Opinion
NOT FOR PUBLICATION
Argued and Submitted at Las Vegas, Nevada: May 17, 2007
Appeal from the United States Bankruptcy Court for the District of Nevada. Honorable Linda B. Riegle, Bankruptcy Judge, Presiding. Bk. No. 01-23232. Ref. No. 06-20.
Before: EFREMSKY, [ SMITH AND DUNN, Bankruptcy Judges.
Hon. Roger L. Efremsky, U.S. Bankruptcy Judge for the Northern District of California, sitting by designation.
MEMORANDUM
Five insider employees and officers (collectively, " Claimants") of Saxton, Inc. (the " Debtor") appeal the bankruptcy court's Order Denying Application for the Approval of Chapter 11 Administrative Claims Pursuant to 11 U.S.C. § 503(b) (the " Order"). For the reasons set forth below, we AFFIRM.
According to the chapter 7 trustee (the " Trustee"), the Debtor's statement of financial affairs identifies James Saxton as the president, CEO and treasurer; James Saxton, II as the vice president for construction; Lee-Ann Burgess as the controller; Michelle Pori as the executive vice president and secretary. Michelle Saxton was apparently not given a title but appears from her Affidavit to have had many administrative roles with the Debtor.
I. FACTS
A. Background Regarding the Case
The Debtor was a real estate developer. In December 2001, certain creditors filed an involuntary chapter 7 case against the Debtor. In May 2002, the case was converted to a chapter 11 case. In December 2004, the court reconverted the case to one under chapter 7, and James F. Lisowski became the chapter 7 trustee.
Unless otherwise indicated, all chapter, section, and rule references are to the Bankruptcy Code, 11 U.S.C. § § 101-1330, and to the Federal Rules of Bankruptcy Procedure, Rules 1001-9036 as enacted and promulgated prior to the effective date of most of the provisions of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub. L. 109-8, 119 Stat. 23 (" BAPCPA"), since the case from which this appeal arises was filed before the BAPCPA effective date (generally October 17, 2005).
In February 2005, the Trustee sued Claimants, alleging, inter alia, fraud and breach of fiduciary duty arising from their activities during the time period they ran the business of the Debtor in possession (the " Adversary Proceeding").
The complaint is not included in the record. The Trustee stated that the claims for relief included breach of fiduciary duty, fraud in a fiduciary capacity, fraud upon the court regarding a post-petition transfer, diversion of funds of the estate, turnover of funds received from Debtor, an accounting, and disgorgement of post-petition salaries.
B. The History of the Application
On May 5, 2005, Claimants timely filed their Application for the Approval of Chapter 11 Administrative Claims (the " Application") seeking approval of $289,851.81 in deferred salaries as an administrative expense. The Application was first set for hearing on June 9, 2005. According to Claimants, the matter was taken off calendar at that time with instructions from the court that it could be renewed at a later point.
In May 2006, Claimants re-noticed the Application for a hearing on June 14, 2006. On May 30, 2006, the Trustee filed an Opposition to the Application. The court apparently did not consider the merits of the Application at the June 14, 2006 hearing. (The record does not include transcripts of the 2005 hearing or the June 2006 hearing.)
In August 2006, Claimants once again set the matter for hearing and filed a reply to the Opposition. The court considered the merits of the Application for the first time on September 7, 2006. There is no evidence that the matter was conducted as an evidentiary hearing.
C. Substance of the Application and the Supporting Affidavits
The Application was brought pursuant to § 503(b)(1)(A). It states that the services provided by the five Claimants arose from post-petition transactions with the Debtor, that the services were necessary to preserve the estate and that the services directly benefitted the estate. The Application also states that Claimants agreed to defer their salaries in an effort to assist the Debtor in its reorganization efforts.
There was apparently no court approval of an agreement to defer salaries. Generally, salaries for employees of a debtor in possession are within the ordinary course of business entitled to administrative expense status under § 364(a). Arguably, an agreement to defer salaries would be outside the ordinary course of business, and notice and court approval may have been appropriate.
The Application was supported by an Affidavit from each Claimant, explaining, in the most general terms, what each Claimant's role had been with the Debtor and the amount claimed to be owed as deferred salary.
For example, the Affidavit of James Saxton (claiming to be owed $108,552.90) contains 11 paragraphs covering less than two pages describing his duties as the CEO and acting CFO of the Debtor. It states that he implemented " broad corporate policies, procedures and organizational structure" and provided " key management direction" to top executives, and management of the " overall direction of the Company."
The other Affidavits are similarly brief and general in their terms. The Affidavit of James Saxton, II states he is owed $52,591.70. It consists of 11 paragraphs in approximately one page and describes his work as overseeing " total development and construction effort from inception through completion to ensure all projects are constructed in accordance with approved plans and specifications, budgets and schedules." He also says he was responsible for project budgets, interfacing with municipalities, managing design professionals, managing the customer service department and ensuring that workstations, printers and telephones worked.
The Affidavit of Michelle Pori, claiming $51,809.93, consists of 14 paragraphs and is less than one page in length. It describes her general duties dealing with insurance policies, corporate records, construction defects, and closing escrows on residential subdivision sales.
The Affidavit of Lee-Ann Burgess, claiming $45,755.52, consists of 13 paragraphs covering less than one page. It describes her general duties dealing with maintaining books and records, bank reconciliations, payroll reports, and inter-company accounts.
The Affidavit of Michelle Saxton, claiming $31,141.77, consists of 12 paragraphs in approximately one page. It generally describes her role as maintaining home sales contracts, interfacing with homeowners, and general office administration.
Each Affidavit ends with the representation that the amount sought is the " actual, necessary costs and expenses of preserving the estate rendered by the Affiant after the commencement of the case." There is one spreadsheet attached to the Application. It shows a total of deferred salary of $289,851.81 for all Claimants for a time period covering 6 pay periods in 2002, 4 pay periods in 2003, and 4 pay periods in 2004.
The Affidavits do not indicate how the Claimants' employment benefitted the estate in any particular way. The Affidavits do not mention a particular project or transaction undertaken by any of the Claimants on behalf of the estate.
D. Substance of the Opposition
In his Opposition, the Trustee described events that he alleged had taken place in the chapter 11 period and attached exhibits relating to these alleged events. The Trustee did not support the Opposition with declarations or affidavits.
This was a contested matter governed by Rule 9014 which makes Part VII of the Rules applicable, including Rule 7052.
The thrust of the Opposition was that Claimants had engaged in self-dealing, had deprived the estate of valuable assets and had, as a result, not provided any benefit to the estate by their services. The transactions described in the Opposition apparently formed the basis for the claims in the Adversary Proceeding.
The exhibits attached to the Opposition appear to have been produced in discovery in connection with the Adversary Proceeding. The Trustee also pointed to several docket entries in support of his self-dealing claims based on events occurring in the bankruptcy court but made no specific request for judicial notice.
Each page of the exhibits has a Bates number on it.
Among the allegations made by the Trustee were the following: James Saxton had shifted $2 million of his personal debt to the Debtor. In connection with a relief from stay motion regarding property referred to as the MLK property, Saxton had filed only a cursory opposition where recent appraisals indicated the property was worth between $1.1 million and $1.7 million, and the secured debt was less than $500,000. After relief from stay was granted, through one of his entities (CDS Member, LLC), Saxton arranged with the secured creditor to pay less than $500,000 to purchase the $2.5 million note and deed of trust and represented to the secured creditor that the amount owed on the note was less than $300,000. CDS Member, LLC then acquired the MLK property at foreclosure for a credit bid of $1.6 million and transferred it to another entity owned by Saxton. The new entity then sold the property for $1.2 million. None of the proceeds from this transaction were shared with the Debtor. Documents allegedly evidencing this series of transactions were attached to the Opposition as exhibits.
The Opposition described several other transactions in which Saxton or his controlled entities allegedly deceived the court, diminished the value of the estate's assets, or deprived the estate of valuable assets or potential claims.
The Trustee also urged a " deepening insolvency" theory as a basis to deny the Application. He pointed out that his first monthly operating report filed in August 2004 showed that liabilities of the estate increased by $17,000 (excluding administrative expenses) from the petition date to his appointment. During this same time period, CDS Member, LLC acquired assets from the Debtor and profited from the transactions. Also, during this time period, certain professionals were paid a " substantial sum", but the estate owed $1 million to professionals at the time the case was converted.
The operating reports are not included in the record.
Based on these allegations, the Trustee argued:
(1) Claimants had not conferred any benefit on the estate. During the four years in chapter 11, the estate incurred almost $1 million in administrative expenses and the only persons to receive a benefit from the case had been Claimants.
(2) Claimants did not meet their burden of proving that their past and present compensation was for reasonable, actual and necessary services to the estate. In fact, they had caused harm to the estate resulting in greater debt, deepening insolvency and dissipation of the estate's assets.
(3) Claimants had performed services for other businesses while receiving compensation from the estate and had operated the business of the Debtor in possession for their own benefit.
The Trustee also argued that Claimants were officers and insiders of the Debtor as defined in § 101 and had not had their employment approved under § 327. This argument was not considered by the bankruptcy court and is not considered here.
E. The September 7, 2006 Hearing on the Application
At the hearing on September 7, 2006, counsel for Claimants stated that (1) he was renewing the Application at the court's instruction; (2) the Opposition was merely a recitation of the allegations in the Adversary Proceeding; (3) Claimants were willing to defer payment of their administrative expenses until the Adversary Proceeding was concluded. Throughout the hearing, counsel stressed that the Trustee had presented no evidence in his Opposition.
The court challenged Claimants' counsel's characterization of the Opposition as lacking in evidence and stated: " [T]he administrative claimants operated the Debtor for the benefit of themselves. How much bolder could that be?" Transcript of Proceedings 7:1-4, September 7, 2006. Counsel stated that the Trustee was suggesting that " they, perhaps, had other side businesses" but claimed that the Trustee did not argue that Claimants' services were not performed and were not beneficial. Id . at 7:14-20.
When the court asked where was the evidence that Claimants had preserved the estate, counsel stated they had completed projects to allow secured creditors to maximize the value of their collateral and repeated that the Trustee had offered no evidence in support of the Opposition. Id . at 8:9-12.
The Trustee's counsel argued that the services were not reasonable or necessary and pointed to the exhibits attached to the Opposition as support for the argument that Claimants had conferred no benefit by their services. In response to the argument that there was no evidence, he referred to his exhibits and stated " I call that evidence . . . there has been no attack that this isn't [sic] genuine documents . . . There's no attack that they didn't offer these documents. There's nobody here right now to explain those documents." Id . at 13:11-15.
The court made the following concluding comments at the hearing:
" How can you bold-facedly come here and demand administrative salaries when these allegations are pending? How can you do that?" When counsel pointed out they were merely allegations, the court replied: " meaning they didn't do the work they were supposed to do . . . meaning they lied, cheated, and [stole]." Id . at 16:19-17:7.
" But how can . . . you come here and demand that they be paid or they be allowed these moneys . . . without a final hearing addressing whether or not these allegations are true? . . . What makes you think . . . that that's appropriate? . . . If you were self-dealing . . . and if you're doing stuff for your own benefit, that's not for the benefit of the estate." Id . at 17:14-18:13.
" It can't be any clearer. Just the [c]hutzpah of your coming here demanding this money when your clients are accused of this in the course of doing these very things you're demanding money for . . . is just astounding to me." Id . at 18:15-23.
The court also pointed out that the Debtor's monthly operating report for the period ending March 31, 2002 showed that no post-petition salaries were owed. Counsel for Claimants appeared surprised by this and admitted to the court he had not checked the monthly operating reports. Upon learning he had not checked, the court stated " I'm now going to deny the motion outright. I don't think you have supported their burden that what they did was beneficial to the estate. I think they were just churning. It's easy to stay in your job and continue to collect a salary. The schedules seem to suggest that they said they weren't owed anything so I'm going to deny the motion . . . I don't have . . . sufficient evidence, so I'm going to deny it." Id . at 23:20-24:4.
It also appears that the next monthly operating report to be filed (which was not until September 2002) showed no postpetition salaries were owed. These operating reports are not part of the record on appeal but the court alluded to them during the hearing.
The court then denied the Application with prejudice. The Order entered on September 14, 2006 states that the court made findings of fact and conclusions on the electronic record which are incorporated into the Order. Claimants filed a timely appeal.
II. JURISDICTION
The bankruptcy court had jurisdiction under 28 U.S.C. § § 1334 and 157(b)(1) and (b)(2). We have jurisdiction under 28 U.S.C. § 158.
III. ISSUE
Whether the bankruptcy court abused its discretion in ruling that Claimants had failed to meet their burden of proof for allowance of their administrative expense claims.
IV. STANDARDS OF REVIEW
An order allowing or disallowing an administrative expense claim is reviewed for an abuse of discretion. Burlington N.R.R. Co. v. Dant & Russell, Inc. (In re Dant & Russell, Inc.), 853 F.2d 700, 707 (9th Cir. 1988).
A bankruptcy court abuses its discretion if it bases its decision on an erroneous view of the law or on clearly erroneous factual findings. Highland Fed'l Bank v. Maynard (In re Maynard), 264 B.R. 209, 213 (9th Cir. BAP 2001). The Panel will not reverse for abuse of discretion unless it has a definite and firm conviction that the bankruptcy court committed a clear error of judgment in the conclusion it reached. S.E.C. v. Coldicutt, 258 F.3d 939, 941 (9th Cir. 2001).
Findings of fact are reviewed for clear error and conclusions of law are reviewed de novo. Einstein/Noah Bagel Corp. v. Smith (In re BCE West, L.P.), 319 F.3d 1166, 1170 (9th Cir. 2003). Mixed questions of law and fact are also reviewed de novo. See U.S. v. McConney, 728 F.2d 1195 (9th Cir.) cert. denied, 469 U.S. 824, 105 S.Ct. 101, 83 L.Ed.2d 46 (1984); Carrillo v. Su (In re Su), 290 F.3d 1140 (9th Cir. 2002). A finding is clearly erroneous when, although there is evidence to support it, the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed. United States v. U.S. Gypsum Co., 333 U.S. 364, 395, 68 S.Ct. 525, 92 L.Ed. 746 (1948). Findings of fact based on credibility are given particular deference. Anderson v. City of Bessemer City, 470 U.S. 564, 573-74, 105 S.Ct. 1504, 84 L.Ed.2d 518 (1985).
Rulings as to the admission of evidence or the necessity for the presentation of evidence are reviewed for an abuse of discretion. Lee-Benner v. Gergely (In re Gergely), 110 F.3d 1448, 1452 (9th Cir. 1997).
V. DISCUSSION
A. The Standards for Allowance of an Administrative Expense
Section 503(b), as applicable in this case, provides that " after notice and a hearing, there shall be allowed administrative expenses, other than claims allowed under section 502(f) of this title, including -(1)(A) the actual, necessary costs and expenses of preserving the estate, including wages, salaries, or commissions for services rendered after the commencement of the case."
The parties agree on the basic framework for the allowance of an administrative expense under § 503. They agree that the burden of proof is on the party seeking payment to establish that the debt arose from a transaction with the debtor in possession and directly and substantially benefitted the estate. Microsoft Corp. v. DAK Indus., Inc. (In re DAK Indus.), 66 F.3d 1091 (9th Cir. 1995). They also agree that the terms " actual" and " necessary" are construed narrowly to keep fees and administrative costs at a minimum. Dant & Russell, 853 F.2d at 706.
The parties disagree as to how this test is to be applied and on the facts before the court upon which it is to be applied.
B. Claimants' Burden of Proof
To meet their burden of proof, Claimants had to show by a preponderance of the evidence that they met the § 503 standard. BCE West, L.P., 319 F.3d at 1172; Toma Steel Supply, Inc. v. Transamerican Natural Gas Corp. (In re Transamerican Natural Gas Corp.), 978 F.2d 1409, 1416 (5th Cir. 1992).
A prima facie case under § 503(b)(1) is established by evidence that the claim arises from a transaction with the estate and that the claimant has benefitted the estate in some demonstrable way. DAK Indus., 66 F.3d at 1094. " After the movant has established a prima facie case, the burden of producing evidence shifts to the objector; but the burden of persuasion, by a preponderance of the evidence, remains with the movant." Transamerican Natural Gas, 978 F.2d at 1416.
Claimants argue that it is undisputed that (1) the services were provided post-petition, and (2) that the amount sought represented the actual and necessary costs and expenses of preserving the estate. Claimants' argument is premised on the assertion that the administrative expense claims must be allowed because the Trustee failed to offer sufficient opposition.
A properly executed and filed proof of claim under § 502 is prima facie evidence of the validity and amount of the claim. Rule 3001(f). No Rule gives a request for payment of an administrative expense under § 503 a similar presumption of validity.
Claimants stressed that they were not seeking immediate payment but merely trying to quantify their offset rights if the Trustee were to prevail in the Adversary Proceeding. Claimants assert that the Trustee's Opposition was based on the unproven allegations of misconduct from the Adversary Proceeding which were not supported in the record.
C. Claimants' Evidence that they Benefitted the Estate
The evidence offered by Claimants consisted of the five Affidavits and the single spreadsheet listing the amount of deferred salary for each of the Claimants. The Trustee argues that the Affidavits are self-serving and conclusory. While they are, by definition, self-serving, the fact that they are vague, general, and lacking in any specificity is fatal.
The Affidavits are simply job descriptions rather than descriptions of jobs actually performed. Each Affidavit is so general in its description of the services provided, it is impossible to conclude that Claimants have shown that they did, in fact, benefit the estate during the period in which they continued to accrue salaries. There is no reference to a particular deal or transaction. There is no showing of a financial benefit to the estate from the performance of any of Claimants' activities.
Claimants had the burden of proof by a preponderance of evidence that all elements of § 503 were met. Taking the statements in each Affidavit as true, they fail to show any benefit to the estate--they simply recite general job duties. On the basis of the defective Affidavits, the bankruptcy court correctly found that Claimants failed to make a prima facie case.
D. The Trustee's Evidence
This was a contested matter governed by Rule 9014. According to Rule 9014 and the analogous local rule, the Trustee's Opposition had to be supported by affidavits or declarations.
Rule 9014 provides that in a contested matter relief is requested by motion. Rule 9014(c) makes Part VII of the Rules apply and Rule 9014(d) provides that testimony of witnesses with respect to disputed material factual issues is taken, as it is in adversary proceedings.
Affidavits must contain only non-hearsay factual evidentiary matter, conform as far as possible to Fed.R.Civ.P. 56(e) and avoid mere general conclusions. Bankr. D. Nev. LR 9014(c)(1)(B). Affidavits must also authenticate documents and exhibits unless the documents have already been authenticated in the record or have been previously admitted into evidence and are specifically referred to and identified in the moving or opposing papers. Bankr. D. Nev. LR 9014(c)(1)(C). It is not clear from the record whether the Trustee's exhibits are within either of these categories.
Oddly, the only description of specific activities of Claimants during the chapter 11 period are those alleged by the Trustee in the Opposition. Although not submitted by way of a declaration and not authenticated, the Trustee relied on the exhibits to support his argument that the Claimants had in fact stripped the estate of assets rather than provided a benefit to it. In addition, the Trustee made reference to certain matters in the court's docket but did not formally request judicial notice of them.
Based on the comments made by the court at the hearing, it is clear that the court was concerned about the timing of the Application. The court also noted that the record in the case, including the schedules and the monthly operating reports, contradicted the assertion that Claimants had provided a benefit to the estate.
Mere allegations unsupported by evidence are insufficient to rebut a prima facie case. However, the court found that the Affidavits did not make out a prima facie case. Thus, any argument that the Trustee failed to offer sufficient facts in his Opposition fails. The burden of persuasion was at all times Claimants'. Transamerican Natural Gas, 978 F.2d at 1416.
E. Findings of Fact and Conclusions of Law
Rule 7052(a) (made applicable by Rule 9014(c)) provides that the court is to find the facts and state its conclusions of law.
In general, when there are conflicting versions of the facts, findings are desirable. See Canadian Commercial Bank v. Hotel Hollywood (In re Hotel Hollywood), 95 B.R. 130, 132 (9th Cir. BAP 1988). Here, at the conclusion of the September hearing, the court stated its legal conclusion that Claimants had not met their burden of proof -- they had not shown that they had provided a benefit to the estate by their post-petition activities.
The court also stated that the monthly operating reports contradicted the claim that salaries were owed, at least as to the time periods for those operating reports. In addition, counsel for Claimants conceded that Claimants' services had gone to completing projects solely for the benefit of the secured creditors. While the court seemed troubled by the fact that the allegations in the Adversary Proceeding, if proven, defeated any argument that there had been a benefit to the estate, the court's decision did not rest on that basis.
F. It Was Not an Abuse of Discretion to Deny the Application
The court had wide discretion in allowing or disallowing these claims. " Although a claim may meet the implicit requirements of section 503(b)(1)(A), namely that any claims under the section must have a distinct postpetition character, bankruptcy courts have broad discretion in determining whether to award administrative expense priority." Dant & Russell, 853 F.2d at 707.
A court abuses its discretion if it bases its decision on an erroneous view of the law or on clearly erroneous factual findings. Maynard, 264 B.R. at 213. The court did not have an erroneous view of the law. Nor did the court make erroneous factual findings or incorrectly apply the law to the facts. The court simply found Claimants' evidence lacking -- they failed to make a prima facie case with their Affidavits, and the record in the case contradicted their assertions. Despite what the Trustee argues, nothing in the record supports a conclusion that the Affidavits were found inadmissible. The court admitted them but found them deficient in light of the requirement that administrative claims are to be narrowly construed, and there must be proof of the required elements by a preponderance of the evidence. Here, the Affidavits failed to show any benefit to the estate; they were essentially general job descriptions.
A finding is clearly erroneous when, although there is evidence to support it, the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed. Anderson, 470 U.S. at 573-74. This standard is not an invitation to reverse the finding of the trier of fact simply because the reviewing court would have decided the case differently. Applying this standard here, the court did not abuse its discretion.
VI. CONCLUSION
The bankruptcy court acted well within its discretion in ruling that the Claimants failed to show by a preponderance of evidence that their services had provided a benefit to the estate. Accordingly, the Order is AFFIRMED.