Opinion ID: 769705
Heading Depth: 1
Heading Rank: 3

Heading: analysis

Text: 11 A. Nicholas' Claim for Fees Cannot be an Administrative Expense Because it is a Pre-Petition Claim. 12 When the assets of a bankruptcy estate are distributed to the bankrupt's creditors, claims for administrative expenses are among the very first unsecured claims that are paid. See United States Trustee v. Endy (In re Endy), 104 F.3d 1154, 1155-56 (9th Cir. 1997); 11 U.S.C. SS 726(a), 507(a)(1), 503(b). The Bankruptcy Code provides a nonexhaustive list of allowable administrative expenses; they include the actual, necessary costs and expenses of preserving the estate, including wages, salaries, or commissions for services rendered after the commencement of the case. 11 U.S.C. S 503(b)(1)(A); see Megafoods Stores, 163 F.3d at 1071 (explaining that the list of particular administrative expenses contained in S 503(b) is nonexhaustive). In general, postpetition business expenses are granted administrative-expense priority so that third parties will risk providing the goods and services that are necessary for a struggling debtor to reorganize. See Microsoft Corp. v. DAK Indus., Inc. (In re DAK Indus., Inc.), 66 F.3d 1091, 1097 (9th Cir. 1995) (Payment of administrative expenses allows the debtor to secure goods and services necessary to administer the estate, which ultimately accrues to the benefit of all creditors.). 13 In addition to those kinds of standard administrative expenses, tort claims based on a trustee's post-petition negligence are granted administrative-expense priority. See Reading Co. v. Brown, 391 U.S. 471 (1968). Such claims are deemed ordinarily incident to [the] operation of a business, id. at 483, and are granted priority status so that the victims of a reorganizing business' torts will be compensated ahead of the creditors who sought reorganization. 14 Critically, however, only post-petition debts can be treated as administrative expenses; pre-petition debts may not be granted administrative-expense priority. See 11 U.S.C. S 503(b)(1)(A) (providing that administrative expenses include the actual, necessary costs and expenses of preserving the estate, including wages, salaries,or commissions for services rendered after the commencement of the case) (emphasis added); Reading Co., 391 U.S. at 482 (holding that tort claims arising during an arrangement [are] actual and necessary expenses of the arrangement) (emphasis added); Dant & Russell, 853 F.2d at 707 (noting that any claims under the section must have a distinct postpetition character); Christian Life Center Litig. Defense Comm. v. Silva (In re Christian Life Center), 821 F.2d 1370, 1373-74 (9th Cir. 1987) (Claims that arise from a creditor's pre-petition services to the estate are not entitled to administrative expense treatment.). The question here, then, is whether Nicholas' claim for attorney fees is a pre-petition or a post-petition claim. Relying on our recent decision in Abercrombie v. Hayden Corp. (In re Abercrombie), 139 F.3d 755 (9th Cir. 1998), we conclude that it is a pre-petition claim and, therefore, that it may not be treated as an administrative expense. 15 The facts of Abercrombie are relatively straightforward. Abercrombie won a judgment in a state-court breach-ofcontract case. The defendant in the contract case, Hayden Corporation, appealed and, while the appeal was pending in the state supreme court, Abercrombie filed a bankruptcy petition. The state supreme court then reversed the judgment and, pursuant to a fee provision in the parties' contract, ordered Abercrombie to pay Hayden's attorney fees. See id. at 756. 3 16 Hayden asked the bankruptcy court to grant administrative expense priority to the attorney fees that it had incurred after Abercrombie filed his bankruptcy petition, on the theory that those fees were caused by Abercrombie's post-petition defense of the appeal. This court held that, because the award of attorney fees was made in an action commenced prepetition, under the authority of a pre-petition contract, it was pre-petition in nature and could not be considered an administrative expense. Although Abercrombie had caused the fees to be incurred through its post-petition conduct, the source of the estate's obligation remain[ed] the prepetition fee provision. Id. at 759. 17 In the present case, the source of the award of attorney fees is the pre-petition state-court fraud action that brought Robert under the jurisdiction of the California courts and subjected him to the fee-shifting rule contained in California Code of Civil Procedure S128.5. The state court's judgment in that case is unitary; all of it must be considered prepetition under the reasoning of Abercrombie. For the purpose of establishing the priority of a claim for attorney fees, we see no principled basis to distinguish a pre-petition contract that provides for fees from a pre-petition tort claim that results in fees. By analogy to Abercrombie, the fact that Robert did not engage in the particular misconduct that caused the fees to be awarded until after he filed his bankruptcy petition does not change the fundamentally pre-petition nature of the fraud action and of the total resulting judgment. 18 It is undisputed that Nicholas' basic claim for fraud damages is a pre-petition, nonpriority claim. See, e.g. Corman v. Morgan (In re Morgan), 197 B.R. 892, 899-900 (N.D. Cal. 1996); In re Allen, 241 B.R. 710, 713 (Bankr. D. Mont. 1999); cf. Papadakis v. Zelis (In re Zelis), 66 F.3d 205 (9th Cir. 1995) (holding that two state-court sanction awards that were based on the debtor's pre-petition filing of two frivolous appeals were pre-petition obligations of the estate). Because Nicholas' claim for attorney fees arises from the same prepetition obligation as the damages, back rent, costs, and all other components of the state court's judgment, it should be afforded the same priority in federal bankruptcy proceedings as those other items. 19 Our conclusion finds substantial support in Cohen v. de la Cruz, 523 U.S. 213 (1998). In Cohen, the Court held that attorney fees that were awarded under state law in connection with a debtor's fraud were nondischargeable under 11 U.S.C. S 523(a)(2)(A). That statute excepts from discharge any debt . . . for money . . . to the extent obtained by . . . false pretenses, a false representation, or actual fraud.  Because the nondischargeable fraud debt was the source of the award of attorney fees, the award likewise was nondischargeable even if it resulted from the debtor's good-faith attempt to litigate the issue of dischargeability. The fraudulent character of the initial debt established that the entire resulting obligation, including the attendant fees, was nondischargeable. See id. at 218-19 (Once it is established that specific money or property has been obtained by fraud, however, `any debt' arising therefrom is excepted from discharge.). 20 Consistent with Abercrombie and Cohen , we hold that the attorney fees awarded by the state court to Nicholas, based on Robert's bad-faith failure to settle the pre-petition fraud case, may not be granted administrative-expense priority. 4 We emphasize, however, that our holding is a narrow one. We do not deal here with a case in which a representative of the estate commenced litigation on behalf of the estate after a bankruptcy petition was filed, cf. In re Met-L-Wood Corp., 115 B.R. 133 (N.D. Ill. 1990), or one in which the representative obtained relief from the automatic stay to continue prepetition litigation, cf. In re E.A. Nord Co., 78 B.R. 289 (Bankr. W.D. Wash. 1987). 21 B. Nicholas' Claim for the $50,000 Financing Cost Cannot be an Administrative Expense Because it was not Caused by the Administration or Operation of the Estate. 22 Nicholas also seeks administrative-expense priority for his claim for $50,000 in financing costs that he incurred in order to make the equalizing payment that was required by the 1995 global settlement. Although Nicholas incurred those costs post-petition, they nonetheless are not administrative expenses of Robert's bankruptcy estate. 23 Nicholas incurred the $50,000 in financing costs solely because the bankruptcy court concluded that it would violate the Bankruptcy Code for Nicholas to credit bid  the fee award. The financing costs had nothing to do with preserving the estate and, indeed, the estate received nothing from Nicholas based on his incurring those costs. Accordingly, they are not standard administrative expenses underS 503(b)(1)(A). 24 Moreover, because the costs were caused solely by the bankruptcy court's order concerning the credit-bid arrangement, and were not caused by any wrongful action of the trustee, they cannot be considered administrative expenses under the fairness principle of Reading Co. 25 In short, the financing costs incurred by Nicholas simply were not part of the administration or operation of the estate. Rather, they were part of the administration and operation of Nicholas' own real estate business. Accordingly, Nicholas' claim may not be granted administrative-expense priority 5 .