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In Re Buffets of Bensalem, LLC,

08-34568 (Bkrtcy. Ct. D. N.J. 2010) (Unpublished)

BANKRUPTCY; CONTRACTS — When a debtor executes a contract outside of the ordinary course of its business or when the debtor is controlled by a trustee in bankruptcy and executes a contract instead of having the trustee execute the contract, the trustee may dishonor the contract and to the extent that the supplier or other party has a claim, that party needs to show that the debtor received a benefit from the contract and will, in the future, receive such a benefit.

A Chapter 11 bankruptcy tenant, and not its trustee in bankruptcy, entered into a contract for an outdoor advertisement to be posted at the debtor’s property. The contract was not court-authorized. When the trustee learned of the contract, it advised the advertising company “that the contract was not authorized, that outdoor advertising was not in the ordinary course of business of the Debtor and, therefore, the contract was void ab initio.” The trustee refused to make payments. At the time in question, the trustee was, in fact, “engaged in negotiations for sale of the Property.”

Nothing evidenced that the trustee “expressly authorized the underlying agreement.” Consequently, under state law the advertising company could only look to the doctrine of “‘apparent authority,’ where a reasonable person would understand that an agent has authority to act. Apparent authority arises ‘when a third party reasonably believes the actor has to act on behalf of the principal and that belief is traceable to the principal’s manifestations.’” Although that is both the common law and New Jersey law, whether the debtor “was cloaked with apparent authority” when it entered the contract was “not determinative in this case because such an estoppel defense is based on state agency and contract law. In contested matters arising when the debtor objects to a post-petition vendor’s administrative expense claim, the Bankruptcy Court need not consider the debtor’s state law defenses to a vendor’s claim. ... Instead, the bankruptcy court may properly limit its consideration to the question of whether services provided by the vendor benefitted the debtor’s estate. ... The Court is to focus on whether the estate received the benefit, and not on whether it was harmed by the claimant’s activities.”

The burden of proving an administrative claim, i.e., one that is for “the actual, necessary costs and expenses of preserving the estate, ...,” is on the claimant “and the measure of proof is preponderance of the evidence.” The advertising company did not meet this burden and the trustee’s cross-motion to expunge the claim was granted. “Arguably, any benefit would have been conferred on the new Buyer, not the Debtor. Had the [advertising company] been able to show that its services, for example, resulted in the Buyer offering a higher sale price, an argument could be made that it benefitted the estate and its creditors.” There was no such argument or showing on the record.

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