Toma Steel Supply, Inc. v. Transamerican Natural Gas Corp. , 978 F.2d 1409 ( 1992 )


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  •                     UNITED STATES COURT OF APPEALS
    FOR THE FIFTH CIRCUIT
    ___________________________
    No. 91-2550
    ___________________________
    IN THE MATTER OF:    TRANSAMERICAN NATURAL GAS CORP.,
    Debtor.
    TOMA STEEL SUPPLY, INC.,
    Appellant,
    versus
    TRANSAMERICAN NATURAL GAS CORPORATION, ET AL.,
    Appellees.
    ___________________________
    Nos. 91-2716,
    91-2717 and 91-2718
    ___________________________
    IN THE MATTER OF:    TRANSAMERICAN NATURAL GAS CORP.,
    Debtor.
    TOMA STEEL SUPPLY, INC.,
    Appellant,
    versus
    GHR ENERGY CORP.,
    Appellee.
    ___________________________
    No. 91-2915
    ___________________________
    IN THE MATTER OF:      TRANSAMERICAN NATURAL GAS CORPORATION,
    Debtor.
    TOMA STEEL SUPPLY, INC.,
    Appellee,
    versus
    TRANSAMERICAN NATURAL GAS CORPORATION,
    f/k/a GHR ENERGY CORPORATION,
    Appellant.
    _________________________________________________________________
    Appeals from the United States District Court for the
    Southern District of Texas
    _________________________________________________________________
    (November 25, 1992)
    Before REAVLEY, JOLLY, and HIGGINBOTHAM, Circuit Judges.
    E. GRADY JOLLY, Circuit Judge:
    These over-litigated consolidated appeals, which have been
    characterized by unnecessary contentiousness since their inception
    in the bankruptcy court in 1987, arise out of Toma's sale of well
    casing, post-petition, to TransAmerican, a Chapter 11 debtor-in-
    possession.     TransAmerican     objected     to   Toma's   administrative
    expense claim, alleging that the bankruptcy estate received no
    benefit, because some of the casing was defective and caused
    damages in excess of the amount of Toma's claim.                In 1987, the
    bankruptcy court allowed Toma's claim in its entirety and ordered
    immediate   payment.      In   1989,   the   district   court   vacated   the
    - 2 -
    bankruptcy court's orders, and remanded the case for findings of
    fact and conclusions of law on TransAmerican's objection.                On
    remand, the bankruptcy court denied Toma's claim, and the district
    court affirmed.     We hold that Toma satisfied its burden of proving
    that the casing benefited the estate, and that the bankruptcy court
    adequately considered TransAmerican's objection when it initially
    allowed Toma's claim.      We therefore REVERSE the judgment of the
    district   court,   and   REMAND   the   case   for   further   proceedings
    consistent with this opinion.
    I
    A brief summary of the lengthy procedural history of these
    appeals is in order.      TransAmerican filed a voluntary bankruptcy
    petition under Chapter 11 in 1983.       In 1985, during the pendency of
    TransAmerican's reorganization proceedings, Toma and TransAmerican
    entered into a contract pursuant to which Toma sold well casing to
    TransAmerican.      In August or September of 1986, TransAmerican
    stopped paying Toma's invoices.            Nevertheless, over the next
    several months, Toma continued to supply casing to TransAmerican,
    until the balance due was $2,288,683.45 (nearly Toma's entire net
    worth).
    In the fall of 1986, TransAmerican experienced five successive
    well failures.      Four of the wells contained casing supplied by
    Toma; the fifth contained casing supplied by another distributor.
    After these failures, casing supplied by Toma was retrieved from
    another well that had not been completed.
    - 3 -
    In February 1987, Toma filed in the bankruptcy court emergency
    motions for allowance of administrative expenses of approximately
    $2.3 million for casing supplied to TransAmerican pursuant to the
    contract.     TransAmerican opposed the motion.
    On   March    11,    1987,     the    bankruptcy      court     conducted    an
    evidentiary      hearing     on     Toma's    administrative         expense    claim.
    TransAmerican asserted that Toma had provided no benefit to the
    estate, because some of the casing supplied by Toma was defective,
    causing     well     failures       and     damages    exceeding       the     balance
    TransAmerican owed Toma. Although the bankruptcy court stated that
    the hearing was limited to determining administrative expense
    priority, and not to whether Toma had supplied defective casing,
    both   parties      introduced       evidence     relevant    to     TransAmerican's
    objection.    At the conclusion of the hearing, the bankruptcy court
    found that Toma had satisfied its burden of proving that the
    expenses were reasonable and necessary for the preservation of the
    estate.     It allowed Toma's administrative expense claim in full,
    and directed TransAmerican to pursue its claims for defective
    casing in another court of competent jurisdiction within 60 days.
    Toma then filed amended and supplemental motions regarding the
    emergency nature of its need for immediate payment.                    It emphasized
    the availability of insurance sufficient to satisfy any damages
    TransAmerican might be awarded if it eventually proved that the
    casing was defective.         The bankruptcy court conducted a hearing on
    the    supplemental        motions     on    April    9.      At     that    hearing,
    TransAmerican argued that the bankruptcy court should postpone
    - 4 -
    ruling on Toma's motion for immediate payment "until the court in
    which the action should be filed has determined the precise amount
    of   Toma's      liability     to    [TransAmerican]."         On     April     11,
    TransAmerican complied with the bankruptcy court's earlier order
    and filed suit against Toma in Texas state court.
    On   May   11,   1987,   the     bankruptcy   court    entered    an    order
    granting Toma's motion for immediate payment.               It found that Toma
    had introduced evidence of severe financial hardship.                  It further
    found that Toma had submitted proof of insurance in an amount
    sufficient to cover any damages caused by defects in the casing.
    It   therefore     ordered     TransAmerican     immediately     to     pay    Toma
    $2,288,634.45, the balance due.           When TransAmerican failed to pay,
    and failed to take any steps to stay execution of the bankruptcy
    court's order, Toma garnished its bank accounts.                 After another
    hearing on June 15, the bankruptcy court ordered Toma to escrow
    $500,000 in an interest-bearing account to protect TransAmerican
    from third-party liens by Toma's suppliers.                 It further ordered
    Toma to assign to TransAmerican its interest under its product
    liability insurance policies to protect TransAmerican in the event
    that TransAmerican succeeded on its claim for damages allegedly
    caused     by   defective    casing.      The   unescrowed    portion     of    the
    garnished amount, approximately $1.8 million, was released to Toma.
    After the bankruptcy court denied its motion for a new trial,
    TransAmerican appealed the bankruptcy court's May 11 payment order,
    as modified by the June 15 order, to the district court.                     In the
    meantime, on September 4, 1987, the bankruptcy court entered an
    - 5 -
    order confirming TransAmerican's plan of reorganization.         The plan
    provided that each holder of an allowed administrative expense
    claim was to "be paid the full amount of such expense or claim when
    due (but not earlier than the consummation date) except to the
    extent the Bankruptcy Court orders otherwise."        Toma's allowed
    administrative expense claim was not treated separately in the
    confirmation order.
    On June 30, 1989, the district court vacated the bankruptcy
    court's orders and remanded the case for findings of fact and
    conclusions   of   law   on   TransAmerican's   objection   to    Toma's
    administrative expense claim.     On August 30, 1989, the bankruptcy
    court ordered the parties to file motions regarding TransAmerican's
    motion for new trial, which it considered to have been revived by
    the district court's judgment. It further directed both parties to
    submit proposed findings of fact and conclusions of law regarding
    the March 11, 1987 hearing.
    On September 13, 1989, TransAmerican filed an amended motion
    for new trial.1    On September 29, both parties submitted proposed
    findings of fact and conclusions of law regarding the March 1987
    hearing.    TransAmerican requested that payment be delayed until
    "final adjudication of all issues."      Toma argued that equitable
    1
    In its original motion for new trial filed in 1987,
    TransAmerican had urged the bankruptcy court to refrain from
    ordering immediate payment in order to permit it to establish its
    defenses to Toma's claim, "preferably" in state court. However,
    during the pendency of its appeal to the district court,
    TransAmerican's state court pleadings had been stricken as
    sanctions for discovery abuses. In its 1989 amended motion for new
    trial, TransAmerican urged adjudication of the defective casing
    issue in the bankruptcy court.
    - 6 -
    grounds supported allowance of payment prior to adjudication of
    TransAmerican's defective casing claim.       Toma urged the bankruptcy
    court to make findings of facts and conclusions of law based upon
    the existing record from the March 1987 hearing.
    On October 2, 1989, the bankruptcy court ordered Toma to
    return the escrowed $500,000 to TransAmerican, but denied without
    prejudice TransAmerican's request that the $1.8 million obtained by
    Toma through the garnishment be returned to TransAmerican (the
    "Escrow Dissolution Order").        On February 20, 1990, it entered
    findings    of   fact   and    conclusions   of   law,   denying   Toma's
    administrative expense claim (the "Administrative Expense Order").
    Based on the evidence at the March 11, 1987 hearing, the bankruptcy
    court found that Toma supplied defective casing to TransAmerican,
    and that Toma had failed to prove that it rendered a benefit to the
    estate.    Although it acknowledged that causation and damages were
    being litigated in state court, it nevertheless found that the
    casing was defective, that "TransAmerican did not receive what it
    contracted to buy from Toma," and that "it is more probable than
    not that the defective casing caused the well failures."
    TransAmerican then renewed its motion seeking disgorgement,
    and on January 10, 1991, the bankruptcy court ordered that Toma
    disgorge the $1.8 million it received in the 1987 garnishment (the
    "Disgorgement Order").        Toma appealed the Administrative Expense
    Order, the Escrow Dissolution Order, and the Disgorgement Order to
    the district court, which affirmed all three orders on April 22,
    1991.
    - 7 -
    Toma filed a notice of appeal on May 22, 1991.2         Toma then
    sought, in the district court, to obtain approval of a supersedeas
    bond in order to stay execution of the district court's judgment
    affirming the bankruptcy court's Disgorgement Order. TransAmerican
    objected, contending that Toma had not properly appealed the
    Disgorgement Order and that Toma was not entitled to stay execution
    of that order by posting a supersedeas bond.         TransAmerican also
    sought permission from the district court to register the district
    court's April 24, 1991 judgment in Colorado, where Toma's place of
    business is located, so that it could seek enforcement of the
    Disgorgement Order and execute on Toma's assets.          The district
    court denied TransAmerican's motion for registration, and approved
    Toma's   proposed   supersedeas    bond,   staying   execution   of   the
    Disgorgement Order during the pendency of Toma's appeal to this
    court.   TransAmerican has appealed from both of these orders.
    We consolidated all matters on appeal.          Before us are (1)
    Toma's appeal from the district court's April 24, 1991 judgment
    (affirming the bankruptcy court's Administrative Expense Order,
    Escrow Dissolution Order, and Disgorgement Order); (2) Toma's
    appeal from the district court's June 30, 1989 judgment (remanding
    for findings on TransAmerican's objection); (3) TransAmerican's
    appeal from the district court's July 19, 1991 order (denying
    TransAmerican's motion to permit registration of the April 24, 1991
    2
    Toma also appealed from the district court's June 30, 1989
    order vacating the bankruptcy court's allowance of immediate
    payment of its claim and remanding the case to bankruptcy court for
    findings of fact and conclusions of law.
    - 8 -
    judgment); and (4) TransAmerican's appeal from the district court's
    August 12, 1991 order (approving Toma's supersedeas bond and
    permitting Toma to stay execution of the April 24, 1991 judgment).
    II
    We directed the parties to brief the issues of whether the
    orders from which Toma has appealed are final and, if so, whether
    the notices of appeal are proper.             We are satisfied that all of the
    orders appealed from are final.               However, TransAmerican contends
    that Toma did not properly appeal the district court's April 24,
    1991   judgment    in     its   entirety.        That      judgment   affirmed    the
    bankruptcy      court's    orders      entered    October        2,   1989   (Escrow
    Dissolution     Order),     February    20,     1990    (Administrative      Expense
    Order), and January 10, 1991 (Disgorgement Order).                    In its notice
    of appeal, Toma stated that it appealed from "the Final Order and
    Judgment of the District Court . . . entered in this case on April
    24, 1991, affirming the Bankruptcy Court Order of February 20,
    1990, denying Toma['s] . . . Emergency Request for Immediate
    Payment    of   Administrative      Expense      .     .    .   ."    According    to
    TransAmerican,     because      Toma    expressly          referred   only   to   the
    Administrative Expense Order, Toma did not properly perfect an
    appeal of the district court's judgment insofar as it affirmed the
    Disgorgement Order.
    The Federal Rules of Appellate Procedure require that a notice
    of appeal "designate the judgment, order or part thereof appealed
    from."    Fed. R. App. P. 3(c).          We construe this portion of Rule
    3(c) broadly.     Osterberger v. Relocation Realty Service Corp., 921
    - 9 -
    F.2d 72, 74 (5th Cir. 1991).       "If there is an error in designating
    a judgment appealed, the error should not bar an appeal if the
    intent to appeal a particular judgment can be fairly inferred, and
    if the appellee is not prejudiced or misled by the mistake."         Friou
    v. Phillips Petroleum Co., 
    948 F.2d 972
    , 974 (5th Cir. 1991).
    We can easily infer Toma's intent to appeal the district
    court's affirmance of the bankruptcy court's Disgorgement Order.
    Contrary    to   TransAmerican's    argument,   the   Disgorgement   Order
    clearly is dependent upon the disposition of Toma's administrative
    expense claim. If we reverse either the district court's April 24,
    1991 judgment affirming the denial of Toma's administrative expense
    claim, or its June 30, 1989 judgment vacating the bankruptcy
    court's orders and remanding the case, it necessarily follows that
    the Disgorgement Order must be vacated; and we have no doubt that
    we have jurisdiction to do so.
    We also conclude that TransAmerican has not been prejudiced or
    misled.     Within ten days following the filing of its notice of
    appeal, Toma filed a statement of issues to be presented on appeal
    and an application for approval of supersedeas bond, both of which
    identified the affirmance of the Disgorgement Order as having been
    appealed.    Obviously, Toma would not have considered it necessary
    to post a supersedeas bond if it had not intended to appeal the
    district court's affirmance of the bankruptcy court's Disgorgement
    Order.    Furthermore, we note that TransAmerican has fully briefed
    the issue.
    - 10 -
    Accordingly, we hold that Toma properly perfected an appeal
    from the district court's April 24, 1991 judgment in its entirety.
    III
    Toma first challenges the district court's June 30, 1989 order
    remanding the case to the bankruptcy court for findings of fact and
    conclusions of law on TransAmerican's objection.      It contends that
    the    bankruptcy   court   adequately   considered   TransAmerican's
    objection, made appropriate findings of fact and conclusions of
    law, and properly directed TransAmerican to pursue its claim for
    damages allegedly caused by defective casing in another forum.
    Next, Toma contends that the bankruptcy court's denial of its
    administrative expense claim on remand from the district court was
    improper. Toma argues that the bankruptcy court failed to focus on
    whether Toma had provided a benefit to the estate, but instead
    based its decision solely on a substantive determination that Toma
    breached its contract by supplying defective pipe to TransAmerican.
    Toma further argues that it was deprived of due process to the
    extent the bankruptcy court made a substantive determination that
    Toma had supplied defective casing, based solely on the restricted
    evidence from the March 11, 1987 hearing.     It also contends that
    the bankruptcy court's finding that the casing was defective is
    clearly erroneous, because it was based on insufficient evidence
    and an improper allocation of the burden of proof.3        Because we
    3
    Toma also contends that confirmation of TransAmerican's plan
    of reorganization in September 1987 mooted TransAmerican's appeal
    of the allowance of Toma's administrative expense claim.       This
    contention, based on Toma's position that TransAmerican appealed
    only the timing of payment, and not the allowance, of Toma's claim,
    - 11 -
    hold      that   the   bankruptcy       court   adequately    considered
    TransAmerican's objections in its first ruling, and the district
    court erred in remanding the case, we do not address the issues
    regarding the proceedings following remand.
    A
    The bankruptcy court's findings of fact "will not be set aside
    unless clearly erroneous."    Matter of Delta Towers, Ltd., 
    924 F.2d 74
    , 76 (5th Cir. 1991).       However, "when a finding of fact is
    premised on an improper legal standard, that finding loses the
    insulation of the clearly erroneous rule."       Matter of Fabricators,
    Inc., 
    926 F.2d 1458
    , 1464 (5th Cir. 1991).      "Conclusions of law, on
    the other hand, are subject to plenary review on appeal."         
    Id.
    The Bankruptcy Code provides that "[a]n entity may file a
    request for payment of an administrative expense."           
    11 U.S.C. § 503
    (a).     Section 503(b) provides that, "[a]fter notice and a
    hearing, there shall be allowed, administrative expenses, . . .
    including--(1)(A) the actual, necessary costs and expenses of
    preserving the estate. . . ."
    The purpose of Section 503 is to permit the
    debtor's business to operate for the benefit of its
    prepetition creditors.   In order to effectuate a
    successful reorganization, third parties must be
    willing to furnish postpetition goods or services
    on credit. Third parties might refuse to extend
    credit to debtors-in-possession for fear that their
    claims would not be paid, but an advance payment
    requirement would impede the debtor's business.
    Section 503 requires that such claims be given
    priority, therefore inducing third parties to
    is meritless.
    - 12 -
    extend credit and enhancing the likelihood of a
    successful reorganization.
    In re Coastal Carriers Corp., 
    128 B.R. 400
    , 403 (Bankr. D. Md.
    1991).
    As   the   district     court    correctly     noted,     TransAmerican's
    objection to Toma's administrative expense claim gave rise to a
    "contested matter" governed by Bankruptcy Rule 9014.                  Rule 9014
    provides:
    In a contested matter in a case under the Code
    not otherwise governed by these rules, relief shall
    be requested by motion, and reasonable notice and
    opportunity for hearing shall be afforded the party
    against whom relief is sought.      No response is
    required under this rule unless the court orders an
    answer to a motion. The motion shall be served in
    the manner provided for service of a summons and
    complaint by Rule 7004, and, unless the court
    otherwise directs, the following rules shall apply:
    7021, 7025, 7026, 7028-7037, 7041, 7042, 7052,
    7054-7056, 7062, 7064, 7069, and 7071. The court
    may at any stage in a particular matter direct that
    one or more of the other rules in Part VII shall
    apply. . . . The clerk shall give notice to the
    parties of the entry of any order directing that
    additional rules of Part VII are applicable or that
    certain of the rules of Part VII are not
    applicable. The notice shall be given within such
    time as is necessary to afford the parties a
    reasonable   opportunity   to   comply   with   the
    procedures made applicable by the order.
    Unlike adversary proceedings, which we have described as "full
    blown federal lawsuits within the larger bankruptcy case," and
    which are    governed   by   all     of   the   rules   in   Part   VII   of   the
    Bankruptcy Rules, contested matters are "subject to the less
    elaborate procedures specified in Bankruptcy Rule 9014." Matter of
    Wood & Locker, Inc., 
    868 F.2d 139
    , 142 (5th Cir. 1989).               Contested
    matter proceedings are generally designed for the adjudication of
    - 13 -
    simple   issues,   often    on     an    expedited   basis.          9   Collier      on
    Bankruptcy, ¶ 9014.05 (15th ed. 1992).               Rule 9014 specifically
    provides that Bankruptcy Rule 7052, which incorporates Fed. R. Civ.
    P. 52, applies in contested matters.              The bankruptcy court was,
    therefore, required to enter findings of fact and conclusions of
    law on whether there was a benefit to the estate.                    However, Rule
    9014 does not provide for the automatic application of Bankruptcy
    Rule 7008, incorporating Fed. R. Civ. P. 8 (affirmative defenses)
    or   Bankruptcy    Rule    7013,    incorporating     Fed.      R.       Civ.   P.   13
    (counterclaims). Those rules apply only if the bankruptcy court so
    directs, and the parties are notified in accordance with Rule 9014.
    Toma had the burden of proving that its claim was for "actual,
    necessary costs and expenses of preserving the estate."                    The words
    "actual" and "necessary" have been construed narrowly:                     "the debt
    must benefit [the] estate and its creditors."              NL Indus., Inc. v.
    GHR Energy Corp., 
    940 F.2d 957
    , 966 (5th Cir. 1991), cert. denied,
    ___ U.S. ___, 
    112 S. Ct. 873
     (1992).             A prima facie case under §
    503(b)(1) may be established by evidence that (1) the claim arises
    from a transaction with the debtor-in-possession; and (2) the goods
    or   services   supplied    enhanced       the   ability   of   the       debtor-in-
    possession's business to function as a going concern.                      After the
    movant has established a prima facie case, the burden of producing
    evidence shifts to the objector; but the burden of persuasion, by
    a preponderance of the evidence, remains with the movant.                            See
    Coastal Carriers, 
    128 B.R. at 404-05
    ; In re Buttes Gas & Oil Co.,
    
    112 B.R. 191
    , 193 (Bankr. S.D. Tex. 1989).                   Mere allegations,
    - 14 -
    unsupported by evidence, are insufficient to rebut the movant's
    prima facie case.
    B
    At the March 11, 1987 hearing, Toma introduced evidence that
    on September 10, 1985, it entered into a requirements contract with
    TransAmerican     as     debtor-in-possession;           that   pursuant   to    the
    contract, it supplied approximately 1,500,000 feet of casing to
    TransAmerican; that TransAmerican used the casing in conducting its
    business of well drilling, completion, and operation; and that the
    unpaid balance owed Toma by TransAmerican was $2,288,683.45.                     Toma
    thus established a prima facie case under § 503(b)(1).
    TransAmerican produced the following evidence in support of
    its objection.        In the fall of 1986, five of TransAmerican's wells
    failed.    Four of the wells contained pipe supplied by Toma, which
    apparently had been manufactured at four separate mills; the fifth
    contained pipe supplied by another distributor.                        After these
    failures, casing supplied by Toma was retrieved from La Perla No.
    73, a well that had not yet been completed, and had not failed.
    (It was not feasible to retrieve the casing from the four failed
    wells containing casing supplied by Toma, because the casing had
    already been cemented in place.)              The casing from La Perla No. 73
    was inspected, and two joints were found to be rejectable.                   Three
    joints    from   La    Perla   No.   73   were    sent    to    a   laboratory   for
    metallurgical testing, which confirmed that two of the three joints
    were defective or rejectable.                 TransAmerican's quality control
    inspector testified that he had not yet concluded his investigation
    - 15 -
    into the cause of the well failures.         It was only based on the
    defects found in two of the joints from La Perla No. 73, that he
    assumed that there were defects in the rest of the casing string.
    Brookins, a TransAmerican vice president responsible for completion
    procedures,   testified   that   he   did   not   think   TransAmerican's
    procedures caused the well failures.         Because TransAmerican had
    used the same procedures in drilling 700 wells without failure,
    Brookins testified that it was his opinion that the failures were
    caused by defective casing supplied by Toma.          TransAmerican had
    incurred $1,797,104.36 in repair costs for the failed wells as of
    the date of the hearing, and it estimated that it would incur an
    additional $800,000.
    There was evidence that casing supplied by Toma had been
    inspected at least twice prior to being placed in the wells; that
    casing supplied by Toma had been used in approximately 50 other
    TransAmerican wells without incident; and that none of Toma's other
    customers had complained of casing failures. An expert witness for
    Toma reviewed the records from the failed wells and inspected all
    of the casing that had been removed from La Perla No. 73.             He
    testified that the well failures were caused by imprudent operating
    practices and completion procedures by TransAmerican, rather than
    defective casing.
    At the conclusion of the March 11 hearing, the bankruptcy
    court allowed Toma's administrative expense claim in its entirety,
    finding that:
    [T]here was not a[n] . . . overwhelming amount of
    evidence by Toma to show that these goods . . .
    - 16 -
    supplied were actual and necessary for preservation
    of the estate. . . . I think it barely tipped the
    burden of proof by preponderance of evidence . . .
    [T]here's enough in the record to say that it
    certainly didn't supply the tubular products other
    than to be placed in the wells, which were used by
    [TransAmerican] for -- at least intended by
    [TransAmerican]   to   generate  revenues.      The
    reasoning behind that -- what I'm trying to say, I
    guess in a way is, that okay I realize that Toma
    didn't present just an overwhelming amount of
    evidence to show that they were actual and
    necessary, but there's enough in there for me to go
    ahead and be persuaded that the supplying of the
    tubular goods were actual and necessary for the
    Debtor to use.
    The   bankruptcy   court   had   the   following   to   say   regarding
    TransAmerican's objection:
    I   don't  know   whether   this   casing  entitles
    [TransAmerican] to compensation of some form and if
    such form would be placed as an offset against the
    amount owing Toma, and I don't know what theory the
    Debtor would seek recovery under, since I have no
    pleadings appropriately before me. The Debtor, as
    I see it, could choose any number of remedies:
    suit on a contract; suit on warranty; . . .
    possibly sounding in tort.      [B]ut until . . .
    [TransAmerican] steps forward as a Plaintiff in
    some court and seeks an actual recovery under some
    theory of law and gets a determination . . . from a
    court of competent jurisdiction, there's nothing I
    can do, other than to go ahead and allow this as an
    administrative expense . . . .
    The burden is on [TransAmerican] . . . to . . .
    attack that claim by Toma, on whatever legal theory
    they want to recover on. I don't know what legal
    theory they're going to -- I cannot try in the
    503(b)(1)(a) claim matter their --I don't know, is
    it sounding in contract; is it sounding under
    warranty? What part? I mean, I don't know. How
    will they know? They say that they don't owe you
    any money because your client supplied them bad
    product. That's not enough.
    In its May 11, 1987 order, the bankruptcy court, after noting
    that it had previously allowed Toma's administrative expense claim,
    - 17 -
    held that Toma was entitled to immediate payment.   The bankruptcy
    court found that the equities favored Toma, because it supplied
    goods to TransAmerican post-petition; there was no evidence that
    the parties agreed to postpone payment until plan confirmation; the
    casing supplied by Toma could not be recovered; Toma had introduced
    evidence of the devastating financial effect that TransAmerican's
    non-payment had on its business because of the size of the debt in
    comparison to its overall operations; and Toma had submitted proof
    of insurance in an amount sufficient to cover any damages suffered
    by TransAmerican as a result of any defects in the casing.     With
    respect to TransAmerican's objection, the bankruptcy court stated:
    [TransAmerican] has asked that this court
    defer an order of payment of Toma's administrative
    claim until it can pursue an offsetting claim
    against Toma for alleged defects in the goods.
    This court notes that there is case law to support
    Debtor's request. [Citations omitted.] However,
    until [TransAmerican]'s claim against Toma for
    defective pipe is determined by a court of
    appropriate jurisdiction, this court cannot apply
    an offset to Toma's claim for administrative
    expenses. Therefore, since the time of payment of
    this claim is a matter within this court's
    discretion, and as elaborated upon above, the
    equities of the matter weigh in Toma's favor, this
    court concludes that Toma's motion should be
    granted. Debtor is free to come back to this court
    with its offsetting claim when that claim has been
    liquidated in the appropriate court.
    TransAmerican filed a motion for new trial, requesting the
    bankruptcy court to permit it to establish its defenses to Toma's
    claim in state court before ordering payment. TransAmerican stated
    that the Texas state courts were "much better equipped to handle"
    the dispute.    On June 15, 1987, the bankruptcy court denied
    TransAmerican's motion, but modified its May 11 order by requiring
    - 18 -
    that $500,000 of the $2,300,000 be escrowed in an interest-bearing
    account.     Furthermore,      the   court    required   Toma    to   assign   to
    TransAmerican all rights under its product liability insurance
    policies "as a result of the claims of Debtor for defective
    casing."
    In its June 30, 1989 judgment, the district court held that
    the bankruptcy court did not have discretion to refuse to make
    findings on TransAmerican's objection, which it characterized as
    "an affirmative defense to liability on the underlying contract
    upon which Toma sought to recover," notwithstanding the fact that
    the bankruptcy court had not directed that Bankruptcy Rule 7008
    would apply in the contested matter involving Toma's administrative
    expense claim. Concluding that Toma's right to reimbursement could
    not be determined until such findings were made, the district court
    vacated the bankruptcy court's orders and remanded for findings of
    fact and conclusions of law on TransAmerican's objection.
    C
    We   hold   that   the   bankruptcy     court   adequately      considered
    TransAmerican's objection in allowing Toma's administrative expense
    claim, and in ruling that Toma was entitled to immediate payment.
    We further hold that its May 11 and June 15, 1987 orders contain
    sufficient findings of fact and conclusions of law reflecting such
    consideration.
    The district court erred in holding that the bankruptcy court
    had   no   discretion    to    refuse   to    make    findings   of    fact    and
    conclusions of law on the substantive merits of TransAmerican's
    - 19 -
    "affirmative defense." Because the bankruptcy court did not direct
    that Bankruptcy Rule 7008 would apply in the contested matter
    involving Toma's administrative expense claim, it acted well within
    its discretion when it refused to make findings of fact on the
    merits       of   TransAmerican's   defective   casing   claims.4   In    a
    commendable effort to prevent this contested matter from expanding
    into a "full blown" trial, that needlessly would have consumed its
    scarce resources, the bankruptcy court directed TransAmerican to
    litigate the merits of its state law claims in another forum.            The
    fact that Toma's administrative expense claim was based on an
    underlying contract did not automatically transform that claim into
    an adversary complaint seeking recovery on the underlying contract,
    nor did it expand the scope of the contested matter into a "full-
    blown" trial of counterclaims or affirmative defenses based on
    state contract law.
    The sole issue before the bankruptcy court was whether Toma
    met its burden of proving that the casing benefited the bankruptcy
    4
    TransAmerican maintains that, if its recoupment defense
    cannot be given effect in a § 503 contested matter proceeding, it
    will suffer worse treatment as a Chapter 11 debtor than it would
    have suffered as a non-debtor, in contravention of 
    11 U.S.C. § 558
    ,
    which provides that "[t]he estate shall have the benefit of any
    defense available to the debtor as against any entity other than
    the estate. . . ." This argument is specious. First, it overlooks
    the substantial benefits that TransAmerican received as a Chapter
    11 debtor--benefits that are not available to non-debtors.
    Moreover, nothing in § 558 gives TransAmerican the right to have
    the merits of its defective casing claims or its recoupment defense
    adjudicated in a § 503 contested matter. TransAmerican did not ask
    the bankruptcy court to direct that Rule 7008 apply, did not appeal
    the bankruptcy court's direction to litigate its defective casing
    claim in state court, and was perfectly content to have the issue
    tried in that forum until it received an unfavorable ruling as the
    result of its own conduct.
    - 20 -
    estate. Although TransAmerican's objection and supporting evidence
    are relevant and must be considered in making that determination,
    the bankruptcy court properly exercised its discretion in refusing
    to rule on the merits of TransAmerican's defective casing claims.
    See Matter of Strause, 
    40 B.R. 110
    , 113 (Bankr. W.D. Wis. 1984)
    (refusing to consider debtor's potential counterclaims raised in
    opposition to § 503(b)(1) administrative expense claim); see also
    In re Gellert, 
    55 B.R. 970
     (Bankr. D.N.H. 1985) (holding that court
    can   "consider"     affirmative   defenses   or   counterclaims   raising
    "extraneous" issues in deciding whether to exercise its equitable
    discretion in granting relief from automatic stay, but "such
    consideration . . . does not authorize proceeding to a res judicata
    determination of such allegations on the merits").
    The total amount of Toma's administrative expense claim is
    $2,288,683.45.        TransAmerican's   damages    allegedly   caused   by
    defective casing total approximately $2,500,000.         Relying on state
    law,5 TransAmerican maintains that, because its repair costs exceed
    the amount of Toma's claim, there was no benefit to the estate.         It
    insists that the benefit to TransAmerican's estate "can only be
    determined by the amount of money TransAmerican was to have paid
    Toma, offset by the damage incurred by TransAmerican's estate due
    to the defective casing."     We disagree.    The purpose of the benefit
    analysis under § 503 is to determine whether the estate received a
    5
    TransAmerican's recoupment defense is based on § 2.717 of the
    Texas Business and Commerce Code, which provides that, upon notice
    to the seller, a purchaser of goods may deduct from the amount owed
    to the seller all or any part of damages resulting from the
    seller's breach of contract.
    - 21 -
    benefit--not whether the estate was harmed. See Matter of Strause,
    
    40 B.R. at 113
     ("the principal purpose of according administrative
    priority to claims for benefit to the estate is to prevent unjust
    enrichment of the debtor's estate, rather than simply to compensate
    the creditor").         Toma    introduced     evidence   at   the    March   1987
    hearing, including copies of its invoices, that the cost of the
    entire casing string in each well was approximately $80,000 per
    well.    Thus, invoices for allegedly defective casing total, at
    most, approximately $400,000 ($80,000 each for the four failed
    wells, plus $80,000 for the casing in La Perla No. 73, which did
    not fail).
    Although the amount to be allowed as an administrative expense
    must    be   measured   in     dollars   and   cents,     (thus   satisfying    §
    503(b)(1)'s requirement that the costs or expenses be "actual"),
    the question whether the estate has been benefited cannot be so
    narrowly confined.       As we have already noted, the purpose of the
    priority treatment afforded by § 503 is to encourage third parties
    to provide necessary goods and services to the debtor-in-possession
    so that it can continue to conduct its business, thus generating
    funds from which prepetition creditors can be paid.                  Although the
    estate receives a benefit that often can be measured by the actual
    cost of necessary goods or services supplied, the estate also
    receives other less readily calculable benefits, such as the
    ability to continue to conduct business as usual.                     See In re
    Coastal Carriers, 
    128 B.R. at 404
    .
    - 22 -
    The district court apparently agreed with TransAmerican's
    argument that the benefit analysis must focus solely on the amount
    of Toma's invoices and the amount of TransAmerican's alleged
    damages.   Such an analysis is incomplete, because it ignores the
    fact that TransAmerican had no complaints regarding over 80% of the
    casing   upon   which   Toma's   claim   was   based.   Furthermore,   it
    disregards evidence that casing supplied by Toma had been used
    successfully in approximately 50 other profitable wells. In short,
    consideration of the damages allegedly caused by a small portion of
    the casing supplied by Toma is only part of the analysis.       Section
    503 also requires consideration of the fact that Toma's willingness
    to undertake the risk of supplying goods to TransAmerican as
    debtor-in-possession enabled TransAmerican to continue conducting
    its business, as well as the fact profits from wells in which Toma-
    supplied casing was successfully used were available for payment of
    prepetition creditors, and enhanced the likelihood of successful
    reorganization.    We agree with TransAmerican's assertion that the
    profitability of a well cannot be attributed solely to the casing.
    Nevertheless, it is clear that casing is an essential part of a
    well:    In the absence of third parties such as Toma, who were
    willing to undertake the risks of doing business with TransAmerican
    as debtor-in-possession, there would be no casing, thus no wells,
    thus no profits, and thus no payment to the creditors.
    Applying these principles to the evidence presented at the
    March 11, 1987 hearing, it is clear that the bankruptcy court
    correctly held that Toma satisfied its burden of proving that the
    - 23 -
    casing   it   supplied     to   TransAmerican      benefited     the   estate.
    TransAmerican made no claim that all of the casing was defective,
    and produced direct evidence that, at most, two joints of casing
    removed from La Perla No. 73, a well which had not failed, were
    defective.    Even if the entire strings of casing in all five of the
    Toma-supplied     wells   about   which    TransAmerican    complained      are
    assumed to be defective, that casing represents only approximately
    $400,000 out of Toma's total claim of approximately $2,300,000.
    With the exception of the casing used in those five particular
    wells, TransAmerican does not dispute that it used the remainder of
    the casing supplied by Toma to conduct its business of drilling,
    completing, and operating wells, which generated revenue to fuel
    its reorganization.
    In conducting its 1987 benefit analysis, the bankruptcy court
    adequately    considered    TransAmerican's       objection.      To   protect
    TransAmerican, the bankruptcy court ordered that $500,000 of the
    approximately $2.3 million claim be placed in an escrow account to
    protect TransAmerican from third-party liens by Toma's suppliers.
    It further ordered Toma to assign its rights under its product
    liability insurance policies to TransAmerican.           Because such steps
    would have been unnecessary in the absence of an objection to
    Toma's   claim,   they    obviously   reflect     a   consideration    of   the
    possibility    that   TransAmerican       might   succeed   in   proving    its
    allegation that some of the casing was defective.                 The course
    chosen by the bankruptcy court was well within its discretion.
    - 24 -
    To sum up, we conclude that the bankruptcy court adequately
    considered TransAmerican's objections and correctly held that Toma
    met its burden of proving that its sale of casing benefited
    TransAmerican's estate.        Because the bankruptcy court entered
    adequate findings of fact and conclusions of law in accordance with
    Bankruptcy   Rules    9014   and   7052,    the    district   court   erred   in
    vacating its orders and remanding the case for findings of fact and
    conclusions of law on the merits of TransAmerican's objections.
    IV
    TransAmerican has appealed from the district court's order
    approving    Toma's   supersedeas    bond    and    allowing   Toma   to   stay
    execution of the Disgorgement Order pending appeal, and from the
    district court's order denying TransAmerican's motion to permit
    registration of the April 24, 1991 judgment.            In the light of our
    ruling on the administrative expense claim, these issues are moot
    for the purposes of this appeal.
    V
    The April 24, 1991 judgment of the district court is VACATED.
    The June 30, 1989 judgment of the district court is REVERSED, and
    the case is REMANDED to the district court.            The district court is
    instructed to vacate the bankruptcy court's Escrow Dissolution
    Order, Administrative Expense Order, and Disgorgement Order, and to
    reinstate the bankruptcy court's May 11, 1987 order, as modified by
    its June 15, 1987 order.      The district court is authorized to order
    - 25 -
    such further proceedings as may be necessary to effectuate the
    reinstated orders, in a manner consistent with this opinion.
    REVERSED and REMANDED.
    - 26 -
    REAVLEY, Circuit Judge, concurring:
    Toma Steel had sold more than a million feet of pipe to
    TransAmerican during the Chapter 11 reorganization.                 The pipe was
    used in the completion and operation of over 50 TransAmerican
    wells.   It is uncontroverted that the sale of pipe was beneficial
    and necessary     to   the    operations    of    TransAmerican     and     to   the
    preservation of the debtor estate, and the bankruptcy judge so
    found.    In   1986    TransAmerican       ceased   payment    of    Toma    Steel
    invoices; the explanation was given at a later time that there were
    questions about the quality of the pipe.            Toma Steel continued the
    sales and, in 1987, sought administrative expense allowance and
    payment for 315,000 feet of pipe.
    TransAmerican objected to the allowance of the administrative
    expense, not because the pipe for which those sales were made )) or
    any portion of those sales )) was defective, but solely on the
    ground that TransAmerican had a damage claim against Toma Steel
    that was greater than the price of the subject 315,000 feet of
    pipe.
    The bankruptcy court could have put this entire controversy
    into an adversary proceeding or applied the adversary rules in the
    pending proceeding.       However, the court was not required to do
    that, and under the pressure of its oppressive docket, chose not to
    do so.   It clearly excluded any consideration of the TransAmerican
    damages claim in allowing the administrative expense after a
    hearing pursuant to 
    11 U.S.C. § 503
    (b).             See D-1 Enterprises Inc.
    v.   Commercial   State      Bank,   
    864 F.2d 36
    ,   39   (5th   Cir.    1989).
    However, when immediate payment was ordered, the bankruptcy court
    protected   TransAmerican   by   the   escrow   and   by   assuring   that
    insurance covered its damages claims.
    I concur in this court's holding that the bankruptcy court
    committed no error and that the district court erred in remanding
    for further findings. I emphasize that TransAmerican's defense was
    not that a certain portion of the pipe, for which Toma Steel sought
    allowance and payment, was defective.     The counterclaim or defense
    was based upon a wholly separate damages claim.
    - 28 -