Opinion ID: 792059
Heading Depth: 2
Heading Rank: 3

Heading: Inapplicability of Administrative Expense Priority Caselaw

Text: 28 Although administrative expense priority is not at issue in this case, the BAP majority relied on Abercrombie and Kadjevich, both involving administrative expense priority, because the outcome of those cases turned on whether attorney fees arose from a pre-petition claim. Ybarra, 295 B.R. at 612. The BAP dissent found the administrative expense priority caselaw inapt because 29 [t]he purpose of administrative expense priority is to facilitate the operation of the debtor in possession's business with a view to rehabilitation.... The purpose of a discharge is to provide the debtor with a fresh start, which is a different concern from determining administrative priority. The Ninth Circuit has not concluded that the standard for determining administrative expense status under § 503(b) and dischargeability under § 727(b) is the same. 30 Id. at 624. We agree with the BAP dissent's assessment and hold that because our standards for determining administrative expense priority are animated by different purposes than are our standards for determining which claims are discharged in bankruptcy, Kadjevich and Abercrombie do not control this case. 8 31 Whereas in discharge cases, the personal liability of the debtor is at issue, creditors seeking administrative expense priority are pursuing property of the bankruptcy estate. Section 507 of the Code sets forth the order of priority accorded to various classes of unsecured creditors when a Chapter 7 bankruptcy estate is liquidated. Administrative expense claims, defined in § 503, are accorded the first level of priority; these claims are paid in full before claims in a lower category. See § 726(a)(1); In re Lazar, 207 B.R. 668, 673 (Bankr.C.D.Cal.1997). Allowable 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. § 503(b)(1)(A). To be deemed an administrative expense, the claim must have arisen from a transaction with the debtor in possession, 9 and directly and substantially benefitted the estate. Abercrombie, 139 F.3d at 757 (quoting Microsoft Corp. v. DAK Indus. (In re DAK Indus.), 66 F.3d 1091, 1094 (9th Cir.1995)). 10 Thus, under the Code, only claims arising from post-petition transactions may be granted such priority. Kadjevich, 220 F.3d at 1019; Abercrombie, 139 F.3d at 758. 32 The purpose of administrative priority status is to encourage third parties to contract with the bankruptcy estate for the benefit of the estate as a whole. See Christian Life Ctr. Litig. Def. Comm. v. Silva (In re Christian Life Ctr.), 821 F.2d 1370, 1373 (9th Cir.1987); Kadjevich, 220 F.3d at 1019 (noting that the purpose of granting priority to post-petition debts is so that third parties will risk providing the goods and services that are necessary for a struggling debtor to reorganize); see also Abercrombie, 139 F.3d at 757 (citing encouragement of third parties to deal with the debtor in possession and facilitate rehabilitation as purpose of the administrative expense priority). The central question in determining whether a claim is granted administrative expense priority is whether the third party should be paid at the expense of the debtor's existing unsecured creditors. See Total Minatome Corp. v. Jack/Wade Drilling, Inc. (In re Jack/Wade Drilling, Inc.), 258 F.3d 385, 389 (5th Cir.2001). 33 By contrast, in the discharge context, the question is whether the debtor should be released from pre-petition debts so that she can be given a fresh start. See Jensen, 995 F.2d at 928. The discharge inquiry involves the existence of personal liability, while administrative expense priority concerns the distribution of assets from a limited pool. Even if a cause of action arose pre-petition, the discharge shield cannot be used as a sword that enables a debtor to undertake risk-free litigation at others' expense. See Siegel, 143 F.3d at 533-34. Personal liability for fees incurred through the voluntary pursuit of litigation initiated post-petition is more consistent with the purpose of discharge. This policy difference supports our conclusion that the administrative expense priority cases do not control our determination of whether a claim is pre-petition or post-petition in the discharge context. 34 As the BAP noted, Siegel was decided less than six weeks after Abercrombie but failed to cite it. Ybarra, 295 B.R. at 613. Kadjevich was decided two years after Siegel, but does not discuss that case. In our view, the best explanation for this lack of integration is that Siegel involved discharge, while Abercrombie and Kadjevich involved administrative expense priority—two distinct areas of bankruptcy law with separate purposes. In sum, we conclude that the rules set forth in Abercrombie and Kadjevich do not apply to the question of whether debts are discharged. 35