In re Gray

• Decision Date: 03 November 2014
• Docket Number: No. 13–41018–JDP.,13–41018–JDP.
• Citation: 522 B.R. 619
• Court: U.S. Bankruptcy Court — District of Idaho
• Parties: In re Phillip B. GRAY, Debtor.

522 B.R. 619

In re Phillip B. GRAY, Debtor.

No. 13–41018–JDP.

United States Bankruptcy Court, D. Idaho.

Signed Nov. 3, 2014.

Steven L. Taggart, Maynes Taggart, PLLC, Idaho Falls, ID, for Debtor Phillip B. Gray.

Lane Erickson, Racine, Olson, Nye, Budge & Bailey, Chtd., Pocatello, ID, for Ross and Christina Rinas.

Kathleen A. McCallister, Meridian, ID, Chapter 13 Trustee.

MEMORANDUM OF DECISION

JIM D. PAPPAS, Bankruptcy Judge.

Introduction

Creditors Ross and Christina Rinas (the “Rinases”) filed an application for an administrative expense under § 503(b)¹ for the attorneys fees they incurred in connection with their efforts to dismiss the bankruptcy case of Phillip B. Gray (“Debtor”). Dkt. No. 95.² Debtor and chapter 13 Trustee Kathleen McCallister (“Trustee”) objected to the Rinases' application. Dkt. Nos. 96;104. In addition, Trustee objected to the amount of the Rinases' proof of claim filed in Debtor's case. Dkt. No. 99.

The Court conducted a hearing concerning the application and claim objection on September 9, 2014. At the conclusion of the hearing, the Court took the issues under advisement. This Memorandum of Decision sets forth the Court's findings of fact, conclusions of law, and decision concerning the issues. Rules 9014 and 7052.

Facts

On May 28, 2010, Debtor and his ex-spouse Colleen Erickson (“Erickson”) contracted to sell a mental health care business they owned known as Life Center for Change (“LCFC”) to the Rinases.³ The transaction generated a dispute, which resulted in litigation. On May 16, 2013, the Rinases obtained a default judgment in Idaho state court against Debtor in the amount of $77,451.83 (the “Judgment”). See Proof of Claim, 5–2 at 5.⁴ Although the Rinases asserted claims against Debtor in state court for breach of contract, unjust enrichment, and fraud,⁵ the Judgment did not specify the basis for the damages it awarded.⁶

Before entry of the Judgment, the state court addressed several issues on summary judgment. Notably, in one decision, the state court determined that a genuine issue of material fact existed as to whether Erickson and Debtor materially breached the contract for the sale of LCFC, and listed several allegations of fraud and breach of contract by the Rinases against both Erickson and Debtor. Memorandum Decision on Summary Judgment, Adv. No. 12–08053, Dkt. No. 10–2 at 20–21.

Erickson filed a chapter 7 petition on April 23, 2012, before entry of the Judgment. Bankr. No. 12–40552–JDP, Dkt. No. 1. On October 12, 2012, the Rinases filed an amended adversary complaint in Erickson's case seeking an exception to discharge pursuant to § 523(a)(2)(A), (a)(2)(B), and (a)(4) for the damages they claimed to have suffered due to alleged fraud by Erickson in the sale of LCFC. Adv. Proc. No. 12–08053, Dkt. No. 10.⁷ On November 18, 2013, the adversary proceeding against Erickson was settled by the parties, with Erickson agreeing to pay the Rinases $6,000 in installments. See Trustee's Exh. No. 200, Dkt. No. 107.⁸

Debtor filed a chapter 7 petition on August 16, 2013. Dkt. No. 1. The Rinases initially filed a proof of claim in Debtor's case for $130,090.30, based, in part, upon the Judgment. Proof of Claim 5–1. After the bankruptcy case was converted to chapter 13, Trustee objected to the Rinases' proof of claim on several grounds. Dkt. No. 99. Trustee argued that the proof of claim should be limited to the Judgment, together with some allowance for interest accruing before the filing of the bankruptcy case. Id. Trustee also argued that Rinases' claim against Debtor must be credited for the Erickson settlement payments of $6,000, because under applicable law, that amount reduces Debtor's liability to the Rinases under the Judgment. Id.⁹ The Rinases thereafter filed an amended proof of claim on August 20, 2014, reducing their claim to the Judgment amount, with interest, to $78,476.74. Proof of Claim 5–2. At the hearing on the objection to the proof of claim, Trustee took issue with the amended proof of claim only to the extent that it did not include a credit for the Erickson settlement of $6,000.

On February 14, 2014, the Rinases filed a motion to dismiss Debtor's chapter 7 case for “abuse” under § 707(b). Dkt. No. 50. On the same day, the Rinases filed an adversary complaint against Debtor in which, similar to the allegations they had made against Erickson, they asserted that Debtor had engaged in fraud in the sale of LCFC, and they requested that the Judgment be excepted from discharge pursuant to § 523(a)(2)(A), (a)(4), and (a)(6). Adv. No. 14–08016, Dkt. No. 1.¹⁰

On May 6, 2014, the Court held an evidentiary hearing on the Rinases' motion to dismiss Debtor's chapter 7 case. After submission of evidence by the Rinases, Debtor made an oral motion to convert his case to one under chapter 13 pursuant to § 706. The Court granted Debtor's motion and converted the case. Dkt. No. 68.

After Debtor's case was converted, the Rinases filed their application for an administrative expense for the attorney's fees they incurred in pursuing the § 707(b) motion to dismiss, which they claim amounted to $17,134.02. Dkt. No. 95.

Debtor and Trustee objected to this request. Dkt. Nos. 96; 104. The Court conducted a hearing on July 29, 2014, and required the Rinases to file a brief in support of their application, allowed Debtor and Trustee an opportunity to respond, and set this matter for further hearing. Dkt. No. 98. The parties filed the requested briefing. Dkt. Nos. 102, 104, 105, and 106. On September 9, 2014, the Court held a continued hearing on the issues presented. Dkt. No. 107. The parties appeared and presented evidence and argument. The Court thereafter took the issues under advisement.

Analysis and Disposition

There are two issues pending before the Court: (1) whether the Rinases should be allowed an administrative expense for the attorney's fees and costs they incurred in pursuing the § 707(b) motion to dismiss; and (2) whether the Rinases' proof of claim should be reduced by $6,000 based upon the Erickson settlement payment.

I. Administrative Expense Priority.

The Rinases argue they should be allowed a priority administrative expense pursuant to § 503(b). They contend that, solely through their efforts in pursuing the § 707(b) motion to dismiss, Debtor's chapter 7 case was converted to chapter 13, which will result in a significant dividend to Debtor's creditors. Because of this, the Rinases believe they should recover the attorney's fees they incurred in pursuing the dismissal motion. Debtor and Trustee disagree with this conclusion, and contend that none of the provisions of § 503(b) allow an administrative expense in this case.

A. Applicable Law

Administrative expenses allowed under § 503(b) are afforded priority in payment in bankruptcy cases. See § 507(a)(2) (providing second priority payment status to allowed § 503(b) administrative expenses). Section 503(b) sets forth a nonexclusive list of administrative expenses. In re Cent. Idaho Forest Prods., 317 B.R. 150, 157 (Bankr.D.Idaho 2004) (citing § 102(3) and Texas Comptroller of Pub. Accounts v. Megafoods Stores, Inc. (In re Megafoods Stores, Inc.), 163 F.3d 1063, 1071 (9th Cir.1998) ). The party asserting an administrative expense bears the burden of proving its claim. Microsoft Corp. v. DAK Indus., Inc. (In re DAK Indus., Inc.), 66 F.3d 1091, 1094 (9th Cir.1995). While bankruptcy courts have broad discretion in determining whether a claim is entitled administrative expense status, the courts are instructed to narrowly construe § 503(b). In re Azevedo, 485 B.R. 596, 601 (Bankr.D.Idaho 2013) (citing In re DAK Indus., Inc., 66 F.3d at 1094 ).

Section 503(b)(1)(A) provides that administrative expenses shall be allowed, including, “the actual, necessary costs and expenses of preserving the estate....” For costs and expenses to qualify under this provision, courts apply a two-part test, and ask: (1) whether the expense arose from a transaction with the bankruptcy estate; and (2) whether the transaction directly and substantially benefitted the bankruptcy estate. In re Azevedo, 485 B.R. at 600–01 (citing Abercrombie v. Hayden Corp. (In re Abercrombie), 139 F.3d 755, 757 (9th Cir.1998) ; In re DAK Indust., Inc., 66 F.3d at 1094 ; Hopkins v. Idaho State Univ. Credit Union (In re Herter), 464 B.R. 22, 32 (Bankr.D.Idaho 2011) ).

Section 503(b)(3)(B) provides for an administrative expense for “the actual, necessary expense, other than compensation and reimbursement specified in paragraph (4)¹¹ of this subsection, incurred by—(B) a creditor that recovers, after the court's approval, for the benefit of the estate, any property transferred or concealed by the debtor[.]” As can be seen, the express language of this statute requires that a creditor obtain court approval for its actions before any recovery is obtained through the creditor's efforts. See Arab Monetary Fund v. Hashim (In re Hashim), 379 B.R. 912, 921 (9th Cir. BAP 2007) (“Although § 503(b)(3)(B) is often described as a ‘prior permission’ requirement, precision requires sharper focus. The statute does not mandate that judicial approval be obtained before the action is filed. Rather, it authorizes administrative expense awards only if the court approves the action before recovery is obtained.”); In re Central Idaho Forest Prods., 317 B.R. at 157 (“To allow an administrative expense to a party for the recovery of a transferred or concealed asset without that party obtaining prior Court approval, would be tantamount to deleting the phrase from the statute.”) (emphasis in original).

B. Application of Law to Facts

The Court concludes that the Rinases have not shown that their legal expenses incurred in prosecuting the § 707(b) motion to dismiss Debtor's case should be allowed as an administrative expense under § 503(b). Specifically, the Rinases have not shown that their claim qualifies under § 503(b) generally, nor under the express provisions of § 503(b)(1)(A) or (b)(3)(B).

First, the Rinases have not...