Court Opinion

ID: 194780
Source: CourtListenerOpinion
Date Created: 2011-02-07 02:24:57+00
Date Added: 2024-06-11T09:44:05.424764
License: Public Domain

UNITED STATES COURT OF APPEALS
                      FOR THE FIRST CIRCUIT
                                           
No. 92-2369
                   IN RE LA ELECTRONICA, INC.,

                              Debtor

                                     

                      LA ELECTRONICA, INC.,

                            Appellee,

                                v.

                         OLGA CAPO-ROMAN,

                            Appellant.

                                           

           APPEAL FROM THE UNITED STATES DISTRICT COURT

                 FOR THE DISTRICT OF PUERTO RICO

          [Hon. Hector M. Laffitte, U.S. District Judge]
                                                       

                                           

                              Before

                       Breyer, Chief Judge,
                                          

                        Torruella and Cyr,

                         Circuit Judges.
                                       
                                           

   Fernando Van Derdys  with whom Jos  A. Acosta  Grubb and Fiddler,
                                                                    
Gonz lez & Rodr guez were on brief for appellant.
                  
   William M. Vidal  Carvajal with whom Antonio  I. Hernandez-Rodri-
                                                                    
guez and Hernandez & Vidal were on brief for appellee.
                        

                                           

                          June 11, 1993
                                           

          CYR, Circuit Judge.   Olga Capo Roman  ("Capo"), former
          CYR, Circuit Judge.
                            

vice  president of  appellee  La Electronica,  Inc. (hereinafter:

"Electronica" or  "chapter  11  debtor"),  appeals  the  district

court's  reversal of a bankruptcy court order according "adminis-

trative  expense" priority to certain alimony and support obliga-

tions due Capo by her former husband, Reinaldo Betancourt Veraits

("Betancourt").  We affirm.

                                I

                            BACKGROUND
                                      

          Capo filed  for divorce  from Betancourt  in 1987.   At

that time, Betancourt was the  president and sole shareholder  of

Electronica, and Capo served as its unsalaried vice-president and

general   manager.    On  July 22,  1988,  Betancourt,  Capo  and

Electronica entered  into an  unusual agreement  ("Support Agree-

ment")  whereby  Electronica  assumed  joint  liability  for  the

alimony and support payments Betancourt would be required to make

to Capo under their divorce decree.  As consideration for Electr-

onica's assumption of liability under the Support Agreement, Capo

agreed to resign her positions with Electronica.1

                    

     1The bankruptcy court  found that the Support  Agreement was
"entered into  in arms-length negotiations, . . ."  and "executed
with [a] clear and avowed  corporate purpose . . . to sever[] all
corporate  and managerial connections  of Mrs. Capo  with debtor,
thus  avoiding the  tense situations  that  could possibly  arise
                                                                 
after the divorce of the sole stockholder of the company from his
wife  and  corporate officer  [sic]  and General  Manager  of the
company for many years."  (Emphasis  added.)  As we affirm on  an
alternate ground relied  upon by the district court,  we need not

                                2

          On June 28, 1989, Electronica filed a voluntary chapter

11  petition  and  discontinued its  payments  under  the Support

Agreement.2    Approximately a  year  later, in  June  1990, Capo

requested  that accrued alimony and support obligations under the

Support Agreement be allowed as priority  "administrative expens-

es" of the chapter 11 estate.  See Bankruptcy Code    503(a),(b)-
                                  

(1)(A);  11 U.S.C.    503(a),(b)(1)(A).  Electronica  opposed the

request.

          On November 29, 1990, the  bankruptcy court confirmed a

chapter 11 reorganization  plan which provided, inter  alia, that
                                                           

"[a]ny  executory  contract  not  specifically  rejected  on  the

confirmation of  the Plan  shall be deemed  assumed."   The court

contemporaneously  allowed  Capo's  request  to  recover  accrued

support  and alimony  payments under  the Support Agreement.   It

ruled that the  Support Agreement, as  an executory contract  not

previously rejected, was  assumed in accordance with  the express

terms of the reorganization plan.  Based on its finding that  the

Support Agreement provided a continuing benefit to "the operation

of the corporation . . . [by] avoiding internal struggles between

two  competing  officers[,]  which could  be  detrimental  to the

[debtor's continued] operation,"  the bankruptcy court  concluded

that the accrued support and alimony payments were "necessary for

                    

determine whether Capo's resignation  constituted valid consider-
ation for  Electronica's assumption  of Betancourt's  obligations
under the Support Agreement.  

     2The  record does not  indicate whether Betancourt continued
to make payments under the divorce decree.  

                                3

[the] preservation" of  the chapter 11 estate,  hence entitled to

priority treatment  as costs  of administration  under Bankruptcy

Code   503(b)(1)(A).   Electronica appealed.  The  district court

reversed  on the  ground that  the Support  Agreement was  not an

executory  contract and, alternatively,  that the marital support

and alimony payments  due Capo under  the Support Agreement  were

not  "actual,  necessary  costs and  expenses  of  preserving the

estate," within the meaning of Bankruptcy Code   503(b)(1)(A).

                                II

                            DISCUSSION
                                      

"Administrative Expense" Priority
                                 

          In the  circumstances of the present case,  we need not

concern  ourselves  with  whether the  Support  Agreement  was an

"executory contract,"3 or whether Capo's prepetition  resignation

                    

     3Subject to  certain exceptions  not presently  relevant, an
executory contract or unexpired lease may be  assumed or rejected
pursuant  to a confirmed chapter 11 plan.   See 11 U.S.C.    365,
                                               
1123(b).  Although  the Bankruptcy Code does not  define the term
"executory  contract," most courts adopt the position advanced by
Professor Vern  Countryman, defining  an "executory  contract" as
one "under  which the obligation  [of] both the bankrupt  and the
other  party to  the contract  are  so far  unperformed that  the
failure  of either  to complete  performance  would constitute  a
material breach excusing the performance  of the other."  Vern A.
Countryman, Executory Contracts in Bankruptcy, Pt. I, 57 Minn. L.
                                                    
Rev. 439, 460 (1973).  A few courts, treating Professor Countrym-
an's definition as "helpful  but not controlling," hold that  the
determination whether a  contract is "executory" requires  a more
"functional"  approach,  "with  an  eye  towards  furthering  the
policies  of the  Bankruptcy Code."    See In  re Richmond  Metal
                                                                 
Finishers, Inc., 34 B.R. 521  (Bkrtcy. E.D. Va. 1983), rev'd., 38
                                                             
B.R.  341 (E.D. Va. 1984), rev'd., 756 F.2d 1043 (4th Cir. 1985),
                                 
cert. denied, 475 U.S. 1057 (1986);  see also In re Magness,  972
                                                           
F.2d  689, 694 (6th  Cir. 1992); In  re Jolly, 574  F.2d 349 (6th
                                             

                                4

as  Electronica's unsalaried  vice-president and  general manager

constituted valid  consideration for Electronica's  assumption of
                                

Betancourt's obligations under the divorce decree.  Even assuming

sufficient consideration for the Support  Agreement, Capo utterly

failed to carry her burden of proof on the subsidiary proposition

that  the  chapter  11 debtor's  postpetition  assumption  of its

president's  financial  obligations   under  the  divorce  decree

constituted  an "actual, necessary  cost[] and expense[]  of pre-

serving the  [chapter 11] estate," within the  meaning of section
                        

503(b)(1)(A); see also In re  Hemingway Transport, Inc., 954 F.2d
                                                       

1,  5 (1st  Cir. 1992)  ("the  burden of  proving entitlement  to

priority payment  as an administrative  expense . . .  rests with

the party  requesting it"); In  re CIS  Corp., 142 B.R.  640, 642
                                             

(S.D.N.Y.  1992) (  503(b)(1)(A)  claimant has burden  of proving

that its services provided an "actual,  necessary" benefit to the

debtor).            As we have  long recognized, "the traditional

presumption favoring  ratable distribution  among all  holders of

unsecured claims counsels  strict construction of the  Bankruptcy

Code  provisions  governing  requests  for  priority  payment  of

administrative  expenses."   Hemingway Trans.,  954  F.2d at  4-5
                                             

(citing cases).  In order to qualify for "administrative expense"

priority under  Bankruptcy Code    503(b)(1)(A), therefore,  "the

consideration supporting  the claimant's  right to  payment [must

                    

Cir.), cert. denied, 439 U.S. 929 (1978); In re Booth, 19 B.R. 53
                                                     
(Bankr. D. Utah 1982).  See generally David G. Epstein, et al., 1
                                     
Bankruptcy   5-4(b) (1992)  (surveying case law on  both sides of
          
issue).

                                5

be] supplied to and beneficial to the debtor-in-possession in the

operation of the  business."  In re Mammoth Mart,  Inc., 536 F.2d
                                                       

950,  954 (1976) (construing Bankruptcy  Act forerunner to Code  

503(b)).  

          We can  discern no economic "benefit" to the chapter 11
                                                                 

estate from its assumption of an  "executory contract" to compen-
      

sate  Capo for not  performing the unsalaried  corporate services
                  

she previously performed for Electronica.  To the extent Electro-

nica derived economic benefit from Capo's resignation    i.e., in
                                                             

the  form of  diminished  risk of  "disruption"  to its  business

operations    law and logic suggest that the benefit derived pre-
                                                                 

petition, viz,  at the  time her  resignation was submitted,  not
                                                           

during the postpetition  stewardship of the debtor-in-possession.

Once  Capo resigned, any  presumed risk of  internal "disruption"

ceased.   The same result  would follow if the  Support Agreement

somehow  were considered analogous to a severance agreement.  Id.
                                                                 

at 955 (whether debtor's severance  pay claim based on unrejected

contract is entitled to administrative priority depends on extent

to  which "consideration supporting the claim was supplied during
                                                                 

the reorganization.") (emphasis added). 
                  

          As  the district court correctly reversed the allowance

of  appellant's  request  for "administrative  expense"  priority

under Bankruptcy Code   503(b)(1)(A), we affirm.4

          Affirmed.  
                  

                    

     4Our disallowance  of Capo's    503(a),(b)(1)(A) request  is
not intended to foreclose its  reconsideration as a timely infor-
                                              
mal proof of unsecured claim.  

                                6

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