IN MATTER OF M S GRADING, INC. (Bankr.D.Neb. 6-25-2009)

CASE NO. BK02-81632-TJM.United States Bankruptcy Court, D. Nebraska.
June 25, 2009

MEMORANDUM
TIMOTHY MAHONEY, Chief Judge

Hearing was held in Omaha, Nebraska, on May 18, 2009, on Anderson Excavating Company’s request for payment of administrative expense (Fil. #865) and objections by the Contractors, Laborers, Teamsters Engineers Health, Welfare and Pension Plans (Fil. #871) and James Killips, the Chapter 7 Trustee (Fil. #872). T. Randall Wright appeared for the Trustee, Ken Wentz appeared for Anderson Excavating Company, and M. H. Weinberg appeared for the Plans. This memorandum contains findings of fact and conclusions of law required by Federal Rule of Bankruptcy Procedure 7052 and Federal Rule of Civil Procedure 52. This is a core proceeding as defined by 28 U.S.C. § 157(b)(2)(B).

In 2004 — post-petition — Anderson Excavating Company subcontracted the debtor, M S Grading, Inc., to perform some of the work on Anderson’s contract with the Metropolitan Utilities District (“MUD”) of Omaha for Phase I of the Platte West water treatment plant construction project. Because this was a public construction project, Anderson was required by state law to provide a bond to insure payment of all labor and material costs of the project. At the time, M S was party to and had assumed the responsibilities of certain collective bargaining agreements with the International Union of Operating Engineers Local 571 to pay administrative dues to the union and contribute to training, pension, and health and welfare plans on behalf of M S’s employees. During the project, M S became delinquent on those contributions and was ordered to comply with its statutory and contractual duty to make timely contributions. M S was unable to meet those obligations, so in February or March 2005, Anderson paid a total of $134,277.62 to the Plans and the training fund to settle their claim against its bond. This sum was in addition to the payments due from Anderson to M S under the parties’ contract. Anderson now seeks repayment of this amount as an administrative expense under 11 U.S.C. § 503(b) as an actual, necessary cost of preserving the bankruptcy estate. The parties concede that Anderson’s payment reduced the amount of the Plans’ claim against the bankruptcy estate.

The Plans and the Trustee object to the administrative expense request. The Trustee questions whether Anderson’s payment provided a direct benefit to the estate, pointing out that the payment was made after M S ceased business operations in January 2005. The Plans join in this argument.

In addition, the Plans argue that Anderson cannot be subrogated to the Plans’ claim because

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Anderson has not met the requirements of 11 U.S.C. § 509.[1]
Specifically, the Plans argue that Anderson cannot meet the five elements necessary to support a § 509 claim:

1) Payment must have been made by the subrogee to protect his own interest.
2) The subrogee must not have acted as a volunteer.
3) The debt paid must be one for which the subrogee was not primarily liable.
4) The entire debt must have been paid.
5) Subrogation must not work any injustice to the rights of others.

Feldhahn v. Feldhahn, 929 F.2d 1351, 1353-54 (8th Cir. 1991) (citing In re Leedy Mortgage Co., 111 B.R. 488, 492
(Bankr. E.D. Pa. 1990)).[2] While § 509 requires a claimant to establish that it is liable with the debtor on a claim of a creditor against the debtor and has paid that claim, some courts

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also apply the equitable subrogation factors set out inFeldhahn. See Photo Mech. Servs., Inc. v. E.I. DuPont de Nemours Co., Inc. (In re Photo Mech. Servs., Inc., 179 B.R. 604, 618-20
(Bankr. D. Minn. 1995) and cases cited therein.

Regardless of whether equitable subrogation is appropriate, it is clear from the statutory language of § 509 that Anderson is a co-debtor entitled to subrogation, although its claim ultimately should be subordinated to the Plans’ claim. Moreover, as explained below, Anderson’s claim is not entitled to administrative priority.

In § 509(a), “the term `liable with’ means that `the parties are liable to the same creditor at the same time on the same debt. The word `with’ has been defined as sometimes equivalent to the words `in addition to.'” Photo Mech. Servs., Inc., 179 B.R. at 619 (quoting Sun Co. v. Slamans (In re Slamans), 148 B.R. 623, 625 (Bankr. N.D. Okla. 1992), aff’d, 175 B.R. 762, 764
(N.D. Okla. 1994)).

As the employer, M S obviously was primarily responsible for payment of its employees’ wages and benefits. Because M S was a subcontractor on a public project, state law required the prime contractor to obtain a bond for the cost of labor and material for the project. Neb. Rev. Stat. § 52-118.[3] That payment bond protects the employees of a subcontractor, even though they do not

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have a direct contractual relationship with the prime contractor. Neb. Rev. Stat. § 52-118.01.[4] Here,

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the Plans gave timely notice to Anderson and its surety company that the Plans claimed $197,008.80 in unpaid contributions related to the MUD project. Accordingly, Anderson is liable on the debt with M S and has met the first element of § 509(a).

The second element of § 509(a) requires that Anderson have paid the claim, which it did. As noted, the Plans claimed $197,008.80 from Anderson and/or its surety. Anderson paid $134,277.62 in full settlement of the claim(s), which resulted in releases of any and all claims by the Plans against Anderson, the surety company, and MUD. Therefore, unless subsections (b) or (c) of § 509 provide otherwise, Anderson is subrogated to the rights of the Plans to the extent of Anderson’s $134,277.62 payment.

Section 509(b)(1) establishes that Anderson would not be subrogated to the Plans’ rights to the extent Anderson’s claim was allowed under § 502, disallowed under § 502(e), or subordinated under § 510. It has not been. Section 509(b)(2) does not allow the subrogation of a claim if the claimant received the consideration for its payment of the claim. This provision excludes those who are primarily liable on the debt from obtaining subrogation because they received consideration for paying the debt. Fibreboard Corp. v. Celotex. Corp.(In re Celotex Corp.), 472 F.3d 1318, 1321-22 (11th Cir. 2006). When Anderson paid the Plans’ claim, it had already paid M S in full for its work on the MUD project. The payment of the Plans’ claim was over and above the amount due to M S on the subcontract and was made to prevent litigation on the bond. Therefore, § 509(b) does not preclude subrogation.

However, § 509(c) requires that a subrogated claim is nevertheless subordinated to the primary creditor’s claim until the primary creditor is paid in full. Aetna Cas. Sur. Co. v.LTV Steel Co. (In re Chateaugay Corp.), 94 F.3d 772, 779 (2d Cir. 1996). Therefore, under the plain language of the statute, Anderson will not receive anything on its claim unless and until the Plans’ claim is paid in full.

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To better its position in the repayment scheme, Anderson argues that its claim should have administrative priority under § 503(b)(1)(A), which requires a showing that the claim arose from a transaction with the estate and tangibly benefitted the estate. AgriProcessors, Inc. v. Iowa Quality Beef Supply Network(In re Tama Beef Packing, Inc.), 290 B.R. 90, 96 (B.A.P. 8th Cir. 2003). Because the allowance of administrative claims often diminishes the recovery of other creditors and claimants, § 503(b) is narrowly construed. Id. (citing Manufacturers HanoverTrust Co. v. Bartsh (In re Flight Transp. Corp. Sec. Litig.), 874 F.2d 576, 581 (8th Cir. 1989)). The party seeking an administrative expense must show that the expenditures benefit the estate as a whole rather than the individual creditor.Fruehauf Corp. v. Jartran, Inc. (In re Jartran, Inc)., 886 F.2d 859, 871 (7th Cir. 1989). “Benefit to the estate” can include “the larger objective . . . of operating the debtor’s business with a view to rehabilitating it.” Reading Co. v. Brown, 391 U.S. 471, 475 (1968).

Here, Anderson made the payments at issue in February or March 2005. M S had ceased business operations in January 2005, and was no longer involved in the MUD project. Anderson had previously paid M S in full under the subcontract; the payments to the Plans were simply to forestall litigation on the bond. Anderson did not make the payment in an effort to help M S stay in business. The payment merely reduced the amount of the Plans’ ultimate claim against the bankruptcy estate, substituting Anderson for a portion of that claim, but did not preserve the estate in the sense contemplated by § 503(b). Therefore, Anderson is not entitled to an administrative expense priority. It shall be treated as a general unsecured claimant for distribution purposes.

A separate order will be entered denying Anderson’s motion.

Notice given by the Court to:

*Ken Wentz
T. Randall Wright
M. H. Weinberg
United States Trustee

Movant (*) is responsible for giving notice to other parties if required by rule or statute.

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ORDER
Hearing was held in Omaha, Nebraska, on May 18, 2009, on Anderson Excavating Company’s request for payment of administrative expense (Fil. #865) and objections by the Contractors, Laborers, Teamsters Engineers Health, Welfare and Pension Plans (Fil. #871) and James Killips, the Chapter 7 Trustee (Fil. #872). T. Randall Wright appeared for the Trustee, Ken Wentz appeared for Anderson Excavating Company, and M. H. Weinberg appeared for the Plans.

IT IS ORDERED: For the reasons stated in the Memorandum of today’s date, Anderson Excavating Company’s request for payment of administrative expense (Fil. #865) is denied.

Notice given by the Court to:

*Ken Wentz
T. Randall Wright
M. H. Weinberg
United States Trustee

Movant (*) is responsible for giving notice to other parties if required by rule or statute.

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