In re Diberto CV-93-652-JD 06/13/95 UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW HAMPSHIRE

In re Robert L. DiBerto Civil No. 93-652-JD

O R D E R

In this civil action. Bluebird Trust, Sable Trust, and Argus

Trust ("appellants") bring an appeal from an order of the United

States Bankruptcy Court for the District of New Hampshire

("bankruptcy court") denying their "Motion for Allowance of

Administrative Expenses" (bankruptcy court document no. 160).

See document no. 1, Memorandum Opinion. Jurisdiction is grounded

upon

(c) and Rule 8001 of the Federal Rules of

Bankruptcy Procedure.

Background

On December 3, 1990, Robert L. DiBerto, appellee in this

action, filed a Chapter 11 bankruptcy petition with the

bankruptcy court. DiBerto filed his plan of reorganization on

August 23, 1991. To secure repayment to the unsecured creditors,

DiBerto's plan proposed that he would provide a non-recourse note

and a mortgage on six of his twenty-four parcels of real property.1 Three of these parcels were already subject to first

mortgage commitments. The remainder of DiBerto's property would

be subject to claims only from secured creditors. As a result,

the unsecured creditors were left disproportionately vulnerable.

The appellants filed four sets of objections to the

proposal. Three other unsecured creditors also opposed this

provision of the plan, although two expressed their willingness

to stipulate to approval prior to the final confirmation hearing.

At that hearing, DiBerto amended his plan to include a mortgage

on all twenty-four parcels of real estate. On August 6, 1992,

the bankruptcy court entered an order confirming the modified

plan.2 The plan was not appealed and is now a final order.

Following confirmation, the appellants filed a motion

seeking compensation for $29,987.34 in administrative expenses

incurred while undertaking efforts to procure the amendment to

the plan of reorganization. Applications for allowance of

administrative expenses may be granted pursuant to

(b) (3) (D) . Section 503(b) (3) (D) provides:

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

1DiBerto had forty-seven creditors, the majority of whom were unsecured.

2Several amendments were made to the original plan of reorganization other than the amendment at issue.

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

(D) a creditor . . . in making a substantial contribution in a case under chapter 9 or 11 of this title

(b)(3)(D) (1993), amended by

(Supp. 1995). The court reviewing the application is charged

with determining whether or not a creditor's efforts resulted in

a substantial contribution. This inguiry is one of fact. In re

Consolidated Bancshares, Inc.,

, 1253 (5th Cir.

198 6); Ex parte Roberts,

(D.S.C. 1988).

On October 1, 1993, the court held a hearing on the

appellant's motion. At the hearing, the appellants "did not

introduce any evidence to establish the factual guestion of

substantial benefit to the estate but stated that the [bankruptcy

court] could take judicial notice of the case record and that the

case record itself would establish their having created that

substantial benefit to the estate." Memorandum Opinion at 1-2.

On October 14, 1993, the bankruptcy court denied the motion. The

bankruptcy court stated that appellants' efforts were not

instrumental in improving the plan of reorganization for three

reasons. First, three other creditors had raised the same

objection. Second, the bankruptcy court would not have allowed

3 that feature of the plan to remain regardless of whether any

objections had been filed since

(a)(7) requires

the bankruptcy court to find a plan of reorganization to be in

the "best interests" of the creditors. According to the

bankruptcy court, leaving the debtor with unencumbered real

estate and the general creditors with an undersecured promise to

pay when more security was available would not be in the

creditors' best interest. Third, the appellants were primarily

motivated by self-interest. The bankruptcy court further ruled

that even had the appellants made a substantial contribution to

the estate or to the creditors as a whole, they waived their

right to reimbursement under § 503(b)(3)(D) by failing to

disclose their intention to make such a claim prior to

confirmation of the plan of reorganization. This appeal ensued.

Discussion

The appellants first argue that the bankruptcy court erred

when it ruled that the appellants' efforts to procure the

amendment to the plan of reorganization was not a substantial

contribution to the estate or to the creditors as a whole. The

appellants assert that their contribution was substantial "as a

matter of law" and seek a de novo review of the bankruptcy

court's ruling. Diberto responds that whether the appellants

4 made a substantial contribution is a question of fact subject to

deferential review and asserts that the bankruptcy court's denial

was appropriate.

Bankruptcy Rule 8013 articulates the appropriate standard of

review of an appeal from an order of the bankruptcy court:

On an appeal the district court . . . may affirm, modify, or reverse a bankruptcy judge's judgment, order, or decree or remand with instructions for further proceedings. Findings of fact, whether based on oral or documentary evidence, shall not be set aside unless clearly erroneous, and due regard shall be given to the opportunity of the bankruptcy court to judge the credibility of the witnesses.

11 U.S.C. Rule 8013. In reviewing a bankruptcy court decision,

the court applies a clearly erroneous standard to findings of

fact, while conclusions of law are reviewed de novo. In re

G .S .F . Corp.,

(1st Cir. 1991) (citing

Bankruptcy Rule 8013) (holding standard of review for district

and appellate courts the same). Where questions of both fact and

law exist, the court will divide them into their respective

components and apply the appropriate test. See In re Brown, 951

F .2d 564, 567 (3d Cir. 1991).

The appellants contend that the bankruptcy court incorrectly

considered their motivation as a factor in denying their

application for administrative expenses. They assert that as a

matter of law their motivation is irrelevant and that they are

5 entitled to an award so long as the estate benefited from their

actions.

The bankruptcy court has wide discretion to determine the

appropriate amount of expenses to be awarded under

§ 503(b) (3) (D) . In re Lister,

(10th Cir. 1988)

(citing In re Consolidated Bancshares, Inc.,

(5th Cir. 1986)). The allowance of administrative expenses under

that section should also be left to the bankruptcy court's

discretion. See id.; In re Grvnberq,

(Bankr. D.

Colo. 1982). Whether the bankruptcy court may consider self-

interest in making its decisions is a guestion of law. However,

whether the appellants actually acted in self-interest and

whether they made a substantial contribution to the plan are

guestions of fact. Consolidated Bancshares,

;

Roberts,

. Thus, if the bankruptcy court applied

the appropriate legal standard, then its denial of the

application for administrative expenses is entitled to

deferential review.

I. Legal Standard

In determining whether an applicant seeking administrative

expenses has made a substantial contribution pursuant to

§ 503(b)(3)(D), the bankruptcy court considers whether the

6 efforts of the applicant resulted in an actual and demonstrable

benefit to the debtor's estate and to the creditors. Lister,

; In re Jensen-Farlev Pictures, Inc.,

(Bankr. D. Utah 1985); Consolidated Bancshares,

.

The services for which compensation is sought must have benefited

the estate itself or all of the parties in the case; must have

had a direct, significant, and demonstrable positive effect upon

the estate; and must not have been duplicative of services

performed by others. In re FRG, Inc.,

(Bankr.

E.D. Pa. 1991) (citing cases). The applicant has the burden of

proving a substantial contribution, and entitlement to an award

must be established by a preponderance of the evidence. In re

United States Lines, Inc.,

(Bankr. S.D.N.Y.

1989); In re Hanson Indus., Inc.,

(Bankr. D.

Minn. 1988).

It is well settled that the statutory provision is to be

narrowly construed. United States Lines,

.

Claims for administrative expenses are given priority and deplete

the funds available to general unsecured creditors. In re

Cuisinarts, Inc.,

(Bankr. D. Conn. 1990) . The

bankruptcy court has a duty to protect available assets.

Therefore, applications to recoup administrative expenses are

subject to strict scrutiny.

7 The reviewing court may consider an applicant's motivation

in undertaking the efforts for which the applicant seeks

compensation.

"'[A] creditor's attorney must ordinarily

look to its own client for payment, unless the creditor's

attorney rendered services on behalf of the reorganization, not

merely on behalf of his client's interest . . . Consolidated

Bancshares,

(guoting In re General Oil

Distributors,

(Bankr. E.D. Pa. 1983). "[C]ase

law . . . is clear that 'efforts undertaken by a creditor solely

to further his own self-interest . . . will not be compensable,

notwithstanding any incidental benefit accruing to the bankruptcy

estate.1" Cuisinarts,

(citing Lister,

; In re D.W.G.K. Restaurants, Inc., 84 Bankr. 684, 689

(Bankr. S.D. Cal. 1988)).

The appellants distinguish on factual grounds several of the

cases cited by the bankruptcy court and by DiBerto for the

proposition that applicants for administrative expenses cannot be

compensated for self-motivated actions. For example, in Lister,

the court held that the pre-petition efforts of an applicant

undertaken solely for his own benefit and not for the benefit of

the estate as a whole are not compensable.

. In

this action, the applicant is reguesting reimbursement for post­

petition activities. However, in Lister, the court was not making a statement that the no self-interest rule only applies to

pre-petition efforts. Rather, the fact that the applicants'

efforts occurred pre-petition was significant to illustrate that

the applicant could not have intended to benefit the bankruptcy

estate since bankruptcy had not been declared at the time the

activities took place. The Lister court embraced the broad

policy embodied in the bankruptcy code to protect assets and

limit awards except in rare and unusual cases. The bankruptcy

court also recognized and followed this well accepted policy.

This policy underlies the reasoning behind those cases on which

the bankruptcy court relied, even though many are factually

distinguishable. The bankruptcy court did not err as a matter of

law in considering the motivation underlying appellants' efforts.

II. Substantial Contribution

The court now considers whether the bankruptcy court's

denial of the appellants application for administrative expenses

was clearly erroneous. "A finding is 'clearly erroneous1 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 v. City of Bessemer

City,

(1985) (guoting United States v. Gypsum

Company,

(1948)); see In re G .S .F Corp.,

. Employing the Anderson criteria, the court finds

that the bankruptcy court did not abuse its discretion in denying

the application.

As noted supra, the determination of whether the efforts of

a creditor constitute a substantial contribution is left to the

informed discretion of the bankruptcy court. In re Baldwin-

United Corp.,

(Bankr. S.D. Ohio 1987); In re

Grvnberq,

(Bankr. D. Colo. 1982). "[Section]

503(b)(3)(D) compensation is grounded upon the limitation that

the expenses be 'actual' and 'necessary,' and leave each

application to be determined upon its own merits. Hence, there

will always remain in each case guestions of whether the services

of any applicant creditor have been 'substantial' and whether the

expenses incurred in that service have been 'actual and

necessary.'" Grvnberq,

.

The burden of proof is on the applicant to establish

entitlement to the award. In re 9085 E. Mineral Office Building,

Ltd.,

(Bankr. D. Colo. 1990) (citing cases).

"Something more than mere conclusory self-serving statements

regarding one's involvement in a case which allegedly resulted in

a "substantial contribution" must be presented to the Court

before compensation can be allowed."

While corroborating

testimony from a disinterested party is preferred, a court's

10 first hand observation may serve as a sufficient basis for

finding substantial contribution.

To keep administrative expenses to a minimum, compensation

is generally limited to cases where "unusual creditor actions

have led to demonstrated benefits to either the creditors as a

whole, the debtor or the estate."

.

Compensation cannot be freely given to all creditors who take an active role in bankruptcy proceedings. Compensation must be preserved for those rare occasions when the creditor's involvement truly fosters and enhances the administration of the estate. Such involvement takes the form of constructive contri­ butions in key reorganizational aspects, when but for the role of the creditor, the movement towards final reorganization would have been substantially diminished. The integrity of § 503(b) can only be maintained by strictly limiting compensation to extraordinary creditor actions which lead directly to significant and tangible benefits to the creditors, debtor, or the estate.

Id. (citing In re D.W.G.K. Restaurants, Inc.,

)

(Bankr. S. D. Cal. 1988).

At the time of the bankruptcy court's hearing on their

motion, the appellants chose not to introduce evidence

establishing their substantial contribution, but rather to rely

on the record before the bankruptcy court. The bankruptcy court

reviewed the records and determined that the appellants' efforts

were duplicative, that the appellants were motivated by self-

interest, and that the plan would have been modified regardless

of the appellants efforts. The appellants now argue that the

11 bankruptcy court unreasonably failed to reward their accomplish­

ment because (1) they "almost singlehandedly . . . forced"

DiBerto to include all twenty-four real estate assets as security

and (2) their "successful efforts" to "force" modification were

motivated by their desire to obtain "greater security for the

claims of all creditors."

The court has reviewed the record submitted to the

bankruptcy court. The record does not substantiate the claims

put forward on appeal. Nothing in the records establishes that

DiBerto made his motion to amend in response to the appellants'

efforts. DiBerto's motion to amend may have been prompted by the

efforts of the other opposing creditors or by the fact that more

than one creditor objected to the provision; may have been in

anticipation of a negative ruling from the bankruptcy court; or

may have occurred for some other reason not contemplated herein.

Similarly, nothing in the record establishes that appellants'

motivation in filing their objections was even remotely

altruistic. "Creditors are presumed to act primarily in their

own interests and not for the benefit of the estate as a whole

. . . ." Cuisinarts, 115 Bankr. at 750. The appellants admit

that they were primarily motivated by self-interest. See Brief

of Appellants at 7-12.

12 The bankruptcy court, familiar with the parties and the

procedure of the case, concluded that the appellants were self­

motivated and that their efforts were not the motivating force

behind the amendment. The bankruptcy court's account of the

evidence is plausible in light of the record viewed in its

entirety. To the extent that the appellants possessed evidence

contrary to the bankruptcy court's findings, their failure to

produce that evidence at the time of the hearing cannot be

remedied by appeal to this court. Bald assertions regarding the

appellants' reasons for acting and the results achieved cannot

now serve as a basis for overturning the bankruptcy court's

decision. The bankruptcy court's decision is not clearly

erroneous and the court finds no abuse of discretion.

Because the court affirms the bankruptcy court's finding

that the appellants did not make a substantial contribution to

the estate or to the creditors as a whole, it is not necessary to

consider whether the bankruptcy court erred in ruling that

appellants are not entitled to administrative expenses due to

their failure to disclose their intent to make a claim prior to

confirmation of the plan of reorganization. The decision is

affirmed.

13 Conclusion

The bankruptcy court's denial of administrative expenses is

affirmed. The clerk of court is directed to close the case.

SO ORDERED.

Joseph A. DiClerico, Jr. Chief Judge June 13, 1995

cc: Mark H. Gardner, Esquire Franklin C. Jones, Esquire George Vannah, U.S. Bankruptcy Court

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