258 F.3d 385 (5th Cir. 2001), 00-30899, In the Matter of Jack/Wade Drilling Inc.

Docket Nº:00-30899
Citation:258 F.3d 385
Party Name:IN THE MATTER OF JACK/WADE DRILLING, INC., Debtor. TOTAL MINATOME CORP., Appellant, v. JACK/WADE DRILLING, INC., PAUL N. DEBAILLON, TRUSTEE, UNITED STATES TRUSTEE, and BAKER HUGHES, INC., Appellee.
Case Date:July 13, 2001
Court:United States Courts of Appeals, Court of Appeals for the Fifth Circuit
 
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Page 385

258 F.3d 385 (5th Cir. 2001)

IN THE MATTER OF JACK/WADE DRILLING, INC., Debtor.

TOTAL MINATOME CORP., Appellant,

v.

JACK/WADE DRILLING, INC., PAUL N. DEBAILLON, TRUSTEE, UNITED STATES TRUSTEE, and BAKER HUGHES, INC., Appellee.

No. 00-30899

United States Court of Appeals, Fifth Circuit

July 13, 2001

Appeals from the United States District Court for the Western District of Louisiana.

Page 386

Before EMILIO P. GARZA and PARKER, Circuit Judges, and ELLISON, District Judge.[*].

ELLISON, District Judge.

Appellant Total Minatome Corporation ("TMC") appeals a district court judgment denying its Motion for Payment of an Administrative Claim in the amount of $ 496,724.79 pursuant to Title 11, United States Code, section 503(b)(1)(A). The question before us is whether a non-debtor litigant is entitled to claim administrative priority for its attorney fees, costs, and expenses incurred in post-petition litigation instituted by a bankruptcy trustee against the non-debtor, and awarded pursuant to the pre-petition contract upon which the trustee based his litigation. Because we find that the exception created in Reading Company v. Brown, 391 U.S. 471, 20 L.Ed. 2d 751, 88 S.Ct. 1759(1968) does not extend to this award, we decline to grant administrative priority. The judgment of the district court is AFFIRMED.

I.

Appellant TMC and debtor Jack/Wade Drilling, Inc. entered into a turnkey drilling contract on September 8, 1994. On April 27, 1995, Jack/Wade filed a Chapter 7 bankruptcy petition. Appellee Paul N. DeBaillon, Jack/Wade's trustee in bankruptcy, filed suit in federal district court on June 17, 1996, for breach of that pre-petition drilling contract, alleging that TMC was obligated to pay Jack/Wade for its drilling services and had failed to do so. TMC filed a counterclaim against the trustee, alleging that Jack/Wade was the first to breach the contract by failing to drill to the proper turnkey depth. Following a trial on the merits, a jury rejected both parties' allegations of breach.

The contract provided for an award of attorney fees, costs, and expenses to the "prevailing party" in any dispute on the contract and TMC sought that award. The district court, however, found that, because the jury had rejected the allegations by both sides, neither party could be said to have prevailed. TMC appealed to this Court, which vacated the district court's order and remanded the case for a determination of the "prevailing party." On September 14, 1999, the district court concluded that TMC was the "prevailing party" and awarded $ 315,412.50 in attorney fees and $ 181,312.29 in costs and expenses.

On December 15, 1997, before resolution of the "prevailing party" dispute, TMC filed a motion in bankruptcy court to have its claim for attorney fees, costs, and expenses given priority as an administrative expense under 11 U.S.C. § 503(b)(1)(A). A hearing on the motion was continued to await resolution of TMC's Fifth Circuit appeal of that dispute. The bankruptcy court heard TMC's request on November 9, 1999, and denied the motion to have its attorney fees, costs, and expenses award treated as an administrative expense and given priority under the bankruptcy code.1 TMC appealed the decision of the bankruptcy court to the district court, which affirmed the denial of its motion. This appeal followed.

Page 387

II.

We review the decision of the district court by applying the same standard to the bankruptcy court's findings of fact and conclusions of law as the district court applied. See In the Matter of Pro-Snax Distributors, Inc., 157 F.3d 414, 419-20 (5th Cir. 1998). A bankruptcy court's findings of fact are subject to clearly erroneous review, while its conclusions of law are reviewed de novo. See In re Gamble, 143 F.3d 223, 225 (5th Cir. 1998). Because this appeal presents only questions of pure law, we review de novo.

Section 507(a)(1) of the bankruptcy code establishes that the administrative expenses incurred in bankruptcy are to be given priority in distribution such that they are generally paid in full before other unsecured non-priority claims. See 11 U.S.C. § 507(a)(1). These administrative expenses include the actual and necessary costs and expenses of preserving the estate. See 11 U.S.C. § 503(b)(1)(A). TMC asserts on appeal that its award of attorney fees, costs, and expenses constitutes "actual and necessary costs" and should, accordingly, be given priority in the distribution of Jack/Wade's assets.

In order to qualify as an "actual and necessary cost" under section 503(b)(1)(A), a claim against the estate must have arisen post-petition and as a result of actions taken by the trustee that benefitted the estate. See Toma Steel Supply, Inc. v. Transamerican Natural Gas Corp. (In the Matter of Transamerican Natural Gas Corp.), 978 F.2d 1409, 1416 (5th Cir. 1992) (finding that 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"). Section 503(b)(1)(A) claims, therefore, generally stem from voluntary transactions with third parties who lend goods or services necessary to the successful reorganization of the debtor's estate. See id. at 1415 (asserting that "the purpose of Section 503 is to permit the debtor's business to operate for the benefit of its prepetition creditors") (citing In re Coastal Carriers Corporation, 128 B.R. 400, 403 (D. Md. 1991)).

TMC admits that its claim against Jack/Wade does not meet the requirements for section 503(b)(1)(A) treatment because the debtor's estate received no discernable benefit from the lawsuit against TMC. See NL Industries, Inc. v. GHR Energy Corporation, 940 F.2d 957, 966 (5th Cir. 1991) (asserting that "courts have construed the words "actual" and "necessary" narrowly: the debt must benefit [the] estate and its creditors"). TMC asserts, however, that its claim should be given administrative priority under an exception created by the Supreme Court for damages inflicted on innocent third parties through a trustee's operation of the debtor's estate. See Reading Company v. Brown, 391 U.S. 471, 485, 20 L.Ed. 2d 751, 88 S.Ct. 1759 (1968) (concluding that "damages resulting from the negligence of a receiver acting within the scope of his authority as receiver give rise to 'actual and necessary costs' of a Chapter XI arrangement" even when no actual benefit to the estate resulted).

The Supreme Court in Reading articulated a principle of "fairness to all persons having claims against an insolvent" designed to guide courts in determining priorities in bankruptcy distributions. See id. at 477. There is, of course and for good reason, a general presumption in bankruptcy favoring equality in distribution...

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