NOT FOR PUBLICATION

Argued and Submitted at Pasadena, California: July 29, 2005

Appeal from the United States Bankruptcy Court for the Central District of California. Honorable Ellen A. Carroll, Bankruptcy Judge, Presiding. Bk. No. LA 89-26724-EC.

Before: Marlar, Meyers^[ and Perris, Bankruptcy Judges.

MEMORANDUM

INTRODUCTION

The debtor's former president and CEO, Robert P. Mosier (" Mosier") has appealed the bankruptcy court's denial of his $59,477.90 administrative expense claim.

The debtor's converted chapter 7 case had insufficient funds to pay all of the preconversion chapter 11 administrative creditors in full, and Mosier faced disgorgement of his chapter 11 fees. With the bankruptcy court's permission, Mosier objected to certain chapter 11 administrative claims in the converted chapter 7 case. His efforts resulted in a reduction of those claims by almost $315,000, thus yielding a greater pro rata payment to the chapter 11 administrative claimants as well as a reduction of the disgorgement amounts.

When Mosier sought an award of administrative expense for his and his professional's fees and expenses, the bankruptcy court denied his claim, finding that he was neither a creditor who had made a substantial contribution to a chapter 9 or 11 estate, as required by the statute, nor was he a professional employed by the estate.

On appeal, Mosier maintains that he was a constructive creditor and that the Code should be read broadly to reward his benefit to the estate. We conclude that neither statutory interpretation nor fundamental fairness justified an administrative expense claim for Mosier, who essentially volunteered his services, and AFFIRM.

FACTS

United Education & Software (" Debtor") filed a chapter 11 petition in 1989. The case was converted to chapter 7 in 1996, and a trustee (" Trustee") was appointed.

Mosier was retained with the bankruptcy court's approval as the chapter 11 Debtor's president and CEO from 1994 to 1996. His fees and costs were paid in full during the chapter 11 case.

In 2000, postconversion, Trustee reported that the estate was administratively insolvent at the chapter 11 level, and the bankruptcy court entered an order that professionals who had received fees, including Mosier, would be subject to a future order of disgorgement of certain amounts so that all chapter 11 administrative creditors would be paid the same pro rata amount.

Mosier made an unsuccessful attempt to exempt himself from the disgorgement process. Meanwhile, in 2003, Trustee filed his final account and report, which authorized payment for certain chapter 11 administrative claims. After reviewing the report, Mosier sought and obtained an order to postpone the disgorgement proceedings in order to permit him to object to some of those claims. The bankruptcy court's June 12, 2003 order stated, in pertinent part:

IT IS HEREBY ORDERED that the hearing on the court's Order to Show Cause re Disgorgement of Fees (the " OSC") and on all other matters relating thereto, currently scheduled for June 16, 2003 at 2:00 p.m. shall be continued to November 25, 2003 at 2:00 p.m. to permit Robert Mosier and/or the Chapter 7 Trustee, Arnold Kupetz, to object to certain Chapter 11 administrative claims, the outcome of which objections may reduce the amounts to be disgorged pursuant to the OSC.

Order Granting Motion to Continue Hearing (June 12, 2003).

Mosier described the genesis of his work as follows:

I assumed (perhaps incorrectly) that the Trustee would review and object to claims as part of his administration of the case. I was therefore startled to discover in 2003 . . . that a number of claims presented for payment in Schedule " G" of the Trustee's Final Account and Report (" TFR") appeared improper. In a review of approximately 45 claims with values over $10,000 (the focus of my limited inquiry), I discovered that many were void of backup, some appeared to be pre-petition (in an estate that could only afford to pay a portion of Chapter 11 administration claims), and one landlord claim had not been reconciled. The level of claims is paramount in a disgorgement equation set up by the Court to achieve equality between the amounts already paid to professionals and amounts to be paid to the remaining Chapter 11 administrative claimants.

Decl. of Mosier (Dec. 10, 2003), p. 2, ¶ 3.

Mosier then began the process of meeting with Trustee and claimants, investigating the claims, and filing objections through his business, Mosier & Co., Inc. It was undisputed that his objections resulted in a reduction of chapter 11 administrative claims by approximately $315,000, which money was then available to all of those claimants. His work thus reduced the amount of chapter 11 administrative fees subject to disgorgement.

In November, 2003, Mosier, describing himself as a " party in interest, " filed an application for administrative expense for reimbursement of fees and costs in the sum of $45,620.71 incurred in bringing the claim objections. The requested amount included compensation for Mosier's professional services and those of his accountant. The basis for the claim was the benefit conferred upon the estate by lowering the amount of non-court-approved chapter 11 administrative claims.

Following a hearing, the bankruptcy court denied the application. The interlocutory order, entered on May 12, 2004, was not appealed.

Then, in June, 2004, the bankruptcy court entered its order for disgorgement which included Mosier among the professionals. Mosier immediately moved for reconsideration, whereupon the court vacated the order, in August 2004, with respect to Mosier, finding that he was not a professional subject to disgorgement.

In December 2004, Mosier filed his First Amended Application for Payment of Administrative Expense (" First Amended Application"), moving under § 503(b)(1)(A) (for " actual and necessary costs and expenses of preserving the estate"), § 503(b)(3) (for actual, necessary expenses incurred by a creditor in making a substantial contribution in a chapter 11 case), and § 503(b)(4) (for compensation of a professional's fees who is employed by an allowed § 503(b)(3) claimant). Mosier requested the sum of $59,477.90 for the period May 2003 through January 2004, while the case was in chapter 7. The basis of the claim was " for expenses he and his accountant incurred in researching filed administrative priority proofs of claim in the case and successfully objecting to $707,738 of said claims, resulting in an increase of $314,686 available for payment of appropriate administrative priority claims in this estate." First Amended Application, at 1-2.

Trustee, while acknowledging that Mosier's work had significantly benefitted the estate, objected to the application for the following reasons: (1) Mosier's actions were intended to benefit himself and only collaterally benefitted the estate; (2) Mosier had already been paid in full for services rendered in the chapter 11 case and did not have to disgorge them in the chapter 7 case; thus, he was not a creditor who would be entitled to compensation for making a substantial contribution to the estate; and (3) Mosier was not a court-approved " professional" and, therefore, his actions as a " de facto" professional in the chapter 7 case should not be compensated.

Mosier replied to Trustee's objections and made the following points: (1) personal benefit is irrelevant in determining the allowance of administrative claims under § 503(b)(3); (2) from 2002 until the court vacated its disgorgement order as to Mosier in August 2004--the time during which the expenses were incurred--Mosier was considered a professional subject to disgorgement and, thus, was a constructive creditor of the estate; and (3) he was also a deemed or constructive creditor because the bankruptcy court permitted him to exercise Trustee's powers in bringing the claim objections.

The bankruptcy court made oral findings and conclusions at the January 25, 2005 hearing. First, it concluded that compensation under § 503(b)(1)(A) was inappropriate for Mosier, as that subsection is intended to encourage entities such as trade creditors to do business with a chapter 11 debtor, not to compensate a party in interest who has objected to claims in a chapter 7 case.

Next, the court found that Mosier was not a creditor and thus was not entitled to compensation under § 503(b)(3). It also determined that Mosier's request did not fit under the provisions of any of the six subsections of § 503(b)(3), which it interpreted as being exclusive.

Finally, because Mosier was not a creditor, the bankruptcy court found that Mosier's accountant could not be compensated under § 503(b)(4).

The order denying the first amended application was entered on February 2, 2005, and was timely appealed by Mosier.

ISSUE

Whether a party in interest who, with the bankruptcy court's permission, successfully objects to chapter 11 administrative claims in a converted chapter 7 case, thereby increasing the cash distribution to those claimants, is entitled to an administrative expense claim in the chapter 7 case for his related fees and expenses.

STANDARD OF REVIEW

The bankruptcy court's interpretation of the Code is a matter of law which we review de novo. United States v. Hatton (In re Hatton), 220 F.3d 1057, 1059 (9th Cir. 2000).

The bankruptcy court's ultimate decision whether to treat a particular claim as an administrative expense is reviewed for an abuse of discretion. See Kadjevich v. Kadjevich (In re Kadjevich), 220 F.3d 1016, 1019 (9th Cir. 2000). Its exercise of its equitable powers is also reviewed for an abuse of discretion. AARP v. First Alliance Mortg. Co. et al. (In re First Alliance Mortg. Co.), 269 B.R. 428, 433 (C.D. Cal. 2001). A bankruptcy court may abuse its discretion if it does not apply the correct law or rests its decision on a clearly erroneous assessment of evidence. See An-Tze Cheng v. K & S Diversified Invs., Inc. (In re An-Tze Cheng), 308 B.R. 448, 452 (9th Cir. BAP 2004).

DISCUSSION

A. § § 503(b)(3) and (b)(4)

In the Ninth Circuit, the claimant has the burden of proving an administrative expense under a standard which " limit[s] abuses of the administrative-expense priority." Einstein/Noah Bagel Corp. v. Smith (In re BCE West, L.P.), 319 F.3d 1166, 1172 (9th Cir. 2003) (alteration added). Section 503(b) has been construed narrowly because administrative claims are paid directly from the bankruptcy estate and reduce the funds available for creditors and other claimants. See Microsoft Corp. v. DAK Indus., Inc. (In re DAK Indus., Inc.), 66 F.3d 1091, 1094 (9th Cir. 1995); In re Alumni Hotel Corp., 203 B.R. 624, 630 (Bankr. E.D. Mich. 1996). See also § § 507(a); 726(a) and (b).

Section 503(b) provides a nonexhaustive list of allowable administrative expenses. See 11 U.S.C. § 503(b); Kadjevich, 220 F.3d at 1019 (citing Tex. Comptroller of Pub. Accounts v. Megafoods Stores, Inc. (In re Megafoods Stores, Inc.), 163 F.3d 1063, 1067 (9th Cir. 1998)).

Mosier admits that his claim for the expenses which he incurred, in objecting to certain proofs of claim, does not fit squarely within the subsections of § 503(b). Still, he maintains that the implied policy behind the statute supports his claim's treatment as an additional type of administrative expense, since he was doing the work of the trustee. Moreover, Mosier maintains that he was a constructive creditor during the time that he was subject to the potential disgorgement order and brought the claim objections, and thus argues that his request falls under § § 503(b)(3) and (b)(4).

Trustee disagrees and maintains that Mosier, acting as a de facto professional, was not entitled to compensation because he had not been employed under § 327(a) nor was he a creditor, as that term is defined in the Code.

The relevant Code sections, § § 503(b)(3) and (b)(4) provide, in pertinent part:

(b) After notice and a hearing, there shall be allowed administrative expenses, other than claims allowed under section 502(f) of this title, including --

(3) the actual, necessary expenses, other than compensation and reimbursement specified in paragraph (4) of this subsection, incurred by --

. . . .

(D) a creditor, an indenture trustee, an equity security holder, or a committee representing creditors or equity security holders other than a committee appointed under section 1102 of this title, in making a substantial contribution in a case under chapter 9 or 11 of this title;

. . . .

(4) reasonable compensation for professional services rendered by an attorney or an accountant of an entity whose expense is allowable under paragraph (3) of this subsection, based on the time, the nature, the extent, and the value of such services, and the cost of comparable services other than in a case under this title, and reimbursement for actual, necessary expenses incurred by such attorney or accountant; . . . .

11 U.S.C. § 503(b)(3) and (b)(4) (emphasis added).

The two requirements to recover on a § 503(b)(3)(D) claim are: (1) the claimant must be a creditor of the estate; and (2) the creditor must have made a substantial contribution to the chapter 9 or 11 bankruptcy estate. See Cellular 101, Inc. v. Channel Communications, Inc. (In re Cellular 101, Inc.), 377 F.3d 1092, 1096 (9th Cir. 2004).

We do not need to decide whether or not Mosier was a creditor because he did not meet the requirement that the creditor make a " substantial contribution in a case under chapter 9 or 11." 11 U.S.C. § 503(b)(3)(D) (emphasis added). Mosier's services and contribution were made in the converted chapter 7 case, not in the chapter 11 case.

The Supreme Court has stated:

It is well established that " when the statute's language is plain, the sole function of the courts--at least where the disposition required by the text is not absurd--is to enforce it according to its terms."

Lamie v. U.S. Trustee, 540 U.S. 526, 534, 124 S.Ct. 1023, 157 L.Ed.2d 1024 (2004) (citation omitted).

In addition, the legislative history of § 503(b)(3)(D) indicates that it was meant to reimburse those efforts that directly benefitted the reorganization process. See Lebron v. Mechem Fin. Inc., 27 F.3d 937, 944-45 (3d Cir. 1994). The proper interpretation of § 503(b)(3)(D) is that it does not authorize administrative priority for expenses incurred in a chapter 7 case or after a case has been converted from chapter 11 to chapter 7. Id.; In re United Container LLC, 305 B.R. 120, 128 (Bankr. M.D. Fla. 2003); Alumni Hotel Corp., 203 B.R. at 631. Therefore, Mosier does not meet the threshold requirements for asserting an administrative claim under § 503(b)(3)(D).

Nevertheless, Mosier contends that the provisions of § 503(b)(3) should be expanded to cover his situation. He argues that the bankruptcy court erred in ruling that the subsections of § 502(b)(3) were exclusive.

For legal support, Mosier cites Matter of Del Grosso, 129 B.R. 156 (N.D.Ill. 1991). There, in an apparent chapter 7 case, two unsecured creditors objected to the secured attorneys' fee claim of the debtor's prepetition lawyers for their work in litigating and settling a personal injury case. The objectors contended that the lawyers failed to perfect their statutory liens. The bankruptcy court sustained the objection, ruling that the lawyers were unsecured creditors and thus more than $41,000, which otherwise would have been disbursed to them as administrative expense, was available to the bankruptcy estate. Id. at 156.

The objectors' attorneys then requested fees for their efforts in defeating the secured claims. Two other unsecured creditors then objected to those fees, and the bankruptcy court sustained the objection. The objectors' appeal went to the district court.

The district court reversed and ruled that the preservation of $41,000 for the estate was a recovery of property by a creditor, under § 503(b)(3)(B), and that the attorneys' fees were allowable as an administrative expense under § 503(b)(4).

Section 503(b)(3)(B) provides for administrative expenses 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;

11 U.S.C. § 503(b)(3)(B).

The district court in Del Grosso reasoned that " setting aside a lien is a recovery of property previously transferred." Id. at 157.

At first blush, there is some appeal between Del Grosso and our case. Here, Mosier's claim objection resulted in a $315,000 reduction in the chapter 11 administrative claims. As a result, the chapter 11 administrative claimants received a greater pro rata distribution from the chapter 7 estate. Similarly, in Del Grosso, the objectors' efforts resulted in more than $40,000 coming back into the estate for distribution. However, the rationale for administrative expense of Del Grosso--that eliminating a lien is a recovery for the estate--is missing in our case. Section 503(b)(3)(B) speaks of recovering for the estate " any property transferred or concealed by the debtor." Here, there were no transfers of a secured interest or other property. The language of subsection (3)(B) therefore cannot be broadened to provide that any claim objection which results in the elimination or reduction of that claim is a recovery of " property transferred" by the debtor.

Mosier further argues that he should be compensated because he was doing Trustee's work. He relies on Duckor Spradling & Metzger v. Baum Trust (In re P.R.T.C., Inc.), 177 F.3d 774 (9th Cir. 1999).

In P.R.T.C., the chapter 7 trustees, in consolidated cases, assigned certain avoidance actions and rights to sue various individuals to the estates' largest creditor after the trustees determined that their respective estates lacked sufficient funds to pursue these actions. Under the assignment, the creditor pursuing the claims was obligated to pay to the estates 50% of the net proceeds of any successful actions. Id. at 777. Over an objection, the bankruptcy court approved the assignment, which was upheld by the district court and affirmed on appeal by the Ninth Circuit. The Ninth Circuit court held:

The bankruptcy court can authorize a creditor to exercise [the trustee's avoidance] powers if: (1) the creditor is pursuing interests common to all creditors; . . . and (2) allowing the creditor to exercise those powers will benefit the remaining creditors . . . .

Id. at 782 (citations omitted).

P.R.T.C. decided the issue of creditor standing. Here, Mosier's standing as a party in interest to bring the claim objections was not disputed. However, such standing does not automatically entitle the creditor to be compensated by the estate for his efforts. In P.R.T.C., the parties agreed, in a written assignment agreement, to the terms of the creditor's involvement, including its retention of 50% of the recovery. See id. at 777. Here, Mosier did not bring the claim objections on behalf of Trustee or enter into any type of agreement with him, nor did he obtain a court order regarding the payment of his fees. We have held that even a creditor acting under the statutory creditor-recovery authority of § 503(b)(3)(B) litigates at his own risk and expense. See Simantob v. Claims Prosecutor, LLC (In re Lahijani), 325 B.R. 282, 292 (9th Cir. BAP 2005).

B. Notions of Equity or Fundamental Fairness

Finally, Mosier contends that § 503 should be read broadly to reimburse him for his undertaking, because the six enumerated subsections under § 503(b) are nonexhaustive.

We are not convinced that § 503(b)(3) should be enlarged to accommodate a substantial contribution by a creditor in a chapter 7 case. When a statute sets forth a series of items included under a general rule, and does not use the term " including, " the canon of expressio unius est exclusio alterius applies, under which a court infers an intention to restrict the statute's application to the specific listed examples. See United States v. Ledlin (In re Mark Anthony Constr., Inc.), 886 F.2d 1101, 1106 (9th Cir. 1989). Therefore, unlike the six enumerated subsections under § 503(b), in which the use of the word " include" is significant for being nonexhaustive, the five examples under § 503(b)(3) are restricted to only those five.

Here, Mosier has not challenged the bankruptcy court's ruling that his request did not fall within the scope of § 503(b)(1)(A). At the same time, the nonrestrictive nature of § 503(b) has lent itself to a broader construction when dealing with new facts. Most prominently, in Reading Co. v. Brown, 391 U.S. 471, 88 S.Ct. 1759, 20 L.Ed.2d 751 (1968), the Supreme Court interpreted the Bankruptcy Act's provision for administrative expense claims broadly and carved out a new basis for a claim based on damages caused by a chapter 11 trustee's negligence in the operation of the bankruptcy estate. Id. at 485. The Court stated that " actual and necessary costs" should " include costs ordinarily incident to operation of a business, and not be limited to costs without which rehabilitation would be impossible." Id. at 483 (construing § 64a of the Bankruptcy Act, a provision similar to § 503(b)(1)(A)). It remarked: " In our view the trustee has overlooked one important, and here decisive, statutory objective: fairness to all persons having claims against an insolvent." Id. at 477.

This " fundamental fairness" doctrine has been applied in various contexts to allow an administrative expense claim if needed to deter the trustee or debtor from injuring third parties for whom fundamental fairness requires recompense. For example, the estate was liable to the state comptroller for an administrative claim including interest for delinquent sales taxes which had been collected by debtor and deposited into its personal bank account in violation of state law. See Megafoods Stores, 163 F.3d at 1072.

The parameters of Reading, as applied to a chapter 11 reorganization, have also been stretched to accommodate fundamental fairness in the context of a chapter 7 administration. In In re Met-L-Wood Corp., 115 B.R. 133, 136 (N.D.Ill. 1990), attorneys' fees incurred by law firms to defend against the chapter 7 trustee's unsubstantiated charge of fraud in a preconversion sale of assets were determined to be an administrative expense. In In re Good Taste, Inc., 317 B.R. 112 (Bankr. D. Alaska 2004), the bankruptcy court expanded the doctrine to cover a prevailing defendant's attorney's fees in the chapter 7 trustee's postpetition action to avoid a prepetition transfer. Id. at 120-21 (noting inconsistent interpretation of Reading in the Ninth Circuit).

Thus, administrative priority is allowable when the trustee has injured a third party by his or her illegal action or inaction. In the case at bar, Mosier maintains that Trustee failed to object to administrative claims that were obviously excessive or unfounded, and that caused him to incur expenses in objecting to the claims himself. However, such expenses are not " damages" in the Reading tradition, even painting the facts with a broad brush, nor are they contractual.

Mosier sought compensation for taking on the claim objections as a volunteer or, as Trustee contends, a de facto professional. We are aware of case law which describes a volunteer as one who proceeds without court approval, but, here, Mosier had court approval. The distinction is this: Mosier requested permission to bring claim objections on his own behalf in order to minimize his chapter 11 fee disgorgement. The bankruptcy court's order stated that " Robert Mosier and/or the Chapter 7 Trustee, Arnold Kupetz" were authorized " to object to certain Chapter 11 administrative claims, the outcome of which objections may reduce the amounts to be disgorged pursuant to the OSC." Such order recognized Mosier's individual standing as a party in interest due to the OSC. See Lawrence v. Steinford Holding B.V. (In re Dominelli), 820 F.2d 313, 317 (9th Cir. 1987) (secured creditor had standing to object to settlement of claim because his interests conflicted with the chapter 7 trustee's).

No doubt Trustee and the estate benefitted from Mosier's expertise and investigative skills. Mosier freely provided them, however. In addition, as a former president and CEO of Debtor, Mosier had the knowledge to seek an order of employment for his company as a professional under § 327. See Juniper Dev. Group. v. Kahn (In re Hemingway Transport, Inc.), 993 F.2d 915, 929 n.17 (1st Cir. 1993) (claimant which voluntarily contracted with chapter 11 estate was denied an administrative claim). " Compensation under § 503 does not allow the professional to side step the requirements of § 327 and § 330--the professional must still be disinterested and not hold any adverse interests." Mehdipour v. Marcus & Millichap (In re Mehdipour), 202 B.R. 474, 479 (9th Cir. BAP 1996), aff'd, 139 F.3d 1303 (9th Cir. 1998).

Equity in bankruptcy court may only be exercised in a manner that is consistent with the provisions of the Code. Unsecured Creditors' Committees v. Pioneer Commercial Funding Corp. (In re Pac. Express, Inc.), 69 B.R. 112, 115 (9th Cir. BAP 1986). The Code does not incorporate state law theories of quantum meruit. See Shapiro Buchman LLP v. Gore Bros. (In re Monument Auto Detail, Inc.), 226 B.R. 219, 224-25 (9th Cir. BAP 1998). Therefore, it would be an abuse of the Code to allow Mosier to claim an administrative expense as a creditor or professional when he did not meet the requirements of § 503(b)(3), nor of § 502(b)(2), which requires a professional to be employed under § 327 and awarded compensation under § 330(a) in order to receive administrative expense priority.

We conclude that Mosier's claim was not allowable as an administrative expense under § 503(b) or its equitable exceptions, nor did the bankruptcy court abuse its discretion in refusing to carve out a new exception for the claim.

CONCLUSION

While § 503(b)(3) acknowledges the substantial contributions of creditors to a chapter 9 or 11 bankruptcy estate, even an equitable approach cannot vary its plain meaning in order to allow such priority for services rendered in a chapter 7 case. Moreover, it would be improper to expand the " fundamental fairness" exception for an allowance of Mosier's claim under § 503(b). Therefore, we AFFIRM the bankruptcy court's order denying Mosier's application for an administrative expense claim.

Thereafter, in June of this year, the Court entered the Order on disgorgement. Although Mr. Mosier was originally subject to this Order, the Court, on reconsideration, held that Mr. Mosier was not a professional subject to disgorgement. As admitted by Mr. Mosier in his opposition to the disgorgement motion, he was paid in full for all of his services because he was not a professional.

Trustee's Statement Re Application for Payment of Fees (Dec. 1, 2004), p. 2:17-21.