UNITED STATES BANKRUPTCY APPELLATE PANEL OF THE NINTH CIRCUIT
March 17, 2010
IN RE: ROBERT W. NICHOLS AND MARY ANN NICHOLS, DEBTORS. ROBERT W. NICHOLS; MARY ANN NICHOLS, APPELLANTS,
SHARON MAXWELL, CHAPTER 7 TRUSTEE; LOUISE WHIPPLE,*FN1 APPELLEES.
Appeal from the United States Bankruptcy Court for the District of Arizona Honorable Eileen W. Hollowell, Bankruptcy Judge, Presiding Bk. No. 02-02215-EWH
SUSAN M SPRAUL, CLERK
U.S. BKCY. APP. PANEL OF THE NINTH CIRCUIT
Argued and Submitted on February 17, 2010 at Tucson, Arizona
Filed - March 17, 2010
Before: PAPPAS, DUNN and JURY, Bankruptcy Judges
Robert W. Nichols and Mary Ann Nichols ("Mrs. Nichols") appeal the bankruptcy court's order denying Mrs. Nichols' request for approval and payment of alleged administrative expenses. We AFFIRM the bankruptcy court's order.
On May 9, 2002, the Nichols filed a voluntary petition under Chapter 7*fn4 of the Bankruptcy Code. Sharon Maxwell ("Trustee") was appointed trustee of the Nichols' bankruptcy estate. Among the assets listed in the Nichols' petition was a one-third interest in a lakeside cabin in Michigan (the "Property") which Mrs. Nichols owned as a joint tenant with right of survivorship with her two brothers.
Trustee investigated the Property to determine if there was any value to be realized for the estate if it were administered.
Under the Arizona law of community property, Trustee determined that Mrs. Nichols held her interest in the Property independently 1 from her husband. See ARIZ. REV. STAT. § 25-213(A). Under Michigan 2 law applicable to rights of joint tenants of real property located 3 in that state, an interest in Michigan real property held by co- 4 tenants with the right of survivorship is deemed a joint life 5 estate followed by contingent remainders. See Albro v. Allen, 6 454 N.W.2d 85, 88 (Mich. 1990). Trustee concluded that the only 7 interest held by the estate in the Property which she could sell 8 was a life estate in the Property based on the life of 9 Mrs. Nichols. Id. at 93 (holding that dual contingent remainders 10 are not subject to partition, i.e., the purchaser of a life estate 11 has no right to the contingent remainder). Trustee therefore 12 determined that this life interest had little or no market value 13 as an estate asset, nor did any other assets, and filed a "No 14 Asset Report" in the bankruptcy case on May 26, 2005.
15 Trustee's conclusion concerning the value of the Property was 16 not shared by creditors Louise Whipple and the estate of Edson 17 Whipple ("Whipple"). On January 20, 2009, Whipple filed a motion 18 to compel Trustee to sell assets of the estate, including 19 Mrs. Nichols' interest in the Property. Then, on or about 20 February 11, 2009, Trustee received an unsolicited offer from a 21 third party to purchase the estate's interest in the Property for 22 $50,000 cash.
23 Trustee withdrew her No Asset Report. The bankruptcy court 24 conducted a series of status conferences concerning Whipple's 25 motion to compel the sale of the Property. On April 9, 2009, the 26 court directed Trustee either to move to sell or to abandon the 27 Property within 90 days.
On the same day, Mrs. Nichols, together with her brothers/ co-tenants William and Robert Cambridge, submitted their original application for allowance and payment of administrative expenses of $37,343.00, representing what they alleged was one-third of the post-petition costs of preserving and maintaining the Property during the bankruptcy case. Whipple objected to the original application on April 14, 2009, arguing, among other points, that the claimants had provided inadequate documentation of their claim.
Trustee submitted a motion seeking authority to sell the Property (the "Sale Motion") on May 11, 2009. In the Sale Motion, Trustee proposed to sell at auction in the bankruptcy court "whatever interests the estate [held in the Property and other real property*fn5 ], via quitclaim conveyance, on an 'as is-where is' basis, without any warranty of any type or manner whatsoever."
The bankruptcy court considered the Sale Motion at a hearing on June 16, 2009. Mrs. Nichols and her brothers, Trustee, and Whipple were represented by counsel and heard. At that time, Mrs. Nichols and her brothers bid $50,010.00 for Mrs. Nichols' interest in the Property, which was the highest and best bid. The Minute Entry for the hearing reflects that the bankruptcy court ruled that: "The backup bid for $50,000 [the third party's bid] will be accepted if within ten business days of today $50,010 [the Nichols' bid] is not delivered to the trustee."
There is no subsequent entry in the docket regarding the Sale Motion, nor was any order approving a sale ever entered by the bankruptcy court. However, Trustee has informed the Panel that Mrs. Nichols' brothers paid Trustee the $50,010 purchase price.
After the hearing, Mrs. Nichols*fn6 filed an Amended Application for Allowance and Payment of Administrative Expenses relating to the Property. The Amended Application reduced the requested administrative expense claim to $14,280, representing one-third of the alleged expenses from the petition date through 2009 for property hazard insurance, real property taxes, utility costs, and non-labor "out of pocket expenses" for the Property. The attached documentation included copies of bills and lists indicating amounts due for the various expenses. However, there was no evidence submitted with the Amended Application to show that any payments had actually been made for these expenses, or by whom such payments were made.*fn7
Whipple objected to the Amended Application on August 20, 2009. Whipple argued that: (1) the expenses in question had not been paid based on any transaction with the trustee; (2) the expenses were incurred for the Nichols' personal benefit, and not for the benefit of the bankruptcy estate; (3) there was no evidence that Nichols in fact paid any of the expenses; and (4) Nichols had failed to carry her burden of proof.
Trustee also filed an objection to the Amended Application on September 22, 2009. Trustee noted that she had never been contacted regarding the expenses for which Nichols sought an administrative expense and had never approved any of the expenses. Additionally, Trustee argued that the expenses were not "actual, necessary costs and expenses of preserving the estate."
The bankruptcy court conducted a hearing on the Amended Application on September 22, 2009, at which Mrs. Nichols, Trustee, and Whipple were represented by counsel and heard. At the conclusion of the hearing, the court orally denied the Amended Application, stating:
The reason that I can't find that its an administrative expense is simply the trustee never authorized it, the trustee never knew about it, to have to come in now seven, eight, nine years later and try to figure out whether it was reasonable or not, that's why, you know, you have to try to work these things through. . . . If the Debtor did make these payments she was a volunteer because she did not have the right, without the trustee's consent, to incur the costs.
Hr'g Tr. 9:6-16 (September 22, 2009).
The bankruptcy court entered its order denying the Amended Application on September 29, 2009. Nichols filed a timely appeal on October 7, 2009.
The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334 and 157(b)(2)(A) and (B). We have jurisdiction under 28 U.S.C. § 158.
2 Whether the bankruptcy court abused its discretion in denying 3 the administrative expense claim of Nichols.
STANDARD OF REVIEW
A bankruptcy court's decision to award or deny administrative 7 expense claims is reviewed for abuse of discretion. Microsoft 8 Corp. v. DAK Indus. (In re DAK Indus.), 66 F.3d 1091, 1094 9 (9th Cir. 1995); Gill v. Tishman Constr. Corp. (In re Santa Monica 10 Beach Hotel), 209 B.R. 722, 725 (9th Cir. BAP 1997). A two-part 11 test is applied to determine if an abuse of discretion has 12 occurred: (1) we review de novo whether the bankruptcy court 13 identified the correct legal rule to apply to the relief 14 requested; (2) we review whether the trial court's application of 15 the facts to the correct legal standard was illogical, implausible 16 or without support in inferences that may be drawn from the facts 17 in the record. If any of these three apply, only then are we able 18 to have a "definite and firm conviction" that the district court 19 reached a conclusion that was a "mistake" or was not among its 20 "permissible" options, and thus that it abused its discretion by 21 making a clearly erroneous finding of fact. United States v. 22 Hinkson, 585 F.3d 1247, 1257 (9th Cir. 2009). 23 We may affirm on any basis supported by the record. 24 United States v. Hemmen, 51 F.3d 883, 891 (9th Cir. 1995); Leavitt 25 v. Soto (In re Leavitt), 209 B.R. 935, 940 (9th Cir. BAP 1997).
2 Although it was not clear in Mrs. Nichols' pleadings in the 3 bankruptcy court, her opening brief in this appeal explains that 4 she sought allowance of administrative expenses under 5 §§ 503(b)(1)(A) and (b)(1)(B). As discussed below, the bankruptcy 6 court did not abuse its discretion in denying an administrative 7 claim for property hazard insurance, utility costs, and non-labor 8 "out of pocket expenses," expenses that might be allowable under 9 § 503(b)(1)(A). Likewise, the bankruptcy court did not abuse its 10 discretion in denying an administrative claim for property taxes 11 that could only be allowable under § 503(b)(1)(B).
13 Before addressing how the alleged expenses do not meet the 14 legal requirements of the Code, we have determined that Mrs. 15 Nichols failed to carry her burden of proof because she did not 16 show that she in fact paid the expenses for which she seeks 17 reimbursement as administrative expenses.
18 Whether seeking administrative expenses under § 503(b)(1)(A) 19 or (b)(1)(B), the claimant must prove that she in fact paid the 20 expenses. In re Babb, 2009 Bankr. LEXIS 3685, 2009 WL 3756395 21 (Bankr. E.D.N.C. October 26, 2009) ("Provided that [claimant] can 22 document the payment of taxes, [claimant] is entitled to file an 23 administrative claim against the estate under 11 U.S.C. 24 § 503(b)(1)(B)."); In re Lickman, 273 B.R. 691, 703 (Bankr. M.D. 25 Fla. 2002) (holding that, under § 503(b)(1)(A), the claimant must 26 demonstrate "that the amounts claimed as administrative expenses 27 were actually expended").
In order to hold administrative expenses to a minimum and to maximize the value of the bankruptcy estate, § 503(b) is narrowly construed. Burlington N.R.R. Co. v. Dant & Russell, Inc. (In re Dant & Russell, Inc.), 853 F.2d 700, 706 (9th Cir.1988) (citing Otte v. United States, 419 U.S. 43, 53 (1974).
Administrative expense claims are to be strictly construed because of the presumption that the debtor has limited resources to equally distribute among creditors. In re Amarex, 853 F.2d 1526, 1530 (10th Cir. 1988); see also In re Mammoth Mart, Inc., 536 F.2d 950, 953 (1st Cir.1976) ("To give priority to a claimant not clearly entitled thereto is inconsistent with the policy of equality of distribution; it dilutes the value of the priority for those creditors Congress intended to prefer."). The administrative expense applicant must prove entitlement to the requested reimbursement by a preponderance of the evidence. Gull Indus. v. John Mitchell, Inc. (In re Hanna), 168 B.R. 386, 388 (9th Cir. BAP 1994)
In her brief, Mrs. Nichols states that she seeks: reimbursement[*fn8 ] for her actual out-of-pocket costs for one-third of the utilities, taxes, insurance premiums, and repair and maintenance costs of the subject property during the time it remained an estate asset. The total amount of such costs sought by Debtor Mary Ann Nichols is $14,280.00, which claim was supported by extensive documentation evidencing the actual payment, and in some cases estimation of accounts, paid by Mary Ann Nichols on account of her one-third interest in the property.
Appellant's Opening Br. at 6 (emphasis added). This statement is simply incorrect. We have carefully examined the record on appeal, as well as all entries in the bankruptcy court docket, and there is no indication at all that Mrs. Nichols paid any of these expenses, let alone "extensive documentation evidencing the actual payment" by Mrs. Nichols.
This statement is all the more striking because it follows multiple challenges in the bankruptcy court and in this appeal that Mrs. Nichols provided no evidence that she paid the expenses.
In response to Mrs. Nichols' first application on April 9, 2009, Whipple objected, challenging whether any of the claimed expenses were actually incurred by Mrs. Nichols. Whipple's response was later joined by another creditor, David Weston, who likewise challenged whether the expenses were incurred by Mrs. Nichols.
Presumably in response to these challenges, Mrs. Nichols submitted her Amended Application on August 17, 2009 due to, in her own words, her "inability to locate documents to verify, or documentation from which amounts can be extrapolated in order to substantiate the various components of the claim." However, the Amended Application contains no evidence that Mrs. Nichols paid any of the expenses. Indeed, with the possible exception of property taxes,*fn9 there was no evidence that anyone had paid any of the expenses. There is a five-page printout summarizing categories of expenses from 2002 to 2009, but these are not contemporaneous records of the expenses and do not indicate whether they were paid or by whom. A few months of utility bills are presented with the application,*fn10 but most were simply estimated at $50 per month, again with no indication that they were paid or by whom.
Whipple also responded to the Amended Application on August 20, 2009, specifically charging that "there is no evidence that Nichols paid any of the expenses." Counsel for Whipple repeated this charge at the hearing on the Amended Application on September 22: "There's absolutely no evidence, or even allegation made, that Mary Ann Nichols paid these expenses." Hr'g Tr. 5:19-20. Mrs. Nichols, through counsel or otherwise, never effectively addressed this charge in the hearing or elsewhere in the bankruptcy court.
In this appeal, Trustee also asserts that there is no evidence that Mrs. Nichols paid the expenses. There is nothing in the record to indicate that any of the payments were made by [Mrs. Nichols]. From evidence before this Court, it cannot be determined if any  such payments were ever, in fact, made at all. It could just as easily be supposed that the payments were made (if at all) by the other joint tenants in the property.
Those other joint tenants had obligations to make all of the sought payments, they benefitted, to the extent anyone at all benefitted, from such payments, and they had the right and opportunity for use and enjoyment at all times of the Michigan property.
1 Trustee's Reply Br. at 14. This argument was not addressed in the 2 Nichols' briefing; indeed, Mrs. Nichols did not file a reply brief 3 in this appeal. Then, counsel for Mrs. Nichols was questioned by 4 all three members of this Panel at oral argument as to what 5 evidence had been presented that Mrs. Nichols had paid the 6 expenses for which she sought reimbursement from the estate.
7 Counsel conceded that there was no evidence in the record. 8 Instead, counsel asked the Panel to remand this contest to the 9 bankruptcy court so that such evidence could be submitted.
10 In this procedural setting, we decline to allow Mrs. Nichols 11 a chance to reopen the evidentiary record in the bankruptcy court. 12 The record on appeal supports a conclusion that Mrs. Nichols has 13 had numerous opportunities to offer proof of this essential 14 element of her case. She ignored these challenges at her peril.
15 Although the bankruptcy court did not consider this failure 16 to address an essential element of her burden of proof, we may 17 affirm on any basis supported in the record. Hemmen, 51 F.3d at 18 891; In re Leavitt, 209 B.R. at 940. Because she bore the burden 19 of proof as to any administrative expense claim and failed to 20 show, or even address, that she had paid the expenses in question, 21 we conclude that the bankruptcy court's decision denying her claim 22 should not be disturbed.
Section 501(b)(1)(A) provides that, "After notice and a 25 hearing, there shall be allowed administrative expenses . . . 26 including -- (1)(A) the actual, necessary costs and expenses of 27 preserving the estate[.]" The bankruptcy court has "broad 28 discretion" in making or denying such awards. Microsoft Corp. v. DAK Indus. (In re DAK Indus.), 66 F.3d 1091, 1094 (9th Cir. 1995).
In the Ninth Circuit and elsewhere, to secure an allowed administrative expense under § 501(b)(1)(A), the claimant must show that the claim in question "(1) arose from a transaction with the [trustee] (or alternatively, that the claimant gave consideration to the [trustee]), and (2) directly and substantially benefitted the estate." Abercrombie v. Hayden Corp. (In re Abercrombie), 139 F.3d 755, 756-57 (9th Cir. 1998) (quoting Microsoft Corp. v. DAK Indus. (In re DAK Indus.), 66 F.3d 1091, 1094 (9th Cir. 1995); accord In re Merry-Go-Round Enters., Inc., 180 F.3d 149 (4th Cir. 1999); In re Sunarhauserman, Inc., 126 F.3d 811, 816 (6th Cir. 1997); Trustees of Amalgamated Ins. Fund v. McFarlin's, Inc., 789 F.2d 98, 100 (2d Cir. 1986).*fn11 The purpose of the administrative expense priority afforded by the Code is to encourage third parties to enter into agreements with the trustee for the benefit of the estate. Boeing v. N. Am., Inc. v. Ybarra (In re Ybarra), 424 F.3d 1018, 1026 (9th Cir. 2005); In re Kadjevich, 220 F.3d 1016, 1019 (9th Cir. 2000) (noting that the policy underlying administrative priority status is to encourage parties to take risks in entering agreements with 1 trustee); In re Abercrombie, 139 F.3d at 757 (citing encouragement 2 of third parties to deal with the trustee).
3 In determining whether there was a transaction with the 4 trustee, the creditor asserting an administrative expense claim 5 must prove there was some inducement by the trustee causing the 6 creditor to incur the expense. In re United Trucking Servs., 7 Inc., 851 F.2d 159, 162 (6th Cir. 1988). The alternative to 8 proving a transaction, a showing that the claimant gave 9 consideration to the trustee, requires that the creditor prove 10 that the trustee induced the creditor's performance, and that 11 performance was then rendered by the creditor to the estate.
12 In re White Motor Corp., 831 F.2d 106, 110 (6th Cir. 1987). 13 Here, the bankruptcy court had repeated, uncontroverted 14 statements from Trustee that she had never been contacted 15 regarding the expenses for which Nichols sought administrative 16 expense approval and had never approved any of the expenses. 17 Mrs. Nichols never contradicted Trustee's assertions or attempted 18 to prove that there was a transaction or inducement from Trustee 19 for Mrs. Nichols to incur the expenses. Consequently, the 20 bankruptcy court had ample factual grounds for its finding that, 21 "the trustee never authorized it, the trustee never knew about 22 it."
23 Having found that there was no contact or approval from 24 Trustee, necessarily implying that there was no transaction with 25 or inducement from Trustee, the bankruptcy court was not required 26 to address the second prong of the DAK Indus. test, whether the 27 alleged administrative expense claim directly and substantially 28 benefitted the estate. However, had the bankruptcy court 1 considered the question, it is clear that Mrs. Nichols provided no 2 evidence or reasoned argument that incurring the expenses directly 3 and substantially benefitted the estate. Her only conclusory 4 statement in the opening brief was that, "Clearly, the expenses 5 for which the Debtor sought an allowance as an administrative 6 expense were both actual and necessary and benefitted the estate 7 by allowing it to recover a substantial sum for these assets even 8 though the sale did not occur until years after the filing of the 9 petition." Appellants' Open. Br. at 8. Mrs. Nichols simply 10 provides no explanation how the expenses she incurred benefitted 11 the estate, directly or indirectly, let alone substantially.
12 On the other hand, there is an admission in Mrs. Nichols' 13 pleadings that her intent was not to benefit the estate, but to 14 benefit herself:
15 All of the expenses set forth in the summary attached hereto were reasonable and necessary to preserve and 16 protect the subject property, and the majority of which were paid after the time that the chapter 7 trustee 17 herein filed a no asset report, indicating initially that the Trustee did not intend to sell the subject 18 property. Had it been clear from the onset that the Trustee did not intend to abandon the property, these 19 costs and expenses would have been a direct cost of the estate, and would not have been paid [by] the debtor.
Amended Application at 2-3 (emphasis added). In short, in her own 21 words, Mrs. Nichols admits that she would not have paid the 22 expenses in order to preserve or benefit the estate. She assumed 23 that her interest in the Property would be abandoned by Trustee 24 and she would pay the expenses, if in fact she paid any of them, 25 to benefit herself.
To qualify as an administrative expense under §
the expenses must not be incurred with the intent to benefit
person making the expenditure. In re Sierra Pac. Broadcasters,
185 B.R. 575, 577 (9th Cir. BAP 1995) (holding that the
2 incurred to benefit the claimants' own interest is not entitled
3 administrative priority under § 503(b)(1)(A)); In re
4 Mortgage Co., Inc., 111 B.R. 488, 493 (Bankr. E.D.
6 For these reasons, we conclude that the bankruptcy court 7 applied the correct legal rule on allowance of administrative 8 claims under § 503(b)(1)(A) and that the court's application of 9 this standard to the facts was neither illogical, implausible nor 10 without support in inferences that may be drawn from the facts in 11 the record. Consequently, the bankruptcy court did not abuse its 12 discretion in denying the administrative claim as to those 13 expenses that might be allowable under § 503(b)(1)(A), i.e., for 14 property hazard insurance, utility costs, and non-labor "out of 15 pocket expenses."
17 Mrs. Nichols' Amended Application sought, in part, an 18 administrative claim for payment of property taxes for the 19 Property. The Bankruptcy Code provides for allowance of an 20 administrative claim for payment of property taxes under 21 § 503(b)(1)(B)(i): "After notice and a hearing, there shall be 22 allowed administrative expenses . . . including -- (1)(B) any tax 23 (i) incurred by the estate, whether secured or unsecured, 24 including property taxes, for which liability is in rem, in 25 personam, or both[.]"
Historically, American bankruptcy law has treated 27 administrative claims for taxes as a separate category from other 28 priority claims. The Bankruptcy Act of 1898 provided for 1 administrative claims similar to the Bankruptcy Code's 2 § 503(b)(1)(A) in repealed § 64 (a)(1)-(3). Administrative claims 3 for payment of tax obligations under the Bankruptcy Act, however, 4 were addressed in repealed § 64(a)(4). Both the former Bankruptcy 5 Act and the current Code require that administrative expenses for 6 non-tax claims be actual and necessary for the preservation of the 7 estate. In contrast, no such requirement, or implied requirement 8 that the administrative claim benefit the estate, is included in 9 either § 503(b)(1)(B) or repealed § 64(a)(4) dealing with taxes. 10 On the contrary, bankruptcy courts have held that the requirement 11 under § 503(b)(1)(B) for a tax payment to be accorded 12 administrative expense priority under the Code is that it be 13 incurred by the bankruptcy estate post-petition. In re Balt. 14 Marine Indus., 344 B.R. 407, 414 (Bankr. D. Md. 2006); 15 In re Tri-City Health Ctr., 283 B.R. 204, 207 (Bankr. N.D. Tex. 16 2002) ("Section 503(b)(1)(B)(I), on the other hand, does not 17 require that the taxes be incurred to preserve the estate, but 18 merely that the taxes be incurred by the estate."); In re Farris, 19 205 B.R. 461, 464 (Bankr. E.D. Pa. 1997). Therefore, the 20 requirements for an administrative claim under § 503(b)(1)(B) are 21 less detailed than one under § 503(b)(1)(A).
22 There is no requirement that the trustee authorize or induce 23 the payment of taxes and, indeed, no prohibition on self-interest.
24 However, as the Babb court ruled, there is still the irreducible 25 threshold requirement that a claimant asserting an administrative 26 claim for reimbursement of a tax debt that she paid for the estate 27 must prove that she did pay it. Counsel for Mrs. Nichols has 28 conceded that there is no evidence in the record that Mrs. Nichols paid the tax debt. Thus we affirm the bankruptcy court's decision 1 not to allow an administrative expense for alleged payment of 2 property taxes.
The bankruptcy court's order is AFFIRMED.