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FILED

APR 24 2018

SUSAN M. SPRAUL, CLERK

U.S. BKCY. APP. PANEL

OF THE NINTH CIRCUIT

 

 ORDERED PUBLISHED

UNITED STATES BANKRUPTCY APPELLATE PANEL

OF THE NINTH CIRCUIT

In re: ) BAP No. AK-17-1285-JuBL

)

COOK INLET ENERGY LLC, ) Bk. No. 15-00236

)

Debtor. )

______________________________)

)

SCOTT M. BORUFF, )

)

Appellant, )

v. ) O P I N I O N

)

COOK INLET ENERGY LLC; U.S. )

TRUSTEE; and CHARLES GEBHARDT,)

Trustee for the Miller Energy )

Creditors Liquidation Trust, )

)

Appellees. )

______________________________)

Argued and Submitted on March 22, 2018

at Pasadena, California

Filed - April 24, 2018

Appeal from the United States Bankruptcy Court

for the District of Alaska

Honorable Gary A. Spraker, Chief Bankruptcy Judge, Presiding

_____________________________________

Appearances: William D. Sullivan of Sullivan, Hazeltine,

Allinson, LLC, argued for Appellant Scott M.

Boruff; David A. Zdunkewicz of Andrews Kurton

Kenyon LLP argued for Appellees Cook Inlet Energy

LLC and consolidated Debtors.

______________________________________

Before: JURY*, BRAND, and LAFFERTY, Bankruptcy Judges.

* Bankruptcy Judge Meredith Jury, Central District of

California, sitting by assignment.
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JURY, Bankruptcy Judge:

Appellant Scott M Boruff (Boruff), former executive

chairman, board member, and majority shareholder of Miller

Energy Resources, Inc. (Miller), one of several related Chapter

112 debtors whose cases were jointly administered under the lead

caption of Cook Inlet Energy, LLC., filed an application for an

administrative expense claim for his prorated contractual salary

for the four-month period between the filing date and plan

confirmation, when his contract was rejected. The bankruptcy

judge awarded him far less than the prorated salary, determining

that Boruff had not proved that the reasonable value of the

benefit to the estate of his postpetition services was more than

the amount paid to other directors on the Miller board. Boruff

asserts on appeal that the bankruptcy court applied the wrong

legal standard in its analysis, imposing an incorrect burden of

proof. We conclude that the court applied a correct legal

standard and properly allocated the burden of proof. Therefore,

we AFFIRM.

 I. FACTUAL BACKGROUND AND PROCEDURAL HISTORY3

On August 6, 2015, an involuntary chapter 11 petition was

filed against Cook Inlet Energy, LLC (Cook), a subsidiary of

2 Unless otherwise indicated, all chapter and section 

references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, and

Rule references are to the Federal Rules of Bankruptcy Procedure. 

3 Most of the material facts are undisputed and are taken

from the Memorandum on Application of Scott M. Boruff For

Administrative Expense Claim entered by the bankruptcy court on

September 13, 2017.

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Miller. Cook consented to entry of an order for relief under

Chapter 11 on October 1, 2015, and on the same day Miller and

several other related subsidiaries filed their own chapter 11

petitions, all of which were jointly administered. Miller and

its subsidiaries (collectively, Debtors) were independent oil

and natural gas exploration and production companies that

focused on developing oil and gas properties in Alaska. Miller

was a publicly traded holding company that owned, directly or

indirectly, the subsidiaries. A significant drop in the price

of oil, Miller’s default on a credit agreement with its secured

lenders, and an unsuccessful attempt to raise capital or sell

some of the assets combined to cause financial distress for the

Debtors. To assist it in finding buyers or creating a financial

restructure, before filing Miller had employed investment

bankers at Seaport Global Securities (SGS), whose continued

employment was approved by the bankruptcy court.

Boruff was part of Miller’s senior management group,

holding the position of executive chairman when the petition was

filed. He had been hired by Miller in August 2008 as its chief

executive officer (CEO), a position he held until September

2014, when he was replaced by Carl Giesler and assumed the newly

created position of executive chairman. Per Boruff’s testimony,

Giesler was brought in to manage the operations of the growing

company while Boruff focused on the “big picture stuff,”

including putting financial deals together and overseeing the

company’s future development. He was employed under an

employment contract (the Contract), which at the time of filing

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paid him $795,000 a year or $66,250 per month.4 The Contract’s

description of Boruff’s job functions was imprecise, but it

emphasized oversight of future development, including mergers

and acquisitions. He worked primarily from his home in

Tennessee, with occasional travel to Alaska and to Houston,

where the Miller headquarters were located. After the drop in

oil prices, he focused on seeking joint venturers or buyers of

assets.

Prior to filing its voluntary petition, Miller formed a

Restructuring Committee to solicit offers to purchase the

company or its assets. Boruff was not initially included on

this committee, which was made up of Giesler and the independent

members of the board of directors. Per Giesler’s testimony, as

Miller’s largest shareholder Boruff was excluded from the

committee. Eventually, during the plan confirmation process,

Boruff was added to the Restructuring Committee. 

Soon after filing, Debtors filed Notices of Intent to Take

Compensation for its officers, but did not include Boruff on that

list. Although the Notices were not served on Boruff, he soon

learned that he was not going to be paid in the chapter 11. 

Debtors moved expeditiously toward confirmation, filing their

disclosure statement and plan just two and one half months

postpetition. Soon after, they filed a Notice of Intent to Assume

or Reject Executory Contracts and Unexpired Leases as part of

confirmation. The Notice was served upon Boruff; his Contract

was listed among those being rejected. Under the terms of the

plan confirmed at a hearing on January 27, 2016, the Contract was

4 Giesler earned $800,000 per year as CEO.

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rejected. Boruff received no portion of his contractual salary

postpetition.

On April 28, 2016, Boruff filed a timely Application for

Administrative Expense Claim, seeking payment as an

administrative priority claim under § 503(b)(1)(A)(i) of his

contractual salary prorated over the four months between the

petition date and the confirmation date. The Application

asserted Boruff was entitled to be paid his full salary because

he remained employed under the Contract while the chapter 11 was

pending until rejection of the Contract at confirmation. The

Application contained scant legal argument other than reference

to the statute itself. 

Debtors opposed the Application, citing numerous cases,

including NLRB v. Bildisco and Bildisco, 465 U.S. 513 (1984) and

In re Bryant Universal Roofing, Inc., 218 B.R. 948 (Bankr. D.

Ariz. 1998), for the principle that although the wages

established in a prepetition employment contract may be probative

evidence on an administrative priority claim, the claimant must

prove the value of the benefit to the estate by a preponderance

of the evidence. They asserted that Boruff failed to show how

his role as executive chairman had benefitted Debtors any more

than the services of other board members, who had been paid less

than $15,000 each. 

Boruff replied, arguing that because Debtors did not

terminate the Contract until the confirmation date, he continued

to perform the duties of executive chairman valued at the

contractual rate and these services were presumed beneficial to

the estate. He construed Bildisco and Bryant Universal Roofing

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to support his assertion that the benefit was set by the contract

rate paid to an employee, so long as the employee continued

working for the debtor, until the contract was rejected. The

gist of his argument was that an employee was not required to

prove the benefit to the estate beyond the contractual salary.

The bankruptcy court determined that an evidentiary hearing

would be necessary to rule on the amount of the administrative

claim, and after almost a year for discovery and other

preparation,5 that hearing took place on May 17, 2017. Boruff

and Giesler testified at the hearing. Exhibits, all admitted by

stipulation, included declarations and deposition transcripts of

other witnesses as well as pertinent documents. Boruff’s

testimony described in general the services he performed both

pre- and post petition, which included his efforts to find a

buyer for assets and his participation on the Restructuring

Committee. Giesler also described the scope of his own

postpetition duties and the general reorganization efforts which

led to plan confirmation. He testified that the salaried

management personnel who were listed in the Notices to be paid

postpetition, and whose contracts were assumed, were specified by

the lenders, who excluded Boruff. He also described the efforts

by SGS to procure buyers, which substantially overlapped with any

efforts of Boruff.

At the close of testimony and oral argument, the bankruptcy

court requested another round of briefing. In his Post-Hearing

5 Much of the delay was caused by scheduling issues of the

parties and the court.

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Memorandum of Law, Boruff argued for the first time that the

statute itself, § 503(b)(1)(A)(i), provided that wages, salaries,

and commissions for services rendered after the commencement of

the case were de facto “actual, necessary costs and expenses of

preserving the estate” and that beyond showing that claimant

worked postpetition, no further proof in support of a § 503(b)

administrative claim was necessary. He then cited Bryant

Universal Roofing and other cases which he believed supported his

assertion that a contractual salary was presumed to be the value

of the benefit to the estate without further proof. 

Debtors’ simultaneous brief emphasized that the statute and

case law gave Debtors an express right to assume or reject

contracts through the time of confirmation without the obligation

to pay for contracts that did not benefit the estate. Contrary

to Boruff’s view, the majority of courts placed the burden on the

claimant under the rejected contract to establish the beneficial

value of the services to the estate. They urged the court to

adopt the analysis in a factually similar case, In re Health

Diagnostic Laboratory, Inc., 557 B.R. 885 (Bankr. E.D. Va. 2016). 

That case emphasized the “heavy burden” on the administrative

claimants to show an “actual benefit to the estate and that such

costs and expenses were necessary to preserve the value of the

estate assets.” Id. at 898. Debtors argued that the admitted

evidence fell far short of proving that the reasonable value of

Boruff’s postpetition services should be measured at the Contract

rate. They suggested that he be reimbursed at the same rate as

other board members.

The bankruptcy court issued its Memorandum on Application of

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Scott M. Boruff for Administrative Expense Claim in September

2017, concluding that Boruff had failed to demonstrate that the

reasonable value of his postpetition services was more than would 

be paid to him as a board member and member of the Restructuring

Committee. In the Memorandum the court recounted the scope of

work Boruff performed for Debtors, which included his efforts to

negotiate with potential buyers of the assets, a service being

primarily provided by Debtors’ investment banker SGS, his

chairman’s role at three board meetings, and his attendance at

Restructuring Committee meetings. It noted there was little

concrete evidence of the time actually expended on these tasks,6

and Boruff had not independently proved a reasonable value for

his services other than to point to the contractual salary. 

After a review of the case law, the court concluded that

“[Miller] has rebutted any presumption that the pre-petition

employment contract states the reasonable value of Boruff’s postpetition services.”7 Although it found that Boruff’s efforts to

find a buyer were of some value, his prepetition salary had no

relation to those benefits and no other evidence supported an

award greater than the sum received by other board members,

$15,000. 

The court entered an order consistent with the conclusions

in the Memorandum, which Boruff timely appealed. 

6 Phone records showed only a few hours of actual time on

calls. The meeting time was also estimated at a few hours. 

7 Memorandum on Application of Scott M. Boruff for

Administrative Expense Claim, p. 20. 

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 II. JURISDICTION

The bankruptcy court had jurisdiction over this proceeding

under 28 U.S.C. §§ 1334 and 157(b)(2)(A) and (B). We have

jurisdiction under 28 U.S.C. § 158.

III. ISSUES

A. Did the bankruptcy court apply the proper legal standard

to Boruff’s application for an administrative claim for wages and

salary under § 503(b)(1)(A)(i) when it determined that the

Contract salary rate was not binding and that Boruff had the

ultimate burden of proving the benefit to the estate and the

reasonable value of his postpetition services?

B. Is the contractual salary in a rejected executory

employment contract the presumptive value of services rendered

postpetition for an administrative claim under § 503(b)(1)(A)(i)?

C. Did the bankruptcy court abuse its discretion in

partially granting Boruff’s application and awarding him $15,000

rather than the contract rate of $252,657.63?

IV. STANDARDS OF REVIEW

We review the bankruptcy court’s order allowing or

disallowing an administrative claim for abuse of discretion. 

Gonzalez v. Gottlieb (In re Metro Fulfillment, Inc.), 294 B.R.

306, 309 (9th Cir. BAP 2003), citing Teamsters Indus. Sec. Fund

v. World Sales, Inc. (In re World Sales, Inc.), 183 B.R. 872, 875

(9th Cir. BAP 1995). A bankruptcy court abuses its discretion if

it applies the wrong legal standard or its findings are

illogical, implausible or without support in the record. 

TrafficSchool.com, Inc. v. Edriver Inc., 653 F.3d 820, 832 (9th

Cir. 2011).

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We review legal issues de novo and factual issues for clear

error. See Veal v. Am. Home Mortg. Servicing, Inc. (In re Veal),

450 B.R. 897, 918 (9th Cir. BAP 2011). However, where the facts

are undisputed, the issue is purely one of law subject to de novo

review. Kipperman v. IRS (In re 800Ideas.com), 496 B.R. 165, 171

(9th Cir. BAP 2013) (citing Elliott v. Four Seasons Props. (In re

Frontier Props., Inc.), 979 F.2d 1358, 1362 (9th Cir. 1992).

Whether the bankruptcy court identified and applied the

correct burden of proof is a question of law we review de novo. 

Margulies Law Firm v. Placide (In re Placide), 459 B.R. 64, 71

(9th Cir. BAP 2011) (citing People’s Ins. Co. Of China v. M/V

Damodar Tanabe, 903 F.2d 675, 682 (9th Cir. 1990)). We also

review issues of statutory interpretation de novo. Allen v. U.S.

Bank, N.A. (In re Allen), 472 B.R. 559, 564 (9th Cir. BAP 2012). 

We may affirm on any ground supported by the record,

regardless of whether the bankruptcy court relied upon, rejected

or even considered that ground. Fresno Motors, LLC v. Mercedes

Benz USA, LLC, 771 F.3d 1119, 1125 (9th Cir. 2014).

V. DISCUSSION

Recognizing that the clearly erroneous standard of review of

the bankruptcy court’s factual findings is an unsurmountable

barrier to success in this appeal, Boruff seeks de novo review,

asserting that the court applied the wrong legal standard for two

separate and distinct reasons. First, he argues that the

construction of the statute whereby wages and salaries are

specifically enumerated as included in “the actual, necessary

costs and expenses of preserving the estate” should end the

inquiry; all he needed to demonstrate to the bankruptcy court for

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an administrative priority claim was that he worked for Debtors

postpetition until confirmation and had an employment contract

which set his salary. In the alternative, he submits that

Bildisco, when referencing payment for postpetition performance

under an executory contract, holds that the contract price is the

presumptively reasonable value of services; Debtors must rebut

that presumption with contrary evidence. Further, he argues that

subsequent case law supports this interpretation of Bildisco. 

The effect of this second argument is a burden shift contrary to

that normally applied in claims litigation, such that the

ultimate burden of persuasion falls upon the objecting party. As

our analysis below shows, we disagree with both assertions.

Before tackling Boruff’s theories, however, it is helpful to

review the well-established burden shifts in claims litigation

and specific application of these standards to allowance of

administrative expense claims. Addressing allowance of claims in

general, a claim is deemed allowed absent objection from a party

in interest. § 502(a). A mere formal claim objection, without

evidence, cannot defeat a claim if the claim is presumed to be

valid under Rule 3001(f). Lundell v. Anchor Constr. Specialists,

Inc., 223 F.3d 1035, 1039 (9th Cir. 2000). To overcome this

presumption, the objecting party must present evidence with

probative value equal to that of the proof of claim to rebut the

claim. Id. If the objecting party successfully rebuts the

presumption, the claimant bears the burden of proof to show by a

preponderance of the evidence that its claim is valid, and the

“ultimate burden of persuasion remains at all times upon the

claimant.” Id. at 1039.

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Administrative priority claims under § 503(b)(1)(A) are held

to a stricter standard. Because they must be presented to the

court by motion, they are not deemed allowed as priority claims. 

The statute provides as follows:

(b) After notice and a hearing, there shall be allowed,

administrative expenses. . .including-–

(1)(A) the actual, necessary costs and expenses of

preserving the estate including-–

(i) wages, salaries, and commissions for

services rendered after the commencement of

the case;

(emphasis added).

As noted in the seminal Ninth Circuit case on administrative

claims, Burlington Northern Railroad Co. v. Dant & Russell, Inc.

(In re Dant & Russell, Inc.), 853 F.2d 700, 706 (9th Cir. 1988):

The statute is explicit. Any claim for administrative

expenses and costs must be the actual and necessary costs

of preserving the estate for the benefit of its

creditors. [citations omitted] The terms “actual” and

“necessary” are construed narrowly so as “to keep fees

and administrative costs at a minimum.” [citations

omitted] An actual benefit must accrue to an estate.

[citations omitted] Additionally, keeping costs to a

minimum serves the overwhelming concern of the Code:

Preservation of the estate. [citations omitted] This

limitation is necessary to protect the limited assets of

the estate for the benefit of the unsecured interests and

is particularly important in a Chapter 11 case where a

partial liquidation is necessary to facilitate

reorganization.

 

Dant & Russell and the statute itself make it clear that an

administrative claimant must present its claim at a noticed

hearing and, like any other moving party, bear the burden of

persuasion by a preponderance of the evidence to meet the strict

standards set, keeping in mind the policy behind the allowance of

such claims. See Shin v. Altman (In re Desert Springs Fin. LLC),

No. CC-16-1374-KuFL, 2017 WL 1434403 (9th Cir. BAP Apr. 20, 2017)

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(citing Lundell, 223 F.3d at 1039 for the burden and

preponderance of the evidence standards).

Against this backdrop, Boruff asserts that the statute

itself has carved out wages and salaries as automatically

entitled to administrative expense priority, without more. He

cites no case law for this novel argument8, nor does he present a 

statutory construction analysis of the statute to arrive at that

conclusion. Rather, he merely asserts that since the statute

says wages and salaries for postpetition services are included in

the actual, necessary costs of preserving the estate, the value

of those services is measured by the terms of a prepetition

employment contract which was not assumed. No other court has

read § 503(b) in that manner, nor do we. The words alone do not

take us there, and the policy which requires that such expenses

be limited to those of actual benefit to the estate mandates

against such interpretation.

Beyond common sense, this assertion fails for additional

reasons, particularly when considering wages set by a prepetition

employment contract which has been rejected under § 365(a). 

First, if Congress had meant the rejecting debtor or trustee

would be bound to pay the contract rate until rejection, it would

have said so explicitly, as it did for rents due under an

unexpired lease. Section 365(d)(4) was added to the Code by the

Bankruptcy Amendments and Federal Judgeship Act of 1984, Pub. L.

8 None of the cases cited by Boruff nor by Debtors even

ponder this argument and we could find no authorities that

suggest that the question of “if” and “how much” postpetition

wages are entitled to priority treatment is simply answered by

the statute itself. 

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98-353, 98 Stat. 333 (1984). That bill required a trustee to

perform all the obligations of the debtor under a lease of

nonresidential real property at the time required in the lease

while the trustee decided whether to assume or reject the lease. 

130 Cong. Rec. S8, 994-95 (daily ed. June 29, 1984) There is no

parallel provision for wages and salaries under an operative

employment contract prior to assumption or rejection. If

Congress had intended such result, it would have said so

explicitly.

In addition, such reading would eviscerate a significant

advantage to a debtor in possession provided by § 365(a), which

is a breathing space to determine whether continuing to pay an

employee at a potentially onerous prepetition salary will be a

benefit to the estate. If a debtor is required to pay that

contract rate pending rejection even if the contract is not

eventually assumed, a rush to early rejection without the

attributes of a full analysis is likely to occur. Nothing

requires a debtor in possession to decide whether to assume or

reject prior to the confirmation date, and this section of the

Code cannot be read to mandate an earlier decision.

Having addressed this novel statutory argument, we now turn

to the issues with which the bankruptcy court tussled when ruling

on the administrative claim application: did Bildisco and its

progeny create a presumption that the contract rate is the

reasonable value of Boruff’s postpetition services which must be

rebutted by Debtors and if so, did Debtors rebut it, or is the

Contract accorded some lesser weight? The bankruptcy court

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found, equivocally,9 that if there was a presumption, Debtors had

rebutted it. We choose a cleaner view: although the rate for

payment under a rejected executory contract has some bearing on

the court’s discretionary determination of the benefit of

postpetition services to the estate, such rate is not presumptive

as the reasonable value, and a debtor in possession need not

rebut it. The burden falls upon the applicant to prove the

value.

We begin, as we should, with the Supreme Court’s decision in

Bildisco, then proceed to the subsequent cases, mostly at

bankruptcy court level, which have interpreted and applied that

ruling. In Bildisco, the Court held that a collective bargaining

agreement, like any other executory contract, was subject to

rejection by a debtor in possession and that the debtor in

possession did not commit an unfair labor practice when, before

the court-ordered rejection, it unilaterally modified or

terminated a provision of the agreement. In addressing an

argument of the NLRB about the effect of § 365(g)(1)10 the Court

stated that the rejection was a breach, creating an unsecured

9 “Rather, the court concludes that [Miller] has rebutted

any presumption that the pre-petition employment contract states

the reasonable value of Boruff’s post-petition services.” 

Memorandum at 20 (emphasis added).

10 Section 365(g)(1) provides “except as provided in

subsections (h)(2) and (i)(2) of this section, the rejection of

an executory contract or unexpired lease of the debtor

constitutes a breach of such contract or lease – (1) if such

contract or lease has not been assumed under this section or

under a plan confirmed under chapter 9, 11, 12, or 13 of this

title, immediately before the date of the filing of the

petition.”

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prepetition claim. However, “[i]f the debtor-in-possession

elects to continue to receive benefits from the other party to an

executory contract pending a decision to reject or assume the

contract, the debtor-in-possession is obligated to pay for the

reasonable value of those services. . . , which, depending on the

circumstances, may be what is specified in the contract.” 

Bildisco, 465 U.S. at 531. 

The Court was addressing the evidentiary impact of the terms

of such rejected contracts on the value of postpetition

performance in the broadest context, accounting for the entire

panoply of possible agreements. Such contracts would range from

employment contracts, leases of residential property, supplier or

executory sales contracts and others. The evidence which might

be presented to establish the reasonable value of that

performance could vary considerably, depending on what the

contract covered. The Court gave the trial courts unlimited

discretion to determine whether such postpetition services were 

“actual, necessary costs and expenses of preserving the estate”

and how to measure the value of such services in light of the

benefit to the estate. Recognizing the breadth of potential

evidence, the Court provided only a generic road map by saying

“depending on the circumstances” and “may be what is specified in

the contract.” The language used allowed a court tasked with

determining the value of goods delivered postpetition, where

there was no real debate about the level of performance under the

contract and where arms’ length parties had negotiated the value

of such goods, to use the contract for considerable evidentiary

weight in valuing the benefit to the estate. On the flip side,

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where the performance of an executory contract was more

subjective and measuring the postpetition benefit to the estate

more nuanced, such as a management employment contract, the trial

court could put the contract price in the mixer with other

evidence and accord it whatever weight it deserved. 

Not surprisingly, the subsequent case law, when applying the

Court’s direction in the context of a rejected employment

agreement, has almost uniformly ruled that although the contract

wages are probative, they are not binding, and courts have not

given them presumptive weight. The Ninth Circuit has not

addressed this precise issue in a published opinion,11 but the

analysis in a First Circuit opinion is compelling. In Mason v

Official Committee of Unsecured Creditors (In re FBI Distribution

Corp.), 330 F. 3d 36 (1st Cir. 2003), the court turned away a

former executive’s argument that the termination benefits

(severance pay) in her rejected prepetition employment and

retention agreement should be accorded administrative priority

status. Id. at 48. In arriving at this conclusion, the court

first looked to the widely accepted standard for awarding an

administrative expense: (1) it must have arisen from a

transaction with the debtor in possession postpetition and

(2) the consideration supporting the claim must have benefitted

the estate in some demonstrable way. Id. at 42, see Cramer v.

Mammoth Mart, Inc. (In re Mammoth Mart), 536 F.2d 950, 954 (1st

Cir. 1976). Then, recognizing that Mammoth Mart left open how

the terms of the prepetition contract affected the measure of

benefit to the estate, it looked to the broad language of

11 Or any unpublished one that we could locate.

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Bildisco for direction. Id. at 43-44. 

Following that direction, it explicitly rejected the

assertion that the prepetition contract controlled the amount of

such claim because of Bildisco’s ruling that the rejected

employment agreement was unenforceable against the debtor in

possession. At most, it found that the contract had probative,

not presumptive weight and was not dispositive on the value of

the benefit. Id. In so ruling, it noted, as we did above, that

Congress had specifically provided in § 365 that the contractual

rent in an unexpired lease of nonresidential real property was

determinative of the administrative claim before rejection but

had not so provided for any other executory contract, including

an employment contract. Id. at 44-45. It also opined that if it

accepted the executive’s argument that he was entitled to an

administrative claim for severance pay, it would be blessing an

“implicit assumption” of the executory contract, something which

§ 365 forbids. Id. at 45.

In a case factually similar to the case at hand, where the

former CEO and a board member had filed administrative priority

claims based on rejected prepetition contracts, In re Health

Diagnostic Laboratory, Inc., 557 B.R. 885 (Bankr. E.D. Va. 2016),

the court ruled that insofar as the claimants sought

administrative priority payment for postpetition services,12 they

12 The case was complex because it considered applications

for administrative expenses for (a) the prepetition value of the

contracts without providing postpetition services, (b) expenses

potentially arising from indemnification claims under the

contracts, (c) compensation for postpetition services, and 

(d) attorney’s fees. Only the compensation for postpetition

services is relevant to our ruling. 

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carried a “‘heavy burden of demonstrating that the [postpetition

services for which they seek compensation] provided an actual

benefit to the estate and that such costs and expenses were

necessary to preserve the value of the estate assets.’” Id. at

898 (quoting In re Bernard Technologies, Inc., 342 B.R. 174, 177

(Bankr. D. Del. 2006)). Such proof must be made by a

preponderance of the evidence. Id. The motion before the court

was brought on summary judgment by the Liquidating Trustee, so

the bankruptcy court found that factual disputes as to the

reasonable value of the services prevented a final merits ruling. 

However, in addressing the evidence which might be pertinent to

its final ruling, it gave no weight to the terms of the

prepetition contract and made no mention of Bildisco at all. The

only presumption applied by the court was that a debtor’s limited

resources should be distributed equally among its creditors such

that administrative priority status should be strictly construed. 

Id. at 893.

The bankruptcy court in In re Kaber Imaging, Inc., 262 B.R.

187 (Bankr. D.N.H. 2001), construed Bildisco to specifically hold

that a rejected contract could not be the proper measure of

value. It ruled that because the former chief financial officer’s

contract was not assumed by the debtor in possession, he was only

entitled to the quantum meruit value of his postpetition

services. Id. at 191. The court placed no presumptive weight on

the wages and vacation pay specified in the rejected contract. 

In addition, because the CFO’s executory contract was not

enforceable until assumed, that the debtor in possession had

delayed in making its decision to reject the contract until

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confirmation had no bearing on the effect of the contract on the

amount of the claim given administrative priority. Id. at 190.

Not citing Bildisco but following closely the First Circuit

ruling in FBI Distrib. Corp., the court in In re Bernard

Technologies, Inc., 342 B.R. 174 (Bankr. D. Del. 2006) found that

a debtor’s CEO was not entitled to his contract rate of pay

because his employment contract was never assumed, giving it only

“minimal probative value.” Id. at 178. The CEO was only

entitled to the reasonable value of his services to the extent

they resulted in an actual benefit to the estate. Id. at 179. 

The only Ninth Circuit case which gave presumptive weight to

a cost specified in a contract rejected under § 365 dealt with an

entirely different measure of monetary value: the monthly rental

value of farm equipment. Thompson v. IFG Leasing Co. (In re

Thompson), 788 F.2d 560 (9th Cir. 1986). The court ordered

remand because the bankruptcy court had made inadequate factual

findings on whether specific pieces of equipment were actually

used to the benefit of the estate. In so doing, the court stated

that the rent reserved in the lease was the presumptive evidence

of fair and reasonable value which could be rebutted. The court

of appeals then clarified that the bankruptcy court was not bound

by the terms of the lease:

When a lease is ultimately rejected but its interim

continuance was an actual and necessary cost and expense

of the estate, the allowable administrative expense is

valued not according to the terms of the lease, but cf.

Mathews v Butte Machinery Co.,286 F. 2d 801, 805-06 (9th

Cir. 1923); Dayton Hydraulic Co. v Felsenthall, 116 F.

961, 966, 969, (6th Cir. 1902), but under an objective

worth standard that measures the fair and reasonable

value of the lease.

Id. at 563.

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Despite the reference to a presumption in Thompson, we do

not believe the Ninth Circuit would extend such presumption to a

rejected employment contract because the measure of value of

management services as a benefit to the estate is substantially

different from calculating the rental value of equipment. An

objective marketplace would control the contracted lease prices

for the equipment whereas no such marketplace would exist for

management services. Under the broad guise of Bildisco, a

court’s discretion to value the benefit of management services

should be unfettered by any presumption.

Boruff cites two bankruptcy court cases, one published and

one unpublished, to support his argument that his employment

contract should be given presumptive weight in determining the

value of his postpetition service. Digging into these cases,

however, shows that neither actually helps his argument. In

Bryant Universal Roofing, 218 B.R. 948, chapter 7 debtor’s former

chairman of the board moved in pertinent part to compel payment

of his administrative claims for salary owing under his

employment agreement. In the context of a summary judgment

motion, after citing Dant & Russell for the accepted Ninth

Circuit standard that a claim for administrative priority is

construed narrowly against the applicant, the bankruptcy court

tussled with whether the services provided by movant should be

allowed as an administrative claim based on the contract or upon

the basis of quantum meruit. Id. at 955. After considering the

applicable language from Bildisco, and recognizing “[t]here is a

paucity of authority on the extent to which the terms of an

unassumed pre-petition employment contract govern the amount of

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compensation due to an employee as an administrative expense,”

the court decided to use the contract rate as “persuasive”, not

presumptive. Id. at 956. In other words, the court put that

evidence in the hopper along with other evidence to consider when

making the factual ruling on value which could not be determined

in a summary judgment motion. Therefore, Bryant Universal

Roofing at best demonstrates that the weight to be given to the

contract has not been determined in the Ninth Circuit.

In an unpublished decision, the bankruptcy court in the

District of Columbia ruled the prepetition employment contract

was “probative” on the issue of the value of postpetition

services, but not dispositive. In re Ellipso, Inc., No. 09-

00148, 2012 WL 827103, *4 (Bankr. D.D.C. 2012). However, the

court explicitly cited Kaber for its holding that the terms of

the contract do not determine the amount of the priority claim;

the reasonable value was determined by all the evidence before

the court. This case has limited value to support the

presumption Boruff would have us accord his Contract.

After this review of the relevant authorities, we are of the

firm conviction that the bankruptcy court here did not apply the

wrong legal standard in a dispositive manner. The bankruptcy

court equivocally found a presumption, but also found that

Debtors overcame it. We hold more definitively that the contract

price in a rejected employment contract is not presumptive of

value in the first place. Neither the statute nor relevant case

law supports the notion that the evidentiary weight of such terms

creates a burden shift requiring Debtors to rebut the contractual

wage. The Ninth Circuit in Dant & Russell ruled that such claims

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are subject to high scrutiny, consistent with preserving the

estate for distribution to general unsecured creditors. Lundell

and a plethora of subsequent authorities make it clear that the

ultimate burden of persuasion on any claim lies with the

claimant. Absent some mandate to shift that burden where the

claim is one for administrative priority - a highly scrutinized

claim which can only be paid if the services provided a

substantial benefit to the estate - we will not do so here. 

Bildisco says only that the bankruptcy court may consider the

terms of the contact, depending on the circumstances of the

particular case. At most, that statement gives the contract

probative, not presumptive, value.

Boruff did not challenge the bankruptcy court’s factual

findings, where it weighed the sparse and indefinite evidence of

the value of his postpetition services. We will not disturb its

conclusion that he should be compensated at a rate comparable to

what the other board members were paid. The court did not abuse

its discretion.

VI. CONCLUSION

The terms of a rejected prepetition employment contract are

not presumptive on the value of postpetition services, creating a

burden shift. Accordingly, we AFFIRM.

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