Appeals from the United States District Court for the Western District of Louisiana.

Before EMILIO P. GARZA and PARKER, Circuit Judges, and ELLISON, District Judge.*

ELLISON, District Judge.

Appellant Total Minatome Corporation ("TMC") appeals a district court judgment denying its Motion for Payment of an Administrative Claim in the amount of $ 496,724.79 pursuant to Title 11, United States Code, section 503(b)(1)(A). The question before us is whether a non-debtor litigant is entitled to claim administrative priority for its attorney fees, costs, and expenses incurred in post-petition litigation instituted by a bankruptcy trustee against the non-debtor, and awarded pursuant to the pre-petition contract upon which the trustee based his litigation. Because we find that the exception created in Reading Company v. Brown, 391 U.S. 471, 20 L. Ed. 2d 751, 88 S. Ct. 1759(1968) does not extend to this award, we decline to grant administrative priority. The judgment of the district court is AFFIRMED.

Appellant TMC and debtor Jack/Wade Drilling, Inc. entered into a turnkey drilling contract on September 8, 1994. On April 27, 1995, Jack/Wade filed a Chapter 7 bankruptcy petition. Appellee Paul N. DeBaillon, Jack/Wade's trustee in bankruptcy, filed suit in federal district court on June 17, 1996, for breach of that pre-petition drilling contract, alleging that TMC was obligated to pay Jack/Wade for its drilling services and had failed to do so. TMC filed a counterclaim against the trustee, alleging that Jack/Wade was the first to breach the contract by failing to drill to the proper turnkey depth. Following a trial on the merits, a jury rejected both parties' allegations of breach.

The contract provided for an award of attorney fees, costs, and expenses to the "prevailing party" in any dispute on the contract and TMC sought that award. The district court, however, found that, because the jury had rejected the allegations by both sides, neither party could be said to have prevailed. TMC appealed to this Court, which vacated the district court's order and remanded the case for a determination of the "prevailing party." On September 14, 1999, the district court concluded that TMC was the "prevailing party" and awarded $ 315,412.50 in attorney fees and $ 181,312.29 in costs and expenses.

On December 15, 1997, before resolution of the "prevailing party" dispute, TMC filed a motion in bankruptcy court to have its claim for attorney fees, costs, and expenses given priority as an administrative expense under 11 U.S.C. 503(b)(1)(A). A hearing on the motion was continued to await resolution of TMC's Fifth Circuit appeal of that dispute. The bankruptcy court heard TMC's request on November 9, 1999, and denied the motion to have its attorney fees, costs, and expenses award treated as an administrative expense and given priority under the bankruptcy code.1 TMC appealed the decision of the bankruptcy court to the district court, which affirmed the denial of its motion. This appeal followed.

We review the decision of the district court by applying the same standard to the bankruptcy court's findings of fact and conclusions of law as the district court applied. See In the Matter of Pro-Snax Distributors, Inc., 157 F.3d 414, 419-20 (5th Cir. 1998). A bankruptcy court's findings of fact are subject to clearly erroneous review, while its conclusions of law are reviewed de novo. See In re Gamble, 143 F.3d 223, 225 (5th Cir. 1998). Because this appeal presents only questions of pure law, we review de novo.

Section 507(a)(1) of the bankruptcy code establishes that the administrative expenses incurred in bankruptcy are to be given priority in distribution such that they are generally paid in full before other unsecured non-priority claims. See 11 U.S.C. 507(a)(1). These administrative expenses include the actual and necessary costs and expenses of preserving the estate. See 11 U.S.C. 503(b)(1)(A). TMC asserts on appeal that its award of attorney fees, costs, and expenses constitutes "actual and necessary costs" and should, accordingly, be given priority in the distribution of Jack/Wade's assets.

In order to qualify as an "actual and necessary cost" under section 503(b)(1)(A), a claim against the estate must have arisen post-petition and as a result of actions taken by the trustee that benefitted the estate. See Toma Steel Supply, Inc. v. Transamerican Natural Gas Corp. (In the Matter of Transamerican Natural Gas Corp.), 978 F.2d 1409, 1416 (5th Cir. 1992) (finding that a "prima facie case under 503(b)(1) may be established by evidence that (1) the claim arises from a transaction with the debtor-in-possession; and (2) the goods or services supplied enhanced the ability of the debtor-in-possession's business to function"). Section 503(b)(1)(A) claims, therefore, generally stem from voluntary transactions with third parties who lend goods or services necessary to the successful reorganization of the debtor's estate. See id. at 1415 (asserting that "the purpose of Section 503 is to permit the debtor's business to operate for the benefit of its prepetition creditors") (citing In re Coastal Carriers Corporation, 128 B.R. 400, 403 (D. Md. 1991)).

TMC admits that its claim against Jack/Wade does not meet the requirements for section 503(b)(1)(A) treatment because the debtor's estate received no discernable benefit from the lawsuit against TMC. See NL Industries, Inc. v. GHR Energy Corporation, 940 F.2d 957, 966 (5th Cir. 1991) (asserting that "courts have construed the words "actual" and "necessary" narrowly: the debt must benefit [the] estate and its creditors"). TMC asserts, however, that its claim should be given administrative priority under an exception created by the Supreme Court for damages inflicted on innocent third parties through a trustee's operation of the debtor's estate. See Reading Company v. Brown, 391 U.S. 471, 485, 20 L. Ed. 2d 751, 88 S. Ct. 1759 (1968) (concluding that "damages resulting from the negligence of a receiver acting within the scope of his authority as receiver give rise to 'actual and necessary costs' of a Chapter XI arrangement" even when no actual benefit to the estate resulted).

The Supreme Court in Reading articulated a principle of "fairness to all persons having claims against an insolvent" designed to guide courts in determining priorities in bankruptcy distributions. See id. at 477. There is, of course and for good reason, a general presumption in bankruptcy favoring equality in distribution such that "if one claimant is to be preferred over others, the purpose should be clear from the statute." See Nathanson v. NLRB, 344 U.S. 25, 29, 97 L. Ed. 23, 73 S. Ct. 80 (1952). When a third party is damaged by the wrongful conduct of a receiver in the course of operating the debtor's estate, however, the Court concluded that it would be unfair to force that party to share equally with those creditors for whose benefit the estate was being operated. See Reading Company v. Brown, 391 U.S. 471, 478, 20 L. Ed. 2d 751, 88 S. Ct. 1759 (1968) (finding that the "petitioner did not merely suffer injury at the hands of an insolvent business: it had an insolvent business thrust upon it by operation of law").

The Reading exception has survived Congressional amendments to the bankruptcy code and been recognized and applied by nearly every Court of Appeals in the nation. See, e.g., Yorke v. NLRB, 709 F.2d 1138 (7th Cir. 1983) (applying Reading to damages incurred based on a trustee's failure to bargain with the union as required by federal law); In re Charlesbank Laundry, Inc., 755 F.2d 200 (1st Cir. 1985) (applying Reading to nuisance damages incurred based on the debtor's violation of a temporary injunction while operating its business); In the Matter of Al Copeland Enterprises, Inc., 991 F.2d 233 (5th Cir. 1993) (applying Reading to taxes wrongfully withheld by the debtor-in-possession and the interest earned on them). No Court of Appeals, however, has extended Reading to cover debts incurred by a non-wrongful post-petition action to liquidate a chapter 7 bankruptcy estate.2 Because we do not find that Reading was intended to grant priority to post-petition attorney fee awards resulting from a trustee's good faith attempt to liquidate the debtor's estate by bringing suit on a pre-petition contract, we decline Appellant's invitation to be the first to extend the exception.3

In evaluating TMC's bid for administrative priority of its attorney fees, the Court begins with the presumption that all Jack/Wade's creditors are equally innocent victims in this bankruptcy. See Reading Company v. Brown, 391 U.S. 471, 482-83, 20 L. Ed. 2d 751, 88 S. Ct. 1759 (1968) (acknowledging that "existing creditors are, to be sure, in a dilemma not of their own making"). The question before us, therefore, is not whether TMC deserves to get paid, but whether TMC deserves to get paid at the expense of Jack/Wade's existing unsecured creditors.

The principle announced in Reading of "fairness to all persons having claims against an insolvent" has survived Congressional amendments to the bankruptcy code. See Reading Company v. Brown, 391 U.S. 471, 477, 20 L. Ed. 2d 751, 88 S. Ct. 1759 (1968); In the Matter of Al Copeland Enterprises, 991 F.2d 233, 239 (5th Cir. 1993) (noting that "the Court's opinion in Reading survived Congress's revisions to the Bankruptcy Code"). Consistent with this objective, the statute has identified certain creditors to be preferred over others, and imposed a rule of equal distribution of the estate between the remaining unsecured parties. See Nathanson v. NLRB, 344 U.S. 25, 29, 97 L. Ed. 23, 73 S. Ct. 80 (1952) (holding that "if one claimant is to be preferred over others, the purpose should be clear from the statute"). The Reading exception arose out of a particular set of facts in which the Supreme Court determined that this statutory objective of fundamental fairness would be defeated if the statute were applied literally. See Reading Company v. Brown, 391 U.S. 471, 477, 20 L. Ed. 2d 751, 88 S. Ct. 1759 (1968).

In Reading, the claimant was an owner of a neighboring business whose property was damaged by a fire negligently caused by the bankruptcy receiver in the course of operating the debtor's estate during a bankruptcy reorganization. See id. at 473-74. The Supreme Court held that it would be unfair to force the fire victim to share equally with the existing creditors and granted administrative priority to that claimant. See Reading Company v. Brown, 391 U.S. 471, 478, 20 L. Ed. 2d 751, 88 S. Ct. 1759(1968) (framing the question as "whether the fire claimants should be subordinated to, should share equally with, or should collect ahead of those creditors for whose benefit the continued operation of the business . . . was allowed").

The Reading Court identified two factors that distinguished the claim of the fire victim from that of a typical unsecured party who is injured post-petition; 1) the wrongful nature of the receiver's act, and 2) that the act was committed in the course of operating the debtor's business so as to improve the position of the existing creditors. See id. at 477-79. The Court determined that the claimant was not merely an unlucky victim of the debtor's bankruptcy, but a foreseeable casualty of the receiver's negligence in operating a business that would not otherwise be able to operate but for the provisions of the bankruptcy statute. See id. at 478 (asserting that "the present petitioner did not merely suffer injury at the hands of an insolvent business: it had an insolvent business thrust upon it by operation of law"). Because the receiver had chosen to operate the estate to improve the position of the existing creditors, fairness dictated that the injured claimant be entitled to recover its damages at the expense of the existing creditors when the receiver operated negligently.

Unlike the situation in Reading, fairness does not dictate that TMC's claim for attorney fees be paid at the expense of Jack/Wade's existing creditors. The trustee acted neither wrongfully nor in the course of operating the business of the debtor so as to attempt to improve the position of the general creditors. He intended only to liquidate an existing claim on which he believed in good faith the Jack/Wade estate was entitled to recover. The only difference between TMC and the existing creditors of Jack/Wade is that TMC's debt was incurred after Jack/Wade filed for bankruptcy. If Jack/Wade had sued TMC and lost one day before filing for bankruptcy, TMC would be an unsecured creditor with no claim to any priority of payment for its award of attorney fees. See In the Matter of Al Copeland Enterprises, 991 F.2d 233, 240 (5th Cir. 1993) (granting administrative expense priority under Reading and 503(b)(1)(A) to only the portion of the debt which accrued postpetition). The Court does not find that this fortuity of timing, standing alone, creates a principled basis on which to make an exception to the rule of equal distribution among creditors.4

The Court recognizes that the trustee in the instant case, made a decision to act in manner that would cause a third party to incur expense.5 Unlike the actions of the Reading receiver, however, the actions of the trustee were taken in the course of responsibly carrying out the duties of his position. In a chapter 7 bankruptcy, the trustee is expected to identify and liquidate all existing claims on which the trustee has a good faith belief the estate is entitled to recover. See Watkins v. Sedberry, 261 U.S. 571, 576, 67 L. Ed. 802, 43 S. Ct. 411 (1923) (noting that "it was the duty of the trustee to employ counsel to bring suit to recover the property belonging to the bankrupt"). To penalize the estate when the trustee faithfully carries out these duties seriously undermines the incentive structure established by the bankruptcy code.6

We recognize that we have strictly construed the Reading exception. The limits we have placed on its application are not, however, without support in neighboring circuits.7 Further, our holding today is fully consistent with prior Fifth Circuit applications of Reading.8 For the foregoing reasons, we affirm the judgment of the district court denying administrative priority treatment of TMC's attorney fee award.