SII Liquidation Company

OCR transcription for search; preserved printed pages are authoritative

The court incorporates by reference in this paragraph and adopts as the findings and orders
of this court the document set forth below.

Russ Kendig
United States Bankruptcy Judge

UNITED STATES BANKRUPTCY COURT
NORTHERN DISTRICT OF OHIO

EASTERN DIVISION

IN RE: ) CHAPTER 11
)

SII LIQUIDATION COMPANY, CASE NO. 10-60702

Debtor JUDGE RUSS KENDIG

)
) MEMORANDUM OF OPINION
) (NOT INTENDED FOR
) PUBLICATION)
)

John B. Pidcock, trustee (“Creditor Trustee”) of the “Creditor Trust,” objected to the
proof of claim filed by American Sand and Gravel, a Division of Kenmore Construction Co.,
Inc. (“American Sand”) as untimely. American Sand contends that excusable neglect
exonerates the late filing and urges the court to allow the claim. Arguments were presented

to the court on March 22, 2011.

The court has jurisdiction of this matter pursuant to 28 U.S.C. § 1334 and the general
order of reference entered in this district on July 16, 1984. Venue in this district and division
is proper pursuant to 28 U.S.C. § 1409. This is a core proceeding under 28 U.S.C.

§ 157(b)(2)(B).

__ This opinion is not intended for publication or citation. The availability of this
opinion, in electronic or printed form, is not the result of a direct submission by the court.

FACTS

American Sand was a pre- and postpetition supplier of aggregate to Medina Supply
Company (“Medina Supply”), one of the jointly administered debtors. On average,
American Sand supplied product to Medina Supply two times each month and issued
invoices. Postpetition, American Sand provided aggregate from March 2010 through
December 2010. With the exception of the May 2010 invoices, the postpetition invoices

AUTHENTICATED
U.S. GOVERNMENT
INFORMATION

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were paid from five to forty-eight days after issuance and the bulk were paid in thirty days
or less.

In May 2010, American Sand provided aggregate on May 15th and May 31st. The
invoices from May 2010, totaling $41,460.76, were not paid. These invoices are the only
postpetition supplies of material by American Sand which were not paid.

On July 9, 2010, the court approved Debtors’ motion to establish a claims bar date

of August 12, 2010. The bar date included claims for postpetition administrative expenses
incurred prior to July 13, 2010.’ The bar date notice was filed on July 20, 2010 and served
on July 21, 2010. American Sand was listed a creditor. The procedure is not challenged.

American Sand filed an untimely administrative expense request (“claim”) for
$41,460.76 on November 17, 2010.

LAW

Creditor Trustee objects to the claim as untimely and there is no argument that the
claim was late. The bar date established a deadline of August 12, 2010 to file administrative
expense claims arising prior to July 13, 2010. The American Sand claim was incurred in
May 2010, making the August 12, 2010 bar date applicable to American Sand.

American Sand wants the court to allow the late filing under an excusable neglect
theory pursuant to Federal Rule of Bankruptcy Procedure 9006(b). Countering, Creditor
Trustee argues that the late filing does not meet the excusable neglect standard of Rule
9006(b). The parties agreed to argue about the wrong standard and the wrong legal
provisions. Neither party addresses the correct standard for this dispute, namely cause under
11 U.S.C. § 503(a), the governing provision for requests for payment of administrative

expenses.

American Sand’s “claim” is a request for payment of an administrative expense.
Although it may be filed on a proof of claim form, an administrative expense is a Separate
classification of claims under the bankruptcy code, governed directly by administrative
expense code provisions. See 11 U.S.C. 503. Collier’s advises against labeling a request for
payment of an administrative expense as a “proof of claim” because “an administrative
expense is not properly asserted in a proof of claim, and the filing of [a] proof of claim is
unnecessary to request payment of an administrative expense; the application for payment
filed under section 503(a) is all that is required.” 4 Alan N. Resnick and Henry J. Sommer,
Collier on Bankruptcy § 503.02[1], 503-9 (16 ed. 2011) (footnotes omitted). Collier’s notes
the absence of procedures for filing requests for administrative expenses, recognizing the
paucity of procedure for administrative expenses as compared to proofs of claim. Id. at

4 503.02.

Under section 503(a), “[a]n entity may timely file a request for payment of an
administrative expense, or may tardily file such request if permitted by the court for cause.”
11 U.S.C. § 503(a) (emphasis added). Thus, the court’s starting point is determine what
constitutes cause for allowing a late-filed application for administrative expenses.

“The term ‘cause’ is not a defined term in either the Bankruptcy Code or the
Bankruptcy Rules, so the kinds of ‘cause’ sufficient to permit tardy filing of administrative
expenses claims is left to judicial discretion and development.” Id. at § 503.02[2], 503-10.

! The claims bar date for administrative expense claims incurred after July 12, 2010 was
January 14, 2011.

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Many courts rely on the excusable neglect standard to determine whether to allow a late
administrative expense claim. See In re UAL Corp., 2009 WL 4068023 *6, fn. 6 (Bankr.
N.D. Ill. 2009) (citations omitted). At least one court specifically rejected the excusable
neglect standard, finding it narrower than an inquiry for cause. See In re Heartland Steel,

Inc., 2003 WL 23100035 (S.D. Ind. 2003).

“Cause” is the standard for relief in many bankruptcy situations. See, e.g., 11 U.S.C.
§§ 324, 362(d)(1), 707(a), 1112(b)(1); 28 U.S.C. § 157(d); Fed. R. Bankr. P. 1006(b)(2),
1019(1)(B), 3002(c)(1), 3003(c)(3). Noting the lack of definition for cause in sections 362(d)
and 1112(b), the Sixth Circuit advised courts to determine whether “discretionary relief is
appropriate on a case-by-case basis.” Laguna Assoc. Ltd. P’Ship v. Aetna Cas. & Sur. Co.
(In re Laguna Assoc. Lid. P’Ship), 30 F.3d 734 (6 Cir. 1994) (citation omitted); see also
Simon v. Amir (Inre Amir), 436 B.R. 1 (B.A.P. 6" Cir. 2010) (using same framework for
§ 707(a)) analysis; In re Pierce, 82 B.R 874 (Bankr. S.D. Ohio 1987) (§ 1322(c)). Cause is
within the court’s discretion and based on the relevant facts of each case and thereby

provides similarity to a Rule 9006(b) analysis.

Rule 9006(b) states that enlargement of the time period is within the court’s
discretion. The party seeking the enlargement bears the burden of proving that the
untimeliness was the result of excusable neglect. In re Lee Way Holding Co., 178 B.R. 976
(Bankr. S.D. Ohio 1995); In re Morelock, 151 B.R. 121 (Bankr. N.D. Ohio 1992). The
determination of whether the act is excusable requires a court to undertake an equitable
review of the relevant circumstances. Pioneer Inv. Serv. Co. v. Brunswick Assoc. Ltd.
P’ship, 507 U.S. 380, 395 (1993). Factors for consideration include, but are not strictly
limited to, “(1) the danger of prejudice to the debtor; (2) the length of delay and its potential
impact on the proceedings; (3) the reason for the delay; (4) whether the delay was within the
reasonable control of the late party; and (5) whether the late party acted in good faith.”
Norpak Corp. v. Eagle-Picher Indus., Inc. (In re Eagle-Picher Indus., Inc.), 131 F.3d 1185,
1188 (6" Cir. 1997) (citing Dix v. Johnson, 95 B.R. 134 (B.A.P. 9" Cir. 1988), Pioneer Inv.,
507 U.S. 380, 381)). The focus on the specific facts of the case, coupled with the court’s
discretionary power, makes the overlap between cause and “excusable neglect” apparent.

One difference, however, is evident. In an equitable review, fairness is the paramount
consideration. That does not necessarily follow on a review for cause. While fairness may
provide the requisite cause for relief, it does not necessarily drive the decision. The court can
picture fact patterns where an inequitable outcome may still establish cause for relief. On
this point, cause and excusable neglect diverge. An exercise of the court’s discretion may
not always be equitable. Thus, the court will use what it views as the less stringent standard
requiring a demonstration of cause rather than that of excusable neglect.”

_ On the facts before the court, cause exists to allow the request for payment.
American Sand successfully demonstrates a lack of prejudice and cognizable harm to
Debtors and an explanation for the delay.

American Sand filed its request for payment before the bar date for administrative
expenses incurred after July 12, 2010 expired. Thus, when American Sand filed,
administrative claims were still being filed by other administrative creditors. As pointed out
by Creditor Trustee, and per the notice issued on December 15, 2010, these creditors had
until January 14, 2011 to file a proof of claim. The objection to the claim was not filed until

? Since the parties have argued under the excusable neglect standard, the factual
analysis looks very similar to the review of facts the court would undertake under
Rule 9006(b). That is simply the result of the framework employed, and facts

emphasized, by the parties.

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February 2011. Thus, American Sand’s delay does not appear to be meaningful.

Creditor Trustee suggests that allowance of this claim could devastate the plan of
reorganization and ultimately result in a state court liquidation of the remaining assets of
Debtors. There is no explanation as to why this claim, compared to later- filed administrative
claims, is calamitous. Thus, is it difficult to imagine a significant negative impact resulted
from the untimely claim when not all claims had yet been filed.

According to the Creditor Trustee, the unsecured creditors will suffer actual prejudice
because they will receive a reduced distribution if the expense is allowed. The consideration
of other parties is reasonable, especially when there is no actual prejudice to the debtor.
Here, Debtors will not benefit if the expense is disallowed because if American Sand is not
paid, the distribution will simply be paid to another claimant. The outcome on the claim
objection will only affect who gets paid. In the question of “who” gets paid, the Code clearly
favors administrative expense holders and, in the absence of palp ble harm, the Code favors

loss apportionment based upon the merits.

There is no question that paying this claim will negatively impact a pool of
claimants, although it is not entirely clear which claimants will be impacted. In one
statement, Creditor Trustee says the detriment will be on unsecured creditors but also
suggests that the Creditor Trust may not be administratively solvent. If the latter is true, the
unsecured creditors would not suffer any adverse impact from allowance of the claim, and
the effect would fall on creditors higher up the ladder. Since very few estates can pay claims
in full, this deleterious effect on some pool of creditors is seldom avoidable.

Creditor Trustee states that the payment of an additional $41,000 would “result in a
measurable increase in the overall Administrative Claims pool.” (Creditor Trustee’s Reply,
p. 6.) However, Creditor Trustee doesn’t provide any frame of reference for its assertion.
It makes a difference if the $41,000 is in a pool of $200,000 or $2,000,000. Without the
reference, the court cannot measure the impact on creditors.

American Sand does not deny it knew of the bar date and disregarded it. According
to American Sand, it did not file its request because it didn’t think it was necessary. In its
communications with Medina Supply, it was informed that the invoices would be paid and
“not to worry.” In reliance on these statements and its previous relationship with the debtor,
American Sand did not file its request for payment. Although American Sand’s disregard is
puzzling in light of the circumstances, no one challenges the statements between Medina

Supply and American Sand.

Further, it appears that nonpayment of the May invoices is an anomaly. The facts
show that, as of the bar date of August 12, 2010, the May invoices were between seventy-
three and eighty-six days old. The majority of the other post-petition invoices were paid in
approximately one-half this time. At the time of the bar date, postpetition invoices for
February, March, April and June had been paid, yet May’s invoices remained outstanding.
The May invoices were the only postpetition invoices which were not paid. This strongly
suggests that nonpayment of the May invoices was an oversight. It also gives credibility to
American Sand’s reliance on the representations by Medina Supply that the invoices would

be paid.

_ The combination of the above facts leads the court to conclude that cause exists to
ermit American’s late-filed request for payment of its administrative expense claim. The

objection to the claim will be overruled.

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An appropriate order shall be issued immediately.

Service List:

Aaron L. Hammer

Thomas R. Fawkes

Freeborn & Peters LLP

311 S. Wacker Dr., Suite 3000
Chicago, IL 60606-6677

Matthew R. Duncan

Patrick J. Keating

Buckingham, Doolittle & Burroughs
3800 Embassy Parkway, Suite 300
Akron, OH 44333

Daniel A DeMarco

200 Public Sq

Suite 2800

Cleveland, OH 44114-2301

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