In Re: Kadjevich, Debtor

• Decision Date: 08 May 2000
• Docket Number: No. 99-15367,No. 99-15372,99-15367,99-15372
• Citation: 220 F.3d 1016
• Parties: (9th Cir. 2000) In re: ROBERT M. KADJEVICH, Debtor. NICHOLAS GEORGE KADJEVICH, JR., Appellant, v. ROBERT M. KADJEVICH; SUZANNE L. DECKER, Trustee; UNITED STATES TRUSTEE/SAN JOSE, Appellees. In re: ROBERT M. KADJEVICH, Debtor. SUZANNE L. DECKER, Trustee, Appellant, v. NICHOLAS GEORGE KADJEVICH, JR., Appellee
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1016

220 F.3d 1016 (9th Cir. 2000)

In re: ROBERT M. KADJEVICH, Debtor.

NICHOLAS GEORGE KADJEVICH, JR., Appellant, v. ROBERT M. KADJEVICH; SUZANNE L. DECKER, Trustee; UNITED STATES TRUSTEE/SAN JOSE, Appellees.

No. 99-15367

In re: ROBERT M. KADJEVICH, Debtor.

SUZANNE L. DECKER, Trustee, Appellant, v. NICHOLAS GEORGE KADJEVICH, JR., Appellee.

No. 99-15372

Office of the Circuit Executive

U.S. Court of Appeals for the Ninth Circuit

Argued and Submitted May 3, 2000

Submission Withdrawn May 8, 2000¹

Resubmitted July 26, 2000

Filed August 8, 2000

[Copyrighted Material Omitted]

John S. Perkins, San Jose, California, for the appellant/crossappellee.

Elizabeth Berke-Dreyfuss, Wendel, Rosen, Black & Dean, LLP, Oakland, California, for the appellee/cross-appellant.

Appeals from the Ninth Circuit Bankruptcy Appellate Panel, Meyers, Jones, and Ollason, Bankruptcy Judges, Presiding; BAP No. NC-97-01021-MeJO

Before: Harlington Wood, Jr.², Andrew J. Kleinfeld, and Susan P. Graber, Circuit Judges.

OPINION

GRABER, Circuit Judge:

Since Angela Kadjevich died 20 years ago, her sons Nicholas and Robert have been embroiled in seemingly perpetual litigation. Initially, the brothers quarreled over the disposition of Angela's estate. That dispute spawned others. An early casualty of this prodigious litigation was Robert's solvency; since 1987, he has been in bankruptcy.

In the decision that we are asked to review today, the bankruptcy court declined to grant administrative-expense status to two claims made by Nicholas against Robert's bankruptcy estate. We conclude that the claims cannot be considered administrative expenses of Robert's bankruptcy estate and, thus, affirm the decision of the bankruptcy court.

FACTUAL AND PROCEDURAL BACKGROUND

Nicholas, Robert, and Angela Kadjevich co-owned several industrial properties in South San Francisco. When Angela died in 1980, Robert assumed control of the properties. In 1983, Nicholas brought a state-court action against both Angela's estate and Robert, seeking partition of the estate and an accounting. That action settled.

Soon thereafter, Robert breached the settlement agreement and, in April 1985, Nicholas sued Robert for fraud. In September 1987, while the fraud case was pending, Robert filed a petition for relief under Chapter 11 of the Bankruptcy Code. Nicholas obtained relief from the automatic stay associated with Robert's bankruptcy case and continued to prosecute the fraud action.

In January 1990, Nicholas and Robert settled the fraud action as part of an effort to obtain a "global " settlement of all the litigation among Nicholas, Robert, Robert's bankruptcy estate, and Angela's probate estate. Once again, however, Robert breached the settlement agreement. Ultimately, the fraud case went to trial, a jury found Robert guilty of fraud, and the state court awarded Nicholas $27,000 in fraud damages and $38,000 in back rent. In addition, the state court awarded Nicholas $150,000 under California Code of Civil Procedure S 128.5 as compensation for attorney fees and costs that he had incurred as a result of Robert's bad-faith breach of the 1990 settlement.

In August 1990, Nicholas' Chapter 11 reorganization case was converted to a Chapter 7 liquidation case, and a trustee was appointed. Five years later, under the auspices of the bankruptcy court, the parties attempted another "global" settlement. Under that settlement, Nicholas was to receive the most valuable property that remained in Angela's probate estate. Because this property was worth more than Nicholas' share of Angela's estate, he was required to make an equalizing payment to Robert's bankruptcy estate. That payment, the parties agreed, could be made in the form of a "credit bid," which meant that Nicholas could credit the full amount of the judgment in the fraud action against the money that he owed to Robert's bankruptcy estate.

Although the bankruptcy court initially approved the parties' settlement, the court ultimately refused to allow Nicholas to offset the $150,000 fee award against the required equalization payment that he was required to pay to Robert's bankruptcy estate. The court reasoned that allowing Nicholas to credit the fee award would violate the Bankruptcy Code's prioritization scheme by paying Nicholas' claim for fees ahead of other comparable claims.

Nicholas arranged alternative financing and made the equalization payment in cash. Obtaining that alternative financing cost him roughly $50,000. Nicholas appealed the bankruptcy court's order denying his request to credit the fee award, but the Bankruptcy Appellate Panel (BAP) concluded that the issue was moot because Nicholas already had made the required payment through other means.

Nicholas then requested that both the $150,000 fee award and the $50,000 in additional expenses be classified as administrative expenses of Robert's bankruptcy estate. The bankruptcy court denied both requests. On appeal, the BAP held that the $150,000 fee award was an administrative expense, but that the $50,000 financing expense was not. Both parties timely appealed.

STANDARD OF REVIEW

We review independently the decision of the bankruptcy court, showing no deference to the decision of the BAP. See Texas Comptroller of Public Accounts v. Megafoods Stores, Inc. (In re Megafoods Stores, Inc.), 163 F.3d 1063, 1067 (9th Cir. 1998). We review de novo the bankruptcy court's conclusions of law, and we review for clear error the bankruptcy court's findings of fact. See id. Finally, we review for abuse of discretion the bankruptcy court's ultimate decision whether to treat a particular claim as an administrative expense. See Burlington N. R.R. Co. v. Dant & Russell, Inc. (In re Dant & Russell, Inc.), 853 F.2d 700, 707 (9th Cir. 1988).

ANALYSIS

A. Nicholas' Claim for Fees Cannot be an Administrative Expense Because it is a Pre-Petition Claim.

When the assets of a bankruptcy estate are distributed to the bankrupt's creditors, claims for administrative expenses are among the very first unsecured claims that are paid. See United States Trustee v. Endy (In re Endy), 104 F.3d 1154, 1155-56 (9th Cir. 1997); 11 U.S.C. SS 726(a), 507(a)(1), 503(b). The Bankruptcy Code provides a nonexhaustive list of allowable administrative expenses; they include "the actual, necessary costs and expenses of preserving the estate, including wages, salaries, or commissions for services rendered after the commencement of the case." 11 U.S.C. S 503(b)(1)(A); see Megafoods Stores, 163 F.3d at 1071 (explaining that the list of particular administrative expenses contained in S 503(b) is nonexhaustive). In general, postpetition business expenses are granted administrative-expense priority so that third parties will risk providing the goods and services that are necessary for a struggling debtor to reorganize. See Microsoft Corp. v. DAK Indus., Inc. (In re DAK Indus., Inc.), 66 F.3d 1091, 1097 (9th Cir. 1995) ("Payment of administrative expenses allows the debtor to secure goods and services necessary to administer the estate, which ultimately accrues to the benefit of all creditors.").

In addition to those kinds of "standard" administrative expenses, tort claims based on a trustee's post-petition negligence are granted administrative-expense priority. See Reading Co. v. Brown, 391 U.S. 471 (1968). Such claims are deemed "ordinarily incident to [the] operation of a business," id. at 483, and are granted priority status so that the victims of a reorganizing business' torts will be compensated ahead of the creditors who sought reorganization.

Critically, however, only post-petition debts can be treated as administrative expenses; pre-petition debts may not be granted administrative-expense priority. See 11 U.S.C. S 503(b)(1)(A) (providing that administrative expenses include "the actual, necessary costs and expenses of preserving the estate, including wages, salaries or commissions for services rendered after the commencement of the case") (emphasis added); Reading Co., 391 U.S. at 482 (holding that "tort claims arising during an arrangement [are] actual and necessary expenses of the arrangement") (emphasis added); Dant & Russell, 853 F.2d at 707 (noting that "any claims under the section must have a distinct postpetition character"); Christian Life Center Litig. Defense Comm. v. Silva (In re Christian Life Center), 821 F.2d 1370, 1373-74 (9th Cir. 1987) ("Claims that arise from a creditor's pre-petition services to the estate are not entitled to administrative expense treatment."). The question here, then, is whether Nicholas' claim for attorney fees is a pre-petition or a post-petition claim. Relying on our recent decision in Abercrombie v. Hayden Corp. (In re Abercrombie), 139 F.3d 755 (9th Cir. 1998), we conclude that it is a pre-petition claim and, therefore, that it may not be treated as an administrative expense.

The facts of Abercrombie are relatively straightforward. Abercrombie won a judgment in a state-court breach-ofcontract case. The defendant in the contract case, Hayden Corporation, appealed and, while the appeal was pending in the state supreme court, Abercrombie filed a bankruptcy petition. The state supreme court then reversed the judgment and, pursuant to a fee provision in the parties' contract, ordered Abercrombie to pay Hayden's attorney fees. See id. at 756.³

Hayden asked the bankruptcy court to grant administrative expense priority to the attorney fees that it had incurred after Abercrombie filed his bankruptcy petition, on the theory that those fees were caused by Abercrombie's post-petition defense of the appeal. This court held that, because the award of attorney fees was made in an action commenced prepetition, under the authority of a pre-petition contract, it was pre-petition in nature and could not be considered an administrative expense. Although Abercrombie had caused the fees to be incurred through its post-petition conduct, "the source of the...