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In re Cook Inlet Energy LLC

United States Bankruptcy Appellate Panel of the Ninth Circuit

April 24, 2018

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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