IN RE: FP LABEL COMPANY, INC., a California corporation, Debtor.

No. 03-82410.United States Bankruptcy Court, C.D. Illinois.
August 25, 2004

OPINION
THOMAS PERKINS, Bankruptcy Judge

Before the Court is the application filed by Printstaff, LLC (PRINTSTAFF), for an administrative claim and the objection filed by the Debtor, FP Label Company, Inc. (“FP LABEL” will be used to refer to prepetition actions whereas “DEBTOR” will be used to refer to postpetition activity).

FACTUAL BACKGROUND

PRINTSTAFF’S application for an administrative claim arises out of a prepetition contract with FP LABEL. PRINTSTAFF, a printing industry employment agency, entered into a contract with FP LABEL on March 5, 2001, pursuant to which PRINTSTAFF would place employees with FP LABEL on a temporary basis. Although the copy of the contract filed with the Court is illegible, the parties do not dispute that it calls for the payment of a commission in the amount of 30% of the worker’s anticipated annual compensation upon the hiring of a temporary employee placed by PRINTSTAFF.

The chronology of events is as follows. On March 12, 2003, Aaron Baugh was placed with FP LABEL as a temporary employee. On April 15, 2003, FP LABEL ceased paying PRINTSTAFF. According to PRINTSTAFF, Baugh informed it of FP LABEL’S impending bankruptcy on May 10, 2003, inquiring whether he could continue on as a PRINTSTAFF employee, and notifying PRINTSTAFF that if he could not, he would seek employment with

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the DEBTOR. According to the DEBTOR, on that date Baugh advised PRINTSTAFF that he was resigning his position. FP LABEL filed its Chapter 11 petition on May 13, 2003. On May 15, 2003, the DEBTOR informed PRINTSTAFF that it would hire Baugh on a permanent basis. The DEBTOR ceased its operations on July 18, 2003, upon the closing of the sale to RM-FP. PRINTSTAFF filed its application for an administrative claim in the amount of $14,000.00, representing 30% of Baugh’s anticipated salary.[1] The DEBTOR objected to the claim and after hearing argument, the Court took the matter under advisement. The case was converted to Chapter 7 on January 13, 2004. Gary T. Rafool was appointed the Chapter 7 Trustee (TRUSTEE) and has adopted the DEBTOR’S arguments in opposition to the claim.

ANALYSIS

Administrative expenses are paid “off the top” and have priority over all other claims to assets of the bankruptcy estate. 11 U.S.C. § 507(a)(1). Section 503(b)(1)(A) of the Bankruptcy Code provides that administrative expenses include “the actual, necessary costs and expenses of preserving the estate, including wages, salaries, or commissions for services rendered after the commencement of the case. . . .”11 U.S.C. § 503(b)(1)(A). Because priority for administrative claims departs from the Bankruptcy Code’s policy of equality of distribution, the party seeking administrative priority bears the burden of proving entitlement and the priority is narrowly construed. In re FBI Distribution Corp., 330 F.3d 36 (1st Cir. 2003). In order for a claim to be entitled to treatment as an administrative expense, the claimant must establish that the debt (1) arises out of a transaction with the debtor-in-possession,

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and (2) benefitted the operation of the debtor’s business Matter of Jartran, Inc., 732 F.2d 584 (7th Cir. 1984); In re Pre-Press Graphics Co., Inc., 300 B.R. 902 (Bankr.N.D. Ill. 2003).

The objection filed by the DEBTOR to the claim for administrative expense is threefold: (1) the employment agreement is an executory contract which was not assumed by the DEBTOR; (2) the claimed amount does not fall within any category of Section 503; and (3) the claimed amount does not reflect the value of any alleged contribution by PRINTSTAFF.

The parties agree that the agreement between PRINTSTAFF and FP LABEL is an executory contract subject to assumption or rejection under Section 365 of the Bankruptcy Code. The agreement was never assumed by the DEBTOR and was ultimately rejected as of July 18, 2003. A postpetition rejection is treated as a breach of the contract, which breach is deemed to have occurred immediately before the date of the filing of the petition. 11 U.S.C. § 365(g)(1). The nondebtor party has a prepetition, general unsecured claim for breach of contract damages, that is not entitled to administrative priority. 11 U.S.C. § 502(g); In re FBI Distribution Corp., 330 F.3d 36, 42 (1st Cir. 2003). As the DEBTOR recognizes, however, that fact is not determinative of PRINTSTAFF’S administrative claim.

Rejection of an executory contract may also give rise to an administrative claim for the reasonable value of services furnished during the postpetition period. In re Pre-Press Graphics Co., Inc., 287 B.R. 726 (Bankr.N.D.Ill. 2003). As previously noted, in order to qualify, the debt must both arise out of a transaction with the debtor-in-possession and benefit the estate. PRINTSTAFF bases its administrative claim upon the fact that when

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Baugh was hired by the DEBTOR, Baugh’s contract with PRINTSTAFF had not been terminated. PRINTSTAFF relies upon Baugh’s continued services throughout the pendency of the Chapter 11 proceeding, characterizing his employment as an “actual and necessary cost” of preserving the estate.

Notwithstanding its attempt to bootstrap its continued relationship with Baugh into one with the DEBTOR, PRINTSTAFF’S claim meets neither of the requisite prongs. PRINTSTAFF did not enter into a contract with the DEBTOR. The DEBTOR’S employment relationship with Baugh was direct and unconstrained by the contract between PRINTSTAFF and FP LABEL. Moreover, as the DEBTOR points out, PRINTSTAFF’S claim is not based on any services it furnished to the DEBTOR.

As a supplier of employees specifically for the printing industry, the value of PRINTSTAFF’S services, in large part, is measured by the specialized knowledge and skill of the employees that it refers to employers. As a relatively well-compensated employee, Baugh was a highly skilled individual of particular value to FP LABEL. The most significant aspect of PRINTSTAFF’S service to FP LABEL was the initial identification and referral of Baugh to the company, which occurred prepetition. Thereafter, PRINTSTAFF did nothing to enhance Baugh’s value to FP LABEL. The commission payable to PRINTSTAFF when Baugh was hired as an employee of the DEBTOR was, in fact, in compensation for PRINTSTAFF’S initial service of finding Baugh and referring him to FP LABEL. The commission was, in reality, a finder’s fee attributable to the work performed by PRINTSTAFF prepetition.
The fact that Baugh was not actually hired by FP LABEL until after its bankruptcy filing is merely fortuitous, and the fact that the commission came due

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then, is in no way the result of any postpetition services rendered by PRINTSTAFF to the DEBTOR. The compensation due on account of Baugh’s postpetition services (the only value provided to the estate) was fully paid by the DEBTOR, to Baugh.

Baugh may have breached his contract with PRINTSTAFF by jumping ship to work for the DEBTOR. Right or wrong, after the filing of the petition, Baugh was placed on the DEBTOR’S payroll and received compensation for the value of his services. The value provided by Baugh to the DEBTOR derived from a postpetition employment agreement with Baugh. There was no postpetition transaction between the DEBTOR and PRINTSTAFF, and PRINTSTAFF provided no postpetition value to the DEBTOR. Consequently, PRINTSTAFF is not entitled to an administrative claim.

This Opinion constitutes this Court’s findings of fact and conclusions of law in accordance with Federal Rule of Bankruptcy Procedure 7052. A separate Order will be entered.

[1] PRINTSTAFF, in its reply brief, reported that Baugh’s compensation was $47.00 per hour for an eight hour day, totaling $376.00 per day. PRINTSTAFF also disclosed that its hourly mark-up for employees like Baugh is $14.30.

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