UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF KENTUCKY
CANNONSBURG ENVIRONMENTAL ASSOCIATES, LTD.
DEBTOR CASE NO. 92-10146
This matter is before the Court on the Amended Motion of David Clark & Associates ("DC & A") to Pay Administrative Expenses. DC & A, formerly the "Operator" of the Cooksey Brothers Landfill, claims certain sums pursuant to a "Landfill Operation Agreement Letter of Intent" ("Letter of Intent") executed by the debtor (then the debtor in possession) and DC & A on or about April 26, 1991. The debtor filed its Chapter 11 petition on March 26, 1992. The debtor's Chapter 11 plan was confirmed on May 28, 1993. The plan provides for the rejection of this contract.
DC& A filed the Amended Motion on August 5, 1992. The debtor filed a Response on August 28, 1992. The debtor, DC & A, and creditor Cooksey Brothers Disposal Co., Inc. filed a Joint Stipulation on August 31, 1992. An Amended Joint Stipulation was filed on September 1, 1992. This Court conducted a hearing on September 2, 1992, on this matter and on the Renewed Motion to Appoint a Trustee filed by Cooksey Brothers Disposal Co., Inc. On September 17, 1992, this Court entered an order for the appointment of a trustee, but reserved a ruling on this matter.
The trustee filed his report on October 22, 1992. He concluded therein that the Letter of Intent constituted an agreement between the debtor and DC & A for services by DC & A at the landfill for the period from April 29, 1991 (sic) through July 31, 1992, but that there was no agreement subsequent to July 31, 1992. He stated his intention to move for rejection of the contract. On October 28, 1992, DC & A filed a Renewed Motion for Trustee to Pay Administrative Expenses and Motion to Assume or Reject Executory Contract With David Clark & Associates, Inc.
On December 18, 1992, the Court entered an Agreed Order to Pay Portion of Administrative Expenses tendered by the trustee and DC & A. That Order provided that the trustee would pay DC & A a total of $30,000.00 as a pre-payment on its post-petition allowance. It also provided that DC & A would withdraw from consideration as future operator of the landfill. On January 8, 1993, the Court entered an Order setting a schedule for the submission of findings of fact, conclusions of law, and memoranda of points and authorities on the postpetition liability of the estate to DC & A, if any. DC & A, the debtor, and the trustee have all complied with that Order.
The issue before the Court is the interpretation of the Letter of Intent, especially concerning amounts of compensation due DC & A, and whether DC & A had the option to renew the agreement past the July 31, 1992 date. The document in question is a combination of typewritten provisions prepared by an attorney for DC & A and handwritten additions, deletions and modifications. The term "Letter of Intent" is in fact a handwritten replacement of the typewritten term "Memorandum of Understanding". Handwritten changes of any kind were initialled by David Clark, the individual, for DC & A, and by Eric Rose, the debtor's manager and general partner, for the debtor.
One of the most crucial handwritten additions is a "legend" under the title of the document which reads: "subject to negotiation and additional language with respect to issues not initialled". The position of both the debtor and the trustee is that this legend controls, thereby making only the "issues" that have been initialled operative. DC & A maintains that the legend is so ambiguous that it "must yield to the definite terms of the contract", arguing that, but for these troublesome words, there would be no dispute as to the agreement at all. The words are there, however, and both DC & A and the debtor consented to making them part of the agreement.
This Court agrees that the contract is ambiguous, but does not agree that its choice is either to make the handwritten legend completely controlling or to ignore it altogether. As stated by the court in A.L. Pickens Co. v. Youngstown Sheet & Tube Co., 650 F.2d 118 (6th Cir. 1981):
When a contract provision is, ..., reasonably subject to more than one interpretation, the Kentucky courts utilize the doctrine of contemporaneous construction. As Kentucky's highest court has stated:
Under the doctrine of contemporaneous construction, courts are required to give great weight to the interpretation which the parties have placed on an ambiguous contract. The construction of parties is best evidenced by their conduct with respect to the agreement.
Billips v. Hughes, 259 S.W.2d 6, 7 (Ky. 1953). Thus we are led to an examination of the course of performance engaged in by the parties to the contract.
At 120. Therefore, this Court must look to the course of performance engaged in by the debtor and DC & A pursuant to this contract.
The Court's first observation concerning the parties' "conduct with respect to the agreement" is that they operated under the entire agreement, not just the parts that were initialled. There are many basic (and apparently noncontroversial) provisions that were not altered in any way, and which governed the conduct of the parties. A good example is paragraph number 4, "Identification of Landfill". One would be hard pressed to argue that such a provision would be "subject to negotiation and additional language", as stated in the legend, and the parties did not behave as though they expected this to happen.
The parties' conduct suggests that, more than anything else, the handwritten legend and other initialled modifications were the products of an 11th hour attempt to put an agreement together, with both sides being willing to operate under a jerry-built contract rather than no contract at all. This Court's construction of the legend is as an expression of the parties' hope and intention to put together a better contract in the future, but not as the controlling provision in this contract.
Both the debtor and the trustee have argued that pursuant to Barnes v. Levy Bros., Inc., 175 S.W.2d 495, Ky. (1943), written provisions in a contract prevail over printed provisions. This case does not stand so much for the supremacy of handwriting over typewriting, however, as it does for the premise that any writing by a party prevails over a printed form. In In re Blieden, 49 B.R. 386, 389 (Bkrtcy.W.D.Ky. 1985), a case which cites Barnes, inserted typewritten provisions prevailed over the preprinted, "boilerplate" provisions of a form contract.
The specific areas of dispute as to this contract have to do with the weekly fee to be paid DC & A pursuant to&& 6-A-(1) and (2) of the Letter of Intent; whether or not DC & A was entitled to "early morning shift differentials"; and whether DC & A had the option of extending the term of the agreement pursuant to & 1-B of the Letter of Intent.
The compensation to be paid to DC & A was a flat weekly fee of $19,000.00 for up to 5000 tons of waste received per week, plus a $1.50 per ton extra fee for waste received over 5000 tons per week, as well as a CPI adjustment. DC & A was paid on this basis up to July 20, 1991. Subparagraph 6-A-(2) provides in part:
Notwithstanding this adjustment, Contractor and Manager specifically agree to renegotiate the fixed fee within six months of the date of the execution of this agreement to determine whether a reduction is necessary or upon Contractor's successful renegotiations of its existing security agreement terms with Michigan Tractor, whichever event occurs sooner.
This provision was initialled by both Dave Clark and Eric Rose. In July 1991, the debtor unilaterally reduced its $19,000.00 per week payment to $12,500.00 per week. An agreement was negotiated, and on September 14, 1991, the fixed payment became $16,000.00 per week retroactive to July 27, 1991. The debtor paid these sums to DC & A, and DC & A continued to accept them and continued to perform as operator of the landfill until it ceased operations for the debtor.
Testimony offered by Eric Rose indicates that the initial reduction from $19,000.00 was undertaken without negotiation, and the amount was set at $12,500.00. DC & A did not agree to this amount. The $16,000.00 amount was arrived at after several weeks of discussions. Rose testified that James Feudner, vice president of DC & A, agreed to this amount. (Transcript of 9/2/92 Hearing, hereinafter "T.H.", p. 82). Feudner testified that the $16,000.00 amount was agreed to on the premise that the $3000.00 deficiency in each week's payment was accruing and would eventually be paid. (T.H., pp. 34-35).
The Letter of Intent provides for the renegotiation of the weekly amount, as set out above. Notwithstanding the fact that the amount was first reduced by the debtor's unilateral action, negotiations did take place soon afterward, and an amount was apparently agreed upon and made retroactive to July 27, 1991. The debtor paid, and DC & A accepted, $16,000.00 from then on. The parties' course of dealing therefore establishes that the amount owed to DC & A from and after July 27, 1991, was $16,000.00 per week.
The issue of whether payment for "extra" work is due DC & A arises from the fact that it was deemed necessary to have a certified landfill operator on duty beginning at 2:00 a.m. because waste haulers arrived at the landfill in the early hours of the morning, and had previously been allowed to "let themselves in". The Letter of Intent does not specify a time of operation for the landfill except in& 5-C which states in part that the "scales shall be open from 6:00 or 7:00 a.m. to 4:00 p.m. or as otherwise agreed by the parties". In determining whether "extra" work was performed, the Court must determine what scope of work the agreement contemplated.
Paragraph 2 sets out the scope of services that DC & A was to provide "for a volume of municipal solid waste of not more than thirty-five hundred (2000) tons at the Landfill..." (The designation in parentheses of the number of tons was changed from 3500 to 2000, and the change was initialled.) The services to be provided pursuant to this paragraph were reception of haulers, direction of haulers, site preparation, road preparation, distribution of compaction, and cover.
Paragraph 3 deals with extra work, and states in part: "In the event the parties agree to expand the scope of services to be performed by the Contractor, such additional responsibilities shall be memorialized in writing and signed by the duly authorized officers or agents of each party." Reading&& 2 and 3 together makes it clear that "extra" work means providing services not listed in & 2. Further, reading these two paragraphs together makes it clear that the scope of work is defined in terms of volume of waste to be handled and specific services to be provided, and not in terms of the time of day it is to be performed.
Again, the parties' course of dealing demonstrates the meaning of the words in the agreement. The debtor requested that the services set out in the agreement be provided starting at 2:00 a.m. DC & A provided those services starting at that hour. The fact that DC & A decided that this constituted "extra" work within the meaning of& 3 does not necessarily bring it within the purview of that paragraph. The parties' actions indicate that they intended that the services called for by the agreement would be performed at whatever hour of the day or night they needed to be performed.
As concerns the issue of whether DC & A had the option of extending the term of the agreement, it is clear that& 1-B provides for such an extension. As stated above, the fact that a contract provision is not initialled does not render it inoperative. It is obvious that the parties were concerned about the term of the agreement, since they changed the expiration date of the initial term from 1995 to 1992. If they had wanted to change or eliminate the subparagraph concerning subsequent terms they could easily have done so, but they did not.
As stated above, this contract was specifically rejected. Rejection of a contract constitutes a breach as of the date of filing of the petition. Where the debtor's obligations stem from contractual liability under a prepetition contract, even a postpetition breach will be treated as a prepetition liability, and thus, a postpetition breach does not give rise to an administrative expense priority. In re Drexel Burnham Lambert Group, Inc., 138 B.R. 687, 698 (Bkrtcy.S.D.N.Y. 1992). Therefore the issue of DC & A's right to renew is not an issue involved in the consideration of the amount of any postpetition claim, but may be an issue as to any prepetition claim.
In consideration of all of the above, it is therefore the opinion of this Court that the flat weekly fee owed to DC & A by the debtor was $16,000.00 from and after July 27, 1991; that providing a certified landfill operator from 2:00 a.m. each day did not constitute "extra" work within the meaning of the agreement; and that the terms of the agreement provided that DC & A had the option of extending the term of the agreement after the initial term expired on July 31, 1992. Therefore, DC & A's claim for the difference between $19,000.00 and $16,000.00 per week and for "late night shift differentials" should be overruled. Any claim of DC & A relating to its right to extend the agreement must be considered in conjunction with any claim for prepetition damages.
By the Court -
John O. Morgan, Jr., Esq.
Robert L. McIntyre, Esq.
W. Thomas Bunch, Esq.