UNITED STATES BANKRUPTCY COURT

DISTRICT OF ALASKA

MEMORANDUM DECISION

                      This action originated in state court during the course of Browning Timber of Alaska's chapter 11 proceeding. It was removed to this court, which has jurisdiction over the dispute in accordance with 28 U.S.C. § 1334(b) and the district court's order of reference. It is a core proceeding to determine the amount of an administrative priority claim in accordance with 28 U.S.C. § 157(b)(2)(A) and (B). I find for the plaintiff in the sum of $11,301.75, with interest.

Background

                         Plaintiff Skookum is an Oregon corporation engaged in the logging business. Citifor, Inc., is a Washington corporation that contracted with the State of 7 ABR 240      Alaska's mental health trust to log timberlands owned by the trust in Alaska. Citifor contracted with defendant Browning Timber of Alaska ("BTA"), an Alaskan corporation, to log certain real property located in Icy Bay, Alaska. BTA, in turn, entered into a logging subcontract with Skookum on the Icy Bay timber on February 25, 2000. At that time, BTA was a debtor in chapter 11 proceedings before this court. BTA's chapter 11 plan, which was confirmed after the Skookum-BTA subcontract was entered, provides for full payment of all administrative expenses. Skookum's subcontract with BTA is the subject of the present proceeding.

                      The subcontract provided that Skookum was to "primarily fall and buck timber to Citifor's specifications within, to, on or from the Logging Area." ^1. Wayne Browning, the president of BTA, drafted the written subcontract based on a form he'd previously used. The contract provided that BTA was to pay Skookum $32.50 per thousand board feet for its work. It failed to specify whether the term "$32.50 per thousand board feet" meant gross scale board feet or net scale board feet, however. ^2. Additionally, not all the terms of the Skookum-BTA agreement were included in the written subcontract. BTA had agreed to supply fuel, a pick-up and camp facilities, including room and board, to Skookum loggers, but these provisions were not included in the written contract.

7 ABR 241     

                       Skookum employees started felling and bucking timber at the Icy Bay site on March 5, 2000. They continued working through July 18, 2000. BTA paid Skookum a total of $234,124.01 for its work. Skookum alleges that BTA owes it another $254,000.00 for work it performed under the contract.

Analysis

                      The actual, necessary costs and expenses of preserving the estate are entitled to administrative priority under 11 U.S.C. § 503(b). Claims arising from postpetition contracts are entitled to priority expense status.

 

The trustee or DIP may enter also into new postpetition contracts for the benefit of the continued operation of the estate. Like an assumed contract, a postpetition contract binds the DIP such that if it receives the benefits of the bargain, it must also adopt the burdens. Thus, the estate is obligated to perform under the contract and will be held liable for any subsequent breach. Again, provided the claimant's consideration was both supplied to and beneficial to the debtor in possession in the operation of the business, payment owing under the contract will be deemed an administrative expense. Similarly, damages from breach of the postpetition contract will also receive administrative priority. ^3.




The felling and bucking services Skookum supplied to BTA were beneficial to BTA in the operation of its business. Any damages from BTA's breach of the subcontract are entitled to administrative priority. Skookum has the burden of proof in establishing its administrative claim for $254,000.00. ^4.                                  


7 ABR 242     

                       Paragraph 23.4 of the Skookum-BTA subcontract provided that all matters under the agreement would be governed by the laws of the State of Alaska applicable to contracts. Because the contract between BTA and Skookum was not a fully integrated agreement, under Alaska law the parol evidence rule does not apply. ^5. BTA unilaterally deducted $2,076.00 for camp fees and $5,069.13 for fuel fees from amounts due Skookum. These deductions violated the parties' oral agreement. BTA was to provide these items at its own expense. Skookum is entitled to reimbursement for the improper deductions, totaling $7,145.13, together with pre-judgment interest at the rate of 4.25% from July 27, 2000, until entry of judgment. ^6. Additionally, BTA concedes that it owes Skookum an additional $3,535.22 for timber cut during the period of July 9 through October 19, 2000, pursuant to the terms of the written subcontract, along with $621.40 for merchantable logs used in a bridge or otherwise unharvested. Skookum is entitled to receive $4,156.62 for this unpaid timber, with interest at the rate of 4.25% from October 19, 2000, until entry of judgment.




                      Skookum claims it is entitled to $72,072.00 in additional damages from BTA. This portion of its claim is based upon the difference between the gross scale board feet of timber Skookum felled and bucked and the sums BTA paid to Skookum, which were based upon net scale board feet. BTA contends it paid Skookum 7 ABR 243      properly. The payment provision in the Skookum-BTA subcontract does not specify whether Skookum was to be paid by the gross or net method, nor does it mention scaling. It states:

 

3. Payment. In consideration for the performance of the services described in section 1 of this Agreement, Browning shall pay to the Subcontractor an amount equal to $32.50 per thousand board feet. The payment is to be made within 7 working days of the receipt of payment by Browning from the Owner. The specific method of payment is to be agreed by the parties. ^7.




Although section 1 of the subcontract required Skookum to fell and buck timber to Citifor's specifications, those specifications did not deal with the question of payment and shed no light on the issue of whether BTA was to pay Skookum by the gross or net method.




                      Skookum argues that the contract clearly and unambiguously calls for payment on a gross scale basis. I disagree. The phrase,"$32.50 per thousand board feet," is essentially a neutral term. It could easily be interpreted to mean either net or gross board feet. Given the lack of specificity in the subcontract, it is unclear whether Skookum was to be paid for all timber felled and bucked, or just the timber without defects. The contract is ambiguous because, taken as a whole, it is reasonably subject to differing interpretations. ^8.




                      When a contract is ambiguous, a court is to discern the reasonable expectations of the parties by looking at the written agreement and extrinsic evidence 7 ABR 244      as to the parties' intent at the time the contract was made. ^9. Here, the parties have given predictable, self-serving testimony as to their intentions at the time they entered the contract. Ken Batten, Skookum's president, says he entered the subcontract with BTA on the understanding that his company would be paid for gross board feet of timber. Wayne Browning argues that BTA would never have entered a gross scale subcontract with Skookum because BTA's contract with Citifor provided for payment on a net scale basis.




                      The Citifor-BTA contract does provide for payment of "$309.00 per thousand board feet net scale," for merchantable sawlogs and "$137.00 per thousand board feet net utility scale," for utility or pulp logs. ^10. The payment provisions of the Citifor-BTA contract raise more issues than they settle, however. First, if BTA was to pay Skookum on a true net scale basis, why didn't Wayne Browning simply use the same net scale language in the Skookum subcontract that was found in BTA's contract with Citifor? Moreover, given the relatively large margins BTA received from Citifor on a net scale basis for sawlogs and utility logs, payment to Skookum on a gross basis rather than net basis, roughly a difference of just 10% or $3.25 per thousand board feet, would not have cut significantly into BTA's profits. Neither the Citifor contract nor the testimony of Browning and Batten regarding their intent resolve the ambiguities regarding payment on the Skookum subcontract. Further, their conflicting 7 ABR 245      testimony indicated that there is no industry-wide standard regarding payment by gross or net board feet.




                      There is extrinsic evidence which leads me to believe, however, that both parties intended that payment would be based on net board feet. BTA consistently paid Skookum on a net scale basis, beginning with the first checks sent to Skookum in April of 2000, and continuing through the final payment in October of that year. Batten demanded that BTA provide more back up than the one-page summaries it was sending with its payments. BTA furnished this to Skookum no later than June or July, 2000. At this time, Skookum received copies of the Columbia River Logging and Scaling Bureau's reports, which listed gross and net board feet. Yet, Skookum never specifically complained about the gross-net differential until more than 14 months later. Batten did not raise the issue in his July 24, 2000, demand letter to BTA. Nor did he specifically claim the gross-net differential in his claim of lien, recorded September 14, 2000. Finally, in Skookum's answers to interrogatories, dated June 28, 2001, Batten did not include a claim based on the gross-net differential when itemizing Skookum's damages. ^11. Skookum didn't raise the gross vs. net theory of damages until approximately one month before trial. Based on this extrinsic evidence, I conclude that both BTA and Skookum intended Skookum to be paid on a net scale basis. Skookum is not entitled to any damages for the gross-net differential.


7 ABR 246     

Remaining Claims




                      At trial, Skookum claimed an additional $180,000.00 in damages for uncredited merchantable timber that it felled and bucked. According to Ken Batten, a large amount of valuable timber was never taken to the sort yard for sorting and scaling because it was either used by BTA in road construction or bridges or simply left on the ground. In support of this claim, Skookum offered the testimony of Batten, as well as of several loggers it employed and scaler Don Wright, together with numerous photographs. Batten and the loggers testified that a lot of merchantable timber went into the roads. Batten estimated the amount of merchantable timber placed in the roads, but conceded it was impossible to make an accurate count without digging up the roads. Wright estimated the amount of merchantable timber remaining on the ground by inspecting portions of the logged property and making estimates based on those inspections. Based on this testimony and the photographs, Skookum claims it is entitled to recover $110,000.00 in damages for logs used in road construction and $70,000.00 for unharvested timber still on the ground.




                      BTA presented evidence which thoroughly rebutted Skookum's contentions. It submitted testimony on this issue from a number of credible witnesses, ^12. and several key points were established. First, as to Skookum's claim based on logs used in road construction, it was undisputed that portions of the logging area were covered 7 ABR 247      with muskeg and required fill materials and gravel to create stable roads. For the most part, the fill material consisted of tree tops, slash, limbs, butts, debris and cull timber. It did not consist of merchantable timber. In some of the logging areas no fill was needed to make serviceable roads. In other areas, not logged by Skookum, some large logs were used by other logging companies, such as Wasser and Winter. This does not aid Skookum, however.




                      Skookum's contention that 6,500 feet of merchantable timber was used for every 35 feet of road built is not credible. Batten and his men kept no reliable records of their logging activities. Skookum's belated attempts to determine the amount of timber used during road construction are at best crude guesses, based on a myriad of incorrect or unsubstantiated assumptions. Skookum's numbers are also unsupportable because, although Batten has been in the logging business for several years, he lacks formal education and expertise in forestry. He does not understand timber cruise theory and appraisal techniques, or statistics, including random sampling and probability theory. Moreover, he is obviously biased. I conclude that Skookum has not met its burden of proof in establishing its claim for damages for use of merchantable timber in roads.




                      Nor does Skookum's damage theory have merit with regard to the amount of merchantable timber allegedly left on the ground. Again, all parties recognized that not every single merchantable log will reach the sorting area. Some good logs are inevitably left behind. The bulk of the remaining timber, however, was either cull, non-merchantable or timber that had been cut by third parties, i.e., Wasser 7 ABR 248      and Winter, A&E and Frank Thomas. Skookum's witness, Don Wright, did not take these variables into account when estimating damages; he even included timber belonging to third parties in his calculations. Finally, even if there were large amounts of merchantable timber left behind, most of the assumptions underlying Wright's computations were simply wrong. Like Batten, he does not have the expertise needed to accurately estimate the amount of merchantable timber remaining at the site. Scalers are not foresters or statisticians. The weight of the evidence is clearly contrary to the Skookum damage theory. Skookum has failed to establish damages of $70,000.00 for unharvested timber.




                      Finally, Skookum has not met its burden of proof on its lien foreclosure count against Citifor. In a prior order entered in this proceeding, I noted that defects in a lien notice are not grounds for dismissal of a lien foreclosure suit if the party claiming the lien had substantially complied with the lien laws and any error in the lien had been made in good faith. ^13. No evidence was submitted by Skookum on the issue of whether the errors in its lien notice were made in good faith. Further, as Skookum itself noted, it would need to identify which timber it had cut in order to successfully prosecute its lien claim. ^14. Skookum did not address this issue at trial. For these reasons, Skookum's lien foreclosure count will be dismissed, with prejudice.


7 ABR 249     

Attorney's Fees




                        The parties' subcontract provides that if either party breaches the agreement, the non-breaching party is entitled to receive all costs, including reasonable attorney's fees, for enforcing its rights. ^15. Under Rule 82(a), ^16. the contract is an exception to the attorney's fees provision of Rule 82(b). ^17. Here, I find that neither party to the Skookum-BTA subcontract can be found to be a "non-breaching" party. BTA breached the agreement, although not to the extent claimed by Skookum. BTA made improper deductions from Skookum's payments and failed to pay Skookum $4,156.62 to which it was entitled. However, Skookum also breached the subcontract terms because it left the job at Icy Bay prior to giving BTA a required 10-day notice of default. Because both parties have breached the subcontract, neither will recover attorney's fees. Recovery of attorney's fees under the subcontract is unambiguously limited to the non-breaching party.




                      Citifor is entitled to attorney's fees under Rule 82(b)(2). ^18. It is a

prevailing party and not bound by the contract. It shall file a motion for attorney's fees within ten days of the entry of an interlocutory order based on this memorandum decision. No final judgment shall be entered until the amount of attorney's fees has been determined.


7 ABR 250     

Conclusion




                        Skookum will recover the principal sum of $11,301.75 from BTA, with interest thereon at the rate provided by state law. Skookum's lien foreclosure claim against Citifor will be dismissed, with prejudice. Neither BTA nor Skookum will recover costs or attorney's fees. Citifor will recover Rule 82(b) attorney's fees. An interlocutory order will be entered in accordance with this decision. A final judgment will be entered after Citifor's attorney's fees have been determined.                        





                         DATED: March 7, 2002.

 

BY THE COURT

DONALD MacDONALD IV

United States Bankruptcy Judge



N O T E S:



1. Defs.' Ex. A, Alaskan Subcontractor Agreement, p. 1.




2. Scaling is a process of evaluating timber by determining the gross footage of a fallen and bucked log and then deducting defects to determine the net amount of merchantable footage. Columbia River Log Scaling and Grading Bureau, an independent company based in Oregon, scaled and graded logs at the Icy Bay site and provided periodic reports to BTA summarizing its findings.




3. Norton Bankruptcy Law and Practice 2d, § 42.24 at pp. 42-141 - 42-142\ (West 1997) [footnotes omitted].




4. The burden of proving entitlement to an administrative priority claim under 11 U.S.C. § 503(b) is on the claimant. Woburn Assoc. v. Kahn (In re Hemingway Transport, Inc.), 954 F.2d 1 (1st Cir. 1992).




5. Philbin v. Matanuska-Susitna Borough, 991 P.2d 1263, 1270 (Alaska 1999).




6. July 27, 2000, is the date that BTA received Skookum's demand letter. The rate of interest on the sums awarded herein is in accordance with AS 09.30.070(a), which provides for a rate of "three percentage points above the 12th Federal Reserve District discount rate in effect on January 2 of the year in which the judgment or decree is entered." The rate of interest currently in effect, applicable both pre- and post-judgment, is 4.25%.




7. Defs.' Ex. A, at p. 1.




8. Williams v. Crawford, 982 P.2d 250, reh'g denied (Alaska 1999).




9. Van Alfen v. Van Alfen, 909 P.2d 1075, 1077 n.5 (Alaska 1996).




10. var WPFootnote10 = '

See Defs.' Ex. B, Logging and Construction Contract, Mental Health Trust - Icy Bay, p. 6, ¶ 2.1A.




11. See Pl.'s Answers to Interrogs. Propounded to Pl. [First Set], Resp. to Interrog. No. 5 [Docket No. 31].




12. These witnesses included Keith Burke (Citifor's Alaska manager), Mike Thompson (a certified log scaler with Columbia River Log Scaling and Grading Bureau and one of two scalers on site during Skookum's Icy Bay logging), Travis Wolff (BTA's on-site manager), Michael Cooney (a forestry consultant for the Mental Health Trust), forester Clare Doig and Wayne Browning.




13. See Ord. Denying Mot. for Summ. J. and Mot. for J. on the Pleadings, entered April 25, 2001 [Docket No. 24].




14. See Skookum's Opp'n to Mot. for J. on the Pleadings [Docket No. 19], at p. 6.

15. Defs.' Ex. A, p. 8.




16. Ak. R. Civ. P.




17. Id.




18. Id.