Lebron v. Mechem Financial, Inc.

Opinions of the United
1994 Decisions States Court of Appeals
for the Third Circuit

6-29-1994

Lebron v. Mechem Financial, Inc.
Precedential or Non-Precedential:

Docket 93-3408

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 UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT

N0. 93-3408

MICHAEL Q. LEBRON; *MICHAEL C. LEBRON; ANTHONY LEBRON

v.

MECHEM FINANCIAL INC.; W. JAMES SCOTT, JR.;
ROBERT G. DWYER, Trustee

W. James Scott, Jr.,
Appellant

(*Per Clerk's 9/20/93 Order, amending the caption)

On Appeal From the United States District Court
For the Western District of Pennsylvania
(D.C. Civil Action No. 93-00067E)

Argued March 1, 1994

BEFORE: STAPLETON and SCIRICA, Circuit Judges, and
VAN ANTWERPEN, District Judge*

(Opinion Filed June 29, 1994)

James R. Walczak
John F. Mizner (Argued)
MacDONALD, ILLIG, JONES & BRITTON
100 State Street, Suite 700
Erie, PA 16507
Attorneys for Appellant

James E. Blackwood (Argued)
23 West 10th Street
Erie, PA 16501
Attorney for Appellees
*Honorable Franklin S. Van Antwerpen, United States District
Judge for the Eastern District of Pennsylvania, sitting by
designation.

OPINION OF THE COURT

STAPLETON, Circuit Judge:

Pursuant to 11 U.S.C. §§ 503(b)(3) and (b)(4) (1988),

the bankruptcy court awarded W. James Scott ("Scott"), a creditor

and former officer and director of the debtor, Mechem Financial,

Inc. ("Mechem"), reimbursement of expenses incurred in connection

with activities that the court felt "substantial[ly] contributed"

to Mechem's estate. Most of Scott's efforts were aimed at

exposing the fact that Mechem's officers and directors were

engaged in fraudulent activity. The bankruptcy court's award was

appealed by three other creditors of the estate, Michael Q.

Lebron, Michael C. Lebron, and Anthony Lebron ("the Lebrons").

The district court reversed, holding that some of Scott's

expenses were incurred either before the chapter 11 petition was

filed or after the case was converted to chapter 7, and that

§§503(b)(3) and (b)(4) do not authorize recovery of expenses

incurred during these periods. The district court further held

that Scott could not recover the expenses he incurred while the

chapter 11 proceedings were pending because he was acting solely

for his own benefit, thus making any benefit to the estate purely

incidental. Finally, the court held that the bankruptcy court's
award was inequitable because Scott was an insider in the

corporation that was committing the fraud. Scott appeals the

judgment of the district court. We will reverse and remand for

further proceedings.

I.

Mechem was founded in 1986 to manage pre-need funeral

trust funds for individuals and to provide these individuals with

funeral goods and services to be paid for with the funds in

trust. The funds were advanced from the participating

individuals to Mechem through funeral directors. Scott was one

of the three initial members of Mechem's board of directors as

well as a minority shareholder. In addition, Scott was a funeral

director who had entrusted Mechem with funds under pre-need

contracts executed by his customers. A second board member, John

R. Copple ("Copple"), served as the President of Mechem, and

controlled the day-to-day operations of the corporation. Soon

after Mechem was organized, Scott began to sense that Copple was

not disclosing to him information regarding Mechem financial

matters and investments. Then, in October 1987, Copple and the

third member of the board of directors removed Scott as an

officer and director of Mechem.

After his removal, Scott apparently made several

requests of Copple for financial information about Mechem, but

Copple refused these requests. Therefore, in 1988, Scott filed a

complaint in mandamus against Mechem in the Court of Common Pleas

of Erie County, Pennsylvania, seeking to exercise his rights
under Pennsylvania law as a shareholder to examine Mechem's

books. During the discovery phase of this action, Scott became

aware that Copple had misappropriated millions of dollars of pre-

need funeral trust fund monies for personal use, much of which

was used to purchase rare coins controlled by Copple. In light

of this information, Scott, in February 1990, filed a complaint

in equity in the Court of Common Pleas of Erie County,

Pennsylvania, against Mechem, its officers, directors, and

majority shareholders, and certain holders of trust funds. He

sought appointment of a custodian to prevent further

mismanagement and fraud, a complete and accurate accounting of

the assets held by Mechem, an injunction against the disbursement

or transfer of pre-need trust funds, and a declaration that

certain issues and transfers of corporate stock were void. Scott

accompanied this complaint with an affidavit that detailed

alleged acts of mismanagement and self-dealing by Copple in his

capacity as president of Mechem.

According to the bankruptcy court, the walls began to

close in on Copple at this point. On March 6, 1990, a common

pleas court ordered Mechem and, specifically, Copple, to file

before March 12, 1990, inventories of all assets, investments,

and accounts held by Mechem or Copple personally. Because

neither Mechem nor Copple filed a satisfactory inventory, Scott

promptly moved to compel compliance with the court's order. On

March 19, 1990, the common pleas court entered an additional

order directing Mechem and Copple to file by March 26, 1990,

inventories and more detailed supporting information.
 Copple reacted to the court's order by causing Mechem

to file a chapter 11 petition on March 23, 1990. Scott

immediately filed in the bankruptcy court for the appointment of

a trustee, for an expedited accounting, and for partial relief

from a stay. The bankruptcy court granted Scott's motion on

March 28, 1990, and a trustee was appointed on that same day.

Scott then gave the trustee all of the information that he had

gathered during his pre-bankruptcy petition legal actions against

Mechem and Copple. The bankruptcy court found that this

information "contributed to the [t]rustee's report of

investigation filed promptly with [the] Court on April 24, 1990

identifying various assets and summarizing the history of

questionable financial transactions between [Mechem] and [Copple

and affiliates and corporations under Copple's control.]" B.Op.

at 6.

The trustee recommended that the proceedings be

converted to chapter 7, which the bankruptcy court did on May 23,

1990. During the liquidation process, the trustee collected cash

in the amount of $460,000. The trustee also brought numerous

adversary proceedings against Copple and his wife, which resulted

in the turnover of additional property to the estate. Finally,

the trustee obtained a judgment against Copple for $4,009,645,

and against Copple and his wife for $1,307,567. According to the

trustee, unless the Copples successfully appeal these awards,

another $400,000 to $700,000 will be collected upon the

liquidation of their personal assets. Despite the collection and
liquidation efforts, the unsecured creditors of Mechem will incur

losses.

Scott, pursuant to §§ 503(b)(3) and (b)(4), applied to

the bankruptcy court for reimbursement of the expenses he had

incurred in connection with the Mechem legal actions and his

participation in the chapter 11 and chapter 7 proceedings.

Specifically, Scott requested $48,805.12 as reimbursement for

attorney fees and $10,207.88 as reimbursement for general

expenses. These amounts represented expenses incurred before,

during, and after Mechem entered the chapter 11 proceedings. The

bankruptcy court awarded Scott his requested reimbursements in

full. In justification of this award, the court made the

following findings:
The information gathered by Scott in his
prosecution of matters against the Debtor was
critical to the Court in making an immediate
determination to appoint a Trustee and
critical to the Trustee in making a prompt
investigation and report to the Court which
resulted in conversion of this case to
Chapter 7. Scott's information also assisted
the Trustee in the subsequent collection of
assets for the benefit of creditors of the
estate.

Scott's efforts were more than just a
passing benefit to the estate. The efforts
of Scott were a substantial contribution in
assisting the Trustee to carry out his
responsibilities. Scott's efforts far
exceeded those which he was obligated to
perform. . . .

. . . [T]he benefit Scott bestowed upon
this estate is clear -- absent Scott's
pursuit of this Debtor, the Debtor lead by
Copple might still be fleecing individuals
into investing in the Debtor's preneed
trusts. Copple could still be diverting the
 Debtor's assets to his own uses. There might
be no estate for unsecured creditors.

. . . Most, if not all of the individual
preneed trust purchasers, will receive the
funeral that they anticipated and the
unsecured creditors will receive some
dividend from this estate. Without Scott's
efforts, the result could have been much
worse -- the Debtor could have continued to
operate until all of the assets were
dissipated.

We find that all of Scott's efforts for

which he incurred fees and expenses both

prepetition and postpetition resulted in a

direct benefit and were a substantial

contribution to the estate. Any fees and

expenses which Scott incurred prepetition

substantially contributed to the

administration of the Debtor's estate

postpetition. Thus, there is more than

sufficient reason to reimburse Scott for fees

and expenses in their entirety.

B.Op. 9-10.

The bankruptcy court also specifically found that

Scott's efforts after the case was converted to one under chapter

7 were of significant benefit to the creditors:
Most of the individual purchasers of preneed
funeral trusts will be spared from any
significant losses, however, because of the
efforts of the [t]rustee to provide a
mechanism for funeral directors to provide
those individuals with fully funded
replacement trusts with which most funeral
directors are complying. . . . Scott assisted
the [t]rustee in this effort. Scott has
 provided funerals for its preneed clients who
have died and replacement trusts for its
living individual clients in the amount of
$64,548.51 and Scott, as a creditor, has an
unsecured claim as a creditor of this estate
for those expenditures.

B.Op. 7.

The district court reversed the bankruptcy court's

decision to award Scott administrative expenses. First, the

court found that under §§ 503(b)(3) and (b)(4), unless the

bankruptcy petition is filed involuntarily or there is a pre-

petition custodian or receiver, pre-petition fees and expenses

cannot be recovered. Because these proceedings were voluntary

and there was no pre-petition custodian or receiver, Scott could

not recover any expenses that he incurred prior to the date

Mechem filed its chapter 11 petition. The court also found that

because §§ 503(b)(3) and (b)(4) specifically authorize the

recovery of expenses for contributions made in cases "under

chapter 9 or 11," any expenses incurred after a case is converted

from chapter 9 or 11 may not be recovered pursuant to these

sections. Thus, it held that Scott was not entitled to recoup

the expenses he incurred after the case was converted to chapter

7. Turning to expenses incurred during the pendency of a chapter

9 or 11 case, the court further concluded that an applicant may

recover such expenses pursuant to §§ 503(b)(3) and (b)(4) only if

they were incurred as a result of activities which made a

"substantial contribution" to the case, and which were not

engaged in primarily for the applicant's own benefit. The court

held that because Scott's actions "were mainly done to protect
his own interests, and any benefits conferred upon the estate

were incidental[,]" there was no basis for awarding him any

expenses. In addition, the court commented that it would be

unjust for Scott, an original incorporator, director,

shareholder, and insider of the debtor, to be reimbursed in full

from funds that would otherwise benefit hundreds of duped

purchasers. In this regard, the court found that the replacement

trusts which Scott helped establish did "not make the purchasers

whole." Op. 5.

II.

We exercise plenary review over the district court's

decision, as well as over the legal determinations of the

bankruptcy court. However, we review the bankruptcy court's

factual findings for clear error. See Sapos v. Provident Inst.

of Sav. in Town of Boston, 967 F.2d 918, 922 (3d Cir. 1992)

("Because in bankruptcy cases the district court sits as an

appellate court, our review of the district court's decision is

plenary. This court exercises the same review over the district

court's decision that the district court may exercise. The

findings of fact by the bankruptcy court are reviewable only for

clear error. Legal questions are, of course, subject to plenary

review".) (quoting Brown v. Pa. State Employees Credit Union, 851
F.2d 81, 84 (3d Cir. 1988) (citations omitted)).

III.
 Subsections 503(b)(3) and (b)(4) of the Bankruptcy

Code, the only authority relied upon by Scott in support of his

award, authorize the court to award administrative expenses under

several different sets of circumstances. They provide:
(b) After notice and a hearing, there shall
be allowed, administrative expenses, other
than claims allowed under section 502(f) of
this title, including--

* * *

(3) the actual, necessary expenses,
other than compensation and reimbursement
specified in paragraph (4) of this
subsection, incurred by--

(A) a creditor that files a
petition under section 303 of this
title;

(B) a creditor that recovers,
after the court's approval, for the
benefit of the estate any property
transferred or concealed by the debtor;

(C) a creditor in connection
with the prosecution of a criminal
offense relating to the case or to the
business or property of the debtor;

(D) a creditor, an indenture
trustee, an equity security holder, or a
committee representing creditors or
equity security holders other than a
committee appointed under section 1102
of this title, in making a substantial
contribution in a case under chapter 9
or 11 of this title; or

(E) a custodian superseded
under section 543 of this title, and
compensation for the services of such
custodian;

(4) reasonable compensation for
professional services rendered by an attorney
 or an accountant of an entity whose expense
is allowable under paragraph (3) of this
subsection, based on the time, the nature,
the extent, and the value of such services,
and the cost of comparable services other
than in a case under this title, and
reimbursement for actual, necessary expenses
incurred by such attorney or
accountant . . ..

§ 503. Because § 503(b)(4) authorizes awards of legal and

accounting fees only in situations coming within the scope of

§ 503(b)(3), and because subsection (D) is the only portion of

§ 503(b)(3) arguably applicable here,1 we focus on

§ 503(b)(3)(D).

Under § 503(b)(3)(D), four categories of persons may

apply for reimbursement of expenses: (1) creditors, (2)

indenture trustees, (3) equity security holders, and (4) creditor

and equity holder committees other than official committees

appointed under § 1102 of the Bankruptcy Code. The court may

award an applicant actual, necessary expenses which were incurred

"in making a substantial contribution in a case under chapter 9

or 11." Under subsection (b)(4), this may include reimbursement

for professional fees of an attorney or accountant, where those

1
Scott cannot recover his claimed expenses pursuant to
§503(b)(3)(A) because this subsection refers to creditors that
file an involuntary petition under § 303, which Scott did not do
here. Subsection (b)(3)(B) is also inapplicable because it
requires that the creditor seek prior approval from the court for
his or her actions, which Scott did not seek. Nor may Scott
recover expenses pursuant to subsection (B)(3)(C), because this
section pertains to expenses incurred in connection with the
prosecution of a criminal offense, and none of the bills
submitted by Scott reflect charges for services rendered in the
course of criminal proceedings against Copple. See D.Ct. Op. 14.
Finally, subsection (b)(3)(E) is inapplicable here because it
refers to expenses incurred by a superseded custodian, and there
was no superseded custodian in this case.
fees meet the additional requirements of that subsection. Any

expenses reimbursed are administrative expenses with the

attendant priority. 11 U.S.C. § 507 (1988).

Here, Scott is a creditor as well as an equity security

holder, and the administrative expenses that he seeks consist of

attorney fees and general expenses. Therefore, he is entitled to

these expenses if he incurred them as a result of activities

which (1) made a "substantial contribution," (2) "in a case under

chapter 9 or 11."

The "substantial contribution" standard of

§ 503(b)(3)(D) is derived from §§ 242 and 243 of the former

Bankruptcy Act, 11 U.S.C. §§ 642, 643 (repealed 1978). Sen. Rep.

No. 95-989, 95th Cong., 2nd Sess. 5, reprinted in 1978

U.S.C.C.A.N. 5787, 5852. Those sections were, in turn, derived

from former Section 77B(c)(9) of the Bankruptcy Act, 11 U.S.C.

§ 207(c)(9) (repealed 1938). See, 6A James William Moore &

Robert Stephen Oglebay, Collier on Bankruptcy ¶ 13.01, at 521-23

(James William Moore ed., 14th ed. 1977); Alfred B. Teton,

Reorganization Revised, 48 Yale L.J. 573, 603-607 (1939).

Sections 242 and 243 and § 503(b)(3)(D) liberalized the

circumstances under which reimbursement was authorized, but at

each stage in the progression, the core concept has been the

same. See, Collier, supra, ¶ 13.01, at 523 (14th ed.); 3 Hon.
Roy Babitt, et al., Collier on Bankruptcy ¶ 503.04, at 14 & 44-50

(Lawrence P. King ed. 15th ed. 1994); Teton, supra, at 604. The

services engaged by creditors, creditor committees and other

parties interested in a reorganization are presumed to be
incurred for the benefit of the engaging party and are

reimbursable if, but only if, the services "directly and

materially contributed" to the reorganization. Steere v. Baldwin

Locomotive Works, 98 F.2d 889, 891 (3d Cir. 1938) (applying

Section 77B(c)); In re Solar Mfg. Corp., 206 F.2d 780 (3d Cir.

1953) (same); In re Mt. Forest Fur Farms of Am., Inc., 157 F.2d

640 (6th Cir. 1946) (applying § 243); In re Lister, 846 F.2d 55

(10th Cir. 1988) (applying § 503(b)(3)(D)).

Thus, "[i]n determining whether there has been a

'substantial contribution' pursuant to section 503(b)(3)(D), the

applicable test is whether the efforts of the applicant resulted

in an actual and demonstrable benefit to the debtor's estate and

the creditors." In re Lister, 846 F.2d 55, 57 (10th Cir. 1988).

See also, Matter of Consol. Bancshares, Inc., 785 F.2d 1249, 1253

(5th Cir. 1986); Collier, supra, ¶ 503.04, at 38 (15th ed.).

"[S]ervices which substantially contribute to a case are those

which foster and enhance . . . the progress of reorganization."

Consol. Bancshares, Inc., 785 F.2d at 1253 (quoting In re Richton

Int'l Corp., 15 B.R. 854, 855 (Bankr. S.D.N.Y. 1981) (other

citation omitted)).

Subsection 503(b)(3)(D) represents an accommodation

between the twin objectives of encouraging "meaningful creditor

participation in the reorganization process," Richton, 15 B.R. at
855-56 (citation omitted), and "keeping fees and administrative

expenses at a minimum so as to preserve as much of the estate as

possible for the creditors." Otte v. U.S., 419 U.S. 43, 53
(1974) (citation omitted). Inherent in the term "substantial" is
the concept that the benefit received by the estate must be more

than an incidental one arising from activities the applicant has

pursued in protecting his or her own interests. Creditors are

presumed to be acting in their own interests until they satisfy

the court that their efforts have transcended self-protection. In

re Solar Mfg. Corp., 206 F.2d at 781 (the "work [of attorneys

employed by creditors] must be at the expense of their clients

unless it is in some manner beneficial to the estate"); In re

Lister, 846 F.2d 55, 57 (10th Cir. 1988); Consol. Bancshares,

Inc., 785 F.2d at 1253 ("a creditor's attorney must ordinarily

look to its own client for payment, unless the creditor's

attorney rendered services on behalf of the reorganization, not

merely on behalf of his client's interest, and conferred a

significant and demonstrable benefit to the debtor's estate and

the creditors.") (quoting from In re Gen. Oil Distribs., 51 B.R.

794, 806 (Bankr. E.D.N.Y. 1985)); In re Bldgs. Dev. Co., 98 F.2d

844 (7th Cir. 1938); In re Jensen-Farley Pictures Inc., 47 B.R.

557, 569 (Bankr. D. Utah 1985). Most activities of an interested

party that contribute to the estate will also, of course, benefit

that party to some degree, and the existence of a self-interest

cannot in and of itself preclude reimbursement. Nevertheless,

the purpose of § 503(b)(3)(D) is to encourage activities that

will benefit the estate as a whole, and in line with the twin

objectives of § 503(b)(3)(D), "substantial contribution" should

be applied in a manner that excludes reimbursement in connection

with activities of creditors and other interested parties which

are designed primarily to serve their own interests and which,
accordingly, would have been undertaken absent an expectation of

reimbursement from the estate.

We turn now to the statutory requirement that the

expenses be ones incurred "in a case under chapter 9 or 11." The

Lebrons argue that this language expressly limits the authority

conferred by § 503(b)(3)(D) to only those expenses that were

incurred during the pendency of a chapter 9 or chapter 11 case.

In other words, they claim that this section authorizes only the

recovery of expenses that are the result of efforts occurring

after a petition for chapter 9 or 11 proceedings is filed, but

before either the reorganization ends, or the case is converted

to one under chapter 7 or 13.

We perceive a fallacy in this argument. It is the

"substantial contribution," not the activity, that must occur "in

a case" under chapter 11, and the Lebrons' argument assumes that

activities conducted and expenses incurred before the filing of a

chapter 11 petition cannot substantially contribute to the

reorganization efforts during the pendency of a chapter 11 case.

We believe the facts of this case, as found by the bankruptcy

court, demonstrate that this assumption is not sound. The

information generated by Scott's pre-petition activities in this

case materially assisted the trustee in carrying out his

responsibilities in the chapter 11 proceedings.

We think our understanding of § 503(b)(3)(D) is

confirmed by its legislative history. Under section 77B(c) of

the Bankruptcy Act, reimbursement of fees was authorized for pre-

petition services of informal committees of creditors and
stockholders where those services directly benefitted the

reorganization. See, e.g., In re Ulen & Co., 130 F.2d 303 (2d

Cir. 1942); In re Detroit Int'l Bridge Co., 111 F.2d 235 (6th

Cir. 1940); Stark v. Woods Bros. Corp., 109 F.2d 969 (8th Cir.

1940); Sullivan & Cromwell v. Colo. Fuel & Iron Co., 96 F.2d 219

(10th Cir. 1938); In re Memphis Street Ry. Co., 86 F.2d 891 (6th

Cir. 1936); In re Tudor Gables Bldg. Corp., 83 F.2d 871 (7th Cir.

1936); In re Nat'l Lock Co., 82 F.2d 600 (7th Cir.), cert.

denied, 299 U.S. 562 (1936).2 The practice of organizing

informal committees before the filing of the petition to function

in anticipation of reorganization proceedings continues today.3

The legislative history of § 503(b)(3)(D) indicates

that it was intended to alter the preexisting law in only one

respect: "It does not require a contribution that leads to

confirmation of a plan [because Congress believed that in] many

cases it will be a substantial contribution if the person

involved uncovers facts that would lead to a denial of

confirmation, such as fraud in connection with the case." Supra,
1978 U.S.C.C.A.N. at 5852-53. This legislative history and the

practice under the prior law demonstrate, we believe, that
2
Under this "direct benefit" rule, pre-petition expenses were
reimbursed only if they directly contributed to a reorganization
plan that ultimately was adopted.
3
See Bankr. Rule 2007, 11 U.S.C.A. (1984 & Supp. 1994), which
states that, "on application of a party in interest and after
notice as the court may direct, the court may appoint as the
committee of unsecured creditors required by § 1102(a) of the
Code, members of a committee selected before the order for relief
in accordance with subdivision (b) of this rule." Thus, if
certain requirements are met, the court may appoint some or all
of the members of the informal committee to the formal post-
petition committee.
§503(b)(3)(D) was not intended to impose an across-the-board bar

to the reimbursement of expenses incurred before the filing of

the petition.

The only other Court of Appeals to have addressed the

issue agrees with our reading of § 503(b)(3)(D). In re Lister,

846 F.2d at 57 ("administrative expenses incurred prior to the

filing of a [chapter 11] bankruptcy petition are compensable

under 11 U.S.C. § 503(b)(3)(D), if those expenses are incurred in

efforts which were intended to benefit, and which did directly

benefit, the bankruptcy estate.").

While we conclude that there is no across-the-board bar

to the recovery of Scott's pre-petition expenses, we reach a

different conclusion with respect to his post-conversion

expenses. Where, as here, a chapter 11 proceeding is converted

into a chapter 7 proceeding, we do not see how expenses incurred

after the conversion can be said to have made a substantial

contribution in the proceedings under chapter 11. There are

provisions of § 503 other than subsection (b)(3)(D) that

authorize reimbursement of expenses incurred in connection with a

chapter 7 proceeding, and we believe that post-conversion

expenses were intended to be reimbursable under those provisions

or not at all. See, e.g., §§ 503(b)(3)(B) and (C).
In sum, we conclude that, if the substantial

contribution test is met, expenses incurred by a creditor prior

to the filing of a chapter 11 petition, or while a chapter 11

case is pending, are recoverable pursuant to § 503(b)(3)(D).

Expenses incurred after a chapter 11 case is converted to one
under chapter 7, however, are not recoverable pursuant to this

provision.

IV.

Applying the above analysis to the case at hand, we

hold that the district court erred when it found that pre-

petition expenses are not covered by § 503(b)(3)(D). We also

conclude that there is record support for the bankruptcy court's

factual finding that Scott's efforts, both before the chapter 11

petition was filed and during the time the case was in chapter

11, benefitted the estate during the pendency of the chapter 11

proceeding. As the bankruptcy court explained, Scott's efforts

against Copple and Mechem were "critical to the Court in making

an immediate determination to appoint a Trustee and critical to

the Trustee in making a prompt investigation and report to the

Court."

As we have indicated, however, a determination that a

benefit was conferred does not end the inquiry as to whether

there was a "substantial contribution" within the meaning of

§503(b)(3)(D). A creditor should be presumed to be acting in his

or her own interest unless the court is able to find that his or

her actions were designed to benefit others who would foreseeably

be interested in the estate. In the absence of such a finding,

there can be no award of expenses even though there may have been

an incidental benefit to the chapter 11 estate. Here, the

bankruptcy court made no such finding. There was evidence before

it tending to show that Scott incurred the reimbursed expense in
pursuit of his own interests. He appears to have incurred a

substantial portion of that expense, for example, in litigation

over control of Mechem initiated many months before a

reorganization was anticipated by anyone. If this be true, this

expense would not be reimbursable under § 503(b)(3)(D) even if

information disclosed in that litigation subsequently turned out

to be helpful to the trustee. On the other hand, there was

evidence from which the bankruptcy court could have concluded

that at least some of Scott's efforts were designed to benefit

the chapter 11 estate and its creditors.

The inquiry concerning the existence of a substantial

contribution is one of fact, and it is the bankruptcy court that

is in the best position to perform the necessary fact finding

task. Consol. Bancshares, Inc., 785 F.2d at 1253. Accordingly,

we will remand this case with instructions that the bankruptcy

court determine whether the efforts which Scott made prior to the

conversion of the chapter 11 proceeding made a substantial

contribution within the meaning of § 503(b)(3)(D).

The bankruptcy court also awarded Scott expenses that

he incurred after the case was converted to chapter 7.

Specifically, the court awarded Scott expenses associated with

his assistance to the trustee in the collection of assets for the

benefit of the creditors, and his role in setting up replacement

trusts for the investors. We have found, however, that

§§ 503(b)(3)(D) and (b)(4) do not authorize fee awards for

expenses incurred after a case is converted from one under

chapter 11 to one under chapter 7. Therefore, with regard to the
administrative expenses that Scott incurred after the conversion

of the case to chapter 7, we will affirm the district court's

decision to reverse the bankruptcy court's award.4

V.

We will reverse the order of the district court and

direct that the case be remanded to the bankruptcy court for

further proceedings consistent with this opinion.5

4
The Lebrons argue, and the district court agreed, that it was an
abuse of discretion by the bankruptcy court to award Scott any
administrative expenses because Scott was an incorporator and
insider in the company that committed the fraud, and, therefore,
it would be inequitable to prioritize his claims over the claims
of the other, less involved, creditors. We reject this argument,
however, because there is no evidence that Scott was at all
involved in the fraud.
5
Scott also asks us to uphold the bankruptcy court's award to him
on an alternative theory. The theory rests upon a passing
comment of the bankruptcy court: "Certainly, if Scott were
entitled only to post-petition fees and expenses, he would be
entitled to a fee enhancement on the basis of the post-petition
fees in an amount equivalent to his pre-petition fees." B.Op.
10. We decline to reinstate the award to Scott on this theory
for several reasons. First, Scott would not be entitled to an
enhancement in connection with post-petition fees which he
incurred in pursuit of his own interest with only an incidental
benefit being bestowed on the estate. Second, even assuming an
enhancement is appropriate in some circumstances under
§§ 503(b)(3)(D) and (b)(4), we perceive no rational basis for an
enhancement of post-petition fees measured by the amount of pre-
petition fees incurred. Without the benefit of some further
explanation of the bankruptcy court's thinking, this passing
observation appears far too arbitrary to be sustainable. Finally,
we understand the purpose of subsection (b)(4) to be to limit
reimbursement of a creditor for legal and accounting expenses to
an amount determined by the court to be reasonable after
considering the factors designated therein. We do not read
subsection (b)(4) to authorize a payment to a creditor in excess
of the amount he or she was required to pay for those services.