Opinion
Bankruptcy No. 03-30008.
April 19, 2005
MEMORANDUM AND ORDER
Before the court is a motion filed December 14, 2004 by Robert M. Hallmark Associates, Inc., Frank Celeste, William R. Austin, Phoenix Energy, Inc., Bobby Lankford and Erskine Williams ("Interest Holders") for allowance of administrative expense claims pursuant to 11 U.S.C. § 503(b)(1)(A). Debtor Athens/Alpha Gas Corporation filed an objection to the application on December 30, 2004. The matter was heard on February 23, 2005.
The Debtor is the operator of an oil well located in western North Dakota and owns approximately 50% of the working interest in the well. The Interest Holders hold 45.16% of the working interest in the well.
The Debtor undertook a reworking of the well in 2000 and 2001. Woodside sent the Interest Owners a letter updating them on the status of the well dated February 5, 2001, stating:
I will not make working interest gas revenue distribution for the months of December and January pending the completion of the required workover. However, the upside of this planning is that no one will be required to come forth with any cash, and furthermore at the conclusion of the workover all bills will have been paid, and gas revenue distribution will commence for the remainder of the year starting with March 2001 sales at the latest. It is possible that a portion of the February gas sales will be available to [ sic] revenue distribution. It all depends on the actual cost of the required workover.
The Debtor filed a petition for relief under Chapter 11 of the Bankruptcy Code on October 28, 2002. After the filing of its bankruptcy petition, the well produced revenue significantly in excess of expenses. Rather than remit 45.16% of the net revenue from the well to the Interest Holders, however, the Debtor used the money to pay operating expenses and debts unrelated to the well.
After the bankruptcy filing, the Debtor provided sporadic accountings to the Interest Holders, but none of them listed any penalty due by any of the Interest Holders to the Debtor until December 2004.
Terrence Delaney, a certified public accountant, testified that he used data provided by the Debtor to the Interest Holders, the United States Trustee and the court to determine the amount of the Interest Holders' claim. The data included gross income received from the sale of gas and oil produced by the well, expenses related to the operation of the well, royalties, and taxes. Delaney calculated the total net income produced by the well from October 2002 to December 2004 was $1,091,301.16. He multiplied the total net income by the percentage working interest of each to determine the net revenue attributable to each Interest Holder:Interest Holder Working Interest (%) Net Revenue ($)
Robert Hallmark Associates 15.00 163,695.17 William R. Austin 16.66 181,887.16 Phoenix Energy, Inc. 7.00 76,391.08 Bobby Lankford 4.00 43,652.05 Frank Celeste 2.00 21,826.02 Erskine Williams 0.50 5,456.51 Delaney subtracted the Interest Holders' shares of unpaid prepetition operating expenses and concluded the net capital balance for each Interest Holder as of December 31, 2004, was:
Robert Hallmark Associates $148,254.22 William R. Austin $88,959.85 Phoenix Energy, Inc. $47,660.81 Bobby Lankford $22,299.02 Frank Celeste $23,297.12 Erskine Williams $2,618.63
Frank Woodside, the Debtor's president, testified as to accountings he complied in January 2005 that indicate Frank Celeste is the only Interest Holder owed money by the Debtor. The discrepancy between the Debtor's and Delaney's conclusions is the result of the Debtor's imposition of a 400% penalty against the Interest Holders for failing to pay their respective shares of expenses for the well reworking. Woodside testified the Debtor operated the well pursuant to a Model Form Operating Agreement that provides for a 400% penalty to be assessed against nonconsenting parties for reworking expenses. The only signature on the agreement is that of Woodside on behalf of the Debtor.
The Debtor has not challenged the Interest Holders' assertion that they are entitled to administrative priority status. Rather, the Debtor's arguments relate solely to the determination of the amount of the administrative claim. The path of least resistence would be to deem the Interest Holders entitled to administrative expense priority and to move to the contested issue of the amount of the administrative expense. But the court is obligated to follow and apply the law, even if litigants unanimously (or through their silence) urge otherwise. Lack of opposition does not absolve the court of its responsibility to evaluate the request under the applicable provisions of the Bankruptcy Code. A creditor seeking priority for administrative expenses can prevail only by demonstrating that its claim comports with the language and underlying purposes of section 503. In re AcoustiSeal, Inc., 290 B.R. 354, 361 (Bankr. W.D. Mo. 2003)
An administrative expense allowed under section 503(b) entitles the holder to priority in distribution. See 11 U.S.C. § 507(a)(1). Section 503(b)(1)(A) defines administrative expenses to include "the actual, necessary costs and expenses of preserving the estate, including wages, salaries, or commissions for services rendered after the commencement of the case." The policy behind such priority is to encourage creditors to extend credit and supply debtors with goods and services postpetition to increase the likelihood of a successful reorganization. See Williams v. IMC Mortgage Co. (In re Williams) 246 B.R. 591, 594 (B.A.P. 8th Cir. 1999); In re AcoustiSeal, Inc., 290 B.R. at 361. Although the court has broad discretion to grant administrative expense requests, it is required to construe section 503(b) narrowly because the presumption in bankruptcy cases is that the debtor's limited resources will be equally distributed among its creditors. See AgriProcessors, Inc. v. Iowa Quality Beef Supply Network, L.L.C. (In re Tama Beef Packing, Inc.), 290 B.R. 90, 96 (B.A.P. 8th Cir. 2003); In re AcoustiSeal, Inc., 290 B.R. at 361.
The court therefore must determine whether the Interest Holders' claim involves an actual and necessary expense of preserving the Debtor's estate. In making this determination the court considers whether (1) the expense arose from a postpetition transaction with the estate, and (2) the expense benefitted the estate in some demonstrable way. See In re Tama Beef Packing, Inc., 290 B.R. at 96. The claimant has the burden of proof as to both requirements. In re Smith, 315 B.R. 77, 79 (Bankr. W.D. Ark. 2004). The standard of proof is a preponderance of the evidence. In re National Steel Corp., 316 B.R. 287, 300 (Bankr. N.D. Ill. 2004).
The Interest Holders do not specify, nor can the court divine, how their claim arises from a postpetition transaction with the Debtor's estate. Indeed, no postpetition transaction has occurred between the Interest Holders and the Debtor. This case does not involve the typical scenario where a creditor provides goods or services to a debtor and the creditor seeks payment for those goods or services as an administrative expense claim. Instead, the Debtor used the Interest Holders' share of the postpetition well revenue to pay operating expenses. The Interest Holders' claim arises from the Interest Holders' ownership rights as they existed prior to the Debtor's filing for bankruptcy relief. Moreover, the Interest Holders did not incur any expense, and "[s]ection 503(b)(1)(A) appears to contemplate that an administrative expense include some expenditure or outlay of `costs' by the creditor." In re Williams, 264 B.R. at 595. Next, the Interest Holders take the incongruous position that the Debtor's use of their share of the revenue for expenses — including debts unrelated to the well — benefitted the estate, yet they have repeatedly challenged the Debtor's management and expenditures throughout this bankruptcy case. The Interest Holders cannot have it both ways. Finally, the policy behind the administrative priority provision would not be furthered by granting the Interest Holders' request because they did not take any action to extend credit or supply the Debtor with goods and services to increase the likelihood of a successful reorganization. Simply put, the Interest Holders neither argued nor submitted any evidence in support of its position that its claim meets the criteria provided in section 503(b)(1)(A). Thus, the Interest Holders failed to establish that their claim is an allowable administrative expense under section 503(b)(1)(a).
The parties focused their arguments and evidence on the issue of whether the Debtor may assess a penalty against the Interest Holders because they did not pay their share of the reworking expenses. The court turns to that issue now.
The Debtor correctly identifies that the operating agreement provides for a 400% penalty to be assessed against non-consenting parties for reworking expenses. However, the copy of the operating agreement admitted into evidence is signed only by Woodside on behalf of the Debtor and therefore is not enforceable against the Interest Holders. The court is also not persuaded by the Debtor's assertion that equitable principles require the imposition of a penalty.
Based on the foregoing, the Interest Holders' application for allowance of administrative claims pursuant to 11 U.S.C. § 503(b)(1)(A) is DENIED, but the Debtor may not impose a penalty against the Interest Holders.