Opinions of the United 1994 Decisions States Court of Appeals for the Third Circuit
6-29-1994
Lebron v. Mechem Financial, Inc. Precedential or Non-Precedential:
Docket 93-3408
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Recommended Citation "Lebron v. Mechem Financial, Inc." (1994). 1994 Decisions. Paper 65. http://digitalcommons.law.villanova.edu/thirdcircuit_1994/65
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N0. 93-3408
MICHAEL Q. LEBRON; *MICHAEL C. LEBRON; ANTHONY LEBRON
v.
MECHEM FINANCIAL INC.; W. JAMES SCOTT, JR.; ROBERT G. DWYER, Trustee
W. James Scott, Jr., Appellant
(*Per Clerk's 9/20/93 Order, amending the caption)
On Appeal From the United States District Court For the Western District of Pennsylvania (D.C. Civil Action No. 93-00067E)
Argued March 1, 1994
BEFORE: STAPLETON and SCIRICA, Circuit Judges, and VAN ANTWERPEN, District Judge*
(Opinion Filed June 29, 1994)
James R. Walczak John F. Mizner (Argued) MacDONALD, ILLIG, JONES & BRITTON 100 State Street, Suite 700 Erie, PA 16507 Attorneys for Appellant
James E. Blackwood (Argued) 23 West 10th Street Erie, PA 16501 Attorney for Appellees *Honorable Franklin S. Van Antwerpen, United States District Judge for the Eastern District of Pennsylvania, sitting by designation.
OPINION OF THE COURT
STAPLETON, Circuit Judge:
Pursuant to 11 U.S.C. §§ 503(b)(3) and (b)(4) (1988),
the bankruptcy court awarded W. James Scott ("Scott"), a creditor
and former officer and director of the debtor, Mechem Financial,
Inc. ("Mechem"), reimbursement of expenses incurred in connection
with activities that the court felt "substantial[ly] contributed"
to Mechem's estate. Most of Scott's efforts were aimed at
exposing the fact that Mechem's officers and directors were
engaged in fraudulent activity. The bankruptcy court's award was
appealed by three other creditors of the estate, Michael Q.
Lebron, Michael C. Lebron, and Anthony Lebron ("the Lebrons").
The district court reversed, holding that some of Scott's
expenses were incurred either before the chapter 11 petition was
filed or after the case was converted to chapter 7, and that
§§503(b)(3) and (b)(4) do not authorize recovery of expenses
incurred during these periods. The district court further held
that Scott could not recover the expenses he incurred while the
chapter 11 proceedings were pending because he was acting solely
for his own benefit, thus making any benefit to the estate purely
incidental. Finally, the court held that the bankruptcy court's award was inequitable because Scott was an insider in the
corporation that was committing the fraud. Scott appeals the
judgment of the district court. We will reverse and remand for
further proceedings.
I.
Mechem was founded in 1986 to manage pre-need funeral
trust funds for individuals and to provide these individuals with
funeral goods and services to be paid for with the funds in
trust. The funds were advanced from the participating
individuals to Mechem through funeral directors. Scott was one
of the three initial members of Mechem's board of directors as
well as a minority shareholder. In addition, Scott was a funeral
director who had entrusted Mechem with funds under pre-need
contracts executed by his customers. A second board member, John
R. Copple ("Copple"), served as the President of Mechem, and
controlled the day-to-day operations of the corporation. Soon
after Mechem was organized, Scott began to sense that Copple was
not disclosing to him information regarding Mechem financial
matters and investments. Then, in October 1987, Copple and the
third member of the board of directors removed Scott as an
officer and director of Mechem.
After his removal, Scott apparently made several
requests of Copple for financial information about Mechem, but
Copple refused these requests. Therefore, in 1988, Scott filed a
complaint in mandamus against Mechem in the Court of Common Pleas
of Erie County, Pennsylvania, seeking to exercise his rights under Pennsylvania law as a shareholder to examine Mechem's
books. During the discovery phase of this action, Scott became
aware that Copple had misappropriated millions of dollars of pre-
need funeral trust fund monies for personal use, much of which
was used to purchase rare coins controlled by Copple. In light
of this information, Scott, in February 1990, filed a complaint
in equity in the Court of Common Pleas of Erie County,
Pennsylvania, against Mechem, its officers, directors, and
majority shareholders, and certain holders of trust funds. He
sought appointment of a custodian to prevent further
mismanagement and fraud, a complete and accurate accounting of
the assets held by Mechem, an injunction against the disbursement
or transfer of pre-need trust funds, and a declaration that
certain issues and transfers of corporate stock were void. Scott
accompanied this complaint with an affidavit that detailed
alleged acts of mismanagement and self-dealing by Copple in his
capacity as president of Mechem.
According to the bankruptcy court, the walls began to
close in on Copple at this point. On March 6, 1990, a common
pleas court ordered Mechem and, specifically, Copple, to file
before March 12, 1990, inventories of all assets, investments,
and accounts held by Mechem or Copple personally. Because
neither Mechem nor Copple filed a satisfactory inventory, Scott
promptly moved to compel compliance with the court's order. On
March 19, 1990, the common pleas court entered an additional
order directing Mechem and Copple to file by March 26, 1990,
inventories and more detailed supporting information. Copple reacted to the court's order by causing Mechem
to file a chapter 11 petition on March 23, 1990. Scott
immediately filed in the bankruptcy court for the appointment of
a trustee, for an expedited accounting, and for partial relief
from a stay. The bankruptcy court granted Scott's motion on
March 28, 1990, and a trustee was appointed on that same day.
Scott then gave the trustee all of the information that he had
gathered during his pre-bankruptcy petition legal actions against
Mechem and Copple. The bankruptcy court found that this
information "contributed to the [t]rustee's report of
investigation filed promptly with [the] Court on April 24, 1990
identifying various assets and summarizing the history of
questionable financial transactions between [Mechem] and [Copple
and affiliates and corporations under Copple's control.]" B.Op.
at 6.
The trustee recommended that the proceedings be
converted to chapter 7, which the bankruptcy court did on May 23,
1990. During the liquidation process, the trustee collected cash
in the amount of $460,000. The trustee also brought numerous
adversary proceedings against Copple and his wife, which resulted
in the turnover of additional property to the estate. Finally,
the trustee obtained a judgment against Copple for $4,009,645,
and against Copple and his wife for $1,307,567. According to the
trustee, unless the Copples successfully appeal these awards,
another $400,000 to $700,000 will be collected upon the
liquidation of their personal assets. Despite the collection and liquidation efforts, the unsecured creditors of Mechem will incur
losses.
Scott, pursuant to §§ 503(b)(3) and (b)(4), applied to
the bankruptcy court for reimbursement of the expenses he had
incurred in connection with the Mechem legal actions and his
participation in the chapter 11 and chapter 7 proceedings.
Specifically, Scott requested $48,805.12 as reimbursement for
attorney fees and $10,207.88 as reimbursement for general
expenses. These amounts represented expenses incurred before,
during, and after Mechem entered the chapter 11 proceedings. The
bankruptcy court awarded Scott his requested reimbursements in
full. In justification of this award, the court made the
following findings: The information gathered by Scott in his prosecution of matters against the Debtor was critical to the Court in making an immediate determination to appoint a Trustee and critical to the Trustee in making a prompt investigation and report to the Court which resulted in conversion of this case to Chapter 7. Scott's information also assisted the Trustee in the subsequent collection of assets for the benefit of creditors of the estate.
Scott's efforts were more than just a passing benefit to the estate. The efforts of Scott were a substantial contribution in assisting the Trustee to carry out his responsibilities. Scott's efforts far exceeded those which he was obligated to perform. . . .
. . . [T]he benefit Scott bestowed upon this estate is clear -- absent Scott's pursuit of this Debtor, the Debtor lead by Copple might still be fleecing individuals into investing in the Debtor's preneed trusts. Copple could still be diverting the Debtor's assets to his own uses. There might be no estate for unsecured creditors.
. . . Most, if not all of the individual preneed trust purchasers, will receive the funeral that they anticipated and the unsecured creditors will receive some dividend from this estate. Without Scott's efforts, the result could have been much worse -- the Debtor could have continued to operate until all of the assets were dissipated.
We find that all of Scott's efforts for
which he incurred fees and expenses both
prepetition and postpetition resulted in a
direct benefit and were a substantial
contribution to the estate. Any fees and
expenses which Scott incurred prepetition
substantially contributed to the
administration of the Debtor's estate
postpetition. Thus, there is more than
sufficient reason to reimburse Scott for fees
and expenses in their entirety.
B.Op. 9-10.
The bankruptcy court also specifically found that
Scott's efforts after the case was converted to one under chapter
7 were of significant benefit to the creditors: Most of the individual purchasers of preneed funeral trusts will be spared from any significant losses, however, because of the efforts of the [t]rustee to provide a mechanism for funeral directors to provide those individuals with fully funded replacement trusts with which most funeral directors are complying. . . . Scott assisted the [t]rustee in this effort. Scott has provided funerals for its preneed clients who have died and replacement trusts for its living individual clients in the amount of $64,548.51 and Scott, as a creditor, has an unsecured claim as a creditor of this estate for those expenditures.
B.Op. 7.
The district court reversed the bankruptcy court's
decision to award Scott administrative expenses. First, the
court found that under §§ 503(b)(3) and (b)(4), unless the
bankruptcy petition is filed involuntarily or there is a pre-
petition custodian or receiver, pre-petition fees and expenses
cannot be recovered. Because these proceedings were voluntary
and there was no pre-petition custodian or receiver, Scott could
not recover any expenses that he incurred prior to the date
Mechem filed its chapter 11 petition. The court also found that
because §§ 503(b)(3) and (b)(4) specifically authorize the
recovery of expenses for contributions made in cases "under
chapter 9 or 11," any expenses incurred after a case is converted
from chapter 9 or 11 may not be recovered pursuant to these
sections. Thus, it held that Scott was not entitled to recoup
the expenses he incurred after the case was converted to chapter
7. Turning to expenses incurred during the pendency of a chapter
9 or 11 case, the court further concluded that an applicant may
recover such expenses pursuant to §§ 503(b)(3) and (b)(4) only if
they were incurred as a result of activities which made a
"substantial contribution" to the case, and which were not
engaged in primarily for the applicant's own benefit. The court
held that because Scott's actions "were mainly done to protect his own interests, and any benefits conferred upon the estate
were incidental[,]" there was no basis for awarding him any
expenses. In addition, the court commented that it would be
unjust for Scott, an original incorporator, director,
shareholder, and insider of the debtor, to be reimbursed in full
from funds that would otherwise benefit hundreds of duped
purchasers. In this regard, the court found that the replacement
trusts which Scott helped establish did "not make the purchasers
whole." Op. 5.
II.
We exercise plenary review over the district court's
decision, as well as over the legal determinations of the
bankruptcy court. However, we review the bankruptcy court's
factual findings for clear error. See Sapos v. Provident Inst.
of Sav. in Town of Boston, 967 F.2d 918, 922 (3d Cir. 1992)
("Because in bankruptcy cases the district court sits as an
appellate court, our review of the district court's decision is
plenary. This court exercises the same review over the district
court's decision that the district court may exercise. The
findings of fact by the bankruptcy court are reviewable only for
clear error. Legal questions are, of course, subject to plenary
review".) (quoting Brown v. Pa. State Employees Credit Union, 851 F.2d 81, 84 (3d Cir. 1988) (citations omitted)).
III. Subsections 503(b)(3) and (b)(4) of the Bankruptcy
Code, the only authority relied upon by Scott in support of his
award, authorize the court to award administrative expenses under
several different sets of circumstances. They provide: (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--
(A) a creditor that files a petition under section 303 of this title;
(B) a creditor that recovers, after the court's approval, for the benefit of the estate any property transferred or concealed by the debtor;
(C) a creditor in connection with the prosecution of a criminal offense relating to the case or to the business or property of the debtor;
(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; or
(E) a custodian superseded under section 543 of this title, and compensation for the services of such custodian;
(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 . . ..
§ 503. Because § 503(b)(4) authorizes awards of legal and
accounting fees only in situations coming within the scope of
§ 503(b)(3), and because subsection (D) is the only portion of
§ 503(b)(3) arguably applicable here,1 we focus on
§ 503(b)(3)(D).
Under § 503(b)(3)(D), four categories of persons may
apply for reimbursement of expenses: (1) creditors, (2)
indenture trustees, (3) equity security holders, and (4) creditor
and equity holder committees other than official committees
appointed under § 1102 of the Bankruptcy Code. The court may
award an applicant actual, necessary expenses which were incurred
"in making a substantial contribution in a case under chapter 9
or 11." Under subsection (b)(4), this may include reimbursement
for professional fees of an attorney or accountant, where those
1 Scott cannot recover his claimed expenses pursuant to §503(b)(3)(A) because this subsection refers to creditors that file an involuntary petition under § 303, which Scott did not do here. Subsection (b)(3)(B) is also inapplicable because it requires that the creditor seek prior approval from the court for his or her actions, which Scott did not seek. Nor may Scott recover expenses pursuant to subsection (B)(3)(C), because this section pertains to expenses incurred in connection with the prosecution of a criminal offense, and none of the bills submitted by Scott reflect charges for services rendered in the course of criminal proceedings against Copple. See D.Ct. Op. 14. Finally, subsection (b)(3)(E) is inapplicable here because it refers to expenses incurred by a superseded custodian, and there was no superseded custodian in this case. fees meet the additional requirements of that subsection. Any
expenses reimbursed are administrative expenses with the
attendant priority. 11 U.S.C. § 507 (1988).
Here, Scott is a creditor as well as an equity security
holder, and the administrative expenses that he seeks consist of
attorney fees and general expenses. Therefore, he is entitled to
these expenses if he incurred them as a result of activities
which (1) made a "substantial contribution," (2) "in a case under
chapter 9 or 11."
The "substantial contribution" standard of
§ 503(b)(3)(D) is derived from §§ 242 and 243 of the former
Bankruptcy Act, 11 U.S.C. §§ 642, 643 (repealed 1978). Sen. Rep.
No. 95-989, 95th Cong., 2nd Sess. 5, reprinted in 1978
U.S.C.C.A.N. 5787, 5852. Those sections were, in turn, derived
from former Section 77B(c)(9) of the Bankruptcy Act, 11 U.S.C.
§ 207(c)(9) (repealed 1938). See, 6A James William Moore &
Robert Stephen Oglebay, Collier on Bankruptcy ¶ 13.01, at 521-23
(James William Moore ed., 14th ed. 1977); Alfred B. Teton,
Reorganization Revised, 48 Yale L.J. 573, 603-607 (1939).
Sections 242 and 243 and § 503(b)(3)(D) liberalized the
circumstances under which reimbursement was authorized, but at
each stage in the progression, the core concept has been the
same. See, Collier, supra, ¶ 13.01, at 523 (14th ed.); 3 Hon. Roy Babitt, et al., Collier on Bankruptcy ¶ 503.04, at 14 & 44-50
(Lawrence P. King ed. 15th ed. 1994); Teton, supra, at 604. The
services engaged by creditors, creditor committees and other
parties interested in a reorganization are presumed to be incurred for the benefit of the engaging party and are
reimbursable if, but only if, the services "directly and
materially contributed" to the reorganization. Steere v. Baldwin
Locomotive Works, 98 F.2d 889, 891 (3d Cir. 1938) (applying
Section 77B(c)); In re Solar Mfg. Corp., 206 F.2d 780 (3d Cir.
1953) (same); In re Mt. Forest Fur Farms of Am., Inc., 157 F.2d
640 (6th Cir. 1946) (applying § 243); In re Lister, 846 F.2d 55
(10th Cir. 1988) (applying § 503(b)(3)(D)).
Thus, "[i]n determining whether there has been a
'substantial contribution' pursuant to section 503(b)(3)(D), the
applicable test is whether the efforts of the applicant resulted
in an actual and demonstrable benefit to the debtor's estate and
the creditors." In re Lister, 846 F.2d 55, 57 (10th Cir. 1988).
See also, Matter of Consol. Bancshares, Inc., 785 F.2d 1249, 1253
(5th Cir. 1986); Collier, supra, ¶ 503.04, at 38 (15th ed.).
"[S]ervices which substantially contribute to a case are those
which foster and enhance . . . the progress of reorganization."
Consol. Bancshares, Inc., 785 F.2d at 1253 (quoting In re Richton
Int'l Corp., 15 B.R. 854, 855 (Bankr. S.D.N.Y. 1981) (other
citation omitted)).
Subsection 503(b)(3)(D) represents an accommodation
between the twin objectives of encouraging "meaningful creditor
participation in the reorganization process," Richton, 15 B.R. at 855-56 (citation omitted), and "keeping fees and administrative
expenses at a minimum so as to preserve as much of the estate as
possible for the creditors." Otte v. U.S., 419 U.S. 43, 53 (1974) (citation omitted). Inherent in the term "substantial" is the concept that the benefit received by the estate must be more
than an incidental one arising from activities the applicant has
pursued in protecting his or her own interests. Creditors are
presumed to be acting in their own interests until they satisfy
the court that their efforts have transcended self-protection. In
re Solar Mfg. Corp., 206 F.2d at 781 (the "work [of attorneys
employed by creditors] must be at the expense of their clients
unless it is in some manner beneficial to the estate"); In re
Lister, 846 F.2d 55, 57 (10th Cir. 1988); Consol. Bancshares,
Inc., 785 F.2d at 1253 ("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, and conferred a
significant and demonstrable benefit to the debtor's estate and
the creditors.") (quoting from In re Gen. Oil Distribs., 51 B.R.
794, 806 (Bankr. E.D.N.Y. 1985)); In re Bldgs. Dev. Co., 98 F.2d
844 (7th Cir. 1938); In re Jensen-Farley Pictures Inc., 47 B.R.
557, 569 (Bankr. D. Utah 1985). Most activities of an interested
party that contribute to the estate will also, of course, benefit
that party to some degree, and the existence of a self-interest
cannot in and of itself preclude reimbursement. Nevertheless,
the purpose of § 503(b)(3)(D) is to encourage activities that
will benefit the estate as a whole, and in line with the twin
objectives of § 503(b)(3)(D), "substantial contribution" should
be applied in a manner that excludes reimbursement in connection
with activities of creditors and other interested parties which
are designed primarily to serve their own interests and which, accordingly, would have been undertaken absent an expectation of
reimbursement from the estate.
We turn now to the statutory requirement that the
expenses be ones incurred "in a case under chapter 9 or 11." The
Lebrons argue that this language expressly limits the authority
conferred by § 503(b)(3)(D) to only those expenses that were
incurred during the pendency of a chapter 9 or chapter 11 case.
In other words, they claim that this section authorizes only the
recovery of expenses that are the result of efforts occurring
after a petition for chapter 9 or 11 proceedings is filed, but
before either the reorganization ends, or the case is converted
to one under chapter 7 or 13.
We perceive a fallacy in this argument. It is the
"substantial contribution," not the activity, that must occur "in
a case" under chapter 11, and the Lebrons' argument assumes that
activities conducted and expenses incurred before the filing of a
chapter 11 petition cannot substantially contribute to the
reorganization efforts during the pendency of a chapter 11 case.
We believe the facts of this case, as found by the bankruptcy
court, demonstrate that this assumption is not sound. The
information generated by Scott's pre-petition activities in this
case materially assisted the trustee in carrying out his
responsibilities in the chapter 11 proceedings.
We think our understanding of § 503(b)(3)(D) is
confirmed by its legislative history. Under section 77B(c) of
the Bankruptcy Act, reimbursement of fees was authorized for pre-
petition services of informal committees of creditors and stockholders where those services directly benefitted the
reorganization. See, e.g., In re Ulen & Co., 130 F.2d 303 (2d
Cir. 1942); In re Detroit Int'l Bridge Co., 111 F.2d 235 (6th
Cir. 1940); Stark v. Woods Bros. Corp., 109 F.2d 969 (8th Cir.
1940); Sullivan & Cromwell v. Colo. Fuel & Iron Co., 96 F.2d 219
(10th Cir. 1938); In re Memphis Street Ry. Co., 86 F.2d 891 (6th
Cir. 1936); In re Tudor Gables Bldg. Corp., 83 F.2d 871 (7th Cir.
1936); In re Nat'l Lock Co., 82 F.2d 600 (7th Cir.), cert.
denied, 299 U.S. 562 (1936).2 The practice of organizing
informal committees before the filing of the petition to function
in anticipation of reorganization proceedings continues today.3
The legislative history of § 503(b)(3)(D) indicates
that it was intended to alter the preexisting law in only one
respect: "It does not require a contribution that leads to
confirmation of a plan [because Congress believed that in] many
cases it will be a substantial contribution if the person
involved uncovers facts that would lead to a denial of
confirmation, such as fraud in connection with the case." Supra, 1978 U.S.C.C.A.N. at 5852-53. This legislative history and the
practice under the prior law demonstrate, we believe, that 2 Under this "direct benefit" rule, pre-petition expenses were reimbursed only if they directly contributed to a reorganization plan that ultimately was adopted. 3 See Bankr. Rule 2007, 11 U.S.C.A. (1984 & Supp. 1994), which states that, "on application of a party in interest and after notice as the court may direct, the court may appoint as the committee of unsecured creditors required by § 1102(a) of the Code, members of a committee selected before the order for relief in accordance with subdivision (b) of this rule." Thus, if certain requirements are met, the court may appoint some or all of the members of the informal committee to the formal post- petition committee. §503(b)(3)(D) was not intended to impose an across-the-board bar
to the reimbursement of expenses incurred before the filing of
the petition.
The only other Court of Appeals to have addressed the
issue agrees with our reading of § 503(b)(3)(D). In re Lister,
846 F.2d at 57 ("administrative expenses incurred prior to the
filing of a [chapter 11] bankruptcy petition are compensable
under 11 U.S.C. § 503(b)(3)(D), if those expenses are incurred in
efforts which were intended to benefit, and which did directly
benefit, the bankruptcy estate.").
While we conclude that there is no across-the-board bar
to the recovery of Scott's pre-petition expenses, we reach a
different conclusion with respect to his post-conversion
expenses. Where, as here, a chapter 11 proceeding is converted
into a chapter 7 proceeding, we do not see how expenses incurred
after the conversion can be said to have made a substantial
contribution in the proceedings under chapter 11. There are
provisions of § 503 other than subsection (b)(3)(D) that
authorize reimbursement of expenses incurred in connection with a
chapter 7 proceeding, and we believe that post-conversion
expenses were intended to be reimbursable under those provisions
or not at all. See, e.g., §§ 503(b)(3)(B) and (C). In sum, we conclude that, if the substantial
contribution test is met, expenses incurred by a creditor prior
to the filing of a chapter 11 petition, or while a chapter 11
case is pending, are recoverable pursuant to § 503(b)(3)(D).
Expenses incurred after a chapter 11 case is converted to one under chapter 7, however, are not recoverable pursuant to this
provision.
IV.
Applying the above analysis to the case at hand, we
hold that the district court erred when it found that pre-
petition expenses are not covered by § 503(b)(3)(D). We also
conclude that there is record support for the bankruptcy court's
factual finding that Scott's efforts, both before the chapter 11
petition was filed and during the time the case was in chapter
11, benefitted the estate during the pendency of the chapter 11
proceeding. As the bankruptcy court explained, Scott's efforts
against Copple and Mechem were "critical to the Court in making
an immediate determination to appoint a Trustee and critical to
the Trustee in making a prompt investigation and report to the
Court."
As we have indicated, however, a determination that a
benefit was conferred does not end the inquiry as to whether
there was a "substantial contribution" within the meaning of
§503(b)(3)(D). A creditor should be presumed to be acting in his
or her own interest unless the court is able to find that his or
her actions were designed to benefit others who would foreseeably
be interested in the estate. In the absence of such a finding,
there can be no award of expenses even though there may have been
an incidental benefit to the chapter 11 estate. Here, the
bankruptcy court made no such finding. There was evidence before
it tending to show that Scott incurred the reimbursed expense in pursuit of his own interests. He appears to have incurred a
substantial portion of that expense, for example, in litigation
over control of Mechem initiated many months before a
reorganization was anticipated by anyone. If this be true, this
expense would not be reimbursable under § 503(b)(3)(D) even if
information disclosed in that litigation subsequently turned out
to be helpful to the trustee. On the other hand, there was
evidence from which the bankruptcy court could have concluded
that at least some of Scott's efforts were designed to benefit
the chapter 11 estate and its creditors.
The inquiry concerning the existence of a substantial
contribution is one of fact, and it is the bankruptcy court that
is in the best position to perform the necessary fact finding
task. Consol. Bancshares, Inc., 785 F.2d at 1253. Accordingly,
we will remand this case with instructions that the bankruptcy
court determine whether the efforts which Scott made prior to the
conversion of the chapter 11 proceeding made a substantial
contribution within the meaning of § 503(b)(3)(D).
The bankruptcy court also awarded Scott expenses that
he incurred after the case was converted to chapter 7.
Specifically, the court awarded Scott expenses associated with
his assistance to the trustee in the collection of assets for the
benefit of the creditors, and his role in setting up replacement
trusts for the investors. We have found, however, that
§§ 503(b)(3)(D) and (b)(4) do not authorize fee awards for
expenses incurred after a case is converted from one under
chapter 11 to one under chapter 7. Therefore, with regard to the administrative expenses that Scott incurred after the conversion
of the case to chapter 7, we will affirm the district court's
decision to reverse the bankruptcy court's award.4
We will reverse the order of the district court and
direct that the case be remanded to the bankruptcy court for
further proceedings consistent with this opinion.5
4 The Lebrons argue, and the district court agreed, that it was an abuse of discretion by the bankruptcy court to award Scott any administrative expenses because Scott was an incorporator and insider in the company that committed the fraud, and, therefore, it would be inequitable to prioritize his claims over the claims of the other, less involved, creditors. We reject this argument, however, because there is no evidence that Scott was at all involved in the fraud. 5 Scott also asks us to uphold the bankruptcy court's award to him on an alternative theory. The theory rests upon a passing comment of the bankruptcy court: "Certainly, if Scott were entitled only to post-petition fees and expenses, he would be entitled to a fee enhancement on the basis of the post-petition fees in an amount equivalent to his pre-petition fees." B.Op. 10. We decline to reinstate the award to Scott on this theory for several reasons. First, Scott would not be entitled to an enhancement in connection with post-petition fees which he incurred in pursuit of his own interest with only an incidental benefit being bestowed on the estate. Second, even assuming an enhancement is appropriate in some circumstances under §§ 503(b)(3)(D) and (b)(4), we perceive no rational basis for an enhancement of post-petition fees measured by the amount of pre- petition fees incurred. Without the benefit of some further explanation of the bankruptcy court's thinking, this passing observation appears far too arbitrary to be sustainable. Finally, we understand the purpose of subsection (b)(4) to be to limit reimbursement of a creditor for legal and accounting expenses to an amount determined by the court to be reasonable after considering the factors designated therein. We do not read subsection (b)(4) to authorize a payment to a creditor in excess of the amount he or she was required to pay for those services.