In re Highway Techs., Inc.

In re HIGHWAY TECHNOLOGIES, INC.,¹ Debtors

Case No. 13-11326 (KJC)

UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE

January 30, 2015

Chapter 7

Re: D.I. 576

MEMORANDUM²

Before the Court is the Motion of Wynne Systems, Inc. ("Wynne") for an Order (i) compelling payment of all outstanding post-petition fees and charges due under a master agreement pursuant to 11 U.S.C. Section 503(b)(1)(A), and (ii) compelling payment of attorneys' fees (the "Motion") (D.I. 576). Wynne seeks allowance and payment of an administrative expense claim based upon the Debtors' post-petition use of Wynne's software systems, and the legal fees incurred by Wynne to obtain payment of its post-petition claim. The Debtors filed an objection to Wynne's Motion, disputing the amount that should be paid to Wynne as an administrative expense claim under Bankruptcy Code § 503(b)(1)(A), and contesting the Debtors' obligation to pay legal fees. Wynne filed a reply to the Debtors' objection and the Court held an evidentiary hearing on the Motion. For the reasons set forth below, the Motion will be granted, in part, to allow Wynne an administrative expense claim in an amount that is less than that requested, and denied, in part, to deny Wynne's request for attorneys' fees.

Facts

Prior to filing its chapter 11 petition, Highway Technologies was one of the largest traffic safety companies in the United States, providing temporary and permanent roadway traffic management and safety services, including pavement marking installations, permanent installations of highway guardrails, barrier walls and signage, and traffic control services for special events. Highway Technologies also offered a complete line of rental products including traffic control devices, trucks, signage and related equipment. (D J. 3, ¶7.)

Wynne provides logistics software called "Rental Man" that allows customers to track shipments, process invoices, and generally manage their businesses (the "Software"). (Joint Pretrial Statement ("JPS"), D.I. 731, ¶ 2.) On or about February 15, 2007, Wynne and the Debtors entered into a Master Agreement³ (the "Agreement") pursuant to which Wynne provided the Debtors with computer products and services relating to the Rental Man Software. (JPS, ¶2 The Agreement, which attaches a number of exhibits and appendices, "is a single unified contract that provides for the Debtors' use of the Rental Man [S]oftware for multiple geographic locations in exchange for an agreed upon price." (JPS, ¶ 2.)

Pursuant to the Agreement, Wynne granted the Debtors a non-exclusive license to use the Software (the "License") for an Initial Term of one year that would automatically renew for additional one-year periods. (JPS, ¶ 2; Agreement, § 7.1; Exhibit 1 to the Master Agreement ("Ex. 1"), § 1.) The Agreement also requires Wynne to provide the Debtors with "Hosting Services" (Ex. 1, § 3) and other technical support, maintenance and enhancement services relatedto the Software, as described in an attached "Service Level Agreement" (the "SLA") (Appx. A to Ex. 1). The fees under the Agreement were as follows:

(1) The annual fee for the License, SLA Services and Hosting Services, for use at up to 70 locations, was $3.1 million;⁴

(2) Additional locations would be assessed a fee of $36,000 per location; and

(3) If either party terminated the Hosting Services or SLA Services as permitted by the Agreement, the annual fee would be reduced to $1.1 million.

(Agreement, Appx. A at A-1.) The Agreement provided that the Debtors would be invoiced monthly in an amount equal to one-twelfth of the annual fee. (Appx. A at A-2.) Payments were due thirty days following the date of receipt of the invoice. (Id.)

Exhibit 1 to the Agreement included an indemnification clause which provided as follows:

4.1 Customer shall indemnify, defend, and hold Wynne, its officers, directors, and agents harmless from and against all claims, demands, actions, costs, liabilities, and losses (including reasonable attorney's fees) of any kind and nature that may be asserted, granted, or imposed against Wynne, its officers, directors, or agents directly or indirectly arising from or in connection with: (a) any misrepresentation made by Customer under this Agreement; (b) a breach of Customer's obligations under this Agreement.

(Ex.1, § 4.1.)

On or about July 25, 2011, the parties entered into Amendment No. 2 to the Agreement, which, among other things, changed the fees as follows:

3. Pricing. Anything in the Agreement to the contrary notwithstanding, during the Current Term, [the Debtors] shall pay Wynne a subscription fee equal to $1,860,000 per year, payable in equal monthly installments of $155,000, for the following services:

i. License, SLA Services and Hosting Services for up to 100 locations;

ii. $1,550 per month for each additional location greater than 100 locations;

iii. As part of the Hosting Fee, Company shall provide [the Debtors] with 1,250 hours of Development Services per year for each year during the Current Term . . . .

(Amendment No. 2, ¶3.)

On May 1, 2013, Wynne issued an invoice (the "May Invoice") to the Debtors in the amount of $160,766, which was not paid.⁵ (JPS, ¶ 3.) On May 22, 2013 (the "Petition Date"), the Debtors filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code.⁶

On July 9, 2013, the Debtors issued a notice of rejection of the Agreement that became effective on July 19, 2013 (the "Rejection Date"). (JPS, ¶5.) Wynne did not contest rejection of the Agreement. (Id.) On July 26, 2013, the Debtors remitted a payment to Wynne in the amount of $160,766, the only post-petition payment made to Wynne (the "July Payment"). (JPS, ¶4.)

Wynne submitted two proofs of claim dated August 20, 2013, based upon the Agreement, including a claim for post-petition breach of contract damages in the amount of $160,766.00, and a claim for pre-petition breach of contract damages, rejection damages and attorney fees in the total amount of $2,102,232.00. (JPS, ¶ 5; Claims Register, Claim nos. 86 and 87.)

After the Petition Date, the Rental Man Software was accessed by the Debtors as follows:

(i) between May 22-30, 2013, the software was accessed at eight locations;

(ii) between June 1-30, 2013, the software was accessed at eighteen locations;

(iii) between July 1-19, 2013, the software was accessed at five locations; (iv) between July 20- 31, 2013, the software was accessed at ten locations; and

(v) between August 1 - 9, 2013, the software was accessed at two locations.

The Debtors' last log-in was on August 9, 2013. (JPS, ¶7.)

At the hearing, Wynne's general manager, John Bureau, testified that the May Invoice was due on May 31, 2013, and that the July Payment was applied to the amount due post-petition. (Tr. 32:9-15.)⁷ He also testified that Wynne maintained the Software's infrastructure and access for the Debtors' locations post-petition, at significant cost to Wynne. (Tr. 32:25-33:5). Bureau also testified that Wynne did not shut down the Debtors' access to the Rental Man Software until mid-August 2013. (Tr. 32:13-15.) He also stated that Wynne would not deactivate the Debtors' passwords unless instructed to do so by the Debtors. (Tr. 34:10-17.)

The Debtors' witness, Robert Hookstra, was employed by the Debtors since 1999, working as the controller since October 2010, and as the interim president since shortly before the Petition Date. (Tr. 36:2-10.) He was one of the main users of the Rental Man Software. (Tr. 36:17-18.) He agreed that the Debtors used the Rental Man Software to run the business pre-petition, including use of the Software to: (i) produce daily reports, (ii) schedule and track the companies' labor, equipment and inventory, (iii) create monthly invoices, (iv) post accounts receivable payments, and (v) process and certify payroll reports. (Tr. 37:8-21.) He testified that that the Debtors used the Rental Man Software to generate reports overnight, which provided the data necessary for the Debtors' employees to create spreadsheets and other reports that could be disseminated to managers to help run the day-to-day operations. (Tr. 38:1-12.)

Hookstra also testified that the last report he received was dated around May 23, 2013 (which is just after the Petition Date) and that "the job cost reports could not be updated after that time." (Tr. 38:20-25.) Because of the problems, the company "took everything offline" andcreated a spreadsheet to track the equipment and create invoices. (Tr. 39:6-20.) He testified that some key users did not have access to the Software between the Petition Date and May 30, 2013. (Tr. 39:22-40:5.) Although more users could access the Software in June 2013, some never got access back. (Tr. 41:8-23.) He is not aware of anyone asking Wynne to deactivate access to the Software, and he did not authorize any deactivation. (Tr. 40:14-17.) The Debtors were reducing their work force between the Petition Date and the end of July (Tr. 41:19-23.)

In summary, Wynne argues that three monthly payments of $160,766.00 each are due impost-petition services in May, June and July 2013. After applying a credit for the July Payment, Wynne seeks an administrative expense claim in the amount of two monthly payments ($321,532.00), plus attorney fees. (Tr. 56:21-23.) The Debtors dispute the amount of Wynne's administrative expense claim, arguing that it exceeds the value of the Debtors' actual post-petition use of the Software.

Discussion

Bankruptcy Code § 503(b)(1) provides that, after notice and a hearing, Bankruptcy Courts shall allow the "actual and necessary costs and expenses of preserving the estate" as administrative expenses. Administrative expenses receive priority payment over other claims pursuant to Bankruptcy Code § 507(a)(2). To qualify for an administrative priority, an expense (i) must arise from a post-petition transaction with the debtor-in-possession, and (ii) must be beneficial to the debtor-in-possession in the operation of the business. In re Marcal...