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In re Madden

filed: August 22, 1995.

IN RE JOSEPH E. MADDEN, DEBTOR. IRMAS FAMILY TRUST, AND GLORIA AND PETER S. GOLD REVOCABLE INTERVIVOS TRUST, APPELLANTS,
v.
JOSEPH E. MADDEN, APPELLEE.



Appeal from the United States Bankruptcy Court for the Northern District of California. BK. No. 93-47110 J. Honorable Edward D. Jellen, Bankruptcy Judge, Presiding.

Before: Volinn, Russell, and Hagan, Bankruptcy Judges.

Author: Volinn

VOLINN, Bankruptcy Judge:

OVERVIEW

Prior to filing his chapter 11 petition, the debtor commenced a suit against defendants for breach of contract in a state court. After the filing, the debtor in possession voluntarily continued with the litigation. Ultimately, defendants prevailed and were awarded attorneys' fees pursuant to the contract. Defendants claimed administrative priority for the portion of fees incurred post-petition. The court denied priority because the fees did not constitute a benefit to the bankruptcy estate. We REVERSE.

FACTS AND PROCEEDINGS BELOW

In April 1993, the debtor, Joseph E. Madden, sued the Irmas Family Trust and the Gloria and Peter S. Gold Revocable Intervivos Trust (the Trusts), appellants herein, in state court. Madden's several causes of action in the state court suit arose from the Trusts' alleged breach of a real estate contract between the parties.

During the pendency of the suit, on October 7, 1993, Madden filed for protection under chapter 11 of the Bankruptcy Code.*fn1 Thereafter, the debtor, as debtor in possession, decided to continue with active prosecution of the state court suit. On February 14, 1994, the Trusts moved for summary judgment, which was granted by the state court, and, pursuant to an attorneys' fee clause in the subject contract,*fn2 the court awarded them $87,000 in attorneys' fees. Of this amount, some $59,000 in fees and costs were found to have been incurred by the Trusts after the filing of Madden's bankruptcy petition.

The Trusts then filed a motion in the bankruptcy case to have this post-petition portion of their fee award granted administrative priority pursuant to § 503(b). The motion was denied by the court by order entered September 12, 1994, and this timely appeal followed.

STANDARD OF REVIEW

We review the bankruptcy court's award or denial of administrative priority for abuse of discretion. In re Hanna, 168 Bankr. 386, 388 (9th Cir. BAP 1993).

ISSUE PRESENTED

Whether the court abused its discretion by denying administrative priority to a liability for post-bankruptcy conduct incurred by the debtor in possession because 1) the liability did not arise from or yield a demonstrably commensurate benefit to the estate, and 2) the claim ...


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