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• 9TH CIRCUIT COURT

In re: ROBERT M. KADJEVICH,
Debtor.

NICHOLAS GEORGE KADJEVICH,
JR.,
No. 99-15367
Appellant,
BAP No.
v.
NC-97-01021-MeJO
ROBERT M. KADJEVICH;
SUZANNE L. DECKER, Trustee;
UNITED STATES TRUSTEE/SAN
JOSE,
Appellees.

In re: ROBERT M. KADJEVICH,
Debtor.
No. 99-15372
SUZANNE L. DECKER, Trustee,
BAP No.
Appellant,
NC-97-01021-MeJO
v.
OPINION
NICHOLAS GEORGE KADJEVICH,
JR.,
Appellee.

Appeals from the Ninth Circuit
Bankruptcy Appellate Panel
Meyers, Jones, and Ollason, Bankruptcy Judges, Presiding

Argued and Submitted
May 3, 2000--San Francisco, California
Submission Withdrawn May 8, 20001
Resubmitted July 26, 2000

Filed August 8, 2000

Before: Harlington Wood, Jr.,2 Andrew J. Kleinfeld, and
Susan P. Graber, Circuit Judges.

Opinion by Judge Graber

Nicholas and Robert settled the fraud action. Once again,
Robert breached the settlement agreement. The fraud case
went to trial, a jury found Robert guilty, and the state court
awarded Nicholas fraud damages and back rent. In addition,
the state court awarded Nicholas $150,000 under California
Code of Civil Procedure as compensation for attorney fees
and costs that he had incurred as a result of Robert's bad-faith
breach of the 1990 settlement.

Roberts' Chapter 11 reorganization case was converted to
a Chapter 7 liquidation case, and a trustee was appointed. The
parties attempted a global settlement of all the litigation
between the brothers. Under that settlement, Nicholas was to
receive the most valuable property in Angela's probate estate.
Because this property was worth more than Nicholas' share of
Angela's estate, he was required to make an equalizing pay-
ment to Robert's bankruptcy estate. That payment, the parties
agreed, could be made in the form of a credit bid in which
Nicholas would credit the full amount of the judgment in the
fraud action against the money that he owed to Robert's bank-
ruptcy estate.

The bankruptcy court refused to allow Nicholas to offset
the $150,000 fee award against the equalization payment, rea-
soning that allowing Nicholas to credit the fee award would
violate the Bankruptcy Code's prioritization scheme by pay-
ing Nicholas' claim for fees ahead of other comparable
claims.

Nicholas arranged alternative financing and made the
equalization payment in cash. Obtaining that alternative
financing cost him $50,000. Nicholas appealed the bank-
ruptcy court's order denying his request to credit the fee
award, but the Bankruptcy Appellate Panel (BAP) concluded
that the issue was moot because Nicholas already had made
the required payment through other means.

The bankruptcy court denied Nicholas requests that both
the $150,000 fee award and the $50,000 in additional
expenses be classified as administrative expenses of Robert's
bankruptcy estate. On appeal, the BAP held that the $150,000
fee award was an administrative expense, but that the $50,000
financing expense was not.

Nicholas and Robert both appealed.

[1] The Bankruptcy Code provides a nonexhaustive list of
allowable administrative expenses, which includes the actual,
necessary costs and expenses of preserving the estate, includ-
ing wages, salaries, or commissions for services rendered
after the commencement of the case. [2]  In addition to those
standard administrative expenses, tort claims based on a trust-
ee's post-petition negligence are granted administrative-
expense priority.

[3] Only post-petition debts can be treated as administrative
expenses; pre-petition debts may not be granted
administrative-expense priority. Nicholas' claim for attorney
fees was a pre-petition claim and could not be treated as an
administrative expense.

[4] The source of the award of attorney fees was the pre-
petition state-court fraud action that brought Robert under the
jurisdiction of the California courts and subjected him to the
fee-shifting rule contained in the California Code of Civil
Procedure. [5] Nicholas' basic claim for fraud damages was
a pre-petition, nonpriority claim. Because his claim for attor-
ney fees arose from the same pre-petition obligation as the
other components of the state court's judgment, it was
afforded the same priority in federal bankruptcy proceedings
as those other items.

[6] The financing costs incurred by Nicholas were not part
of the administration or operation of the estate. Rather, they
were part of the administration and operation of Nicholas'
own business. Nicholas' claim could not be granted
administrative-expense priority.

COUNSEL

John S. Perkins, San Jose, California, for the appellant/
cross-appellee.

Elizabeth Berke-Dreyfuss, Wendel, Rosen, Black & Dean,
LLP, Oakland, California, for the appellee/cross-appellant.

_________________________________________________________________

OPINION

GRABER, Circuit Judge:

Since Angela Kadjevich died 20 years ago, her sons Nicho-
las and Robert have been embroiled in seemingly perpetual
litigation. Initially, the brothers quarreled over the disposition
of Angela's estate. That dispute spawned others. An early
casualty of this prodigious litigation was Robert's solvency;
since 1987, he has been in bankruptcy.

In the decision that we are asked to review today, the bank-
ruptcy court declined to grant administrative-expense status to
two claims made by Nicholas against Robert's bankruptcy
estate. We conclude that the claims cannot be considered
administrative expenses of Robert's bankruptcy estate and,
thus, affirm the decision of the bankruptcy court.

FACTUAL AND PROCEDURAL BACKGROUND

Nicholas, Robert, and Angela Kadjevich co-owned several
industrial properties in South San Francisco. When Angela
died in 1980, Robert assumed control of the properties. In
1983, Nicholas brought a state-court action against both
Angela's estate and Robert, seeking partition of the estate and
an accounting. That action settled.

Soon thereafter, Robert breached the settlement agreement
and, in April 1985, Nicholas sued Robert for fraud. In Sep-
tember 1987, while the fraud case was pending, Robert filed
a petition for relief under Chapter 11 of the Bankruptcy Code.
Nicholas obtained relief from the automatic stay associated
with Robert's bankruptcy case and continued to prosecute the
fraud action.

In January 1990, Nicholas and Robert settled the fraud
action as part of an effort to obtain a "global " settlement of
all the litigation among Nicholas, Robert, Robert's bank-
ruptcy estate, and Angela's probate estate. Once again, how-
ever, Robert breached the settlement agreement. Ultimately,
the fraud case went to trial, a jury found Robert guilty of
fraud, and the state court awarded Nicholas $27,000 in fraud
damages and $38,000 in back rent. In addition, the state court
awarded Nicholas $150,000 under California Code of Civil
Procedure S 128.5 as compensation for attorney fees and costs
that he had incurred as a result of Robert's bad-faith breach
of the 1990 settlement.

In August 1990, Nicholas' Chapter 11 reorganization case
was converted to a Chapter 7 liquidation case, and a trustee
was appointed. Five years later, under the auspices of the
bankruptcy court, the parties attempted another "global" set-
tlement. Under that settlement, Nicholas was to receive the
most valuable property that remained in Angela's probate
estate. Because this property was worth more than Nicholas'
share of Angela's estate, he was required to make an equaliz-
ing payment to Robert's bankruptcy estate. That payment, the
parties agreed, could be made in the form of a "credit bid,"
which meant that Nicholas could credit the full amount of the
judgment in the fraud action against the money that he owed
to Robert's bankruptcy estate.

Although the bankruptcy court initially approved the par-
ties' settlement, the court ultimately refused to allow Nicholas
to offset the $150,000 fee award against the required equaliza-
tion payment that he was required to pay to Robert's bank-
ruptcy estate. The court reasoned that allowing Nicholas to
credit the fee award would violate the Bankruptcy Code's pri-
oritization scheme by paying Nicholas' claim for fees ahead
of other comparable claims.

Nicholas arranged alternative financing and made the
equalization payment in cash. Obtaining that alternative
financing cost him roughly $50,000. Nicholas appealed the
bankruptcy court's order denying his request to credit the fee
award, but the Bankruptcy Appellate Panel (BAP) concluded
that the issue was moot because Nicholas already had made
the required payment through other means.

Nicholas then requested that both the $150,000 fee award
and the $50,000 in additional expenses be classified as admin-
istrative expenses of Robert's bankruptcy estate. The bank-
ruptcy court denied both requests. On appeal, the BAP held
that the $150,000 fee award was an administrative expense,
but that the $50,000 financing expense was not. Both parties
timely appealed.

STANDARD OF REVIEW

We review independently the decision of the bankruptcy
court, showing no deference to the decision of the BAP. See
Texas Comptroller of Public Accounts v. Megafoods Stores,
Inc. (In re Megafoods Stores, Inc.), 163 F.3d 1063, 1067 (9th
Cir. 1998). We review de novo the bankruptcy court's conclu-
sions of law, and we review for clear error the bankruptcy
court's findings of fact. See id. Finally, we review for abuse
of discretion the bankruptcy court's ultimate decision whether
to treat a particular claim as an administrative expense. See
Burlington N. R.R. Co. v. Dant & Russell, Inc. (In re Dant &
Russell, Inc.), 853 F.2d 700, 707 (9th Cir. 1988).

ANALYSIS

A. Nicholas' Claim for Fees Cannot be an Administrative
       Expense Because it is a Pre-Petition Claim.

[1] When the assets of a bankruptcy estate are distributed
to the bankrupt's creditors, claims for administrative expenses
are among the very first unsecured claims that are paid. See
United States Trustee v. Endy (In re Endy), 104 F.3d 1154,
1155-56 (9th Cir. 1997); 11 U.S.C. SS 726(a), 507(a)(1),
503(b). The Bankruptcy Code provides a nonexhaustive list of
allowable administrative expenses; they include "the actual,
necessary costs and expenses of preserving the estate, includ-
ing wages, salaries, or commissions for services rendered
after the commencement of the case." 11 U.S.C.
S 503(b)(1)(A); see Megafoods Stores, 163 F.3d at 1071
(explaining that the list of particular administrative expenses
contained in S 503(b) is nonexhaustive). In general, post-
petition business expenses are granted administrative-expense
priority so that third parties will risk providing the goods and
services that are necessary for a struggling debtor to reorga-
nize. See Microsoft Corp. v. DAK Indus., Inc. (In re DAK
Indus., Inc.), 66 F.3d 1091, 1097 (9th Cir. 1995) ("Payment
of administrative expenses allows the debtor to secure goods
and services necessary to administer the estate, which ulti-
mately accrues to the benefit of all creditors.").

[2] In addition to those kinds of "standard" administrative
expenses, tort claims based on a trustee's post-petition negli-
gence are granted administrative-expense priority. See Read-
ing Co. v. Brown, 391 U.S. 471 (1968). Such claims are
deemed "ordinarily incident to [the] operation of a business,"
id. at 483, and are granted priority status so that the victims
of a reorganizing business' torts will be compensated ahead
of the creditors who sought reorganization.

[3] Critically, however, only post-petition debts can be
treated as administrative expenses; pre-petition  debts may not
be granted administrative-expense priority. See 11 U.S.C.
S 503(b)(1)(A) (providing that administrative expenses
include "the actual, necessary costs and expenses of preserv-
ing the estate, including wages, salaries, or commissions for
services rendered after the commencement of the case")
(emphasis added); Reading Co., 391 U.S. at 482 (holding that
"tort claims arising during an arrangement  [are] actual and
necessary expenses of the arrangement") (emphasis added);
Dant & Russell, 853 F.2d at 707 (noting that "any claims
under the section must have a distinct postpetition character");
Christian Life Center Litig. Defense Comm. v. Silva (In re
Christian Life Center), 821 F.2d 1370, 1373-74 (9th Cir.
1987) ("Claims that arise from a creditor's pre-petition ser-
vices to the estate are not entitled to administrative expense
treatment."). The question here, then, is whether Nicholas'
claim for attorney fees is a pre-petition or a post-petition
claim. Relying on our recent decision in Abercrombie v. Hay-
den Corp. (In re Abercrombie), 139 F.3d 755 (9th Cir. 1998),
we conclude that it is a pre-petition claim and, therefore, that
it may not be treated as an administrative expense.

The facts of Abercrombie are relatively straightforward.
Abercrombie won a judgment in a state-court breach-of-
contract case. The defendant in the contract case, Hayden
Corporation, appealed and, while the appeal was pending in
the state supreme court, Abercrombie filed a bankruptcy peti-
tion. The state supreme court then reversed the judgment and,
pursuant to a fee provision in the parties' contract, ordered
Abercrombie to pay Hayden's attorney fees. See id. at 756.3

Hayden asked the bankruptcy court to grant administrative-
expense priority to the attorney fees that it had incurred after
Abercrombie filed his bankruptcy petition, on the theory that
those fees were caused by Abercrombie's post-petition
defense of the appeal. This court held that, because the award
of attorney fees was made in an action commenced pre-
petition, under the authority of a pre-petition contract, it was
pre-petition in nature and could not be considered an adminis-
trative expense. Although Abercrombie had caused the fees to
be incurred through its post-petition conduct, "the source of
the estate's obligation remain[ed] the prepetition fee provi-
sion." Id. at 759.

[4] In the present case, the "source" of the award of attor-
ney fees is the pre-petition state-court fraud action that
brought Robert under the jurisdiction of the California courts
and subjected him to the fee-shifting rule contained in Cali-
fornia Code of Civil Procedure S128.5. The state court's judg-
ment in that case is unitary; all of it must be considered pre-
petition under the reasoning of Abercrombie. For the purpose
of establishing the priority of a claim for attorney fees, we see
no principled basis to distinguish a pre-petition contract that
provides for fees from a pre-petition tort claim  that results in
fees. By analogy to Abercrombie, the fact that Robert did not
engage in the particular misconduct that caused the fees to be
awarded until after he filed his bankruptcy petition does not
change the fundamentally pre-petition nature of the fraud
action and of the total resulting judgment.

[5] It is undisputed that Nicholas' basic claim for fraud
damages is a pre-petition, nonpriority claim. See, e.g. Corman
v. Morgan (In re Morgan), 197 B.R. 892, 899-900 (N.D. Cal.
1996); In re Allen, 241 B.R. 710, 713 (Bankr. D. Mont. 1999);
cf. Papadakis v. Zelis (In re Zelis), 66 F.3d 205 (9th Cir.
1995) (holding that two state-court sanction awards that were
based on the debtor's pre-petition filing of two frivolous
appeals were pre-petition obligations of the estate). Because
Nicholas' claim for attorney fees arises from the same pre-
petition obligation as the damages, back rent, costs, and all
other components of the state court's judgment, it should be
afforded the same priority in federal bankruptcy proceedings
as those other items.

Our conclusion finds substantial support in Cohen v. de la
Cruz, 523 U.S. 213 (1998). In Cohen, the Court held that
attorney fees that were awarded under state law in connection
with a debtor's fraud were nondischargeable under 11 U.S.C.
S 523(a)(2)(A). That statute excepts from discharge "any debt
. . . for money . . . to the extent obtained by . . . false pre-
tenses, a false representation, or actual fraud. " Because the
nondischargeable fraud debt was the source of the award of
attorney fees, the award likewise was nondischargeable even
if it resulted from the debtor's good-faith attempt to litigate
the issue of dischargeability. The fraudulent character of the
initial debt established that the entire resulting obligation,
including the attendant fees, was nondischargeable. See id. at
218-19 ("Once it is established that specific money or prop-
erty has been obtained by fraud, however, `any debt' arising
therefrom is excepted from discharge.").

Consistent with Abercrombie and Cohen , we hold that the
attorney fees awarded by the state court to Nicholas, based on
Robert's bad-faith failure to settle the pre-petition fraud case,
may not be granted administrative-expense priority. 4 We
post-petition, however, but considered only whether the "fairness" ratio-
nale of Reading Co. v. Brown, 391 U.S. 471 (1968), could be applied to
an intentional, rather than a negligent, tort. Although the scope of the
Charlesbank Laundry holding is unclear, we take comfort in the fact that
the First Circuit follows the rule of Abercrombie. See Woburn Assocs. v.
Kahn (In re Hemingway Transport, Inc.), 954 F.2d 1, 7 (1st Cir. 1992)
("We are aware of no authority that the Reading-Charlesbank exception
encompasses a right to payment [for attorney fees that were incurred in
post-petition litigation] originating in a prepetition contract with the debt-
or.").

emphasize, however, that our holding is a narrow one. We do
not deal here with a case in which a representative of the
estate commenced litigation on behalf of the estate after a
bankruptcy petition was filed, cf. In re Met-L-Wood Corp.,
115 B.R. 133 (N.D. Ill. 1990), or one in which the representa-
tive obtained relief from the automatic stay to continue pre-
petition litigation, cf. In re E.A. Nord Co., 78 B.R. 289
(Bankr. W.D. Wash. 1987).

B. Nicholas' Claim for the $50,000 Financing Cost Cannot
       be an Administrative Expense Because it was not Caused
       by the Administration or Operation of the Estate.

Nicholas also seeks administrative-expense priority for his
claim for $50,000 in financing costs that he incurred in order
to make the equalizing payment that was required by the 1995
"global" settlement. Although Nicholas incurred those costs
post-petition, they nonetheless are not administrative
expenses of Robert's bankruptcy estate.

Nicholas incurred the $50,000 in financing costs solely
because the bankruptcy court concluded that it would violate
the Bankruptcy Code for Nicholas to "credit bid " the fee
award. The financing costs had nothing to do with "preserving
the estate" and, indeed, the estate received nothing from Nich-
olas based on his incurring those costs. Accordingly, they are
not "standard" administrative expenses underS 503(b)(1)(A).

Moreover, because the costs were caused solely by the
bankruptcy court's order concerning the credit-bid arrange-
ment, and were not caused by any wrongful action of the
trustee, they cannot be considered administrative expenses
under the "fairness" principle of Reading Co.

[6] In short, the financing costs incurred by Nicholas sim-
ply were not part of the administration or operation of the
estate. Rather, they were part of the administration and opera-
tion of Nicholas' own real estate business. Accordingly, Nich-
olas' claim may not be granted administrative-expense priority.5

CONCLUSION

The judgment of the Bankruptcy Appellate Panel is
AFFIRMED in part and REVERSED in part. The judgment
of the bankruptcy court is AFFIRMED. Costs on appeal are
awarded to the Trustee.
_______________________________________________________________

FOOTNOTES

1 After these cases were argued and submitted, we withdrew submission
and referred the cases to mediation. We acknowledge the efforts of the
Circuit Mediation Office.
2 The Honorable Harlington Wood, Jr., Senior United States Circuit
Judge for the Seventh Circuit, sitting by designation.
3 Although the fact is not mentioned in the Abercrombie opinion, Hay-
den must have obtained a lifting of the stay associated with Abercrombie's
bankruptcy in order to continue its appeal in the state supreme court.
4 We observe that the bankruptcy court's decision in In re Execuair
Corp., 125 B.R. 600 (Bankr. C.D. Cal. 1991), appears inconsistent with
our holding. To that extent, we disapprove that opinion.

We also are aware that the First Circuit granted administrative-expense
priority to post-petition attorney fees that were caused by the debtor's con-
temptuous breach of a pre-petition injunction. See Spunt v. Charlesbank

5 In the present posture of the case, we need not and do not decide
whether Nicholas' claim for $50,000 in financing costs is a proper claim
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