Opinion
District Court Case Number: 2:21-cv-07896-SVW-E Bankruptcy Court Case Number: 2:14-bk-29611-RK
2022-01-26
IN RE Nikolay MACHEVSKY, Debtor, Data Leverage, LLC, Appellant, v. Wesley Howard Avery, Chapter 7 Trustee, Appellee.
Steven R. Fox, Fox Law Corporation Inc., Encino, CA, for Appellant. Nancy Hoffmeier Zamora, Zamora and Hoffmeier, Los Angeles, CA, for Appellee.
Steven R. Fox, Fox Law Corporation Inc., Encino, CA, for Appellant.
Nancy Hoffmeier Zamora, Zamora and Hoffmeier, Los Angeles, CA, for Appellee.
ORDER AFFIRMING DECISION OF THE BANKRUPTCY COURT ON DATA LEVERAGE'S MOTION TO ALLOW SUPPLEMENTAL ADMINISTRATIVE EXPENSE CLAIM OF DATA LEVERAGE, LLC.
STEPHEN V. WILSON, UNITED STATES DISTRICT JUDGE
I. INTRODUCTION
This case comes before the Court on an appeal from a decision of the bankruptcy court. Data Leverage, LLC ("Data Leverage" or "Appellant") challenges the bankruptcy court's August 23, 2021 decision disallowing Data Leverage's administrative expense claim. See Memorandum Decision, Appellant's Appendix ("AA"), Tab 25, ECF No. 13. Data Leverage filed its opening brief on November 12, 2021, see ECF No. 12, and Trustee Wesley Howard Avery ("Avery" or "Appellee") responded on December 12, 2021, see ECF No. 14. Data Leverage filed its reply on December 24, 2021. The Court held a hearing on the appeal on January 3, 2022. Having reviewed the bankruptcy court record, the parties’ briefing, and oral arguments, the August 23, 2021 decision of the bankruptcy court is hereby AFFIRMED.
This statement of factual and procedural history is drawn in large part from the Bankruptcy Court's Memorandum Decision on Motion to Allow Supplemental Administrative Expense Claim of Data Leverage, LLC, entered August 23, 2021. These general facts are not in dispute on appeal.
Debtor Nikolay Machevsky ("Debtor") filed a petition for Chapter 7 relief (the "Case") on October 16, 2014. He did not disclose his interest in certain real property located at 10701 Wilshire Boulevard, Units 1802 and 1803, Los Angeles, California, 90023 (the "Property"). In fact, Debtor had transferred the Property to his mother, Izabella Kleemoff ("Kleemoff") in 2011, who was purportedly holding it in trust for Debtor. On January 21, 2015, Chapter 7 Trustee Alberta Stahl filed a "no distribution" report, indicating that there was no property available for distribution from the estate. Debtor was granted a discharge on January 26, 2015, and the initial bankruptcy case was closed the next day.
Shortly thereafter, Debtor filed a civil lawsuit against his mother, Kleemoff, in the Los Angeles County Superior Court. Kleemoff had entered into an agreement to sell the Property to a third party, Behzad Daniel Binafard ("Binafard"), without Debtor's consent. Debtor alleged that Kleemoff had no right to sell the Property, however, because she was holding it for Debtor in trust. Kleemoff failed to appear in the action, and the state court granted default judgment in Debtor's favor on August 26, 2016. Thus, Debtor confirmed his title to the Property.
Around the same time, Binafard filed suit against Kleemoff seeking specific performance of the agreement to purchase the property. Binafard also named Debtor as a defendant in the suit. He sought declaratory relief that Debtor did not have title or any right to possess the Property. This matter was never resolved before the state court.
At some point, Appellant Data Leverage learned about the Property. Data Leverage was interested in purchasing the Property as an investment. On October 30, 2018, Debtor and Data Leverage entered into a purchase and sale agreement. Pursuant to the agreement, Debtor was to transfer the Property to Data Leverage in exchange for a life estate in one of the Property's two condominium units—Unit 1802. Data Leverage retained Unit 1803 for its own use. Data Leverage also agreed to pay unpaid mortgage payments, property taxes, and other expenses.
It is unclear from the Bankruptcy Court's decision or from the parties’ briefing how Data Leverage and Debtor were first connected.
Accordingly, on November 1, 2018, Data Leverage paid $122,572.68 in mortgage arrears on a senior lien on the Property, held by Selene Financial. This prevented a foreclosure sale on the Property, which had been set for November 2, 2018. Next, from January to July 2019, Data Leverage paid made seven monthly mortgage payments on this senior lien, totaling $17,255.50. Finally, Data Leverage paid delinquent property taxes to the Los Angeles County Tax Collector on June 27, 2019 totaling $20,774.19. Data Leverage seeks reimbursement of these payments—which total $160,602.57—as administrative expenses.
Data Leverage also made a payment of $30,000 in cash to Kleemoff, which enabled her to pay a second lien on the Property, held by JP Morgan Chase. However, records later obtained by Data Leverage indicated that the amount Kleemoff paid to the bank was only $5,678.41. Separately, Data Leverage advanced payment of Debtor's legal fees and costs in defending the specific performance lawsuit brought by Binafard—totaling $96,874.00. Data Leverage does not seek reimbursement of these expenses.
Data Leverage first learned about Debtor's bankruptcy case at the end of May 2019 or the first week of June 2019. To protect its investment in the Property, Data Leverage consulted with an attorney, Nancy Zamora, who reported Debtor's failure to disclose to Avery, the Chapter 7 Trustee, Welsey Avery. Avery conducted an investigation and presented his findings to the United States Trustee, who filed a motion to reopen the Case. The Case was reopened on July 26, 2019. Because Debtor failed to disclose the Property on his bankruptcy petition and bankruptcy schedules, the real property remained property of the bankruptcy estate pursuant to 11 U.S.C. § 541. Upon reopening, the Trustee determined that the Property was the sole asset of the estate. Avery, as Chapter 7 Trustee, negotiated a settlement between the Estate, Debtor, Binafard, and Kleemoff, who had also filed for bankruptcy. Pursuant to the terms of the settlement, Binafard purchased the Property for approximately $880,000 and paid off all outstanding liens. After the settlement, the estate retained net proceeds of $133,879.92.
On November 5, 2019, Data Leverage filed a proof of claim in this case in the amount of $293,694.87, seeking payment of the expenses that it incurred pursuant to its agreement with Debtor. On appeal, Data Leverage seeks reimbursement of $160,602.57—the mortgage arrears, subsequent mortgage payments, and delinquent property taxes—as administrative expenses.
III. STANDARD OF REVIEW
A district court may hear appeals from "final judgments, orders, and decrees," and, "with leave of the court, from interlocutory orders and decrees" of bankruptcy judges. 28 U.S.C. § 158(a). In re Forrest , 611 B.R. 662, 665 (C.D. Cal. 2019). The Court reviews the order of the bankruptcy court allowing or disallowing an administrative claim for an abuse of discretion. In re Metro Fulfillment, Inc. , 294 B.R. 306, 309 (B.A.P. 9th Cir. 2003) (citing Teamsters Indus. Sec. Fund v. World Sales, Inc. (In re World Sales, Inc.) , 183 B.R. 872, 875 (9th Cir. BAP 1995) ); Gill v. Tishman Constr. Corp. (In re Santa Monica Beach Hotel) , 209 B.R. 722, 725 (9th Cir. BAP 1997) ("The bankruptcy court has broad discretion to determine whether to grant a section 503 claim").
A bankruptcy court abuses its discretion if it bases its decision on an erroneous view of the law or clearly erroneous factual findings. Id. (citing Cooter & Gell v. Hartmarx Corp. , 496 U.S. 384, 405, 110 S.Ct. 2447, 110 L.Ed.2d 359 (1990) ). The Court first "determines de novo whether the bankruptcy court identified the correct legal rule to apply to the relief requested." In re Forrest , 611 B.R. at 665–66. Second, the Court examines the bankruptcy court's findings for clear error. Id.
IV. DISCUSSION
Pursuant to Bankruptcy Code section 503(b)(1)(A), a claim is allowed as an administrative expense for "the actual, necessary costs and expenses of preserving the estate." 11 U.S.C. § 503(b)(1)(A). An administrative expense claim has priority over other unsecured claims. In re DAK Indus., Inc. , 66 F.3d 1091, 1094 (9th Cir. 1995).
"In the Ninth Circuit, the claimant has the burden of proving an administrative expense under a standard which ‘limit[s] abuses of the administrative-expense priority.’ Einstein/Noah Bagel Corp. v. Smith (In re BCE West, L.P.), 319 F.3d 1166, 1172 (9th Cir. 2003) (alteration added)." Mosier v. Kupetz (In re United Educ. & Software ), 2005 Bankr. LEXIS 3408 at *11, 2005 WL 6960237, at *4 (9th Cir. BAP 2005). Further, "[t]he terms ‘actual’ and ‘necessary’ are construed narrowly so as "to keep fees and administrative costs at a minimum." An actual benefit must accrue to an estate. Additionally, keeping costs to a minimum serves the overwhelming concern of the Code: Preservation of the estate." In re Cook Inlet Energy LLC , 583 B.R. 494, 500 (9th Cir BAP 2018) (quoting Burlington Northern Railroad Co. v. Dant & Russell, Inc. (In re Dant & Russell, Inc.) , 853 F.2d 700, 706 (9th Cir. 1988) ) (cleaned up).
In its decision, the bankruptcy court applied the two-pronged test from DAK Industries . See In re DAK Indus., Inc. , 66 F.3d at 1094. There, the Ninth Circuit held that, to allow an administrative expense claim, the claimant must establish that the claim "(1) arose from a transaction with the debtor-in-possession as opposed to the preceding entity (or, alternatively, that the claimant gave consideration to the debtor-in-possession); and (2) directly and substantially benefitted the estate." See id. (citing In re White Motor Corp., 831 F.2d 106, 110 (6th Cir. 1987) ). The bankruptcy court concluded that neither prong was satisfied and disallowed the claim.
On appeal, Data Leverage contends that the bankruptcy court erred by applying the DAK Industries test. In essence, Data Leverage argues that the test is inapplicable because of the unique factual circumstances in this case. The Court considers each prong in turn.
A. TRANSACTION WITH THE TRUSTEE
First, Data Leverage argues that its claim need not have arisen from a transaction with the trustee to constitute an allowable administrative expense claim. See In re DAK Indus. , 66 F.3d at 1094 ; In re Abercrombie , 139 F.3d 755, 757 (9th Cir. 1998).
The Court notes that this first prong has been formulated in a number of ways, requiring either claimant to have engaged in a transaction with a "trustee," "debtor in possession," or "the estate." See In re Ybarra , 424 F.3d 1018, 1026 (9th Cir. 2005). A"debtor in possession" is a debtor in a Chapter 11 or Chapter 12 case or a person who has qualified as a trustee under § 322. See id. n. 9 (citing § 1101; 1 Epstein et al., Bankruptcy § 1–4, at 9). Because this is a Chapter 7 case, there is no "debtor in possession" here. As the bankruptcy court explained, courts consistently apply the DAK Industries test in Chapter 7 cases with a Chapter 7 trustee. See Memorandum Decision, App'x at 362–63 (citing In re 800Ideas.com, Inc. , 496 B.R. 165, 175 (9th Cir. BAP 2013) ; In re Nichols , BAP No. AZ-09-1326 PaDJu, 2010 WL 6259965 at *5-6 (9th Cir. BAP Mar. 17, 2010) ; In re Forrest , 611 B.R. at 667 ).
Data Leverage's argument focuses on a "plain reading" of 11 U.S.C. § 503(b)(1)(A), which allows an administrative expense claim for "the actual, necessary costs and expenses of preserving the estate." Data Leverage is correct that the statute does not explicitly state that a claim must have arisen from a transaction with a trustee.
However, the DAK Industries interpretation of the statute is well-established: "[T]he 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." In re Nichols , No. BAP.AZ-09-1325-PADJU, 2010 WL 6259965, at *5 (B.A.P. 9th Cir. Mar. 17, 2010) (emphasis added) (citing Boeing v. N. Am., Inc. v. Ybarra (In re Ybarra) , 424 F.3d 1018, 1026 (9th Cir. 2005) ); see also In re Abercrombie , 139 F.3d at 757–58 ; Reading Co. v. Brown, 391 U.S. 471, 475, 88 S.Ct. 1759, 20 L.Ed.2d 751 (1968) (interpreting a similar provision in the earlier Bankruptcy Act to explain that the purpose of administrative expense propriety is to facilitate the operation of the debtor-in-possession's business, with a view to rehabilitation); In re Mammoth Mart, Inc., 536 F.2d 950, 954 (1st Cir. 1976) (describing that the availability of the priority encourages third parties to deal with a business that has filed in bankruptcy, because these parties will be paid ahead of other creditors); In re White Motor Corp. , 831 F.2d 106, 110 (6th Cir. 1987). Data Leverage does not allege that it engaged in any transaction with the Trustee. Indeed, it entered into the purchase-and-sale agreement for the Property with Debtor, who had failed to disclose his interest in the Property in the initial Case.
Nevertheless, Data Leverage responds that its claims are allowable because it incurred the various expenses during a "gap" period between the initial closure of the Case and its subsequent reopening. Because the initial trustee had been discharged when the initial Case was closed, Data Leverage was not able to enter into an agreement with a trustee. Therefore, Data Leverage argues, the first DAK Industries prong does not apply.
However, Data Leverage's briefing cites no pertinent authority—either from the Bankruptcy Code or from any case law—in support of this proposition. For example, Data Leverage cites In re Sierra Pacific Broadcasters , 185 B.R. 575, 577 (9th Cir. BAP 1995), where the court did not explicitly apply the "transaction with a trustee" prong. There, an employee of a bankrupt radio station was injured in an industrial accident. Id. The Chapter 11 trustee had allowed the station's worker's compensation insurance to lapse, so the Industrial Commission of Arizona paid benefits to the injured employee pursuant to Arizona law. Id. When the Industrial Commission sought reimbursement from the estate as an administrative expense, the court allowed the claim: the worker's compensation liability was deemed an "actual and necessary cost" of administering the estate. Id. at 578 ; see Reading Co. , 391 U.S. at 483, 88 S.Ct. 1759 (referring to an "actual and necessary cost" as one "ordinarily incident to operation of a business"). Though the court did not explicitly discuss the "transaction with a trustee" prong, the prong's reasoning was implicit in the court's analysis. See id. at 577, n. 4. The court explained that, when the Industrial Commission pays benefits, it "acts as a judgment [of liability] against the employer" pursuant to Arizona law. Thus, because state law rendered the debtor-in-possession liable for the payment—as though the debtor-in-possession had made the payment itself—the first prong was satisfied by virtue of state law. As a result, Data Leverage's reliance on this case is misplaced.
Second, Data Leverage's counsel referred to In re Autosport International , Case No. 2:12-bk-15800-RK, 2013 WL 3199826 (Bankr. C.D. Cal Jun. 24, 2013) at oral argument. However, the Autosport case focused on a different question—the legal standard where a trustee and claimant requested that a court retroactively approve a compromise for an administrative expense claim. See Autosport Memorandum Decision at *8, Dkt. 262. By contrast, the Trustee and Data Leverage did not compromise: Data Leverage seeks administrative expense priority over the Trustee's objection, rendering Autosport inapplicable. See id. Further, the Autosport court evaluated the merits of the administrative expense claim under Section 503(b)(3)(B), a different section than the one at issue here. Id. at *9. The DAK Industries test does not apply to claims brought under Section 503(b)(3)(B). For these reasons, Data Leverage's reliance on Autosport is unavailing.
In this Court's own review of various bankruptcy authorities, it has found no case supporting Data Leverage's proposed reading of 11 U.S.C. § 503(b)(1)(A). As a result, the Court is not in a position to decide that an exception to a well-established, consistently applied principle exists. The Court finds that the bankruptcy court properly applied 11 U.S.C. § 503(b)(1)(A) and the test set forth in DAK Industries . Therefore, as to this prong, the decision of the bankruptcy court is AFFIRMED.
B. "BENEFIT" TO THE ESTATE
Data Leverage next challenges the second prong of the DAK Industries test, which requires an allowable administrative expense to have "directly and substantially benefitted the estate." In re DAK Indus. , 66 F.3d at 1094. As with the first prong, this test has been restated in a few different ways. For example, in Dant & Russell , the Ninth Circuit held, "Any claim for administrative expenses and costs must be the actual and necessary costs of preserving the estate for the benefit of its creditors." In re Dant & Russell, Inc. , 853 F.2d 700, 706 (9th Cir. 1988). In Sierra Pacific Broadcasters , the court noted that the claim need not have actually benefitted the estate, but that "the conduct involved in attempting to preserve the estate must be for the ‘benefit’ of the estate as opposed to the benefit of some other entity." In re Sierra Pacific Broadcasters , 185 B.R. at 577.
First, Data Leverage argues that its actions benefitted the estate because, by paying the mortgage arrears on October 30, 2018, the foreclosure sale scheduled on November 2, 2018 was cancelled. However, as a practical matter, this argument is highly speculative—it is uncertain that a foreclosure would have occurred had the arrears not been paid. For example, Trustee's counsel at explained that a company conducting a title search would have likely discovered the existence of Debtor's bankruptcy case, which may have prevented a foreclosure from taking place. Here, Data Leverage again cites the Autosport case, which is inapposite for the reasons discussed in Section A above.
Second, Data Leverage asserts that its mortgage and property tax expenditures increased the estate's available funds, which the estate can use to pay claims of unsecured creditors. Data Leverage explains that the initial Case was declared a "no asset" case, but that the estate now has $133,879.92, which it would not have had but for Data Leverage's expenditures. However, it was not clearly erroneous for the bankruptcy court to find that, if Data Leverage's claim for $160,602.57 was allowed, the estate would actually be in a less favorable position than had Data Leverage failed to make the expenditures to begin with. See Memorandum Decision at 22–23, 41–45 (explaining the lack of a benefit to the estate). The bankruptcy court estimated various statutory fees, like those to which the trustee is entitled, and described how the payout of the claim to Data Leverage would put the estate in the negative, precluding any payment to creditors holding general unsecured claims. Id. at 45 – 46 ("[T]otal administrative expense claims would be estimated at $260,000, of which about $130,000 in assets remain for distribution[.]"). Thus, the court calculated that the estate would be administratively insolvent if the administrative expense claim was allowed.
Even if the above calculation is uncertain, which the bankruptcy court itself pointed out, Data Leverage does not challenge the court's central holding: that the expenses Data Leverage incurred were made for its own benefit. A finding that expenditures were made "with the intent to benefit the person making the expenditure" precludes a bankruptcy court from allowing an administrative expense claim. In re Nichols , 2010 WL 6259965 at *7 ; See In re Leedy Mortgage Co., Inc., 111 B.R. 488, 493 (Bankr. E.D. Pa. 1990) (stating that the cost incurred to benefit the claimants’ own interest is not entitled to administrative priority); Sierra Pacific , 185 B.R. at 578 ("[P]ostpetition expenses which benefitted a third party would not be entitled to an administrative expense."). Data Leverage does not dispute the fact that it made the mortgage and property tax payments for the Property based on its investment-oriented goals. Accordingly, Data Leverage is not entitled to administrative expense priority.
Analogous here is In re Forrest , where the Forrests were a husband and wife who, after filing for bankruptcy, continued to live in their home and make various home-related post-petition payments. See In re Forrest , 611 B.R. at 665. The Forrests argued that their expenses, which included mortgage, insurance, and property tax expenditures, "preserved and improved the value of the [h]ome and reduced the expected payoff amounts in the future sale of the [h]ome on at least a dollar-for-dollar basis." Id. This resembles Data Leverage's argument that, but for its expenditures, the estate would not have had the proceeds it now does. See Opening Br. at 20. However, like in Forrest , where the appellants "indicate[d] that their intent was not to benefit the estate, but to benefit themselves," Data Leverage is clear that its purpose in purchasing the Property was to benefit itself. See 611 B.R. at 667 ; Opening Br. at 7. Thus, like in Forrest , it was not an abuse of discretion for the bankruptcy court to conclude "that Appellant's payments conferred no ‘direct[ ] and substantial[ ] benefit’ upon the estate." See In re Forrest , 611 B.R. at 668 (quoting DAK Indus. , 66 F.3d at 1094 ).
For these reasons, Data Leverage is unable to establish that its payment of mortgage arrears, seven monthly mortgage payments, and delinquent property taxes "directly and substantially benefitted the estate." DAK Indus. , 66 F.3d at 1094. The Court finds that the bankruptcy court correctly applied 11 U.S.C. § 503(b)(1)(A) in denying Data Leverage's motion for an administrative expense claim. Accordingly, as to this second prong, the decision of the bankruptcy court is AFFIRMED.
V. CONCLUSION
As explained above, Data Leverage failed to establish that its payments were "the actual, necessary costs and expenses of preserving the estate." 11 U.S.C. § 503(b)(1)(A). The Court hereby AFFIRMS the August 23, 2021 decision of the bankruptcy court.
IT IS SO ORDERED.