United States Bankruptcy Appellate Panel of the Ninth Circuit
In re: COOK INLET ENERGY LLC, Debtor.
v.
COOK INLET ENERGY LLC; U.S. TRUSTEE; and CHARLES GEBHARDT, Trustee for the Miller Energy Creditors Liquidation Trust, Appellees. SCOTT M. BORUFF, Appellant,
Argued
and Submitted on March 22, 2018 at Pasadena, California
Appeal
from the United States Bankruptcy Court for the District of
Alaska Honorable Gary A. Spraker, Chief Bankruptcy Judge,
Presiding
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.
OPINION
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
11[1]
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
HISTORY[2]
On
August 6, 2015, an involuntary chapter 11 petition was filed
against Cook Inlet Energy, LLC (Cook), a subsidiary of
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 paid him $795,
000 a year or $66, 250 per month.[3] 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 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 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, [4] 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
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
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,
[5]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 post-petition services."[6] 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.
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
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