JIM D. PAPPAS, Bankruptcy Judge
In this chapter 7
Debtor Launa
A few months later, on December 9, 2009, Debtors Joseph and Launa Coonrod filed a chapter 7 bankruptcy petition. Dkt. No. 1. Debtors did not inform Ms. Casperson or anyone else at HKHC about the bankruptcy filing, and their initial bankruptcy schedules did not include any information concerning the pending discrimination claim or litigation.
On February 4, 2010, Ms. Casperson received a letter from Trustee informing her that, in his opinion, Launa's discrimination claim was property of the bankruptcy estate. Dkt. No. 34, Ex. A. This is how Ms. Casperson first learned of the bankruptcy filing. Id. at ¶ 3. In the letter, Trustee requested copies of all documents, as well as an update on the status of the lawsuit and an estimation of the value of the claims. Id. at Ex. A. Trustee's letter also stated that "if you are interested in pursuing the claim on behalf of the bankruptcy estate, please send a proposed fee agreement. We will need to obtain Court approval of your employment." Id. In response, Ms. Casperson sent the requested information and documentation to Trustee, including a request to be appointed as special counsel to pursue the discrimination claims. Dkt. No. 34, ¶ 5.
On March 10, 2010, Trustee filed an Application for Leave to Retain Attorneys. Dkt. No. 22. However, in the Application, Trustee did not request the appointment of Ms. Casperson as special counsel, but rather his usual bankruptcy counsel, James Spinner. Id. The application was generic in nature, and nondescript concerning what sorts of services Mr. Spinner would provide to Trustee, or more particularly, what assets or interests of the estate he would pursue. Id. Debtors were served with a copy of Trustee's application, but no notice of the application was sent to Ms. Casperson.
Meanwhile, having on at least two prior occasions been employed as special counsel for a trustee, and believing that HKHC would be employed by Trustee in this case to represent the estate in the discrimination action, Ms. Casperson continued to perform the legal services in the case that she considered to be critical, such as meeting upcoming deadlines and completing some discovery, including preparing for and attending both Debtors' depositions. Id. at ¶ 6. Nevertheless, Ms. Casperson knew from her experiences that, if she were to be employed by Trustee, she should expect to receive a proposed application to employ the firm as special counsel. When no such application arrived, in late March or early April, 2010, she called Trustee to inquire. Id. at ¶ 7. Curiously, Trustee suggested she call Mr. Spinner's office, who simply told her that he did not know anything about her employment as yet. Id.
In early June 2010, Ms. Casperson again contacted Mr. Spinner to inquire about the status of the case and her role. Id. at ¶ 8. She was again informed that he did not know whether Trustee would seek to have HKHC appointed as special counsel. It was also at this time that she learned that Mr. Spinner and counsel for the IDOC had been communicating about the pending discrimination suit. Nevertheless, Mr. Spinner did not enter an appearance in the discrimination suit, and Ms. Casperson worried that deadlines were looming in the action, though she had already stopped actively working on it. On June 11, 2010, she requested an extension of pending deadlines in the case, which the District Court granted. Id. at ¶ 9, Dist. Ct. Dkt. Nos. 19, 20.
During this time, Trustee and Mr. Spinner reviewed the documents forwarded by HKHC about the discrimination claim, and were contacted by the IDOC regarding the law suit. Trustee and his counsel determined that they would likely be able to resolve the action via a compromise themselves, and therefore, did not need to employ HKHC as special counsel.
On June 23, 2010, Ms. Casperson sent a letter to Mr. Spinner in which she expressed concern over the delay in her employment. Dkt. No. 34 at ¶ 10. In response, the following day, Mr. Spinner sent a letter to Ms. Casperson informing her that Trustee did not intend to seek to employ HKHC as special counsel. Dkt. No. 34, Ex. B. As things turned out, Trustee and IDOC tentatively settled Debtor's claim for $20,000 in late June 2010. Id. at ¶ 12.
On July 12, 2010, HKHC filed a Motion for Allowance of Administrative Expense Claim along with Ms. Casperson's supporting affidavit. Dkt. No. 33-34. HKHC acknowledges that it entered into a contingency fee agreement with Debtors to handle the discrimination action, under which the firm would be paid one-third of any recovery, plus reimbursable costs. See Dkt. No. 34, Ex. C. Thus, HKHC contends that it should be entitled to an administrative expense in this bankruptcy case in the amount of $6,666.00 plus costs of $1,130.48, for a total of $7,796.48. Id. at ¶¶ 21-23.
On September 14, 2010, Trustee filed a stipulation in the bankruptcy case in which he and the IDOC agreed to the $20,000 settlement. Dkt. No. 37. At the same time, Trustee filed a motion asking the Court to approve the compromise. Dkt. No. 38. The Court denied Trustee's motion. Dkt. Nos. 50, 51.
On March 8, 2011, Mr. Spinner filed a notice of appearance in the District Court action, and on March 14, 2011, Ms. Casperson filed a motion to withdraw as Debtor's counsel, which motion the District Court granted on March 16, 2011. Dist. Ct. Dkt. Nos. 26, 28, 29. Subsequently, on May 19, 2011, Trustee and the IDOC filed a second stipulation for settlement of the discrimination claims for $20,0000 in the bankruptcy case, and another motion for Court approval. Dkt. Nos. 62, 63. HKHC objected to approval of the proposed settlement as did the Debtors. Dkt. Nos. 69, 70. The Court eventually overruled the objections, and approved the settlement. Dkt. No. 78.
On January 30, 2012, Trustee objected to HKHC's motion for allowance of an administrative expense claim. Dkt. No. 87. HKHC responded to Trustee's objection, and Trustee replied. Dkt. Nos. 92, 99.
The motion hearing took place on April 10, 2012, after which the Court required Ms. Casperson to file a brief explaining the legal basis of her motion for an administrative expense. No brief was ever filed.
The Court notes one significant problem with HKHC's motion for allowance of an administrative expense right out of the gate: no notice of the motion, or of the hearing on the motion, was ever served on all creditors and other interested parties as required by Rule 9014 and LBR 2002.2.
Despite this complication, given the nature of the issues, and that those issues have been fully briefed and argued by the parties, the Court deems it worthwhile to consider whether there is any legal basis for HKHC's administrative expense claim. Should the Court determine that some legal support exists for an administrative expense claim, additional, proper notice to other interested parties could then be undertaken.
Another impediment to the Court's work in this case results from the fact that HKHC failed to file a post-hearing brief as directed by the Court. As a result, the Court is left to determine, as best it can, the legal basis for the argument that the firm is entitled to an administrative expense.
In its initial brief, filed in July 2010, HKHC, without analysis, cited to § 503(b)(4) as the statutory foundation to assert an administrative claim.
11 U.S.C. § 503(b)(4). As this statute specifically references subparagraphs (A)-(E) of paragraph (3), it is important to consider the text of those subparagraphs in order to determine whether any of them apply in this case. They provide that, after notice and a hearing, the Court may allow, as administrative expenses:
11 U.S.C. § 503(b)(3). As can been seen, the plain language of § 503(b) allows, under certain circumstances, administrative expense status for actual and necessary expenses, other than compensation, incurred by creditors. § 503(b)(3). Paragraph (4) of § 503(b) allows reasonable compensation for professional services to be given administrative expense status, but only if the "expense is allowable under subparagraph (A), (B), (C), (D), or (E) of paragraph (3). . . ." § 503(b)(4) (emphasis added). In other words, to constitute an allowed administrative expense, first an expense must be allowable under one of those subparagraphs, and then it must be reasonable in amount.
In order for HKHC's fees and costs to be eligible for administrative expense status under § 503(b), as a creditor, HKHC must fit into one of the enumerated subparagraphs. However, HKHC did not: (A) file an involuntary petition; (B) recover property transferred or concealed by the debtor; (C) become a creditor in connection with prosecuting a criminal case; (D) make a substantial contribution in a case under chapters 9 or 11; or (E) act as a custodian according to § 543.
Subparagraph (E) is the most likely to be applicable to HKHC under these circumstances, or perhaps more properly, that subparagraph is the only provision the Court can not immediately rule out. However, even if HKHC were to contend that it is the physical or constructive custodian of Debtors' discrimination case files, general knowledge and legal theory of Debtor's case, HKHC does not fit the statutory definition of "custodian" under the Code:
11 U.S.C. § 101(11). Thus, the Court concludes that § 503(b) offers no support for HKHC's asserted administrative expense claim for its work done on the discrimination case prior to, and following, the filing of the bankruptcy case.
The burden of proving an entitlement to an administrative expense is on the claimant. In re Sanders Grain Farms, 07.2 IBCR 19, 19 (Bankr. D. Idaho 2007) (quoting In re Cent. Idaho Forest Prod., 04.4 IBCR 159, 161 (Bankr. D. Idaho 2004)). While the Court is given broad discretion to grant administrative expense requests, "it is required to construe § 503(b) narrowly to keep costs to a minimum and preserve the limited assets of the bankruptcy estate for the benefit of unsecured creditors." Id. (citing Microsoft Corp. v. DAK Indus. Inc. (In re DAK Indus. Inc.), 66 F.3d 1091, 1094 (9th Cir. 1995); In re TSB, Inc., 302 B.R. 84, 87 (Bankr. D. Idaho 2003)).
The Code is particular about how bankruptcy estate professionals are to be employed and compensated, and the Court has enforced its mandates carefully. See, e.g., §§ 327-330; In re Taylor Quality Concerete, Inc., 07.1 IBCR 3 (Bankr. D. Idaho 2007) ("lack of familiarity with the requirements of the Bankruptcy Code and Rules does not constitute exceptional circumstances justifying retroactive approval of the [application for employment]"). HKHC acknowledges that Ms. Casperson was familiar with the process, having been employed as special counsel by bankruptcy trustees on at least two prior occasions. It is therefore fair to assume that HKHC and Ms. Casperson were aware that their proposed client, a bankruptcy trustee, would need to apply for approval of the firm's employment as special counsel. While it is commendable that Ms. Casperson made genuine efforts to preserve her client's discrimination claim in the civil action so as not to suffer on account of delay or missed deadlines, the hard truth is that, in doing so, HKHC served Debtors at the risk of not being paid via the bankruptcy estate, the new owner of the claim.
The Court is mindful that HKHC, and Ms. Casperson in particular, expended considerable time, effort and expertise on Debtors' behalf in the discrimination case. The Court can also comfortably speculate that at least some of HKHC's work product was utilized by Trustee and Mr. Spinner in negotiations with IDOC, and enhanced the opportunity for Trustee to settle the civil action. Admittedly, it seems unfair for HKHC to go uncompensated for its efforts.
Moreover, as noted by the Court during oral argument, the approach taken here by Trustee and his attorney appeared less than forthright. Indeed, as the Court stated then, Trustee's letter to Ms. Casperson served as an "invitation to a mistake," in that it suggested, without promising, that Trustee would seek to have HKHC employed as his special counsel if the claim had merit and the firm proposed a reasonable fee agreement, both of which conditions were satisfied. Based upon these facts, and Ms. Casperson's past experience with trustees, she was perhaps justified, if not a little naive, in assuming all was well.
Regardless of these circumstances, however, the outcome under the Code is clear. HKHC has not met its burden to demonstrate that it is entitled to allowance of an administrative expense claim.
Inequitable as it may seem, HKHC's motion for an administrative expense will be denied by separate order.
