DEBTOR CASE NO. 87-00020







This matter is before the Court on the Amended Application for Payment of Administrative Expenses filed by Cumberland Surety Insurance Company, Inc., formerly Reclamation Surety Insurance Company, Inc., ("Cumberland"). Cumberland makes its Application pursuant to 11 U.S.C. '' 503(b)(1)(A) and 507(a)(1), and requests an Order allowing the payment of Chapter 11 administrative expenses. A specific amount, $85,888.55, is claimed for premiums owed. Cumberland also seeks costs of the remaining reclamation due on each permit site on which Cumberland has a bond or bonds posted, less any amounts already paid into escrow accounts. This Court has jurisdiction of this matter pursuant to 28 U.S.C. ''1334(a) and 157(a).


The debtor herein filed a Chapter 11 petition in this Court on January 27, 1987. The debtor-in-possession assumed three executory contracts between itself and Cumberland pursuant to an Agreed Order entered on March 18, 1987. These contracts are referred to in that Agreed Order as the "Greenup Contract", the "Pike Contract" and the "Ferguson Contract". Pursuant to that Agreed Order, payments on the "Pike" and "Greenup" contracts were to be made in accordance with an amended payment schedule, and upon the payment of a total of $50,000.00 the monetary obligations of the debtor-in-possession was to be deemed fulfilled. The amended payment schedule shows that $30,000.00 of the total was to be applied to the escrow accounts on those contracts and $20,000.00 to premiums.

The debtor-in-possession entered into a fourth contract, the "Ferguson Contract II", with Cumberland post-petition. The case was converted to Chapter 7 on May 11, 1989. An Agreed Order was entered in this Court on June 11, 1990, allowing Cumberland to substitute bonds on behalf of the debtor. Cumberland filed an Application for Payment of Administrative Expenses on November 23, 1990. An Objection to the Application for Payment of Administrative Expenses was filed by the United States of America, Internal Revenue Service, on December 13, 1990. Cumberland filed its Amended Application on January 7, 1991. The Trustee filed her Response on January 28, 1991.

Under each of the contracts referred to hereinabove, the debtor was to make premium and escrow payments to Cumberland. In return for such payments Cumberland, as surety, posted a reclamation bond in certain amounts which could be forfeited by the Commonwealth of Kentucky in the event of the failure of the permittee to carry out its reclamation obligations. The escrow payments were deposited in an escrow account to cover any such costs of reclamation. Pursuant to paragraph 7 of each of the contracts, Cumberland had the right to enter the permitted area and perform reclamation if the debtor failed to do so or failed to correct a cited violation. Pursuant to Paragraph 10(ii), Cumberland had the right to recover from the debtor all of its costs and expenses in enforcing its rights under the contract.

All events that are significant in determining Cumberland's claim for administrative expenses pursuant to these contracts occurred during the pendency of the Chapter 11 case, i.e., the subject contracts were either assumed or initiated, claims for breach of those contracts arose, and any default by the debtor-in-possession took place. The fact that some of Cumberland's activities pursuant to the subject contracts continued past the time of the conversion of this case to a Chapter 7 does not affect the identification of any its administrative claims pursuant to the contracts as Chapter 11 claims.


Courts have consistently held that if an executory contract is assumed, "the estate is liable for the full performance of the contract and any subsequent postpetition breach or rejection creates an administrative expense claim." In re Monroe Well Service, Inc., 83 B.R. 317, 321 (Bkrtcy.E.D.Pa. 1988), citing N.L.R.B. v. Bildisco & Bildisco, 465 U.S. 513, 1104 S.Ct. 1188, 79 L.Ed.2d 482 (1984). Therefore, claims pursuant to the three assumed contracts are allowable as Chapter 11 administrative expenses.

The fourth contract, entered into by Cumberland and the debtor-in-possession postpetition meets the test set out in the leading case of In re Mammoth Mart, Inc., 536 F.2d 950 (1st Cir. 1976): 1) the debt must arise from a transaction with the debtor-in-possession; and 2) the debt must be beneficial to the debtor-in-possession in the operation of the business. At 954. See also In re White Motor Corp., 831 F.2d 106 (6th Cir. 1987). Cumberland's claims for premiums owed and the cost of reclamation are pursuant to these four contracts as set out above, and they are therefore allowable as Chapter 11 administrative expenses. Cumberland includes in its claim under these contracts an amount for liquidated damages. This Court does not believe that Cumberland is entitled both to performance under the contract and damages.

In conclusion, therefore, it is the opinion of this Court that premiums due and the cost of reclamation pursuant to the subject contracts are allowable as administrative expenses entitled to first priority pursuant to 11 U.S.C. ''503(b)(1)(A) and 507(a)(1). They are, however, subordinated to claims for administrative expenses incurred after the conversion of this case to Chapter 7, pursuant to 11 U.S.C. '726(b).

As to specific amounts claimed herein, Cumberland maintains that it is owed $85,888.55 in premiums pursuant to the "Pike", "Greenup" and "Ferguson" contract. The Trustee points out that pursuant to the March 18, 1987 Agreed Order, the debtor's payment of $20,000.00 was to have satisfied its premium payment obligation on the "Pike" and "Greenup" contracts, while Cumberland is now seeking a total of $80,119.54 in premium payments on those two contracts. Neither Cumberland nor the Trustee has provided the Court with information sufficient to enable it to decide how the amount Cumberland may claim is to be calculated. This Court will therefore defer its decision on the amount Cumberland may claim and enter a separate Order setting this issue for hearing.



By the Court -












Copies to:

Maureen D. Carman, Esq.

Susan Mullins Johnson, Trustee

Ann E. Samani, Esq.

James L. Hayden, Esq.

David Middleton, Esq.

Carol C. Priest, Esq.

Patrick McKinney, Esq.

Kentucky Revenue Cabinet

U.S. Trustee