
USCA1 Opinion

	




                            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                                          I                                      BACKGROUND                                      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                                          II                                      DISCUSSION                                      DISCUSSION                                      __________          "Administrative Expense" Priority          "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                                                     7
