InRe:Specker Mtr v. ( 2004 )

NOT RECOMMENDED FOR FULL-TEXT PUBLICATION
File Name: 04a0172n.06
Filed: December 17, 2004
No. 03-1893
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
SPECKER MOTOR SALES CO., )
)
Respondent-Appellant, )
)
v. ) On Appeal from the United States
) District Court for the Western
SAIL EISEN, UNITED STATES TRUSTEE, ) District of Michigan
)
Petitioner-Appellee. )
Before: Boggs, Chief Judge; Gilman, Circuit Judge; and Weber, Senior District Judge*
PER CURIAM. Donald Bays appeals from the district court’s order requiring him to disgorge
the portion of his retainer in excess of his pro rata share of the Specker Motor Sales Company
bankruptcy estate. Bays argues that the district court erred in finding that disgorgement is
mandatory when necessary to effectuate a pro rata distribution of the estate’s assets. Because we
conclude that such disgorgement is mandatory, we affirm the district court.
I
Specker Motor Sales, Inc., entered into Chapter 11 bankruptcy on March 18, 1997. On April
21, 1997, the bankruptcy court authorized Specker Motors to employ Donald Bays as its Chapter
*
The Honorable Herman J. Weber, Senior United States District Judge for the Southern
District of Ohio, sitting by designation.
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Specker Motors v. Eisen
11 counsel. At that time, Bays was paid a $10,000 retainer.
In August 1997, the United States Trustee filed a motion requesting that Specker Motors be
converted to Chapter 7 liquidation. The Trustee noted that Specker Motors had auctioned off all its
assets, failed to file required reports, and failed to make required payments. The motion was granted
on September 24, 1997. On October 9, 2001, Bays submitted his final request for fees. On February
4, 2002, the bankruptcy court approved Bays’s final application for total fees in the amount of
$17,343.10. The court permitted him to keep the $10,000 retainer as interim compensation.
Upon final liquidation, the bankruptcy court determined there were five administrative
claimants. Unfortunately for these claimants, the estate’s assets were insufficient to cover even the
administrative claims. Therefore, as provided by statute, the court divided Specker Motor’s
remaining assets pro rata amongst the five claimants. The administrative claims totaled
$204,799.74, far more than the $11,494.67 remaining in the estate. Bays’s pro rata share was only
$973.41. The order thus required Bays to disgorge $9,026.59 of the original $10,000 retainer.
Bays contested the disgorgement. On February 26, 2003, his objections were denied and he
was ordered to disgorge by the bankruptcy court. The court found that the plain language of 11
U.S.C. § 726(b) mandates disgorgement when necessary to achieve pro rata distribution among
similarly situated claimants. The district court affirmed, finding that “mandatory disgorgement is
the only reasonable and logical result if 11 U.S.C. § 726(b) is to be given any effect.” This timely
appeal followed.
II
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Specker Motors v. Eisen
We must first consider a jurisdictional issue brought to our attention by the government, but
not raised by either court below. Bays was not representing Specker Motors at any stage of this
bankruptcy proceeding. Specker Motors entered Chapter 7 bankruptcy in August 1997, and from
that point forward could only be represented by its Chapter 7 trustee – presently Sail Eisen. See
Spenlinhaur v. O’Donnell, 261 F.3d 113, 118 (1st Cir. 2001). Bays has standing to bring suit on his
own behalf, but he failed to name himself as a party at any point. Needless to say, the deadline for
naming himself as a party on the Notice of Appeal has long passed.
Nonetheless, the government has acknowledged that it was at all times aware that Bays was
the opposing party, and we therefore retain jurisdiction. A federal appeals court can exercise
jurisdiction over an unnamed party in a particular case only if it finds that the “functional
equivalent” of the proper party has been named. Torres v. Oakland Scavenger Co., 487 U.S. 312,
312 (1988). We have said that the functional equivalent test is satisfied when the litigant’s acts give
the appellee notice of the litigant’s intent to seek appellate review. Mattingly v. Farmers State Bank,
153 F.3d 336, 337 (6th Cir. 1998). The government concedes that it was subjectively aware at every
step of litigation that Bays was the opposing party. Such awareness constitutes the notice sufficient
to satisfy the functional equivalent test. It is therefore proper for this court to exercise jurisdiction
over this appeal.
III
The sole issue in this case is one of statutory interpretation; there are no disputed facts. We
review de novo the bankruptcy court’s conclusions of law and also accord no deference to the
district court’s decision. In re Hurtado, 342 F.3d 528, 531 (6th Cir. 2003).
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11 U.S.C. § 726(b) plainly mandates pro rata distribution of assets among creditors in the
same statutory class. It reads, in pertinent part:
Payment on claims of a kind specified in paragraph (1), (2), (3), (4), (5), (6), (7), or (8) of
section 507(a) of this title, or in paragraph (2), (3), (4), or (5) of subsection (a) of this
section, shall be made pro rata among claims of the kind specified in each such particular
paragraph.
11 U.S.C. § 726(b) (emphasis added). The use of the word “shall” with the pro rata requirement in
§ 726(b) indicates that such distribution is not discretionary. 11 U.S.C. § 507(a), which is
referenced in § 726(b), establishes a hierarchy of creditors, describing the order in which they may
lay claim to the assets of the bankrupt estate. At the top of this hierarchy are “administrative
claimants,” whose claims are “administrative expenses allowed under § 503(b) of this title, and any
fees and charges assessed against the estate under chapter 123 of title 28.” Ibid. The five creditors
in this case authorized by the bankruptcy court to receive a pro rata share of the Specker Motors
estate have administrative claims as defined in § 507(a).1 Bays is one of these five, and, thus, under
the statutory scheme Bays is similarly situated to the other four creditors. Each of these creditors
must therefore receive a pro rata share of the estate by the plain terms of § 726(b).
It is undisputed that, upon Chapter 7 dissolution, each of these administrative claimants
receives only a pro rata share of the estate’s remaining assets. Bays, however, argues that the
1
Bays’s fees are authorized under § 503(b), specifically as “compensation and
reimbursement awarded under § 330(a) of this title.”
11 U.S.C. § 330(a)(1) permits “(A) reasonable compensation for actual, necessary
services rendered by the trustee, examiner, professional person, or attorney and by any
paraprofessional person employed by any such person; and (B) reimbursement for actual,
necessary expenses.”
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Specker Motors v. Eisen
$10,000 retainer already paid to him should not be subject to this mandatory pro rata distribution
because the money has already been paid out of the estate. We must therefore consider whether the
retainer remains within the scope of mandatory pro rata distribution.
We conclude that the $10,000 of interim compensation that Bays was authorized to keep on
February 4, 2002, was always subject to disgorgement.2 Interim compensation is subject to re-
examination and adjustment. In re Callister, 673 F.2d 305 (10th Cir. 1982); Matz v. Hoseman, 197
B.R. 635, 639-40 (Bankr. N.D. Ill. 1996). This includes retainers, which are held in trust for the
estate, and remain the property of the estate. In re Downs, 103 F.3d 472, 478 (6th Cir. 1996). As
discussed above, interim compensation is payment for professional services authorized by § 330(a),
and § 330(a) fees are administrative claims. Bays’s claim, like other approved administrative claims
on the estate, at all times remained subject to the statutory pro rata distribution scheme in § 726(b).
Bays relies on United States v. Schottenstein, Zox, & Dunn (In re Unitcast), 219 B.R. 741(B.A.P. 6th Cir. 1998).3 The Unitcast court found that “nothing in § 726(b) . . . compels trustees of
2
Interim compensation for professionals is authorized by 11 U.S.C.A. § 331:
A trustee, an examiner, a debtor's attorney, or any professional person employed under
section 327 or 1103 of this title may apply to the court not more than once every 120
days after an order for relief in a case under this title, or more often if the court permits,
for such compensation for services rendered before the date of such an application or
reimbursement for expenses incurred before such date as is provided under section 330 of
this title. After notice and a hearing, the court may allow and disburse to such applicant
such compensation or reimbursement.
3
Unitcast is the opinion of a Bankruptcy Appellate Panel, which is equivalent to review
by a district court and is therefore non-precedential for this court. 28 U.S.C. § 158(b)(1); In re
Robinson, 326 F.3d 767, 770-71 (6th Cir. 2003).
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Specker Motors v. Eisen
administratively insolvent estates to reach back through the prior administrative periods(s) to recover
(only) payments to professionals, that disgorgement then transforms into (unpayable) ‘administrative
expenses.’” Id. at 753. It further noted that to permit such disgorgement would “subordinate”
professionals when an estate’s funds are insufficient to cover administrative costs. Ibid. The court
concluded that disgorgement to achieve a pro rata distribution was at the sound discretion of the
bankruptcy court. Ibid. See also In re Kids Creek Partners, L.P., 220 B.R. 963, 978 (Bankr. N.D.
Ill. 1998) (holding that disgorgement to achieve pro rata distribution is at the discretion of the
bankruptcy court); In re Anolik, 207 B.R. 34, 39 (Bankr. D. Mass. 1997) (same). Bays urges us to
adopt Unitcast.
We think that the courts below in this case, and most courts that have addressed the issue,
were correct to find the Unitcast view unpersuasive. See, e.g., Matz, 197 B.R. at 640-41 (“[C]ourts
have uniformly permitted trustees and creditors to seek the return of funds paid to professionals
employed in the bankruptcy proceeding . . . . To hold otherwise would be to ignore the plain
language of § 726(b) and to unjustly award certain administrative claims of professionals a
‘superpriority’ status that is not mandated by the Code.”) (citations omitted); In re Lochmiller
Industries, Inc., 178 B.R. 241, (Bankr. S.D. Cal. 1995) (collecting cases and stating that, in 1995, it
could find no case that did not order disgorgement of interim compensation when necessary to
achieve pro rata distribution among equally situated creditors); In re Kingston Turf Farms, Inc., 176
B.R. 308, 310 (Bankr. D.R.I. 1995) (“[D]isgorgement is required as a matter of law, just to adhere
to the mandatory payment scheme of the Code, i.e., to ensure that all creditors of the same class share
[pro rata] in the available pool of funds.”).
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Unitcast’s emphasis on the harshness of disgorgement and its effect of subordinating
professionals, 219 B.R. at 753-54, seems misplaced. It is true that only professionals can be asked
to disgorge interim compensation, but that is because only professionals can receive interim
compensation under § 331(a). Indeed, failure to order disgorgement gives interim compensation
superpriority. The Unitcast court seems to imply as much, when it stated that disgorgement
“transforms” interim compensation into “administrative expenses” that will be unpayable. 219 B.R.
at 753. This implies, of course, that interim compensation to professionals is not an administrative
expense. The Unitcast decision implicitly creates a super-category, above the hierarchy in § 507(a),
for interim compensation paid to professionals under § 331.4 There is no statutory basis for such a
super-category. Quite the opposite; fees to professionals can be paid only under § 330(a)(1) and
those are explicitly categorized as administrative expenses in § 503(b). Lamie v. United States
Trustee, 124 S. Ct. 1023, 1030-32 (2004) (finding that debtor’s attorney may be compensated only
through the statutory authorization in § 330(a)(1)). Disgorgement does not “transform” interim
compensation into an administrative expense, because interim compensation is never anything but
an administrative expense.
Bays also raises a number of arguments of a public policy nature – he describes it as a “parade
of horribles” – arguing that debtor’s counsel should not be treated as situated similarly to the other
administrative claimants. For instance, Bays argues that he alone is in a fiduciary relationship with
4
The Unitcast view has another strange consequence. A professional who requested and
received interim compensation under § 331 would benefit from the super-category, and could be
permitted to keep fees in excess of her pro rata share. But that same professional, if she never
received interim compensation and instead submitted her fees to the estate at the time it was
dissolved, would receive only her pro rata share.
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Specker Motors v. Eisen
the estate and has a special ethical relationship with the estate, which would be undermined by equal
treatment or uncertainty of payment. He also argues that placing debtor’s counsel on equal footing
with other administrative claimants burdens the bankruptcy court with both “lengthy and complicated
hearings” necessary to decide who is equally situated with debtor’s counsel and the need to “reel in”
moneys already disbursed.
These arguments are without merit. Although we, like the district court, are not persuaded,
we need not reach the merits of these arguments because the statute is not ambiguous. “Equality of
distribution among creditors is a central policy of the Bankruptcy Code. According to that policy,
creditors of equal priority should receive pro rata shares of the debtor's property.” Begier v. Internal
Revenue Service, 496 U.S. 53, 58 (1990). Equality of distribution would be vitiated if one equally
situated administrative claimant – Bays – received more than his pro rata share. It is understandable
that this conclusion dismays Bays. He ably provided his services, and now, through no fault of his
own, is denied all but a sliver of compensation. But his position is no different from that of anyone
who provides services or credit to a bankrupt firm. Indeed, as an administrative claimant, his position
is better than most. As the district court stated, “counsel is a gambler in [bankruptcy] proceedings
like every other administrative creditor.”
Because we find that interim compensation must be disgorged when necessary to achieve pro
rata distribution of a Chapter 7 bankruptcy estate, we AFFIRM the district court.
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