In re Forrest

• Decision Date: 26 December 2019
• Docket Number: Case No.: ED CV 19-01252-AB,Bankruptcy Case No: 6:17-bk-19913
• Citation: 611 B.R. 662
• Parties: IN RE Thomas J. FORREST
• Court: U.S. District Court — Central District of California

611 B.R. 662

IN RE Thomas J. FORREST

Case No.: ED CV 19-01252-AB

Bankruptcy Case No: 6:17-bk-19913

United States District Court, C.D. California.

Filed December 26, 2019

Carla Badirian, Deputy Clerk, Attorney(s) Present for Plaintiff(s): None Appearing

N/A, Court Reporter, Attorney(s) Present for Defendant(s): None Appearing

Michael Frank Chekian, Chekian Law Office, Inc., Los Angeles, CA, for Appellants.

Wesley H. Avery, Law Offices of Wesley H. Avery, APC, Pasadena, CA, for Larry D. Simons, Chapter 7 Trustee.

Proceedings: [In Chambers] Order AFFIRMING Bankruptcy Court Order

The Honorable ANDRÉ BIROTTE JR., United States District Judge

Before the Court is the appeal of Appellants and Debtors Thomas J. Forrest and Sarah Forrest (collectively, "Appellants" or "Debtors"), husband and wife, from the bankruptcy court's June 17, 2019 Order (AA EOR¹ Tab 22) denying Appellant Thomas J. Forrest's Motion for Administrative Claim. ("Motion," AA EOR Tab 17). Appellants filed an opening brief ("AA Br.," Dkt. No. 8) and Appellee Larry D. Simons ("Appellee" or "Trustee"), the Chapter 7 Trustee of Appellant Thomas J. Forrest, also filed an opening brief ("AE Br.," Dkt. No. 10). Appellants replied. ("Reply," Dkt. No. 12). Having reviewed the parties' briefing and the record before the bankruptcy court, the June 17, 2019 Order is AFFIRMED .

I. BACKGROUND

Debtor and Appellant Thomas J. Forrest ("Mr. Forrest") filed a solo Chapter 7 voluntary bankruptcy petition without his wife Mrs. Sarah Forrest ("Mrs. Forrest") on November 30, 2017. (AA EOR Tab 1). At the time this petition was filed, the Forrests jointly owned their home at 19518 Denair Court, Riverside, California 92508 ("the Home"). (Declaration of Mr. Forrest ("Mr. Forrest Decl."), AA EOR Tab 17 at 8 ¶ 2).

On or about April 12, 2019, Appellant's duly appointed Chapter 7 Trustee, Appellee Larry Simons, applied to employ a real estate broker to sell the Home. (AA EOR Tab 28). Trustee owned the Home in fee simple for the benefit of the bankruptcy estate via a judgment entered on February 8, 2019 in the adversary proceeding captioned Larry Simons v. Sarah Forrest, et al.

Prior to Trustee's ultimate sale of the Home, Appellants lived there with their two minor sons. (Mr. Forrest Decl. ¶ 3). Assuming the Home would be sold, Appellants stated that they would need funds to relocate to another residence in the same neighborhood so their children could attend the same schools and maintain their relationships with current teachers, coaches, mentors, and friends. (Id. ).

Appellants maintained that, after payment of the senior mortgage and costs of sale, there should be substantial proceeds remaining. (Mr. Forrest Decl. ¶ 4; Declaration of Mrs. Forrest ("Mrs. Forrest Decl.") ¶ 4). The sale price was initially estimated at $515,000, the first mortgage payoff was estimated at $277,000, and the costs of sale were estimated at $40,000, resulting in net proceeds of $198,000. (Id. ). The Home was ultimately sold for $495,000.00 and proceeds from the sale were $157,713.28. (See AE SEOR² Tab 1 (Sale Order for the Home entered on July 31, 2019) and Tab 2 (Report of Sale dated August 13, 2019)).

The Forrests maintain that after Mr. Forrest's bankruptcy and post-petition, from approximately December 2017 through April 2019 they have spent at least $37,993.98 on Home expenses, covering payments for the mortgage, insurance, property taxes, repairs, and maintenance. (Mr. Forrest Decl. ¶ 6 and Mrs. Forrest Decl. ¶ 5); see also EOR Tab 17 at Ex. A (displaying a chart of expenses). The Forrests claim that these expenses have preserved and improved the value of the Home and reduced the expected payoff amounts in the future sale of the Home on at least a dollar-for-dollar basis. (Mr. Forrest Decl. ¶ 6; Mrs. Forrest Decl. ¶ 5).

On May 1, 2019 Appellant Thomas J. Forrest filed a Motion for an administrative claim, requesting that the $37,993.98 of the post-petition expenses, purportedly incurred to maintain and improve their family home sold by Trustee. (AA EOR Tab 17). On May 28, 2019, Trustee opposed the Motion (AA EOR Tab 20). After a hearing on June 11, 2019 (AA EOR Tab 27, June 11, 2019 Hearing Transcript ("Tr.")), the bankruptcy court denied the Motion on June 17, 2019. ("June 17, 2019 Order," AA EOR Tab 22).

In bringing the instant appeal, Appellants again assert that "the payments [they] made towards the mortgage principal, interest, insurance and property taxes increased the net sales proceeds on the Home for the estate on at least a dollar for dollar basis compared to of those payments were not made" and ultimately "help[ed] the Trustee receive a top dollar sales price." (AA Br. at 9). Accordingly, Appellants argue that they should be reimbursed $37,993.98.

II. LEGAL STANDARD

A district court may hear appeals from "final judgments, orders, and decrees," and, "with leave of the court, from interlocutory orders and decrees" of bankruptcy judges. 28 U.S.C. § 158(a). The bankruptcy court's conclusions of law are reviewed de novo and its factual findings are reviewed for clear error. Dawson v. Wash. Mut. Bank, F.A. , 367 F.3d 1174, 1177 (9th Cir. 2004) ; In re Olshan , 356 F.3d 1078, 1083 (9th Cir. 2004).

A bankruptcy court's decision to award or deny administrative expense claims is reviewed for abuse of discretion. Microsoft Corp. v. DAK Indus. (In re DAK Indus.) , 66 F.3d 1091, 1094 (9th Cir. 1995) ; Gill v. Tishman Constr. Corp. (In re Santa Monica Beach Hotel) , 209 B.R. 722, 725 (9th Cir. BAP 1997) ("The bankruptcy court has broad discretion to determine whether to grant a section 503 claim"). Courts apply a two-part test to determine if the bankruptcy court has abused its discretion. First, the Court determines de novo whether the bankruptcy court identified the correct legal rule to apply to the relief requested. Second, if the bankruptcy court correctly applied the legal rule, then its factual findings are examined for clear error. The bankruptcy court's factual findings are affirmed unless it is determined that those findings are "(1) ‘illogical,’ (2) ‘implausible,’ or (3) without ‘support in inferences that may be drawn from the facts in the record.’ " United States v. Hinkson , 585 F.3d 1247, 1261–62, n.21–22 (9th Cir. 2009) (en banc).

In reviewing the bankruptcy court's findings of fact for clear error, "[t]his court must accept the bankruptcy court's findings of fact unless, upon review, the court is left with the definite and firm conviction that a mistake has been committed by the bankruptcy judge." In re Greene , 583 F.3d 614, 618 (9th Cir. 2009). " ‘If two views of the evidence are possible, the [bankruptcy] judge's choice between them cannot be clearly erroneous.’ " In re Marshall , 721 F.3d 1032, 1039 (9th Cir. 2013) (quoting Price v. Lehtinen (In re Lehtinen) , 332 B.R. 404, 411 (9th Cir. BAP 2005) ).

III. DISCUSSION

a. The bankruptcy court applied the correct legal rule.

Appellants contend that the bankruptcy court applied the incorrect legal rule in denying their Motion requesting reimbursement for administrative expenses. Specifically, they assert that the bankruptcy court erred in stating that "the case law is very clear that you have to have a unique application of funds to an estate property that is going to either prevent diminishment or actually increase the value for the primary reason of maximizing the value to the estate." (AA EOR Tab 27, Tr. 5:8–12).

Bankruptcy Code section 503(b)(1)(A) allows as administrative expenses "the actual, necessary costs and expenses of preserving the estate[.]" 11 U.S.C. § 503(b)(1)(A). A claimant seeking administrative expense treatment must show that the debt asserted to be an administrative expense: (a) arose postpetition;³ "[ (b) ] arose from a transaction with the debtor-in-possession as opposed to the preceding entity (or alternatively, that the claimant gave consideration to the debtor-in-possession); and [ (c) ] directly and substantially benefitted the estate." In re DAK Indus., Inc. , 66 F.3d 1091, 1094 (9th Cir. 1995) ; In re Abercrombie , 139 F.3d 755, 757 (9th Cir. 1998). "The administrative expense applicant must prove entitlement to the requested reimbursement by a preponderance of the evidence." In re Nichols , BAP No. AZ–09–1325 PaDJu, 2010 WL 6259965, at *6 (9th Cir. BAP 2010) (citing Gull Indus. v. John Mitchell, Inc. (In re Hanna) , 168 B.R. 386, 388 (9th Cir. BAP 1994) ).

"As noted in the seminal Ninth Circuit case on administrative claims, Burlington Northern Railroad Co. v. Dant & Russell, Inc. (In re Dant & Russell, Inc.) , 853 F.2d 700, 706 (9th Cir. 1988),

Any claim for administrative expenses and costs must be the actual and necessary costs of preserving the estate for the benefit of its creditors. [ (citations omitted).] The terms "actual" and "necessary" are construed narrowly so as "to keep fees and administrative costs at a minimum." [ (citations omitted).] An actual benefit must accrue to an estate. [ (citations omitted).] Additionally, keeping costs to a minimum serves the overwhelming concern of the Code: Preservation of the estate. [ (citations omitted).] This limitation is necessary to protect the limited assets of the estate for the benefit of the unsecured interests[.]"

In re Cook Inlet Energy LLC , 583 B.R. 494, 500 (9th Cir BAP 2018).

Courts "allow payment of administrative expenses from the proceeds of secured collateral," such as a home, when they are either "[ (1) ] incurred primarily for the benefit of the secured creditor," such as a trustee, "or [ (2) ] when the secured creditor caused or consented to the expense." In re Cascade Hydraulics & Utility Serv., Inc. , 815 F.2d 546, 548 (9th Cir. 1987).

Here, the bankruptcy court applied the correct legal rule in stating that, to obtain administrative expense treatment, Appellants' payments needed to "actually increase the value" of the Home "for the primary reason of maximizing the value to the estate." (AA EOR Tab 27, Tr. 5:8–12). The court properly denied Appellan...