Opinion ID: 490185
Heading Depth: 2
Heading Rank: 2

Heading: administrative expense

Text: 8 The bankruptcy court allowed LDC its claim for attorney's fees as a first priority administrative expense under 11 U.S.C. Sec. 503(b)(3)(D). The district court disallowed the administrative expense claim. Our role and that of the district court is essentially the same in the appellate process. Thus in reviewing the district court's decision with respect to the bankruptcy court's order allowing LDC's claim, we are in essence reviewing the order of the bankruptcy court. See Sambo's Restaurants, Inc. v. Wheeler (In re Sambo's Restaurants, Inc.), 754 F.2d 811, 814 (9th Cir.1985). We review de novo the bankruptcy court's interpretation of section 503(b)(3)(D). See Global W. Dev. Corp. v. Northern Orange Credit Serv., Inc. (In re Global W. Dev. Corp.), 759 F.2d 724, 726 (9th Cir.1985). 9 Section 503(b)(3)(D) provides in relevant part for allowance as an administrative expense of actual, necessary expenses ... incurred by ... a committee representing creditors ... in making a substantial contribution in a case under chapter ... 11 of this title. 3 The phrase substantial contribution is derived from sections 242 and 243 of the Bankruptcy Act of 1898 (1898 Act), amended by Act of June 22, 1938, Pub.L. No. 696 Secs. 242, 243, 52 Stat. 840, 900 (repealed 1977). S.Rep. No. 989, 95th Cong., 2d Sess. 66, reprinted in 1978 U.S.Code Cong. & Admin.News 5787, 5852. The principal test of substantial contribution under the 1898 Act was the extent of benefit to the estate, and the same test applies to claims under comparable section 503(b)(3)(D). 3 Collier on Bankruptcy p 503.04, at 503-48 (L. King ed. 15th ed. 1987). 10 The policy underlying administrative expense priority is that the estate as a whole is benefited if general creditors subordinate their pre-bankruptcy claims in order to secure goods and services necessary to an orderly and economical administration of the estate after the petition is filed. Yermakov v. Fitzsimmons (In re Yermakov), 718 F.2d 1465, 1470 (9th Cir.1983). Claims that arise from a creditor's pre-petition services to the debtor are not entitled to administrative expense treatment. See, e.g., Lines v. System Bd. (In re Health Maintenance Found.), 680 F.2d 619, 621 (9th Cir.1982) (severance pay for post-petition termination based on length of employment with the debtor not entitled to administrative expense priority when right to severance pay accrued from pre-petition employment services). 11 LDC's claim for administrative expenses is for its legal fees for defending Argue, a corporate officer of the debtor, in the adversary proceeding, not for defending the debtor itself. Thus the claim is actually for indemnification of litigation costs. A corporation's duty to indemnify its officer, whether conferred by statute or by contract, is a form of compensation for the officer's services. In re Baldwin-United Corp., 43 B.R. 443, 454-56 (S.D.Ohio 1984). Argue was sued for his pre-petition actions of setting up and administering the trust fund. Any duty of the church to reimburse or indemnify Argue for his legal expenses arises from these pre-petition services. As such LDC's legal fees claim arises from Argue's pre-petition services to the corporation rather than any post-petition services. Thus LDC's claim is at most a general unsecured claim not entitled to administrative priority. See id. at 454-56 (debtors could not advance legal fees as administrative expense to officers under indemnity contract for pre-petition services). It makes no difference that the duty to indemnify Argue for litigation expenses, if such duty exists, did not accrue until after the petition was filed when Argue incurred those expenses; the critical fact is that the claim for indemnity arose from pre-petition services Argue provided the corporation. Id.; see In re Health Maintenance Found., 680 F.2d at 621.