Memorandum of Decision Re: Priority of Postpetition Court Costs
NORTHERN DISTRICT OF CALIFORNIA
On November 10, 1992, debtor Beyond Words Corporation filed a complaint for damages against Samna Corporation in district court. The complaint alleged breach of contract, breach of confidence, implied contract and fraud. The action was still pending on May 8, 1992, when Beyond Words filed its Chapter 11 petition. The bankruptcy was converted to Chapter 7 on August 6, 1993, with the action still pending. Pursuant to FRBP 6009, the Chapter 7 trustee elected to pursue the litigation. In July, 1994, the court denied Samna's motion that the trustee be required a bond in order to be allowed to continue to prosecute the action. The court denied the motion for three reasons, one of which was that an improper priority would be created be requiring a bond. The court cited as support for this proposition In re Hemingway Transport, Inc., 954 F.2d 1, 5 (1st Cir.1992). Samna appealed the denial of the bond. The district court affirmed the decision. However, in its written decision, relying on In re Madden, 185 B.R. 815 (9th Cir.BAP 1995), the district court expressed the opinion that Samna would in fact be entitled to priority for its costs of suit if it prevailed. The date of the district court decision was February 23, 1996. On March 24, 1998, the Court of Appeals issued its decision in In re Abercrombie, 139 F.3d 755 (9th Cir. 1998). In that decision, the court expressly approved Hemingway Transport and disapproved Madden. 139 F.3d at 759. Samna eventually prevailed in the litigation, and was awarded $125,210.49 in costs. Its motion for an allowed administrative priority claim pursuant to section 503(b)(1)(A) of the Bankruptcy Code is now before the court. Samna makes two arguments in support of its motion: that the district court decision consitutes the "law of the case" and mandated priority status for the costs, and that Abercrombie only applies to attorneys' fees, not other awarded costs. The court finds neither argument persuasive.
II. Law of the Case
The district court affirmed this court's ruling that Samna was not entitled to a bond. The law of this case is therefore that Samna is not entitled to a bond. The mere fact that the district court opined that one of the three reasons given by the court was incorrect does not rise to the level of law. That part of the opinion was not necessary to the court's decision, and was only dicta. Dicta does not create the law of the case. Rebel Oil Co., Inc., v. Atlantic Richfield Co., 146 F.3d 1088, 1093 (9th Cir.1998); Milgard Tempering, Inc. v. Selas Corp., 902 F.2d 703, 715 (9th Cir. 1990). This court is obligated to follow the Court of Appeals decision in Abercrombie, and is not bound by the dicta in the district court decision issued two years before Abercrombie.
The court finds no support in Abercrombie for Samna's argument that it applies only to attorneys' fees and not costs. The court specifically noted that "[p]ostpetition contracts may qualify for administrative expense priority, but costs and expenses arising out of prepetition contracts are treated under the Bankruptcy Code as nonprioritized unsecured claims." 139 F.3d at 757 (emphasis added). There is no rational basis for treating attorneys' fees and other costs of litigation differently. Samna argues that the costs at issue were incurred after the bankruptcy, but so were a portion of the attorneys' fees. Abercrombie makes it clear that if the act which gave rise to the litigation occurred prepetition, then any costs associated with litigation over those acts is treated as a prepetition debt. 139 F.3d at 758-9.
IV. Trustee's Position
In his response, the trustee did not dispute Samna's claim to priority. The court suspects that this is due to an understandable misapprehension as to the state of the law, which has changed three times in this circuit from Hemmingway to Madden to Abercrombie. To the extent that the trustee understands the law but feels it is in the best interests of the estate not to opposes the motion, he should notify all of the creditors of his intent to abandon any defenses to the motion pursuant to FRBP 6007 or, if he intends to compromise part of the defense, FRBP 9019.
Abercrombie applies to costs of litigation as well as attorney's fees. Dicta in the district court decision, rendered before Abercrombie, does not compel the court to ignore Abercrombie. Accordingly, Samna is not entitled to an administrative priority claim. The court will therefore deny Samna's motion, without prejudice to the trustee's right to abandon or compromise. Counsel for the trustee shall submit an appropriate form of order forthwith.
Dated: March 12, 1999 ____________________________ Alan Jaroslovsky United States Bankruptcy