Swope v. Myers Coach Lines, Inc. (In re Lincoln Coach Lines, Inc.)

Citations: 271 B.R. 61; 2001 Bankr. LEXIS 1678; 38 Bankr. Ct. Dec. (CRR) 230Docket: Bankruptcy No. 99-28044-BM; Adversary No. 01-2065-BM

Court: United States Bankruptcy Court, W.D. Pennsylvania; December 21, 2001; Us Bankruptcy; United States Bankruptcy Court

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The chapter 7 trustee seeks to recover $25,000 from Myers Coach Lines, Inc. for an agreement to purchase the debtor's operating authority for bus service between Pittsburgh and Grove City, Pennsylvania. The defendant argues that the agreement, made during the chapter 11 phase, is unenforceable due to the trustee's failure to obtain court approval for the sale. The court will grant judgment for the trustee in the amount of $25,000.

Lincoln Coach Lines, the debtor, provided scheduled bus service under authorization from the Pennsylvania Public Utility Commission (PUC) and was the sole provider on this route from 1984 until August 2000. The debtor filed for chapter 11 bankruptcy on November 29, 1999, and operated as a debtor-in-possession. The operating authority was not listed as an asset in the bankruptcy schedules, though it was valuable.

In August 2000, realizing it could no longer operate due to an inability to pay an insurance premium, the debtor's president, Dennis Long, sought buyers for the operating authority. Myers Coach Lines expressed interest, offering $25,000, which Long accepted. They executed a letter agreement on August 18, 2000, without consulting legal counsel. The debtor ceased operations on August 20, 2000, and, despite lacking PUC authority, Myers began operating the route the next day based on the letter agreement. After consulting legal counsel, Myers was advised that the letter agreement required bankruptcy court approval to be enforceable. Consequently, Myers sought its own operating authority instead of pursuing the transfer of the debtor's operating authority.

On August 25, 2000, the defendant's counsel submitted an application to the Pennsylvania Public Utility Commission (PUC) for emergency authority to operate a bus route, which was granted that same day via an ex parte order by the PUC’s chairman. Six days later, the entire PUC board ratified this emergency order without prior notice or hearing. On August 28, 2000, the debtor filed for conversion to a Chapter 7 bankruptcy proceeding, which was granted on September 8, 2000, and the Chapter 7 trustee was appointed on September 11, 2000. On the same day, the defendant applied for permanent authority to operate the bus route, with notice published in the Pennsylvania Bulletin on September 30, 2000. Additionally, on September 13, 2000, the defendant applied to the Pennsylvania Department of Transportation (PENNDOT) for an assistance grant for the route.

The Chapter 7 trustee learned about the defendant's operating authority and an agreement from August 18, 2000, only on October 6, 2000, and noted that this authority was not listed as an asset in the debtor's bankruptcy schedules. PENNDOT informed the defendant on October 24, 2000, that the grant would remain effective unless the bankruptcy court approved a transfer of the debtor's operating authority to another party. The defendant did not inform the debtor, the trustee, or the bankruptcy court of this determination.

The trustee, busy managing the debtor's affairs, did not immediately address the August 18 agreement with the defendant. As the sale of the debtor's vehicles approached in late October 2000, the trustee communicated with David Myers, suggesting she would seek court approval for the sale of the operating authority. Myers gave the impression that the defendant was still interested in acquiring this authority, failing to disclose its own applications for operating authority and assistance.

Subsequently, the PUC initiated proceedings on November 8, 2000, to revoke the debtor's operating authority due to failure to maintain liability insurance, but the trustee was unaware of this action. After unsuccessful attempts to contact Myers, the trustee sent him a letter on November 17, 2000, requesting cooperation for court approval of the authority transfer. She expressed urgency, stating that if she did not hear from him by November 30, she would seek another buyer. Myers, realizing the potential risk of the trustee discovering the defendant's actions, did not respond immediately. On the same day, the defendant entered into an agreement with PENNDOT for operating assistance for the route.

A grant of $88,403 was awarded for the period from August 21, 2000, to June 30, 2001. On November 30, 2000, the Pennsylvania Public Utility Commission (PUC) approved the defendant's application for permanent authority to operate the Pittsburgh-to-Grove City bus route, which the defendant had already begun operating. On the same day, defendant’s counsel informed the chapter 7 trustee that the defendant was no longer interested in purchasing the debtor’s operating authority for the same route, despite having recently received its own operating authority. The chapter 7 trustee had no prior knowledge of the defendant's application for this authority. Subsequently, the PUC revoked the debtor's operating authority on December 15, 2000, and the trustee did not seek to contest this order. On January 23, 2001, the chapter 7 trustee demanded $25,000 from the defendant, as per an agreement dated August 18, 2000, for the debtor's operating authority, but the defendant failed to respond or make payment. The trustee initiated an adversary action on February 26, 2001, to recover the agreed amount to benefit the debtor’s creditors. The case was tried on October 18, 2001. The court noted that the sale of operating authority was not typical for common carriers and required bankruptcy court approval, which was not obtained since the trustee did not request a hearing. Consequently, the transaction was deemed ineffective, leading the trustee to pursue action against the defendant for taking advantage of the situation, negatively impacting the estate's creditors.

The chapter 7 trustee seeks recovery from the defendant based on two theories: unjust enrichment and breach of contract regarding an agreement dated August 18, 2000. The trustee argues that the defendant was unjustly enriched by acquiring a valuable estate asset without compensating the bankruptcy estate, as the transaction lacked a hearing and court approval. Additionally, the trustee claims that the debtor was ready to perform under the agreement, while the defendant refused, thus breaching the contract and failing to pay the stipulated $25,000 purchase price.

The defendant contends it was not obligated to perform due to the lack of court approval, denying any deception of the trustee regarding its intentions to consummate the agreement. Instead, the defendant asserts it had no duty to inform the trustee about its attempts to obtain operating authority.

Unjust enrichment, an equitable doctrine, requires a showing that the defendant wrongfully secured or passively received a benefit that it would be inequitable to retain. The elements of unjust enrichment include: 1) a benefit conferred by the plaintiff to the defendant; 2) retention of that benefit by the defendant; and 3) inequity in the defendant retaining the benefit without compensation. The plaintiff does not need to demonstrate the defendant's knowledge or wrongful intent.

The trustee's position underscores that the defendant took unfair advantage of the debtor's situation, notably when it began operating a route based on the debtor's authority before acquiring its own operating authority from the PUC. The defendant's actions involved exploiting the debtor’s operational authority without payment, benefiting from the debtor's prior knowledge of its operational discontinuation. The case illustrates the implications of timing and knowledge in the context of unjust enrichment.

Defendant's actions could potentially exclude other carriers from a route and deprive the debtor's creditors of a valuable asset, making it unfair for the defendant to benefit without compensating for the agreed value. Although the immediate recoverable amount for the chapter 7 trustee appears minimal, the negotiated value of the timing, knowledge, and authority involved is accepted at $25,000. Even if the trustee’s unjust enrichment claim fails, the outcome remains unchanged. The chapter 7 trustee suggests that the defendant is equitably estopped from claiming the agreement is unenforceable due to the trustee's failure to seek court approval. Equitable estoppel relies on principles of fairness and necessitates that one party's promise, whether explicit or implied, induces another party to rely on it to their detriment. It requires proof of two elements: inducement and justifiable reliance. The defendant's prior representations led the trustee to believe that the agreement would be honored, preventing the trustee from seeking alternative buyers in time. Evidence indicates that the defendant, through David Myers, misled the trustee about their intentions regarding the agreement while having already sought their own operating authority from the PUC.

Myers misled the chapter 7 trustee to prevent her from seeking other buyers for the debtor's operating authority, anticipating that once the defendant secured its own operating authority, no one would want to purchase the debtor’s authority. The route had only one operator, the debtor, for sixteen years, indicating that multiple operators were not viable. PENNDOT's substantial operating assistance grant further suggested the route's value, which could have produced proceeds to pay creditors. After learning on December 1, 2000, that the defendant had obtained its authority, the trustee refrained from pursuing other purchasers, believing it would be futile. The trustee’s reliance on Myers' misleading representations was justifiable since she was unaware of the debtor's operating authority and the agreement with the defendant until October 6, 2000. The publication in the Pennsylvania Bulletin did not diminish the trustee’s reliance, as she had no knowledge of the authority, and neither she nor her law firm had access to the Bulletin. The defendant acted on advice from its experienced counsel, who was confident in outmaneuvering less knowledgeable opponents before the PUC, contributing to the trustee's inability to recognize the misrepresentation regarding the defendant’s interest in purchasing the debtor's authority.

The chapter 7 trustee relied on the defendant's false representations, which led to harm to the debtor's bankruptcy estate. This reliance caused the trustee to forgo pursuing other potential buyers while believing the defendant was genuinely interested in finalizing the agreement from August 18, 2000. The court found no fault with the trustee’s inaction after discovering that the defendant had secured its own operating authority, as it was likely that only one operator could profitably serve the route in question. Further efforts to seek court approval for a sale to another buyer would likely have been futile, and the court indicated it would have criticized the trustee had she attempted such a motion. The defendant is equitably estopped from claiming that the August 18, 2000 agreement is unenforceable due to the trustee's failure to seek court approval. Despite this failure, the defendant breached the agreement by refusing to purchase the debtor’s operating authority for $25,000 based on its attorney's advice. The court determined that $25,000, the agreed purchase price, is the proper measure of damages for the breach. A judgment will be entered in favor of the chapter 7 trustee for this amount against the defendant.