Spire Consulting Group, LLC v. Fleming Steel Co. (In re Fleming Steel Co.)

Citations: 482 B.R. 765; 68 Collier Bankr. Cas. 2d 990; 2012 Bankr. LEXIS 5322; 57 Bankr. Ct. Dec. (CRR) 61Docket: No. 11-22292-JKF

Court: United States Bankruptcy Court, W.D. Pennsylvania; November 14, 2012; Us Bankruptcy; United States Bankruptcy Court

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Spire Consulting Group, LLC's motion for allowance of administrative expenses was denied by Bankruptcy Judge Judith K. Fitzgerald. Spire had previously asserted a secured claim against First Sealord Surety, Inc. based on quantum meruit for services rendered, but the court had sustained the Debtor's objection to this claim, determining Spire was not a prepetition creditor, lacked a contractual relationship with the Debtor, and had no lien or security interest. 

The court requested Spire to provide evidence regarding whether the Debtor could be considered a third-party beneficiary of the contract between Spire and First Sealord. Spire argued that it should be compensated based on an assigned General Indemnity Agreement and claimed that the Debtor would be unjustly enriched by Spire's work. However, the court concluded that no evidentiary hearing was necessary as there were no factual disputes and found no legal basis to support Spire’s application.

The background includes a 2010 agreement between the Debtor and BE K/Turner Joint Venture for hangar door installation, which required a surety bond from First Sealord. First Sealord had a security interest in the proceeds from the Boeing Contract but failed to file a financing statement before the Debtor's Chapter 11 filing, thus lacking a secured claim. Despite demands, First Sealord did not fulfill its obligations on the bond, resulting in no unsecured claim. The Debtor incurred approximately $965,071 in unanticipated costs due to delays from the Joint Venture and was owed additional contract retention amounts. Claims were filed against the surety bond by subcontractors, leading to an agreement for the release of undisputed funds for their payment.

On December 15, 2011, the Court approved a motion allowing the Joint Venture to pay $569,003 on behalf of First Sealord concerning mechanics' liens, while the total claims from subcontractors exceeded $666,000. To recover additional costs of $965,071 incurred by the Debtor due to changes in the Boeing Contract, First Sealord needed the Joint Venture's consent. Although the Debtor contacted Spire for assistance in preparing a Change Order, no formal contract was established. On May 12, 2011, First Sealord instructed that all payments owed to the Debtor be redirected to it. Ultimately, Fleming chose not to retain Spire, and it was determined that the Change Order would not benefit the estate since any recovery would reimburse First Sealord for bond claims and expenses, with remaining funds going to First Commonwealth Bank, which had a first lien on the Debtor's assets. The Debtor informed First Sealord of its lack of interest in the Change Order, affirming cooperation while First Sealord would cover all related expenses, including those for Spire. Subsequently, First Sealord engaged Spire to draft the Change Order, which was essential for recovering costs since the Debtor could not pay subcontractors. Despite Spire's invoicing beginning in May 2011, a formal Letter of Engagement was not signed until August 4, 2011. However, First Sealord failed to pay any subcontractors under the surety bond, leading to its liquidation ordered by the Pennsylvania Commonwealth Court on February 8, 2012, with the bond termination effective March 9, 2012. 

For administrative expenses to qualify for payment under 11 U.S.C. § 503(b), they must be necessary for preserving the estate or contribute substantively to it. Priority treatment aims to encourage post-petition business with the debtor and the provision of necessary services. Debtor disclaimed any interest in funds from the Joint Venture, and Spire was contracted only by First Sealord, not the Debtor, indicating Spire did not provide necessary services to the Debtor nor benefit the estate. Spire claims entitlement to administrative claimant status, arguing that its work allowed the Debtor to recoup funds from the Boeing Contract, which would otherwise unjustly enrich the Debtor.

Responsibility for administrative expenses is grounded in the principle of unjust enrichment rather than compensating creditor losses. Spire seeks compensation for losses incurred when First Sealord liquidated; however, the Debtor was not unjustly enriched. Unjust enrichment involves retaining a benefit conferred by another without compensation when such compensation is expected. Spire did not anticipate compensation from the Debtor until First Sealord's liquidation and had a contract solely with First Sealord, which explicitly disclaimed any third-party beneficiaries. Spire's counsel did not engage in the bankruptcy proceedings until after First Sealord’s bond was canceled.

The contract indicates that Spire was contracted for First Sealord's benefit, not the Debtor's, and Spire could not reasonably expect compensation from the Debtor. Payments made by the Joint Venture to settle mechanics' liens were based on an agreement with First Sealord, which was established after Spire began invoicing First Sealord. Although the Joint Venture paid $569,002.74 for mechanics' liens, subcontractors were owed over $666,000. A letter from the Debtor’s president indicated additional costs of $965,071, and a Change Order request was submitted at First Sealord's request. 

The Joint Venture disputed this Change Order, and Debtor subsequently offered to settle for $493,954.00, which was ultimately agreed upon at $375,000. The Reorganized Debtor's motion claimed the settlement's total value as $666,650.74, but Spire's assertion of Debtor’s enrichment does not account for the fact that the Debtor was owed more than what it recovered.

The amount of $666,650.74 reflects payments made on mechanics’ liens, which exceeded the undisputed contract retention of $291,650.74 and a $375,000 settlement. The total payment to the Debtor was insufficient, falling short by $298,420.26 of the claimed amount exceeding $960,000, indicating that the Debtor was not unjustly enriched. The engagement letter between Spire and First Sealord, signed by Spire’s principal Anthony Gonzales, designates First Sealord as the sole client with no third-party beneficiaries, and there is no evidence supporting Debtor as a third-party beneficiary. Spire claims entitlement to payment based on an assignment of a General Indemnity Agreement from First Sealord. However, this assignment occurred after the court sustained an objection to First Sealord’s claim, rendering it ineffective, as Spire's rights cannot exceed those of its assignor. Consequently, since First Sealord had no valid claim against the estate, Spire also lacks a cognizable claim. Therefore, the Application for Allowance of Administrative Expense is denied. First Sealord did not respond to the objection to its claim, leading to its disallowance. Additionally, Debtor attempted to settle a claimed overage of $965,071 for $785,605. Litigation was also initiated by subcontractors against the Joint Venture and others for unpaid balances, while Debtor communicated necessary information to Spire for a potential Change Order, but did not finalize any contract with Spire.

First Commonwealth Bank holds a secured claim exceeding $3 million, with an agreement to receive $1.75 million as secured and the remainder as unsecured under the reorganization plan (Doc. Nos. 108, 166). A November 3, 2011, letter regarding the Joint Venture/First Sealord agreement noted a retainage amount of $202,786, which subsequently increased to $277,352. The amount of $291,650.74 was part of an overage, but $277,352 was not included in the Change Order calculation. Spire's claim for an administrative expense is based on delivering the Change Order to the Debtor; however, this act does not constitute a benefit to or preservation of the estate under 11 U.S.C. 503. From May 31, 2011, to December 31, 2011, Spire billed only First Sealord, with minimal reference to the Debtor. The reorganization plan stipulated that First Sealord would pursue the Joint Venture for its claims, but First Sealord’s claim was disallowed due to non-payment on bonds. Although the Assignment Agreement between First Sealord and Spire was not submitted to the Court, it was irrelevant since the assignment occurred after First Sealord's claim was disallowed. Spire's reliance on the General Indemnity Agreement's paragraphs 5 and 6 is ineffective as First Sealord had no claim to assign, and thus Spire cannot assert a claim based on the Indemnity Agreement's provisions. Additionally, since First Sealord made no payments, Debtor's liability as stated in paragraph 8 of the Indemnity Agreement does not apply. Overall, Spire has no valid administrative claim.