Mediofactoring v. McDermott (In Re Connolly North America, LLC)

RECOMMENDED FOR FULL-TEXT PUBLICATION
Pursuant to Sixth Circuit I.O.P. 32.1(b)
File Name: 15a0234p.06
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
_________________
In re: CONNOLLY NORTH AMERICA, LLC, ┐
Debtor. │
│
__________________________________________ │No. 13-2489
MEDIOFACTORING; COFACE ARGENTINA, │
Plaintiffs-Appellants, │>
│
v. │
│
│
DANIEL M. MCDERMOTT, United States Trustee, │
Defendant-Appellee. │
┘
Appeal from the United States District Court
for the Eastern District of Michigan at Detroit.
No. 2:12-cv-14891—Gerald E. Rosen, Chief District Judge.
Argued: June 26, 2014
Decided and Filed: September 21, 2015
Before WHITE, DONALD, and O’MALLEY,* Circuit Judges.
_________________
COUNSEL
ARGUED: William M. Hannay, SCHIFF HARDIN, Chicago, Illinois, for Amicus Curiae.
Marc N. Swanson, MILLER, CANFIELD, PADDOCK & STONE, PLC, Detroit, Michigan, for
Appellants. Cameron M. Gulden, UNITED STATES DEPARTMENT OF JUSTICE, Chicago,
Illinois, for Appellee. ON BRIEF: William M. Hannay, SCHIFF HARDIN, Chicago, Illinois,
for Amicus Curiae. Marc N. Swanson, Michael H. Traison, Ronald A. Spinner, MILLER,
CANFIELD, PADDOCK & STONE, PLC, Detroit, Michigan, for Appellants. Cameron M.
Gulden, Sean Cowley, UNITED STATES DEPARTMENT OF JUSTICE, Chicago, Illinois, for
Appellee.
*
The Honorable Kathleen M. O’Malley, Circuit Judge for the United States Court of Appeals for the
Federal Circuit, sitting by designation.
1
No. 13-2489 Mediofactoring, et al. v. McDermott Page 2
DONALD, J., delivered the opinion of the court in which WHITE, J., joined.
O’MALLEY, J. (pp. 13–20), delivered a separate dissenting opinion.
_________________
OPINION
_________________
BERNICE BOUIE DONALD, Circuit Judge. In a case under Chapter 7 of the
1
Bankruptcy Code, three unsecured creditors successfully removed the bankruptcy trustee for
misfeasance. The successor trustee then commenced an adversary proceeding against his
predecessor, reaching a settlement that significantly increased the amount of funds available for
the § 541(a) bankruptcy estate and its creditors. Despite determining that they had contributed
substantially to achieving the settlement, the United States Bankruptcy Court for the Eastern
District of Michigan denied the subsequent application of two creditors, Mediofactoring and
Coface Argentina (collectively, “Coface”), for reimbursement of administrative expenses.2
According to the court, 11 U.S.C. § 503(b), which governs the allowance of administrative
expenses, does not authorize such reimbursement in a Chapter 7 case.
The United States District Court for the Eastern District of Michigan affirmed the
bankruptcy court’s conclusion, and Coface now appeals to this Court, supported by the successor
trustee as amicus curiae. For the reasons that follow, we REVERSE the district court’s
judgment and hold that administrative expenses are allowable in these circumstances under
§ 503(b) in a Chapter 7 case.
I.
A Chapter 7 petition was filed against Connolly North America, LLC (“Connolly”) in the
Bankruptcy Court in 2001.3 See In re Connolly N. Am., 376 B.R. 161, 164 (Bankr. E.D. Mich.
2007). In 2005, Mark H. Shapiro (“Shapiro”), who was then the bankruptcy trustee, initiated an
adversary proceeding. Id. at 165. In 2007, the bankruptcy court concluded that Shapiro and his
1
“Bankruptcy Code” refers to Title 11 of the United States Code.
2
The third creditor did not join in the application and is not a party to this appeal.
No. 13-2489 Mediofactoring, et al. v. McDermott Page 3
attorney had breached their discovery obligations due to gross negligence. Id. at 164-65. The
court therefore dismissed Shapiro’s claims with prejudice. Id. at 165.
Three of Connolly’s unsecured creditors, among them Coface, subsequently filed a
motion to remove Shapiro from the position of bankruptcy trustee. See In re Connolly N. Am.,
479 B.R. 719, 721 (Bankr. E.D. Mich. 2012). They prevailed, and Bruce Comly French
(“French”), Shapiro’s successor, then commenced an adversary proceeding against Shapiro, his
law firm, and his professional-liability insurer for damages. The parties reached a court-
approved settlement in 2012, and the bankruptcy court recognized “that at least some of the work
that Coface paid its attorneys to do in this case substantially benefitted the bankruptcy estate and
the unsecured creditors, and contributed greatly to there being a significant increase [in] the
amount of funds that the unsecured creditors w[ould] receive.” In re Connolly N. Am., 479 B.R.
at 722.
Consequently, Coface applied for reimbursement of $164,336.28 in attorney fees and
costs “under the general authority to allow ‘administrative expenses’ . . . in the opening clause of
[11 U.S.C.] § 503(b).”4 Id. at 720. The U.S. trustee opposed Coface’s application, and the
bankruptcy court denied it, concluding that § 503(b) does not authorize the requested
reimbursement. In re Connolly N. Am., 479 B.R. at 723. As the bankruptcy court saw the
matter, Congress’s failure to extend § 503(b)’s express provision for reimbursement for a
creditor that makes “a substantial contribution in a case under chapter 9 or 11 [of the Bankruptcy
Code],” § 503(b)(3)(D), to a creditor making such a contribution in a case under Chapter 7
reflected “a Congressional intent” to deny reimbursement in Chapter 7 cases.5 In re Connolly N.
Am., 479 B.R. at 723.
3
The Bankruptcy Code provides for five different kinds of bankruptcy cases. One of these arises under
Chapter 7, which enables individuals to discharge certain debts that they cannot afford in exchange for surrendering
certain non-exempt assets. See 11 U.S.C. § 701, et seq. Chapter 7 only applies to individuals (or proprietorships); it
does not apply to corporations, partnerships, LLCs, or other legal entities. 11 U.S.C. § 727(a).
4
Section 503(a) authorizes such applications.
5
See supra note 3. Chapter 9 provides for municipal reorganizations, see 11 U.S.C. § 901, et seq., and
Chapter 11 allows for reorganizations and liquidations of corporations, partnerships, LLCs, and individuals, see id.
§ 1101, et seq.
No. 13-2489 Mediofactoring, et al. v. McDermott Page 4
Coface then appealed to the district court, which agreed with the bankruptcy court.
According to the district court, Coface’s “proposed reading of § 503(b) . . . runs afoul of the
‘well-established canon of statutory interpretation’ that ‘the specific governs the general.’” In re
Connolly N. Am., 498 B.R. 772, 775 (E.D. Mich. Sept. 30, 2013) (quoting RadLAX Gateway
Hotel, LLC v. Amalgamated Bank, 132 S. Ct. 2065, 2070-71 (2012)). Additionally, the district
court explained, “[t]he authority to address any inequities which may be present in the
application of the plain meaning rule to § 503(b) is vested in Congress, not the courts.” Id. at
*12 (quotation omitted) (alteration in original).
This timely appeal followed, and we allowed French to participate in the appeal as
amicus curiae in support of Coface.
II.
A.
When we consider an appeal that originated in bankruptcy court, “our review process is
slightly different from our normal standard of review[.]” Barlow v. M.J. Waterman & Assocs.
(In re M.J. Waterman & Assocs.), 227 F.3d 604, 607 (6th Cir. 2000). “[W]e directly review the
bankruptcy court’s decision rather than the district court’s review of the bankruptcy court’s
decision,” id., recognizing that we are “in as good a position to review the bankruptcy court’s
decision as is the district court,” XL / Datacomp v. Wilson (In re Omegas Group), 16 F.3d 1443,
1447 (6th Cir. 1994) (citation and internal quotation marks omitted). We examine the
bankruptcy court’s findings of fact for clear error and consider its conclusions of law de novo.
Zingale v. Rabin (In re Singale), 693 F.3d 704, 707 (6th Cir. 2012) (citing Chase Manhattan
Mortg. Corp. v. Shapiro (In re Lee), 530 F.3d 458, 463 (6th Cir. 2008)). At issue in this appeal
is a single conclusion of law: the bankruptcy court’s statutory construction of § 503(b)(3)(D) as
a per-se bar to reimbursement of the instant administrative expenses under § 503(b) in this
Chapter 7 proceeding. We therefore apply the de novo standard of review.
B.
We begin with principles. The first is the “overriding consideration that equitable
principles govern the exercise of bankruptcy jurisdiction[,]” highlighted by the Supreme Court in
No. 13-2489 Mediofactoring, et al. v. McDermott Page 5
Bank of Marin v. England, 385 U.S. 99, 103 (1966); see also Green v. Green (In re Green),
986 F.2d 145, 150 (6th Cir. 1993). Bankruptcy courts are thus “specialized court[s] of equity.”
Curtis v. Loether, 415 U.S. 189, 195 (1974). And although their equitable powers “are not
unlimited,” their decisions are unimpeachable so long as these powers are “‘exercised within the
confines of the Bankruptcy Code.’” Architectural Bldg. Components v. McClarty (In re
Foremost Mfg. Co.), 137 F.3d 919, 924 (6th Cir. 1998) (quoting In re Omegas Group, 16 F.3d at
1453).
The second principle is that statutory language is the keystone on which all other analysis
relies. Thus, “[t]he task of resolving the dispute over the meaning of [the Bankruptcy Code]
begins where all such inquiries must begin: with the language of the statute itself.” United States
v. Ron Pair Enters., Inc., 489 U.S. 235, 241 (1989). If the language is clear, we need not look
further because Congress “says in a statute what it means and means in a statute what is says.”
Hartford Underwriters Ins. Co. v. Union Planters Banks, N.A., 530 U.S. 1, 6 (2000); see also
Ron Pair, 489 U.S. at 241. Consequently, we have checked the bankruptcy court’s exercise of
its equitable powers where that exercise contradicts the plain, unambiguous meaning of the
Bankruptcy Code. See, e.g., In re Foremost Mfg. Co., 137 F.3d at 923 (“We prefer this ‘plain
meaning’ approach for the simple reason that [the provision of the Bankruptcy Code in question]
is unambiguous.”).
With these key principles in mind, we turn to the case at bar. Where, as here,
reimbursement of administrative expenses properly follows from the totality of the pertinent
facts, interpretation of the statutory language, and relevant equitable considerations, we hold that
§ 503(b) allows for reimbursement in Chapter 7 cases.
C.
The text of the Bankruptcy Code supports this view. Section 503(b) states that
administrative expenses may be awarded regarding nine categories of claims that it expressly
deems reimbursable. One such category, set out in § 503(b)(3)(D), authorizes reimbursement for
creditors who have made “substantial contribution[s]” in cases under Chapters 9 and 11 of the
Bankruptcy Code. However, there is no similar express statutory provision for creditors in
Chapter 7 cases:
No. 13-2489 Mediofactoring, et al. v. McDermott Page 6
(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—
(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.
11 U.S.C. § 503(b)(3)(D) (emphasis added).
There is general agreement among the parties and courts that § 503(b) would allow for
reimbursement in the present case were it not for Congress’s supposed signaling of a contrary
intent in § 503(b)(3)(D). See, e.g., In re Connolly N. Am., 479 B.R. at 723 (“[T]he Court
concludes that no administrative expense may be allowed, based on the opening clause of
§ 503(b), for a creditor’s substantial contribution in a Chapter 7 case [because] the provision in
§ 503(b)(3)(D), expressly allowing an administrative expense for a creditor who makes a
substantial contribution in a Chapter 9 or Chapter 11 case, but not extending that to a Chapter 7
case, shows a Congressional intent not to extend administrative expense treatment to such a
creditor in a Chapter 7 case.”) (emphasis in original). The question, therefore, is whether the
inclusion of the “substantial contribution in a case under chapter 9 and 11” language in
subsection (b)(3)(D) negates the meaning of “including” in the introductory provision of
§ 503(b) and divests bankruptcy courts of the authority to allow reimbursement of administrative
expenses incurred by a Chapter 7 creditor who makes a substantial contribution to the debtor’s
estate. The bankruptcy court answered this question in the affirmative, holding that Coface’s
claim for reimbursement must fail because it arises out of a Chapter 7 case.
But the plain language of the Act does not compel this conclusion. Nowhere does the
Act say, “expenses incurred by a creditor in securing the removal of a Chapter 7 trustee are not
allowable”; or, “expenses incurred in making a substantial contribution in a case under Chapters
9 or 11, but not Chapter 7, may be allowed”; or, “only the enumerated expenses shall be
allowed.” Thus, courts addressing this issue, including the bankruptcy court and district court in
the present case, must rely on established canons of statutory construction to interpret § 503(b).
No. 13-2489 Mediofactoring, et al. v. McDermott Page 7
D.
Our jurisprudence instructs that claims for expenses under § 503(b) be strictly construed
because they “reduce the funds available for creditors and other claimants.” City of White Plains
v. A & S Galleria Real Estate, Inc. (In re Federated Dep’t Stores, Inc.), 270 F.3d 994, 1000 (6th
Cir. 2001) (citation omitted). There is, however, broad consensus that the categories listed in the
statute are not exhaustive. See, e.g., In re Al Copeland Enters., 991 F.2d 233, 239 (5th Cir.
1993); United States v. Ledlin (In re Mark Anthony Constr., Inc.), 886 F.2d 1101, 1106 (9th Cir.
1989); In re T.A. Brinkoetter & Sons, Inc., 467 B.R. 668, 670 (Bankr. C.D. Ill. 2012); Pergament
v. Maghazeh Family Trust (In re Maghazeh), 315 B.R. 650, 654 (Bankr. E.D.N.Y. 2004).
We have noted previously that the Bankruptcy Code itself encourages an expansive
reading of § 503(b). The statute explains in § 102(3) that the terms “‘includes’ and ‘including’
are not limiting[.]” See United States v. Flo-Lizer, Inc. (In re Flo-Lizer, Inc.), 916 F.2d 363, 365
(6th Cir. 1990). Consequently, we held that Congress’s failure to expressly designate a given
expense as allowable under § 503(b) does not mean that it is excluded. See In re Flo-Lizer, Inc.,
916 F.2d at 365 (“[T]he failure of Congress to expressly list interest as an administrative expense
[in a subsection of § 503(b)] does not mean that it cannot be an administrative expense.”); In re
George Worthington Co., 921 F.2d 626, 634 (6th Cir. 1990) (“Although we fail to find express
authority for the reimbursement of an official committee’s administrative expenses in the Code,
we believe it is implied in the overall scheme for reorganization and in the legislative history of
the Code and its amendments.”).
On the contrary, by using the term “including” in the opening lines of the subsection,
Congress built a mechanism into § 503(b) for bankruptcy courts to reimburse expenses not
specifically mentioned in § 503(b)’s subsections. The insertion of the term indicates that
Congress did not intend to provide an exhaustive list of allowable expenses. Rather, it appears
that Congress anticipated that bankruptcy courts would encounter a variety of administrative
expenses and circumstances warranting reimbursement, which it could then evaluate on a case-
by-case basis depending on the specific facts of the case, the benefit conferred upon the
bankruptcy estate and its creditors, and whether the expenses at issue were actual, necessary, and
reasonable.
No. 13-2489 Mediofactoring, et al. v. McDermott Page 8
To be sure, the examples in the subsections of § 503(b) are not meaningless. They
provide a contextual framework, describing obligations of the bankruptcy estate, such as wages
and taxes, and situations where the trustee, creditors, creditor committees, and others administer,
preserve, or augment the estate. Congress intended to provide guidance, and in doing so, it set
forth the more common administrative expenses intended to be allowed. It makes good sense
that in providing these examples, Congress would expressly mention Chapters 9 and 11 in the
context of creditor activity making a “substantial contribution,” but not Chapter 7. In both
Chapters 9 and 11, as a matter of course, a creditor will spend its own time and resources to
benefit the estate; however, in all but the most atypical Chapter 7 case (such as the instant case),
the U.S. trustee fulfills this role. See H.R. Rep. No. 95-595 at 88 (1978) (reprinted in
1978 U.S.C.C.A.N. at 5787, 5963, 6049) (stating that the primary role of the U.S. trustees is to
serve as the “bankruptcy watch-dogs to prevent fraud, dishonesty, and overreaching in the
bankruptcy arena”).
The U.S. trustee is tasked with, among other things, “monitoring the progress of cases
under [the Bankruptcy Code] and taking such actions as the United States trustee deems to be
appropriate to prevent undue delay in such progress.” 28 U.S.C. § 586(a)(3)(G). If the U.S.
trustee determines that the acting trustee failed “to safeguard or to account for estate funds and
assets,” or believes that the acting trustee has delivered “[s]ubstandard performance of general
duties and case management,” the U.S. trustee may remove the acting trustee. 28 C.F.R.
§ 58.6(a)(1), (4). And if the U.S. trustee does not see cause to remove the acting trustee, a
creditor typically must only file a motion with the bankruptcy court to have the acting trustee’s
conduct reviewed. See 11 U.S.C. § 324 (providing the bankruptcy court with authority to
remove an acting trustee). Such a motion alerts the U.S. trustee of the issue and, in theory,
prompts an investigation. Thus, in a properly administered case under Chapter 7, a creditor will
not be in a position to “substantially contribute” to the estate by pursuing the acting trustee’s
removal and prosecuting a claim on behalf of the estate.
As this case demonstrates, however, the U.S. trustee is not a fail-proof safeguard, and in
certain circumstances, a Chapter 7 creditor may be compelled to utilize its own resources to
No. 13-2489 Mediofactoring, et al. v. McDermott Page 9
protect the estate as a whole.6 It is worth noting that, had the U.S. trustee fulfilled its duty as the
“bankruptcy watch-dog” here, there is no question that the estate would have paid the expenses
associated with removing the former trustee and prosecuting the malpractice action. See
11 U.S.C. §§ 326, 330. Thus, the construction favored by the bankruptcy court, the U.S. trustee,
and the dissent results in the disallowance of an administrative expense that would have been
allowed had the bankruptcy proceeded as intended by the Bankruptcy Code.
E.
The U.S. trustee, the bankruptcy court, and the dissent conclude that the clear language of
inclusion is trumped by implication, relying on the precept expressio unius est exclusio alterius
(“the expression of one thing excludes others”) and the Supreme Court’s endorsement of the
“‘well-established canon . . . of statutory construction that the specific governs the general’” in
RadLAX, 132 S. Ct. at 2070-71 (quoting Morales v. Trans World Airlines, Inc., 504 U.S. 374,
384 (1992)). They reason that a specific subsection of the Bankruptcy Code—like
§ 503(b)(3)(D)’s express authorization for administrative expenses in cases under Chapters 9 and
11—“[cannot] be ignored by relying on a general subsection” like § 503(b)’s prefatory decree
that “there shall be allowed administrative expenses.” But nothing about our interpretation
ignores the mandate in § 503(b)(3)(D). If anything, our approach reflects a more comprehensive
understanding of the general/specific canon and its implications in this context.
First, although RadLAX extolled the virtues of the general/specific canon, that case
concerned § 1129(b)(2)(A) of the Code, not § 503(b). See 132 S. Ct. at 2068. Neither the term
“include”—nor any variation thereof—is to be found in § 1129(b)(2)(A). Accordingly, applying
the Supreme Court’s reasoning in RadLAX to this case would disturb yet another “‘cardinal
principle of statutory construction,’” TRW Inc. v. Andrews, 534 U.S. 19, 31 (2001) (quoting
Duncan v. Walker, 533 U.S. 167, 174 (2001)): that, whenever possible, a statute should be
6
In this case, it appears that the unsecured creditors, acting trustee, and bankruptcy court all agree that
Coface’s role in removing the former trustee and prosecution of the malpractice suit substantially benefitted the
estate. See In re Connolly N. Am., LLC, 498 B.R. at 773–76. Further, it does not appear that any of these parties
objected to Coface’s motion for administrative expenses, and the U.S. trustee only takes issue with the motion
because of § 503(b)(3)(D)’s language purporting to limit reimbursement for “substantial contributions” to Chapters
9 and 11. Accordingly, without the language of § 503(b)(3)(D), it appears that Coface’s reimbursement would have
been authorized without objection. This does not resolve the issue before us, but it strongly suggests that Coface’s
actions are the type of conduct befitting reimbursement as an administrative expense.
No. 13-2489 Mediofactoring, et al. v. McDermott Page 10
construed so that “‘no clause, sentence, or word shall be superfluous, void, or insignificant,’” id.
Congress deliberately inserted “including” into the text of § 503(b) and expressly instructed, in
§ 102(3), that the term “[is] not limiting[.]”
Second, Congress was fully capable of stating that § 503(b) excludes reimbursement in
Chapter 7 cases if that is what it actually intended the statute to do. Cf. United States v. Murphy,
241 F.3d 447, 456 (6th Cir. 2001) (quoting United States v. Fuller, 86 F.3d 105, 106 (7th Cir.
1996) and United States v. Miranda, 986 F.2d 1283, 1284 (9th Cir. 1993)) (noting that Congress
did not restrict the “‘limitless delay provision’” of one statute with the time limits of another
“‘[a]lthough it was certainly capable of doing so’”). It did not. “‘We refuse, therefore, to find a
limitation where Congress did not expressly create one.’” Id. (quoting Miranda, 986 F.2d at
1284).
F.
Without doubt, balancing policy concerns in the bankruptcy arena is entrusted to
Congress. Our job as a court is simply to respect the intended meaning of the Bankruptcy Code
and enforce that meaning, leaving Congress to assess the outcome. But in discerning that
intended meaning, we properly look to the overall intent and purpose of the Code. Failing to
award administrative expenses to the rare Chapter 7 creditors who are forced by circumstances to
“tak[e] action that benefits the [bankruptcy] estate when no other party is willing or able to do
so,” would deter them from participating in bankruptcy cases and proceedings, which is plainly
inconsistent with the purposes of the Act. This militates in favor of interpreting § 503(b) to
embrace reimbursement of administrative expenses in cases such as this one and § 503(b)(3)(D)
as not divesting the bankruptcy courts of the authority to do so.
The U.S. trustee insists that Coface already has “reaped benefits” from participating in
Connolly’s Chapter 7 cases. “As the creditor holding roughly 50% of the amount of the
unsecured claims,” the U.S. trustee observes, “Coface will receive roughly 50% of the net
increase in distributions that are paid to unsecured creditors because of [its] work.” This is true,
but it is true of other allowable expenses, as well. And while it is also true that the size of
Coface’s claim was sufficient to prompt it to undertake the effort, this view discounts the
uncertainty involved. Coface had no way of knowing when it undertook to remove Shapiro from
No. 13-2489 Mediofactoring, et al. v. McDermott Page 11
the position of bankruptcy trustee that it ultimately would be successful; nor could it foresee that
French’s subsequent adversary action against Shapiro would result in valuable and meaningful
net gains to the bankruptcy estate. A creditor with a lesser claim may have simply walked away
and declined to take actions that benefited the estate as a whole. Further, although Coface
recovered a substantial portion of the settlement it made possible, it will nonetheless pay a share
of any administrative expense allowed because that expense will reduce the amount distributed
to all of the unsecured creditors pro rata.
Denying creditors reimbursement of administrative expenses in such circumstances not
only would disincentivize participation in the bankruptcy process, it also would impugn the
fundamental notion of bankruptcy as equitable relief.7 As neither Congress nor case law
compels such a result, we will not dictate it under the circumstances of this case. Instead, we
hold that § 503(b)(3)(D) of the Bankruptcy Code does not divest bankruptcy courts of authority
to allow reimbursement under § 503(b) of reasonable administrative expenses of creditors whose
efforts substantially benefit the bankruptcy estate and its creditors in a Chapter 7 proceeding.8
7
See supra pp. 4-5.
8
To be sure, and as the dissent points out, this interpretation is contrary to holdings of the Third Circuit and
the cases relying on its reasoning. See Lebron v. Mechum Fin. Inc., 27 F.3d 937, 945 (3d Cir. 1994) (“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 [such] expenses were intended to be reimbursable under those
provisions or not at all.”). We are also aware that, when analyzing a claim for derivative standing, we have stated in
dictum that:
[T]here is no textual support in the Code for drawing such a distinction between the
Chapter 7 and Chapter 11 contexts [for derivative standing]. Section 503(b)(3)(B) . . .
applies in both Chapter 7 and Chapter 11 proceedings. We do not believe that this was a
mere oversight, given that Congress expressly limited another subsection of § 503(b)(3)
to Chapters 9 and 11. See § 503(b)(3)(D).
In re Trailer Source, Inc., 555 F.3d 231, 243 (6th Cir. 2009). We conclude, however, that these cases are
wrongly decided.
No. 13-2489 Mediofactoring, et al. v. McDermott Page 12
III.
For these reasons, we REVERSE the judgment of the District Court and REMAND for
consideration of the merits of Coface’s request.9
9
We note, for purposes of clarity, that unlike a properly filed and executed pre-petition proof of claim, see
Fed. R. Bankr. 3002, applications for reimbursement of administrative expenses under § 503(b)—for which § 503(a)
provides—do not constitute prima facie evidence of the validity and amount of the administrative expenses at issue.
However, the bankruptcy court expressly concluded “that at least some of the work that Coface paid its attorneys to
do in this case substantially benefitted the bankruptcy estate and the unsecured creditors, and contributed greatly to
there being a significant increase [in] the amount of funds.” In re Connolly N. Am., 479 B.R. at 722. We leave it to
the bankruptcy court to evaluate the request in the first instance as it would any request under § 503(b).
No. 13-2489 Mediofactoring, et al. v. McDermott Page 13
_________________
DISSENT
_________________
KATHLEEN M. O’MALLEY, Circuit Judge, dissenting. The question presented in this
appeal is a purely legal one: does § 503(b) of the Bankruptcy Act of 1978 (“Bankruptcy Code”)
authorize a bankruptcy court to reimburse a creditor for costs incurred in providing a “substantial
contribution” to the administration of a bankruptcy estate and to classify that reimbursement as
an administrative expense? The bankruptcy court that considered Coface’s request for such a
reimbursement decided that the answer was no. On appeal, the district court agreed with that
conclusion. The majority reverses, concluding that § 503(b), though not expressly authorizing
the payments at issue, does not “check” a bankruptcy court’s equitable power to authorize the
administrative expense Coface requested. I respectfully disagree. For the reasons stated by the
district court, and those set forth below, I would affirm the bankruptcy court’s decision.
I.
I agree that bankruptcy courts are courts of equity and that equitable principles, therefore,
govern the exercise of bankruptcy jurisdiction. But, as the majority recognizes, the equitable
nature of a bankruptcy proceeding does not untether a bankruptcy court from the strictures of the
Bankruptcy Code itself. Indeed, the Supreme Court has made clear that the equitable power of a
bankruptcy court “can only be exercised within the confines of’ the Bankruptcy Code.” Law v.
Siegel, 134 S. Ct. 1188, 1194–95 (2014) (quoting Norwest Bank Worthington v. Ahlers, 485 U.S.
197, 206 (1988)); see also Raleigh v. Ill. Dep’t of Revenue, 530 U.S. 15, 24–25 (2000)
(“Bankruptcy courts are not authorized in the name of equity to make wholesale substitution of
underlying law . . . but are limited to what the Bankruptcy Code itself provides.”). This court has
also recognized that, “although the bankruptcy court has broad equitable powers under 11 U.S.C.
§ 105(a), those powers are not unlimited.” In re Foremost Mfg. Co., 137 F.3d 919, 924 (6th Cir.
1998). We must, accordingly, begin with the terms of the statute to determine whether Congress
has confined the reach of the bankruptcy court’s equitable powers in § 503(b).
No. 13-2489 Mediofactoring, et al. v. McDermott Page 14
Section 503(b) provides:
(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—
...
(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.
This court has made clear that “[c]laims for administrative expenses under § 503(b) are
[to be] strictly construed because priority claims reduce the funds available for creditors and
other claimants.” In re Federated Dep’t Stores, Inc., 270 F.3d 994, 1000 (6th Cir. 2001); see
also In re United Educ. & Software, No. CC-05-1067-MaMeP, 2005 WL 6960237, at *4 (B.A.P.
9th Cir. Oct. 7, 2005) (“Section 503(b) has been construed narrowly because administrative
claims are paid directly from the bankruptcy estate and reduce the funds available for creditors
and other claimants.”). Rather than strictly construe § 503(b), however, the majority gives it a
sweeping reach. It concludes that the use of the term “including” in § 503(b) allows bankruptcy
courts to classify substantial contribution expenses by a creditor in a Chapter 7 proceeding as an
administrative expense. It reaches this conclusion, moreover, despite the explicitly narrower
language in § 503(b)(3)(D)—expressly authorizing reimbursements in proceedings under
Chapters 9 and 11, but not mentioning Chapter 7. The majority believes that § 503(b)(3)(D)
would only limit a court’s ability to award substantial contribution administrative expenses in
Chapter 7 proceedings (and presumably Chapters 12 and 13 proceedings) if the subsection had
read “under Chapters 9 and 11 of this title, but not under Chapters 7, 12, and 13 thereof.”
Although it is true that Congress could have explicitly stated that § 503(b) excludes
substantial contribution claims in Chapter 7, it remains just as true that Congress only specified
that substantial contribution claims can be considered administrative expenses under Chapters
9 and 11. Generally, Congress “says in a statute what it means and means in a statute what is
says there.” Hartford Underwriters Ins. Co. v. Union Planters Banks, N.A., 530 U.S. 1, 6
No. 13-2489 Mediofactoring, et al. v. McDermott Page 15
(2000); see also In re Hackney, 351 B.R. 179, 201 (Bankr. N.D. Ala. 2006) (“Congress knew
how to create a ‘substantial contribution’ administrative expense for cases it believed were
appropriate for that benefit. It did that in section 503(b)(3)(D) for Chapter 9 and Chapter 11
cases. It could have done the same in Chapter 7 cases. It did not.”). Further, while Congress
chose to use “including” in § 503(b), Congress did not use “including” in § 503(b)(3), implying
that the list of “actual, necessary expenses” covered by that provision is exclusive. That
Congress used “including” language in some provisions of the Bankruptcy Code, but not others,
is meaningful. For example, Congress used “including” for the list of “actual, necessary costs
and expenses of preserving the estate” in § 503(b)(1)(A), but conspicuously chose not to include
similar language in § 503(b)(3).
The majority’s construction of § 503(b) would also read § 503(b)(3)(D) out of the statute,
violating a fundamental canon of statutory construction. See, e.g., Freytag v. Comm’r, 501 U.S.
868, 877 (1991) (stating that “[o]ur cases consistently have expressed ‘a deep reluctance to
interpret a statutory provision so as to render superfluous other provisions in the same
enactment” (quoting Penn. Dep’t of Public Welfare v. Davenport, 495 U.S. 552, 562 (1990))).
Under the majority’s interpretation of § 503(b), § 503(b)(3)(D) would be superfluous. If
substantial contributions in a Chapter 7 proceeding can be considered an administrative expense
under the broad “including” provision of § 503(b), then there is no reason why substantial
contributions in Chapter 9 and 11 proceedings could not also have been considered
administrative expenses under that same language, making § 503(b)(3)(D) unnecessary. The
majority fails to explain the purpose of § 503(b)(3)(D) under its interpretation of the statutory
scheme.
The majority also claims that Congress did not include Chapter 7 in § 503(b)(3)(D)
because it is only the rare case where a creditor would need to step in to benefit the estate in
Chapter 7 proceedings because the Trustee normally fulfills that role. Maj. Op. at 9. This
explanation seems to support the notion that Congress consciously chose to exclude Chapter 7
from § 503(b)(3)(D), however; if Congress felt substantial contribution reimbursements were not
needed in Chapter 7 cases we must respect that conclusion. Indeed, what little legislative history
there is regarding § 503(b)(3)(D) indicates that Congress intended its scope to be limited. Senate
No. 13-2489 Mediofactoring, et al. v. McDermott Page 16
Bill 236, one of the earliest versions of the Bankruptcy Act, provided that an administrative
claim “shall be allowed” for “compensation for services, representing a substantial contribution”
or an “expense, representing a substantial contribution” in Chapter 9 and 11 proceedings.1
S. 236, 94th Cong. § 4–403(a)(8),(9) (1975). House Bill 6, adopting the modern structure of
§ 503(b), continued to describe substantial contributions as administrative expenses in Chapters
9 and 11, but not Chapter 7. H.R. 6, 95th Cong. (1977). Later bills in the House, such as H.R.
8200, 95th Cong. (1978), and H.R. 7330, 95th Cong. (1977), and Senate, such as S. 2266, 95th
Cong. (1978) (amended), and S. 2266, 95th Cong. (1977), continued to provide for substantial
contributions as administrative expenses for only Chapter 9 and 11 proceedings. And, unlike in
In re Mark Anthony, 886 F.2d 1101 (9th Cir. 1989), or In re Flo-lizer, Inc., 916 F.2d 363
(6th Cir. 1990), upon which the majority relies, where Congress legislated against a background
common law rule providing for a particular type of administrative expense, neither Coface nor
the majority places the legislative history of § 503(b)(3)(D) in that same context. While the
House and Senate reports and hearings are silent on § 503(b)(3)(D), and Congressional silence
often has little interpretative value, Helvering v. Hallock, 309 U.S. 106, 121 (1940) (“[W]e walk
on quicksand when we try to find in the absence of corrective legislation a controlling legal
principle”), Congress’s decision to explicitly include Chapters 9 and 11 in § 503(b), while not
including Chapter 7 in even the earliest drafts of the Bankruptcy Act, further persuades me that
Congress did not intend for § 503(b) to cover substantial contributions in Chapter 7 proceedings.
That Congress may not have foreseen the unusual circumstances at issue here does not give us
the freedom to rewrite the statute in order to take account of them and reach an “equitable”
solution.
Indeed, other courts, including at least one panel from this court, that have considered the
issue seem to agree that § 503(b)(3)(D) excludes Chapter 7 proceedings. Our court, in In re
Trailer Source, Inc., 555 F.3d 231 (6th Cir. 2009) (analyzing the scope of § 503(b)(3)(B)), stated
that:
1
Of note, § 4–403(a)(8) referred to substantial contributions for a “chapter VII case” while § 4–403(a)(9)
referred to substantial contributions for a “chapter VIII case.” Chapter VII, titled “Reorganizations”, and Chapter
VIII, titled “Adjustment of Debts of Public Agencies and Instrumentalities and Political Subdivisions,” would
become Chapters 11 and 9, respectively, in later bills. See, e.g., S. 2266, 95th Cong. (1978); H.R. 7330, 95th Cong.
(1977).
No. 13-2489 Mediofactoring, et al. v. McDermott Page 17
[T]here is no textual support in the Code for drawing such a distinction between
the Chapter 7 and Chapter 11 contexts [for § 503(b)(3)(B)]. Section 503(b)(3)(B)
. . . applies in both Chapter 7 and Chapter 11 proceedings. We do not believe that
this was a mere oversight, given that Congress expressly limited another
subsection of § 503(b)(3) to Chapters 9 and 11. See § 503(b)(3)(D) . . . .
Id. at 243. Thus, we have previously recognized that Congress limited § 503(b)(3)(D) to only
Chapters 9 and 11. Other circuits and bankruptcy appellate panels—not to mention the vast
majority of district and bankruptcy courts2—have held expressly that substantial contributions in
a Chapter 7 proceeding are not administrative expenses under § 503(b). See, e.g., In re United
Educ. & Software, 2005 WL 6960237, at *5–7; In re Morad, 328 B.R. 264, 273 (B.A.P. 1st Cir.
2005); In re Lloyd Sec., Inc., 75 F.3d 853, 856–58 (3d Cir. 1996); Lebron v. Mechem Fin. Inc.,
27 F.3d 937, 945 (3d Cir. 1994) (“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).”).
2
At the time of this writing, 25 bankruptcy or district courts either denied recovery for substantial
contributions in a Chapter 7 case or recognized that § 503(b)(3)(D) is limited to only Chapters 9 and 11.
In re Peterson, 152 B.R. 612, 614 (D.S.D. 1993); In re Beck Rumbaugh Assocs. Inc., 84 B.R. 369, 371 (E.D. Pa.
1988); In re Kavlakian, No. 06-11280-JNF, 2013 WL 2422688, at *11 n.2 (Bankr. D. Mass. June 3, 2013); In re
Watson, 495 B.R. 88, 93–95 (Bankr. D. Col. 2013); In re Keeley and Grabanski Land P’ship, No. 10-31482, 2013
WL 4170414, at *11 (Bankr. D.N.D. Aug. 15, 2013); In re Engler, 500 B.R. 163, 174 (Bankr. M.D. Fla. 2013); In re
Schimmel, No. 11-10272, 2012 WL 6538953, at *1 (Bankr. N.D. Cal. Dec. 12, 2012); In re Lambert, No. 04-30394-
WRS, 2010 WL 3927067, at *1–2 (Bankr. M.D. Ala. Oct. 5, 2010); In re Courtney, 359 B.R. 883, 887 n.2 (Bankr.
E.D. Tenn. 2007); In re Hackney, 351 B.R. 179, 200–05 (Bankr. N.D. Ala. 2006); In re Harvey, No. 04-35576PM,
2006 WL 4481990, at *2 (Bankr. D. Md. Nov. 22, 2006) (denying reimbursement despite recognizing that
“fundamental fairness crie[d] out for” it because “§ 503(b)(3)(D) is limited to cases under Chapter 9 or 11”);
In re Hall, 373 B.R. 788, 800 (Bankr. S.D. Ga. 2006); In re Chavez, No. 05-29937-B-7, 2006 WL 3832858, at *3
(Bankr. E.D. Cal. Dec. 27, 2006); In re Dorado Marine, Inc., 332 B.R. 637, 640 (Bankr. M.D. Fla. 2005); In re
United Container LLC, 305 B.R. 120, 128 (Bankr. M.D. Fla. 2003); In re Blount, 276 B.R. 753, 757 (Bankr. M.D.
La. 2002); In re Schachter, 228 B.R. 359, 362 (Bankr. E.D. Pa. 1999) (acknowledging that § 503(b)(3)(D) is
inapplicable to Chapter 7 proceedings); In re Conty, 205 B.R. 329, 332 (Bankr. M.D. Fla. 1996); In re Alumni Hotel
Corp., 203 B.R. 624, 631 (Bankr. E.D. Mich. 1996); In re Francosky, 185 B.R. 550, 551 (Bankr. N.D. Ohio 1995);
In re Indian Motorcycle Apparel and Accessories Co., Inc., 174 B.R. 659, 663 n.2 (Bankr. D. Mass. 1994);
In re Trinsey, 115 B.R. 828, 836 (Bankr. E.D. Pa. 1990); In re Kahler, 84 B.R. 721, 723 (Bankr. D. Col. 1988);
In re Beck-Rumbaugh Assocs. Inc., 68 B.R. 882, 885–86 (Bankr. E.D. Pa. 1987), aff’d, 84 B.R. 369, 371 (E.D. Pa.
1988); In re Romano, 52 B.R. 590, 594 (Bankr. M.D. Fla. 1985). In contrast, only four bankruptcy courts permitted
recovery of substantial contributions as an administrative expense in a Chapter 7 case. In re Pappas, 277 B.R. 171,
176 (Bankr. E.D.N.Y. 2002); In re Lloyd Sec., Inc., 163 B.R. 242, 252–53 (Bankr. E.D. Pa. 1994), rev’d, 75 F.3d
853, 856–58 (3d Cir. 1996); In re Zedda, 169 B.R. 605, 607–08 (Bankr. E.D. La. 1994); In re Rumpza, 54 B.R. 107,
109 (Bankr. S.D. 1985).
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The majority cites to Sixth Circuit precedent, and that of our sister circuits, to support its
interpretation of § 503(b). None of those cases compel the conclusion the majority reaches,
however. The majority cites to, for example, In re Mark Anthony Construction, Inc., In re Al
Copeland Enterprises, Inc., 991 F.2d 233 (5th Cir. 1993), and In re Flo-Lizer, Inc., as evidence
that “there is broad consensus that the categories [§ 503(b)] sketches are not exhaustive.”3 Maj.
Op. at 6. I agree with the limited holding of these cases that Congress’s use of “including” in
§ 503(b) implies that §§ 503(b)(1)–(b)(9) do not constitute an exhaustive list of potential
administrative expenses. These cases, however, do not require—or even suggest—that we
recognize a substantial contribution claim in a Chapter 7 proceeding as an administrative
expense in light of § 503(b)(3)(D). For example, in In re Al Copeland Enterprises, the Fifth
Circuit determined that post-petition interest on sales taxes could be considered an administrative
expense under § 503(b)(2). 991 F.2d 238–39. But, unlike the present appeal, § 503(b) is entirely
silent regarding interest as an administrative expense, and does not contain a provision,
analogous to § 503(b)(3)(D), that explicitly defines the circumstances under which interest can
be considered an administrative expense. Id.
Similarly, both the Ninth Circuit and this court, in adopting the Ninth Circuit’s analysis,
have held that post-petition interest from unpaid federal employment taxes can be considered an
administrative expense. In Nicholas v. United States, 384 U.S. 678 (1966), the Supreme Court
held that interest could be treated as an administrative expense under a prior version of the
Bankruptcy Act. In re Mark Anthony Constr., 886 F.2d at 1104. The Ninth Circuit, in In re
Mark Anthony Construction, identified an early Senate bill for the modern Bankruptcy Act that
specifically included interest as an administrative expense under § 503(b), consistent with
Nicholas, though the later House version of the bill and the eventual compromise bill were silent
on the subject. Id. Given the use of the open-ended “including” language of § 503(b) and
Congress’s failure to expressly exclude interest from the reach of that language, the court held
that § 503(b) and its legislative history supported the continued application of the common law
rule of Nicholas that interest could be considered an administrative expense. Id. at 1106. The
3
Counsel for Coface has stated that In re Flo-lizer is the strongest case supporting their argument that
§ 503(b) permits categorizing substantial assistance claims under Chapter 7 as an administrative expense. Oral
Argument at 8:50, Mediofactoring v. McDermott, No. 13-2489 (6th Cir. 2014).
No. 13-2489 Mediofactoring, et al. v. McDermott Page 19
Ninth Circuit further noted that Congress explicitly included penalties for failure to pay taxes as
an administrative expense in § 503(b)(1)(C), and concluded that there was no reason to treat
interest and penalties differently. Id. at 1108. In In re Flo-Lizer, this court largely adopted the
Ninth Circuit’s approach, focusing on the “including” language in § 503(b), the legislative
history of the Bankruptcy Act, and the treatment of penalties in § 503(b)(1)(C), to hold that
interest could be considered an administrative expense under § 503(b) even if not expressly
mentioned. In re Flo-Lizer, Inc., 916 F.2d at 365–66.
These cases are distinguishable from the circumstances before us now: (1) Coface has
not identified any pre-Bankruptcy Act practice of granting administrative expense status to
creditor contributions in Chapter 7 proceedings; (2) nothing in the legislative history indicates
that either house of Congress believed substantial contribution claims in Chapter 7 proceedings
were appropriate; and (3) no provision of § 503(b) grants administrative expenses for costs
similar to substantial contributions in Chapter 7. Thus, the case law upon which the majority
relies does not actually support an interpretation of § 503(b) which would grant bankruptcy
courts the authority to award expenses for substantial contributions by a creditor in Chapter 7
proceedings.
II.
We should be hesitant, as an Article III court, to make a policy determination about the
appropriate scope of § 503(b) based solely on Congressional inaction. Congress explicitly stated
that substantial contributions can be considered an administrative expense in Chapter 9 and 11
proceedings. Congress has said nothing about Chapter 7. Although the majority reads much into
Congress’s use of “including” in § 503(b), Congress’s failure to include Chapter 7 in
§ 503(b)(3)(D) seems to be far more indicative of its intent, especially where Congress used the
term “including” in § 503(b)(1)(A) and did not do so in § 503(b)(3). To the extent the majority
relies on principles of equity, moreover, the equities actually cut both ways here. We must
consider the equities for all creditors, not just creditors like Coface who seek the higher priority
given to administrative expenses. While it is true that Coface’s contributions have benefitted the
bankruptcy estate, Coface is not the only creditor seeking recovery from the estate. Pursuant to
the majority’s decision to grant Coface administrative expense status for their contributions,
No. 13-2489 Mediofactoring, et al. v. McDermott Page 20
other creditors will be harmed, as administrative expenses receive one of the highest priority
statuses under § 507. The majority also highlights policy considerations that favor an expansive
reading of § 503(b), including promoting creditor participation in Chapter 7 proceedings and
rewarding Coface for taking action to remove Shapiro when it had “no way of knowing . . . that
it ultimately would be successful.” Maj. Op. at 12. Though Coface’s actions are commendable,
Coface will be compensated, as a party holding approximately 50% of the amount of the
unsecured claims, for its actions. And, as the Supreme Court has cautioned before with respect
to the Bankruptcy Code, it is the duty of Congress, and not the courts, to address any difficulties
or “improper incentives” that may arise from the application of the plain meaning of a Code
provision. Taylor v. Freeland & Kronz, 503 U.S. 638, 644–45 (1992) (stating that it is for
Congress to address any “improper incentives” that may come from the Supreme Court’s
interpretation of 11 U.S.C. § 522(l) as consistent with the language of the statute).
Considerations of equity and fairness simply do not favor Coface as strongly as the petitioners
and majority urge. As the only Congressional guidance we have on the interpretation of § 503(b)
appears in the apparent restrictions written into § 503(b)(3)(D), we should limit claims for
substantial contribution to the express language of § 503(b)(3)(D), and leave it to Congress to
expand that authority to Chapter 7 proceedings if it so desires.
While I respect the majority’s thoughtful analysis of this difficult issue, I ultimately must
disagree with it. Because the claimed costs accrued during a Chapter 7 case, and because
§ 503(b)(3)(D) does not permit such costs to be considered an administrative expense under the
appropriate limited construction of § 503(b), I believe that we should affirm the holdings of the
bankruptcy court and district court, and deny Coface’s application for administrative expenses
under § 503(b).