In re Stainless Sales Corp.

579 B.R. 836

IN RE: STAINLESS SALES CORPORATION, Debtor.

Case No. 17bk03148

United States Bankruptcy Court, N.D. Illinois, Eastern Division.

Signed December 22, 2017

Attorneys for Chapter 7 Trustee: Gregory K. Stern, Dennis E. Quaid, Monica C. O'Brien and Rachel S. Sandler, Gregory K. Stern P.C. Chicago, IL

Attorneys for Atlas Toyota Material Handling, LLC: William J. Factor and Z. James Liu, Factorlaw, The Law Office of William J. Factor, Ltd., Chicago, IL

MEMORANDUM DECISION

TIMOTHY A. BARNES, Judge.

Before the court is Atlas's Request for Payment of an Administrative Expense [Dkt. No. 171] (the "Application") brought by Atlas Toyota Material Handling, LLC ("Atlas") in the above-captioned bankruptcy case (the "Case"). The Application is opposed by David R. Herzog (the "Trustee"), the chapter 7 trustee of Stainless Sales Corporation (the "Debtor"). This matter raises the question of how, if at all, a bankruptcy estate may be held accountable for the actions of a debtor's prepetition assignee for the benefit of creditors.

For the reasons set forth more fully below, upon review of the parties' respective filings, the court finds that Atlas is not entitled, as it claims, to reimbursement of its claim as an administrative expense under the provisions affording administrative expense status to claims by custodians. However, Atlas is entitled to protection, in the manner set forth herein.

JURISDICTION

The federal district courts have "original and exclusive jurisdiction" of all cases under title 11 of the United States Code, 11 U.S.C. § 101, et seq. (the "Bankruptcy Code"). 28 U.S.C. § 1334(a). The federal district courts also have "original but not exclusive jurisdiction" of all civil proceedings arising under the Bankruptcy Code, or arising in or related to cases under the Bankruptcy Code. 28 U.S.C. § 1334(b). District courts may, however, refer these cases to the bankruptcy judges for their districts. 28 U.S.C. § 157(a). In accordance with section 157(a), the District Court for the Northern District of Illinois has referred all of its bankruptcy cases to the Bankruptcy Court for the Northern District of Illinois. N.D. Ill. Internal Operating Procedure 15(a).

A bankruptcy judge to whom a case has been referred may enter final judgment on any core proceeding arising under the Bankruptcy Code or arising in a case under the Bankruptcy Code. 28 U.S.C. § 157(b)(1). Bankruptcy judges must therefore determine, on motion or sua sponte , whether a proceeding is a core proceeding or is otherwise related to a case under the Bankruptcy Code. 28 U.S.C. § 157(b)(3). As to the former, the court may hear and determine such matters. 28 U.S.C. § 157(b)(1). As to the latter, the bankruptcy court may hear the matters, but may not decide them without the consent of the parties. 28 U.S.C. §§ 157(b)(1) & (c) ; Wellness Int'l Network, Ltd. v. Sharif , ––– U.S. ––––, 135 S.Ct. 1932, 1939, 191 L.Ed.2d 911 (2015) ; Richer v. Morehead , 798 F.3d 487, 490 (7th Cir. 2015) (noting that "implied consent is good enough"). Instead, the bankruptcy court must "submit proposed findings of fact and conclusions of law to the district court, and any final order or judgment shall be entered by the district judge after considering the bankruptcy judge's proposed findings and conclusions and after reviewing de novo those matters to which any party has timely and specifically objected." 28 U.S.C. § 157(c)(1).

Matters arising under section 503(b) of the Bankruptcy Code are matters that may only arise in a bankruptcy case and, thus, the bankruptcy court is empowered to enter final orders with respect to the same. Matilla v. Radco Merch. Servs., Inc. (In re Radco Merch. Servs., Inc. ), 111 B.R. 684, 686 (N.D. Ill. 1990) ("A claim for administrative expenses is one of the core proceedings listed in 28 U.S.C. § 157(b)(2)(B)."). Further, all parties have consented to this court's entry of a final order adjudicating the Application.

Accordingly, determination of the Application is within the scope of the court's jurisdiction and constitutional authority.

BACKGROUND¹

Prior to the commencement of this bankruptcy case, the Debtor's business consisted of the distribution of stainless steel products to various manufacturers. When the Debtor's financials began to deteriorate, the Debtor's board of directors approved an assignment for the benefit of creditors (the "Assignment") and selected Michael J. Eber (the "Assignee") of High Ridge Partners as the assignee. The Debtor, in accordance with Illinois law, assigned all of its assets to the Assignee. In order to liquidate those assets, the Assignee arranged for an auction (the "Auction") to take place.

Preceding the Auction, however, Atlas contacted the Assignee to request the return of a forklift which it had leased to the Debtor and which the Assignee then possessed. According to the communications between the Assignee and Atlas, it appears that the Assignee was willing to return the forklift to Atlas. Unfortunately, before that could happen, the Assignee conducted the Auction and therein sold the forklift. Atlas's forklift was sold for $15,500.00.

Before the Assignee and Atlas could resolve this situation, on February 3, 2017 (one-day after the Auction and before the Assignee could distribute the Auction proceeds), other creditors of the Debtor commenced an involuntary bankruptcy proceeding against the Debtor under chapter 11 of the Bankruptcy Code. In that proceeding, this Case, an order for relief was subsequently entered. Approximately one-month later, the court converted the Case from one proceeding under chapter 11 to one proceeding under chapter 7. David R. Herzog was appointed as the chapter 7 Trustee.

On August 14, 2017 Atlas filed the Application, initially seeking an administrative expense for $15,500.00 under section 503(b)(3)(E) of the Bankruptcy Code. Atlas's central argument was that, under Reading Co. v. Brown , 391 U.S. 471, 478, 88 S.Ct. 1759, 20 L.Ed.2d 751 (1968), Atlas should be allowed to recover its claim against the Assignee as a section 503(b)(3)(E) administrative expense of the bankruptcy estate. That claim against the Assignee, as asserted by Atlas, was for liability arising out of civil conversion. In the alternative, Atlas argued that a constructive trust should be imposed on the estate in the amount of the proceeds of the sale of the forklift.

On September 1, 2017, the Trustee filed its response (the "Response"). The Trustee argued that Atlas's request was inappropriate for several reasons. The Trustee argued that the proceeds from the sale of the forklift did not provide a benefit to the estate and that there was no evidence the proceeds were paid to the Trustee, thus defeating a section 503(b)(3) administrative expense request. The Trustee further contended that a constructive trust should not be imposed as the proceeds from the sale of the forklift cannot be traced to the bankruptcy estate. Finally, the Trustee argued that if an administrative expense is allowed, the court should not direct the payment of said expense.

On October 17, 2017, the court conducted a hearing (the "Hearing") on the Application, at which counsel for Atlas and the Trustee argued in support of their respective positions. During the Hearing, it became clear that Atlas would be unlikely to succeed under section 503(b)(3)(E). Instead, the discussion shifted to whether Atlas was entitled to protection under section 543(c)(1) of the Bankruptcy Code, and if so, what manner of that protection would be appropriate.

DISCUSSION

A. Administrative Expense under Section 503(b) and Reading

Atlas contends that it is entitled to be compensated for the Assignee's obligation to it as an administrative expense under section 503(b)(3)(E) of the Bankruptcy Code. The Trustee responds that an administrative expense would be improper under the standard set forth for the same. Further, the Trustee argues that the court should not direct payment of that administrative expense.

Section 503(b) provides, in pertinent part, that "after notice and a hearing, there shall be allowed administrative expenses, ..., including, (3) the actual, necessary expenses, ... (E) incurred by a custodian superseded under section 543 of this title, and compensation for the services of such custodian." 11 U.S.C. § 503(b)(3)(E).

Atlas relies almost entirely on Reading to advance its argument. In Reading , the Supreme Court considered how, if at all, a party to whom a receiver of the debtor's had become obligated after the commencement of the bankruptcy case should be compensated from the bankruptcy estate. There, a fire took place several months after the debtor had filed the petition for bankruptcy, while the custodian remained in possession of the property. Reading , 391 U.S. at 473, 88 S.Ct. 1759. In considering the issue, the Supreme Court found that an administrative expense claim was appropriate because "costs that form ‘an integral and essential element of the continuation of the business’ are necessary expenses even though priority is not necessary to the continuation of the business." Id. at 484, 88 S.Ct. 1759.

Atlas's faith in Reading is, however, misplaced for several reasons.

First, Reading is a pre-Bankruptcy Code case. While such pre-Bankruptcy Code cases may "inform [ ] our understanding of the code," Harford Underwriters Ins. Co. v. Union Planters Bank , 530 U.S. 1, 10, 120 S.Ct. 1942, 147 L.Ed.2d 1 (2000) ; see also Colfin Bulls Fundings A, LLC v. Paloian (In re Dvorkin Holdings, LLC ), 547 B.R. 880, 893 (N.D. Ill. 2016), such cases are not controlling law in the present day. "[P]re–Code practices ‘cannot overcome th[e] language of the Code.’ " Harford Underwriters , 530 U.S. at 10, 120 S.Ct. 1942 ; see also Dvorkin , 547 B.R. at 893. First and foremost, this court is obligated to interpret the Bankruptcy Code, not pre-Bankruptcy Code. RadLAX Gateway Hotel, LLC v. Amalgamated Bank , 566 U.S. 639, 648, 132 S.Ct. 2065, 182 L.Ed.2d 967 (2012) ; see also Dvorkin ,...