Opinion
Case No. 03-70789, Adv. No. 04-7076.
December 8, 2004
JUDGMENT
The court having taken "Debtor's Motion to Reconsider or to Clarify Opinion or to Make Additional Findings and Conclusions of Law and Notice" (Document # 18) and "KWVA's Response to Motion to Reconsider and Objection to Tendered Summary Judgment Order" (Document # 19) under submission (Document # 20) and being sufficiently advised, makes the following Findings of Fact and Conclusions of Law pursuant to Federal Rule of Bankruptcy Procedure 7052.
FINDINGS OF FACT:
The parties' agreed stipulations as to facts and exhibits (Document # 9) are incorporated herein as if set forth in their entirety. Furthermore, references used in the stipulations will be used here, for example "KWVA" for "KWVA Energy, Inc."
A hearing was conducted December 3, 2004 ( See Documents # 16 17) on the parties' dueling motions for summary judgment (Documents # 10 13), which had been briefed prior to the hearing as required by the court's scheduling orders (Documents # 11 14).
The court takes judicial notice of "Chapter 11 Operating Order" entered in the main case (Document # 3, main case), specifically the following provision:
TRANSFERS TO OR COMPENSATION OF DEBTOR OR INSIDERS
During the pendency of this action, neither the debtor nor any insider shall receive any increase in compensation, whether in salary or fringe benefits or in any other form, without prior court approval after notice and hearing. This prohibition includes transfers of property to the individual debtor or to any insider. Unless and until the debtor in possession has obtained court approval after notice and hearing, the debtor in possession shall make no payments in payment of any debt, whether secured or unsecured, owed to an insider or to a creditor whose claim is either co-signed by or guaranteed by an insider.
Counsel for the debtor acknowledged at the hearing, and conceded in agreed stipulations, that the defendant is owed $135,891.51 as an actual and necessary expense of the estate.
CONCLUSIONS OF LAW:
The contracts with KWVA Energy, Inc. which are the subject of this adversary proceeding were not in the ordinary course of business of the debtor. As such they were not excepted from notice and hearing as provided by 11 U.S.C. § 363(c)(1). The Chapter 11 Operating Order, entered in the main bankruptcy case as Document # 3, is a clear indication that this court will not look favorably upon transactions between the debtor and insiders unless there is "court approval after notice and a hearing." Whether seen as a blanket prohibition, that is, an injunction against any insider transaction with the debtor, or seen as a prohibition under certain circumstances, the section of the Chapter 11 Operating Order titled "Transfers to or Compensation of Debtor or Insiders" should have been a red flag, an alarm, to the parties that contractual obligations between them would be at risk if they did not have prior court approval. See Brewer v. Erwin Erwin, P.C. (In re Marquam Inv. Corp.), 942 F.2d 1462 (9th Cir. 1991) (establishing that in bankruptcy setting, insider transactions are subject to rigorous scrutiny by the court).
The contracts must be viewed as one, particularly since 11 U.S.C. §§ 363 and 549 concern only "property of the estate." See 11 U.S.C. § 541.
It could be argued that the language "unless the court orders otherwise" encompasses the court's Operating Order, thus rendering the KWVA contracts not exempt under this section.
The arrangement between the parties, which involved cross-leasing of assets of two companies, was not in the ordinary course of business of Cook and Sons Mining, Inc. Although coal truck hauling agreements, including refuse and compaction agreements, are common in the coal mining industry, before the transaction between these parties, the debtor had done all of its own such hauling. Therefore, the arrangement not only was new between the debtor and KWVA, it also was an entirely new way for the debtor to do business. See In re Century Brass Products, Inc., 107 B.R. 8 (Bankr. Conn. 1989) (establishing "radical departure from prior transactions" standard).
In sum, there is no single fact which takes a contract outside the ordinary course of business, not the length of time, nature, or size of the contract, including the amount of debt incurred if a breach is found, not a bidding process or recommendation by independent consultants. Rather, the court must view all of the facts together to reach its conclusion. Based on the facts of this case, the "Coal Refuse Hauling and Compaction Agreement" cannot be seen as being within the ordinary course of business of the debtor. It was a long-term contract, which outsourced services previously handled by the debtor and was accomplished by cross-lease of the debtor's assets with insiders, and although awarded as the best bid and recommended by the debtor's consultants, was without consideration to the court's Chapter 11 Operating Order which required prior court approval of transfers to or compensation of the debtor or insiders.
The parties have agreed that only this contract is germane here.
IT IS HEREBY ORDERED:
(1) The debtor's motion for summary judgment is sustained (Document # 10), and KWVA's motion for summary judgment is overruled (Document # 13). Pursuant to 11 U.S.C. § 549(a)(1)(B), the KWVA contracts are avoided as not authorized under this title or by the court.
(2) Pursuant to 11 U.S.C. § 503(b)(1)(A), KWVA Energy, Inc. is entitled to an administrative expense claim in the total amount of $135,891.51, as an actual and necessary expense of preserving the bankruptcy estate.