Opinion
Case No.: ED CV 19-01252-AB Bankruptcy Case No: 6:17-bk-19913
12-26-2019
IN RE Thomas J. FORREST
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.
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 EOR 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 .
AA EOR refers to Appellant's Excerpts of Record. (Dkt. No. 9, Tabs 1–28).
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 SEOR Tab 1 (Sale Order for the Home entered on July 31, 2019) and Tab 2 (Report of Sale dated August 13, 2019)).
AE SOER refers to Appellee's Supplemental Excerpts of Record.
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; "[ (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) ).
Although the parties dispute whether Appellants' debt arose postpetition, here the Court need not address this question because the bankruptcy court properly determined that the third prong of In re DAK Industries, Inc. was not met; specifically that Appellants' expenses did not "directly and substantially benefit the estate." In re DAK Indus., Inc. , 66 F.3d 1091, 1094 (9th Cir. 1995). This determination alone precludes administrative expense treatment.
"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 Appellants' request for administrative expense reimbursement "not because of anything else except that it did not primarily benefit the estate" because "every dollar spent ... inured to the benefit of the debtor and the debtor's nonfiling spouse." (Id. at 10:8–12). Thus, the bankruptcy court applied the proper legal test.
b. The bankruptcy court did not commit clear error in making its factual findings or abuse its discretion in denying Appellants' administrative claim under Bankruptcy Code section 503(b), either as a matter of law or policy.
Applying the correct legal rule to the facts at bar, the bankruptcy court did not commit clear error in (1) explicitly finding that the administrative expenses were not "incurred primarily for the benefit" of Trustee or the estate, Cascade , 815 F.2d at 548, and (2) implicitly finding that Trustee neither "caused [n]or consented to the expense[s]" that Appellants made, id.
Here, the bankruptcy court made a reasonable—and not clearly erroneous—factual finding that Appellants paid $37,993.98 in Home-related expenses not primarily to benefit the estate or the Trustee, but to "continue to live [at the Home] and not face a foreclosure." (Tr. 4:23–25, 5:1). The court observed that Appellants made these payments primarily for their own personal benefit, as they were able to live at the Home rent-free with their children from at least December 2017 through April 2019. (See Tr. 6:6–12). While the court observed that "the estate may, in fact, have a benefit," its analysis clearly indicates that this benefit did not "directly and substantially benefit[ ] the estate," as required for administrative expense treatment. In re DAK Indus. , 66 F.3d at 1094.
Appellants provide no evidence to the contrary; instead they merely assert, in a conclusory fashion, that the payments they made "increased the net sales proceeds on the Home for the estate on at least a dollar for dollar basis compared to if those payments were not made." (AA Br. at 9). They attempt to support this claim by stating that, had they "simply moved out of the Home at the start of the bankruptcy case and not paid for the mortgage, the property taxes, the insurance and the upkeep on the Home for over 1 year until the Trustee finally sold the Home, there would have been far less proceeds for the estate to realize" partly because these payments "avoided additional costs such as late charges, penalties, deferred maintenance and forced placed insurance." (Reply at 7). But this is no response to the bankruptcy court's determination that this is "just simply not true" because "[t]he mortgage lender would place the insurance" and "would get the notice of the failure of insurance or lapsing of insurance," which he or she would then cover to avoid fees. (Tr. at 8:4–7). The bankruptcy judge reasonably determined that had Appellants not made the payments at issue, Trustee would have "move[d] quickly" to sell the Home "because the value is going to be diminished" otherwise. (Tr. at 6:2–3).
Further, some purported increase in the net sales proceeds—which Appellant notably disputes due to the differences in the expected (higher) and actual (lower) Home sale prices—does not alone constitute a "substantial benefit." Here, Appellants "simply provide[ ] no explanation how the expenses [they] incurred benefitted the estate, directly or indirectly, let alone substantially." In re Nichols , 2010 WL 6259965, at *6. Even Appellants indicate that their intent was not to benefit the estate, but to benefit themselves. (Tr. at 7:16–18 ("I acknowledge that there are benefits to the debtors themselves of keeping up their home, because they live there with their minor children.")). Thus, the court did not abuse its discretion in concluding that Appellant's payments conferred no "direct[ ] and substantial[ ] benefit" upon the estate. In re DAK Indus., Inc. , 66 F.3d at 1094. The Court also rejects Appellants' claim that the bankruptcy court's ruling "ignores strong policy factors favoring Appellants' administrative claim." ( Id. ) (capitalization altered). Appellants argue that the June 17, 2019 Order denying their claim
ignores the equity of the plight of debtors who have their family homes sold by bankruptcy trustees. It shows a blind eye to the potential win-win scenario where debtors work in concert during the pendency of a Chapter 7 [bankruptcy] with the trustee and his professionals to sell the home, safe in the knowledge that they will be reimbursed for the expenses incurred post-petition in their residences, which paid expenses increase the value and benefit of the potential sale proceeds for all involved.
( Id. ). Appellee counters that if Appellants prevailed on their administrative claim, "trustees would now have a distinct incentive to remove debtors from their residences as quickly as possible as the debtors' administrative claims are growing and the estates' equities are shrinking." (AE Br. at 9).
Considering both arguments and agreeing with Appellee, the bankruptcy court reasonably concluded that policy interests militate against reimbursement here. The court recognized that "[i]f [Appellants] continue making payments, ... equity doesn't pay to volunteer. These payments, we appreciate it, but [Appellants] got to live there." (Tr. 9:6-8). The Court agrees with the bankruptcy court that, Appellants have voluntarily made payments to stay in their home, not "primarily for the benefit" of Trustee. Cascade , 815 F.2d at 548. And the bankruptcy court's denial of Appellants' claim here comports with the policy of § 503(b), which is narrowly construed to hold administrative expenses to a minimum and to maximize the value of the bankruptcy estate, especially where no alternative agreements have been made with the secured creditor, as here. In re Dant & Russell, Inc. , 853 F.2d at 706.
The Court notes that, in response to Appellee's claim that their requested relief is "unprecedented" (AE Br. at 9), Appellants concede "[t]his may be true," showing that even they recognize the far reach of their policy claims from established precedent. (AA Br. at 10).
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IV. CONCLUSION
For the forgoing reasons, the bankruptcy court's June 17, 2019 Order is AFFIRMED.
IT IS SO ORDERED .