disposition of this
dispute.

Debtor focused its analysis on Certified Air because it
specifically addressed the issue of the priority of a claim for
arrears under a collective bargaining agreement. Debtor explained
that the bankruptcy court in Certified Air recognized that the
“plain language of a statute is conclusive as to its meanine when
the statutory scheme is coherent and consistent.” 300 B.R. at 336.
Furthermore, the court in Certified Air determined that since §
1113 is silent as to priorities, it must be inferred that Congress
did not intend to grant administrative priority to arrears under
collective bargaining agreements. Id. at 367.

MEMORANDUM DECISION
DENYING CREDITOR’S MOTION FOR ALLOWANCE
AND PAYMENT OF ADMINISTRATIVE CLAIM 16

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Debtor argued that Creditor specifically agreed, througfk. the
Stipulation, Order and counsel's statements at hearings befcre the
Court, that its claim would not be granted administrative status
and that the CBA would not be assumed. Debtor urged the Court to
consider only the Stipulation, Order and prior testimony to

evaluate the priority of Creditor’s claim.

IIL.
ANALYSIS

The party seeking allowance of an administrative claim has the
burden of proving that its claim is entitled to administrative
priority. D.W.G.K. Restaurants, 84 B.R. at 689. ‘“[S]Jince an
administrative expense constitutes a priority claim, any recovery
must be subject to strict scrutiny by the court,” and therefore the
party seeking administrative priority “bears a heavy burden.” Id.
Limiting administrative priority, “keep[s] fees and administrative
expenses at a minimum so as to preserve the estate for the benefit

of all creditors.” In re Sedona Institute, 220 B.R. 74, 79 (B.A.P.

9th Cir. 1998).
A. Creditor’s Implied Assumption Argument

The parties agree that the CBA was valid and enforceable at the
time of the bankruptcy filing. Section 1113 sets forth the
procedure for the rejection of collective bargaining agreements.
Section 1113(f£) provides that “[n]o provision of this title shall
be construed to permit a trustee to unilaterally terminate cr alter
any provisions of a collective bargaining agreement prior tc
compliance with the provisions of this section.” 11 U.S.C. §
1113(f). Creditor argued that because Debtor did not reject the

MEMORANDUM DECISION
DENYING CREDITOR’S MOTION FOR ALLOWANCE
AND PAYMENT OF ADMINISTRATIVE CLAIM 17

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CBA pursuant to the requirements of § 1113, Debtor impliedly
assumed it and therefore the pre-petition arrears were transformed
into an administrative expense.

It is true that, under certain circumstances, a collective
bargaining agreement may be assumed as a result of the debtor's
failure to reject the agreement in accordance with § 1113. Section
1113 “plainly imposes a legal duty on the debtor to honor the terms
of a collective bargaining agreement, at least until that agreement
is properly rejected.” Adventure Resources, 137 F.3d at 796. It
is likewise true that the assumption of a collective bargaining
agreement, either express or implied, may convert a pre-petition
claim into an administrative expense. Id. at 798. However, while
§ 1113 clearly prohibits unilateral modification of a collective
bargaining agreement, it encourages mutually satisfactory
modification.?®> In fact, consensual modification of the agreement
must be attempted before it may be rejected. 11 U.S.C. §

1113(b) (1). Based on the specific language of the Stipulation and
Order, the CBA was neither assumed nor rejected, but was
effectively modified with the consent of the parties. The Court is
convinced by these documents, combined with the declarations of
record and arguments of counsel, that the CBA was not implicitly

assumed, but rather was explicitly not assumed.

> See Adventure Resources, 137 F.3d at 796, n.13 (“If the
debtor believes that its obligations under a collective bargaining
agreement would inhibit its effective reorganization, it must first
make a good faith effort to negotiate a modification of the
contract with its employees’ authorized representative”); see also,
United Food and Commercial Workers Union, Local 328, AFL-CI0Q v.
Almac’s Inc., 90 F.3d 1, 6 (ist Cir. 1996); Roth American, {75 F.2d
at 956, n.8.

MEMORANDUM DECISION
DENYING CREDITOR‘S MOTION FOR ALLOWANCE

AND PAYMENT OF ADMINISTRATIVE CLAIM 18

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This conclusion is inescapable in light of the fact that the
Stipulation was the result of lengthy negotiations involving not
only Debtor and Creditor, but Williams and the Creditors’ Committee
as well. As the bankruptcy court in Equalnet (a case Creditor
cited) stated in dicta:

In a bankruptcy context, some issues clearly involve
interests upon which the parties such as the debtor, the
unsecured creditor’s committee, the major lenders, and
major unsecured groups such as bondholders can agree. If
there is agreement among all of the constituencies and if
each of them is a sophisticated, competently representec.,,
knowledgeable constituency, the Court is generally loathe
to substitute its business judgment about the consequences
of the proposed course of action for that of the parties
that hold the real financial interest.

Equalnet, 258 B.R. at 370. All of the constituencies, each
represented by competent counsel, entered into negotiations in this

case regarding, inter alia, what was to be done with the CBA, and

the treatment to be given Creditor’s pre-petition claim for health
benefits provided thereunder. The end result of those negotiations
was a Stipulation which specifically stated that the CBA “will not
be assumed at this time” and “permitted,” but did not require, that
Debtor cure the pre-petition arrears. Williams’ counsel testified
that the status to be accorded Creditor’s claim was a key point in
these negotiations, and neither her client, nor the Creditors’
Committee would have agreed to any resolution which resulted in an
administrative claim.” Williams permitted Debtor to use his cash
collateral to continue its business on this basis. This Court will
not, under these circumstances, upset the agreement reached by the

parties in this case. To allow Creditor to obtain administrative

7° See Diemer Declaration, 7 5.

MEMORANDUM DECISION
DENYING CREDITOR'S MOTION FOR ALLOWANCE

AND PAYMENT OF ADMINISTRATIVE CLAIM 19

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1} status for its claim under these circumstances would be both

2 |} inequitable and contrary to the clearly expressed intention of the
3 |] parties.

4||B. Creditor’s Necessity of Payment Argument

5 The Court is likewise unswayed by Creditor’s “necessity of

6 | payment” argument. That doctrine is rooted in pre-Code decisions,
7}/and is to be invoked only in extraordinary circumstances. In re

8 || CoServ, LLC, 273 B.R. 487, 491-92 (Bankr. N.D. Tex. 2002). “[TJhe
9]|sine qua non for the application of the ‘necessity of payment’

10 | doctrine is the possibility that the creditor will employ an

11 | immediate economic sanction, failing such payment.” In re

12 | Ionosphere Clubs, Inc., 98 B.R. 174, 176 (Bankr. S.D.N.Y. 1989).
13 This Court is not aware of any case where the necessity of

14 }payment doctrine has been successfully invoked by a creditor where
15 || there is a specific agreement that there will be no assumption, and
16} the creditor agreed to a specific treatment of its claim. Nor is
17 |} the Court aware of any case where, long after the theoretical

18 || “necessity” had arisen, a creditor (rather than a Debtor) used the
19 || doctrine to convert a pre-petition claim into an administrative

20 |} expense. Each of the cases Creditor cited -- none of which is

21 |} binding on this Court -- is, in any event, distinguishable. Two of
22 |} the cases each involved a chapter 11 debtor (rather than a

23 || creditor) seeking to invoke the doctrine to authorize immediate
24 |} payment of pre-petition expenses it considered necessary to its
25 || continued operations. Equalnet, 258 B.R. at 369; Gulf Air, 112
26}B.R. at 153. That is certainly not the case here, where Creditor
27 || invoked the doctrine to gain administrative status for its claim,
28 || and the Debtor opposed.

MEMORANDUM DECISION
DENYING CREDITOR’S MOTION FOR ALLOWANCE
AND PAYMENT OF ADMINISTRATIVE CLAIM 20

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The Columbia Packing case Creditor cited, a bankruptcy court

case from the District of Massachusetts, is similarly unsupportive
of Creditor’s position. It involved a debtor’s apparently
uncontested request to pay pre-petition expenses, prior to plan
confirmation, in accordance with the priority scheme established by
§ 507, which the court granted -- without even mentioning any
“necessity” of the payment. 35 B.R. at 448. Most importantly, the
case did not involve a negotiated agreement between the debtor and
its creditors, which is the exact situation here.

Likewise, the holding in Cajun Electric cannot be read to
support Creditor’s argument that the necessity of payment dcctrine
entitles its claim to administrative status in this case. In
assessing one of the settlements proposed in a trustee’s plan of

reorganization, the trustee in Cajun Electric contended that the

necessity of payment doctrine would provide a valid defense toa
preference action. The objectors to the settlement and plan
countered the trustee’s argument by asserting that the doctrine had
been limited to employee wage claims and certain other clains
otherwise entitled to priority under § 507. 230 B.R. at 754-755.
The bankruptcy court merely weighed the availability of preference
defenses as a factor in determining the reasonableness of the
proposed settlement. The context in which the court addressed the
necessity of payment doctrine -- evaluating proposed settlements --
is completely unlike the factual scenario in this case, where
Creditor attempted to invoke the doctrine to obtain administrative

status for its claim.

MEMORANDUM DECISION
DENYING CREDITOR’S MOTION FOR ALLOWANCE
AND PAYMENT OF ADMINISTRATIVE CLAIM 21

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C. Treatment of a Pre-petition Claim Where the CBA is Not Assumed

We next turn to the manner in which Creditor’s claim relating
to a pre-petition expense under an unassumed collective bargaining
agreement is to be treated. This Court finds the analysis in
Certified Air persuasive. In Certified Air, the bankruptcy court
followed decisions in the Second, Third and Fourth Circuits stating
that a claim arising from a default under an unassumed collective
bargaining agreement is not automatically treated as an

administrative claim. Certified Air, 300 B.R. at 369. Instead,

when the claim relates to a pre-petition period, it is treated
according to the priorities contained in § 507. Id.; see also,
Adventure Resources, 137 F.3d at 797; In re Ionosphere Clubs, Inc.,
22 F.3d 403, 408 (2d Cir. 1994); Roth American, 975 F.2d at 956.
Nothing in § 1113(f) or its legislative history indicates that
Congress intended for that section to override the priorities set
forth in § 507. Certified Air, 300 B.R. at 366-367.
Reconciliation of § 1113 with § 507 is preferable to an
interpretation that one section conflicts with or overrides the
other, and these sections should be interpreted to achieve equality
of distribution as a fundamental bankruptcy principle. Id. at 369.
Although Creditor relied on World Sales for its argument that
it had provided Debtor with a post-petition benefit akin to a
“loan” when it issued the credit to Debtor’s employees, that case

is distinguishable. World Sales involved a claim for paymerts due

under an unrejected collective bargaining agreement for post-
petition work arising out of a post-petition breach of a collective

bargaining agreement. Due to the post-petition nature of tke

MEMORANDUM DECISION
DENYING CREDITOR’S MOTION FOR ALLOWANCE
AND PAYMENT OF ADMINISTRATIVE CLAIM 22

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claim, it was entitled to treatment as an administrative expense.
However, in this case, Creditor’s claim is for pre-petition arrears
arising from a pre-petition breach of a collective bargaining
agreement that was not assumed. In addition, to the extent chat
Creditor’s post-petition loan argument is founded upon the idea
that Creditor granted the credit based upon Debtor’s
representations that it would, in fact, cure the defaults, the

Stipulation provides otherwise and the Court is similarly

unconvinced. The language of the Letter -- which Creditor
repeatedly cites as evidence of Debtor’s assurances?’ -- is
perfectly consistent with the language of the Stipulation -- that

Creditor would release the benefits upon payment of the
delinquency, and not before. This fact, coupled with the admission
of Creditor’s counsel that the benefits were credited because of an
internal error, lead the Court to conclude that the credit was not,
in fact, given in reliance on Debtor’s representation. ?®

Creditor’s unilateral mistake cannot transform the pre-petition
debt into an administrative claim. The Order permitting Debtor to
pay the arrearage over time was intentionally so structured to
avoid the creation of an administrative claim at the insistence of
Williams and the Creditors’ Committee. Creditor’s mistake in
crediting Debtor’s employees with the benefits for the unpaid pre-

petition period cannot alter the effect of the Stipulation and

27 See Crowley Declaration, Ex. D.

Even if this were the case (despite the evidence to the
contrary), in the face of the language of the Stipulation, any such
reliance on Creditor’s part was simply misplaced.

MEMORANDUM DECISION
DENYING CREDITOR’S MOTION FOR ALLOWANCE
AND PAYMENT OF ADMINISTRATIVE CLAIM 23

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Order. Moreover, Debtor was completely unaware both that Creditor
was providing such benefits to Debtor’s employees and that Creditor
had made this mistake.

The Court is not aware of any authority that would, under the
specific facts of this case, transform Creditor’s claim for a pre-
petition expense under an unassumed collective bargaining agreement
from a priority claim into an administrative claim, whether or not,
as Creditor argues, that expense was “necessary” for preservation
of the estate. Accordingly, the Court declines to address whether,
and/or the extent to which, any benefit conferred on Debtor by
Creditor’s mistaken credit of benefits for the unpaid pre-petition
period, of which Debtor was completely unaware, could constitute an
actual and necessary expense under § 503(b)(1)(A) in a different
factual setting (i.e., in the absence of the Stipulation and
Order).

The Court finds that Creditor’s claim is not an administrative
claim but is instead a priority claim under §§ 507(a) (3) and (4).
Section 507(a) (4) specifies fourth priority for:

allowed unsecured claims for contributions to an employee

benefit plan--

(A) arising from services rendered within 180 days

before the date of the filing of the petition or the date

of the cessation of the debtor’s business, whichever occurs

first; but only

(B) for each such plan, to the extent of--
(i) the number of employees covered by each such
plan multiplied by $4,925; less
(ii) the aggregate amount paid to such employees
under paragraph (3) of this subsection, plus the
aggregate amount paid by the estate on behalf of

such employees to any other employee benefit
plan.

MEMORANDUM DECISION
DENYING CREDITOR’S MOTION FOR ALLOWANCE
AND PAYMENT OF ADMINISTRATIVE CLAIM 24

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1/11 u.s.c. § 507(a) (4). According to § 507(a) (4), the amount must
be reduced by the amount of claims under § 507(a) (3). Section
507(a) (3) provides third priority to allowed unsecured claims:

to the extent of $4,925 for each individual or
corporation, as the case may be, earned within 90 days
before the date of the filing of the petition or the date
of the cessation of the debtor’s business, whichever occurs
first, for-

(A) wages, salaries, or commissions, including
vacation, severance, and sick leave pay earned by an
individual; or

(B) sales commissions earned by an individual or by a
corporation with only 1 employee, acting as an independent
contractor in the sale of goods or services for the debtor
in the ordinary course of the debtor’s business if, and
10 only if, during the 12 months preceding that date, at least
75 percent of the amount that the individual or corporation
11 earned by acting as an independent contractor in the sale
of goods or services was earned from the debtor.

oO eo NIN DBO A FE WY NY

12
1311 U.S.C. § 507(a) (3).

14 The maximum limit of Creditor’s employee benefit contribution
15 || claim pursuant to § 507(a) (4) is $128,050 -- calculated by

16 multiplying the number of participants (26) by $4,925.00 (the

17 || statutory claims’ cap). This amount is then reduced by the amount
18 |] claimed by Creditor under § 507(a) (3), or $30,427.10. Accordingly,
19 |] creditor’s claim under § 507(a)(3) is $30,427.10, and its claim
20 | under § 507(a) (4) is $97,622.90 ($128,050 - $30,427.10). The
21118 507(a) (4) claim is further reduced by payments made by Debtor
22 || totaling $69,798.60, yielding a final claim amount of $27,824.30.
23 || Thus, as the parties stipulated at the January 20, 2006 hearing,
24 "the total amount of Creditor’s claim is $58,251.40. The Court

25 || finds that Creditor has a priority claim as follows: $30,427.10
26 | under § 507(a) (3) and $27,824.30 under § 507(a) (4), for a total
27 || claim of $58,251.40.

28

MEMORANDUM DECISION
DENYING CREDITOR’S MOTION FOR ALLOWANCE
AND PAYMENT OF ADMINISTRATIVE CLAIM 25

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1 Iv.

2 CONCLUSION

3 For the reasons stated above, Creditor’s Allowance Motion is
4l|denied. Pursuant to the parties’ stipulation, made on the record,
5 | Creditor is entitled to a priority claim under §§ 507(a)(3) and (4)
6 |} in the amount of $58,251.40.

7 Counsel for Debtor shall submit a form of order so providing,

8 || after review by Creditor as to form.

Ko)

10 |] Dated: olulag

11 _

13 ARTHUR S. WEISSBRODT
UNITED STATES BANKRUPTCY JUDGE

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MEMORANDUM DECISION
DENYING CREDITOR’'S MOTION FOR ALLOWANCE

AND PAYMENT OF ADMINISTRATIVE CLAIM 26

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Court Service List

Carpenter Funds Administrative Office
Field Services

265 Hegenberger Road, #100

Oakland, CA 94621

Lawrence A. Jacobson, Esq.

Law Offices of Cohen and Jacobson
900 Veterans Blvd. #600

Redwood City, CA 94063

Dymond Construction Group, Inc.
1705 Russell Ave.
Santa Clara, CA 95051

Christian L. Raisner, Esq.
Weinberg, Roger & Rosenfeld
180 grand Avenue, Suite 1400
Oakland, CA 94612

Kathryn S. Diemer, Esq.

Law Offices of Diemer and Whitman
2 North Second Street, #290

San Jose, CA 95113

David A. Bohl, Esq.

Weinberg, Roger and Rosenfeld
180 Grand Avenue #1400
Oakland, CA 94612

Office of the U.S. Trustee
US. Federal Bldg.
280 S Ist St. #268
San Jose, CA 95113-3004

David J. Rapson

Guttenberg, Rapson and Colvin
1111 Broadway #1500
Oakland, CA 94607

Charles E. Logan

Law Offices of Charles E. Logan
95 S Market St. #660

San Jose, CA 95113

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