Christian Life Center, In re

• Decision Date: 10 July 1987
• Docket Number: No. 85-2617,85-2617
• Parties: Bankr. L. Rep. P 71,894 In re CHRISTIAN LIFE CENTER, Debtor. CHRISTIAN LIFE CENTER LITIGATION DEFENSE COMMITTEE, Malcolm A. Misuraca, and Michael Welty, Plaintiffs-Appellants, v. Beatrice SILVA, Manuel Silva, Lucille Kersh, Marianne Speckman, Russell Speckman, George Viale, Geraldine Viale, Geraldine C. Westphalen, Dorothy H. Westphalen, Helen Greco, Clyde C. Greco, and Official Creditors Committee, Defendants-Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1370

821 F.2d 1370

Bankr. L. Rep. P 71,894

In re CHRISTIAN LIFE CENTER, Debtor CHRISTIAN LIFE CENTER LITIGATION DEFENSE COMMITTEE, Malcolm A. Misuraca, and Michael Welty, Plaintiffs-Appellants, v. Beatrice SILVA, Manuel Silva, Lucille Kersh, Marianne Speckman, Russell Speckman, George Viale, Geraldine Viale Geraldine C. Westphalen, Dorothy H. Westphalen, Helen Greco Clyde C. Greco, and Official Creditors Committee Defendants-Appellees.

No. 85-2617.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted July 19, 1986.

Decided July 10, 1987.

Christopher G. Costin, Santa Rosa, Cal., for plaintiffs-appellants.

Vincent O'Gara, San Francisco, Cal., for the Official Creditors Committee.

Gary Koenigsberg, San Francisco, Cal., for defendants-appellees.

Appeal from the United States District Court for the Northern District of California.

Before CHOY, HUG, and WIGGINS, Circuit Judges.

WIGGINS, Circuit Judge:

In this appeal we determine whether Christian Life Center Litigation Defense Committee ("LDC"), a group of lawyers representing corporate officers of a Chapter 11 debtor in an adversary proceeding, is entitled to priority as an administrative expense for the payment of its fees. The district court disallowed the claim as an administrative expense and subordinated it to claims of general creditors. We affirm the disallowance of the administrative expense claim but reverse the order of subordination.

BACKGROUND

Christian Life Center ("Christian Life") is an Assembly of God church in Santa Rosa, California. In 1972 Christian Life began raising funds for church construction by selling shares in a "trust fund." The church failed to register the shares as a security. As a result, the California Superintendent of Banking issued a cease and desist order in 1978 against the trust fund, causing a run on the fund. A group of trust fund purchasers ("Investors") who failed to recover their investment brought an action in a California court against Christian Life, its pastor Reverend A. Watson Argue, and other church officers for rescission of the sale of unregistered securities under California Corporations Code sections 25503-25504, and against the church and its pastor only for fraud. In 1979 Christian Life petitioned for reorganization under Chapter 11 of the Bankruptcy Code (Code), 11 U.S.C. Secs. 1101-1174, and the pending state securities action was transferred to the bankruptcy court and converted to an adversary proceeding. In 1980 the court approved a liquidation plan, reserving for later determination whether to allow claims of defendant-officers for indemnity of litigation expenses incurred in the adversary proceeding. The court distributed the estate pursuant to the plan, retaining a reserve of $500,000.

Sitting as the trial court in the adversary proceeding, the bankruptcy court dismissed the California securities claims. In 1984 the Bankruptcy Appellate Panel (BAP) reversed and remanded. Kersh v. Christian Life Center (In re Christian Life Center), 45 B.R. 905, 911-12 (Bankr. 9th Cir.1984). While that appeal was pending, the fraud claim against Argue was tried and a jury found him not liable. The Investors appealed to BAP, which transferred the appeal to the district court, where the appeal is pending. Trial of the securities claims against all the defendants is pending in the bankruptcy court.

LDC is a group of attorneys representing the officers in the adversary proceeding. After Argue's favorable trial judgment, LDC submitted a claim against the estate for indemnity of Argue's defense costs as a first priority administrative expense. The bankruptcy court allowed the claim. ¹ The appellants--Official Creditors Committee and Investors (collectively "Creditors")--two groups of church general creditors, appealed to BAP, which granted interlocutory review under 28 U.S.C. Sec. 158(a) (Supp.1985) and transferred the appeal to the district court. The court disallowed LDC's claim as an administrative expense and subordinated indemnity claims in the adversary proceeding to general creditors' claims. LDC appeals. ²

LDC argues that the bankruptcy court properly classified its indemnity claim as a first priority administrative expense, or in the alternative that its claim should be treated on par with other general unsecured claims. The Creditors argue that the district court correctly subordinated indemnity claims to other unsecured claims.

Following oral argument we requested additional briefing on whether the appeal was premature due to the pendency of the adversary litigation and whether LDC has standing to assert its clients' indemnity claims.

ANALYSIS

I. APPELLATE JURISDICTION

On our own motion we must determine whether we have jurisdiction over the appeal. Dental Capital Leasing Corp. v. Martinez (In re Martinez), 721 F.2d 262, 264 (9th Cir.1983). The district court has jurisdiction to review an interlocutory bankruptcy court decision when leave to review is granted, 28 U.S.C. Sec. 158(a), as it was here. We have jurisdiction of appeals from final orders of district courts reviewing decisions of bankruptcy courts. Id. Sec. 158(d). While the bankruptcy order is interlocutory, that fact does not automatically defeat our jurisdiction. Four Seas Center, Ltd. v. Davres, Inc. (In re Four Seas Center, Ltd.), 754 F.2d 1416, 1418 (9th Cir.1985). Instead we follow a pragmatic approach to determine appealability under section 158(d). La Grand Steel Prods. Co. v. Goldberg (In re Poole, McGonigle & Dick, Inc.), 796 F.2d 318, 321 (9th Cir.), amended, 804 F.2d 576 (1986). An order subordinating a claim to general creditors' claims is appealable if no further proceedings will affect the scope of the order. See id. The district court order finally determined the question of subordination of officers' indemnity claims. No further action on this issue is contemplated or necessary. Indeed, the order disposes of the indemnity claims as a practical matter. The parties have stated that if the remaining reserve is distributed to general creditors ahead of the subordinated indemnity claimants, the reserve will be exhausted. Thus the order is appealable under section 158(d).

II. ADMINISTRATIVE EXPENSE

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).

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).

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).

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...