U.S. Trustee v. Fishback ( 1996 )

United States Court of Appeals,
Eleventh Circuit.
No. 95-2849.
In re GLADOS, INC., Debtor.
U.S. TRUSTEE, Plaintiff-Appellant,
v.
Jere M. FISHBACK and Lawrence S. Kleinfeld, Defendants-Appellees.
May 28, 1996.
Appeal from the United States District Court for the Middle
District of Florida. (No. 93-2905-CIV-T-23), Harvey E. Schlesinger,
Judge.
Before EDMONDSON and DUBINA, Circuit Judges, and LOGAN*, Senior
Circuit Judge.
DUBINA, Circuit Judge:
1
The United States Trustee ("UST") appeals the district
court's judgment affirming the bankruptcy court's judgment. The
bankruptcy court held that pursuant to 11 U.S.C. § 726(a)(5), a
trustee may receive interest on his or her compensation dating from
the trustee's appointment and that professionals other than the
trustee may receive interest on their fees dating from the
submission of their fee applications. Because we disagree with
both the bankruptcy court and the district court's conclusions, we
reverse the district court's judgment.
*
Honorable James K. Logan, Senior U.S. Circuit Judge for the
Tenth Circuit, sitting by designation.
1
The UST is an official of the United States Department of
Justice charged by statute with the duty to oversee and supervise
the administration of bankruptcy cases. 28 U.S.C. § 586(a). The
UST is expressly given standing under 11 U.S.C. § 307 to raise
and be heard on any issue under Title 11, except that the UST may
not file a reorganization plan under Chapter 11.
I. STATEMENT OF THE CASE
On September 30, 1983, Glados, Inc. (the "Debtor") filed a
voluntary petition for relief under Chapter 11 of the Bankruptcy
Code (the "Code"). The case was converted to Chapter 7 with the
bankruptcy court's approval on February 8, 1985. Lawrence S.
Kleinfeld (the "Trustee") was appointed as interim Chapter 7
trustee. At the time, the Debtor had no assets other than two
pending legal actions: (1) a claim in the United States District
Court for the Middle District of Florida against the Debtor's
insurance company to recover insurance proceeds resulting from the
destruction of the Debtor's business by fire; and (2) a claim
against the Debtor's former landlord for wrongful eviction. The
Trustee was substituted as plaintiff in the pending lawsuits and
sought to employ counsel. On September 9, 1985, the bankruptcy
court approved the Trustee's application to employ the law firm of
Kleinfeld & Fishback (hereinafter "Trustee's counsel") on a
contingency fee basis. Following six years of litigation, the
Trustee's counsel obtained favorable judgments in both lawsuits and
thus secured substantial litigation proceeds for the estate. The
insurance company appealed the judgment to this court and
ultimately to the United States Supreme Court. The judgment was
affirmed.
The Trustee's counsel filed a motion in the district court
seeking an award of attorneys' fees. On June 6, 1986, the district
court granted this motion and awarded the Trustee's counsel the sum
of $79,200. On March 14, 1988, the Trustee's counsel filed a
second motion for attorneys' fees for work performed at the
appellate level. On September 18, 1991, the Debtor's insurer paid
the estate $129,402.12, which represented the trial level fees plus
accrued post-judgment interest. The Trustee and the Debtor's
insurer compromised on a fee for the appellate work in the sum of
$80,000, and on January 23, 1992, the bankruptcy court approved
this compromise.
Following the liquidation of the estate's assets, all secured
and unsecured claims, including administrative expenses, were fully
paid, and a surplus remained. On July 21, 1992, the Trustee filed
a Preliminary Report of the Estate along with his application for
compensation. The Trustee's counsel filed their fee application
which included a request for the fees awarded in the insurance
litigation in addition to fees for other work performed on behalf
of the Trustee. The bankruptcy court then issued a Notice of
Preliminary Report of Estate Funds and Notice of Surplus Funds to
all creditors and parties in interest. This Notice advised all
creditors of the availability of surplus funds to pay additional
claims if filed. On September 29, 1992, the Debtor's counsel filed
their fee application. However, on February 16, 1993, the
bankruptcy court deferred ruling on the fee applications until it
had determined whether the estate contained sufficient funds for
the payment of fees.
On February 25, 1993, the bankruptcy court informed the
Trustee of the allowed amounts of all administrative expenses.2
2
The bankruptcy court awarded the Trustee $8,927.25 in fees
and $56.15 in expenses. The Trustee's counsel was awarded
$227,612.12 in fees and $1,515.02 in expenses. The Trustee's
counsel's compensation award consisted of $79,200 for the
district court litigation as well as $50,202.12 in judgment
Using this information, which included the compensation awards for
the Trustee and the Trustee's counsel as determined under § 330,
the Trustee prepared a proposed order allowing administrative
expenses, authorizing disbursements, and directing the payment of
dividends. The proposed order provided that following the full
payment of all claims, the estate would have surplus funds which
would be used to pay interest on the fees of the Trustee, the
Trustee's counsel, and the Debtor's counsel pursuant to §
726(a)(5). The UST objected to the proposed distribution solely
based on the allocation of surplus funds for interest. Billy Ray
Addison, the largest unsecured creditor, joined in the UST's
objection.
Following a hearing on the UST's objection, the bankruptcy
court entered an order on September 30, 1993. The bankruptcy
court's order allowed administrative fees and expenses to the
Trustee, the Trustee's counsel, and the Debtor's counsel. In
addition, the order provided for the payment in full of all
priority and unsecured claimants and allocated the remaining
$77,711.82 of surplus funds as interest on the administrative fees
and expenses. The bankruptcy court also concluded under §
726(a)(5) that interest on a trustee's fees accrues from the date
that the trustee is appointed and that interest on a non-trustee
professional's fees accrues from the date of the filing of the fee
application. Moreover, the bankruptcy court held that if other
litigation caused the professional to file a fee application with
interest on that award, $80,000 for the appellate work, and
$18,210 for the balance of services provided by the Trustee's
counsel.
another court, interest on those fees would accrue from the date
the professional filed the fee application with the other court.
The bankruptcy court advised using the federal judgment rate of
interest in effect on the date the Chapter 7 case was filed or, if
the case was originally filed under another chapter, the interest
rate on the date of conversion to Chapter 7. Consequently, the
bankruptcy court awarded the Trustee's counsel $73,400.68 in
interest, the Trustee $4,008.42 in interest, and the Debtor's
counsel $302.72 in interest. Such payments consumed the surplus.
The UST appealed to the district court, which affirmed the
bankruptcy court's order. The UST then perfected this appeal.
II. ISSUES
We address the following issues on appeal:
1. whether a trustee may, pursuant to 11 U.S.C. § 726(a)(5),
receive interest on his or her compensation in a case dating
from the trustee's initial appointment; and
2. whether professionals other than the trustee may, pursuant to 11
U.S.C. § 726(a)(5), receive interest on their compensation
dating from the professionals' submission of their fee
applications.
III. STANDARD OF REVIEW
Because the district court functions as an appellate court in
reviewing bankruptcy court decisions, this court is the second
appellate court to review bankruptcy court cases. Haas v. Internal
Revenue Service, 31 F.3d 1081, 1083 (11th Cir.1994), cert. denied,
--- U.S. ----, 115 S. Ct. 2578, 132 L. Ed. 2d 828 (1995). This court
reviews determinations of law, whether from the bankruptcy court or
the district court, de novo. Id. We review the bankruptcy court's
factual findings under the clearly erroneous standard of review.
Id.
IV. DISCUSSION
This case is novel in that rarely will a Chapter 7 case result
in assets that exceed the amount necessary to satisfy creditors and
administrative expenses. In the event of a surplus, the Code
allows for trustees and other professionals to receive interest on
their fees. This case revolves around the issue of when such
interest begins to accrue. The bankruptcy court and the district
court found that the Trustee is entitled to interest from the date
of his or her appointment and that the Trustee's counsel is
entitled to interest from the date of the filing of a fee
application. The UST argues that the Code and case law throughout
the country allow interest on trustee and other professional fees
to accrue only from the time of the court's fee award, and not from
the time of the appointment or the submission of an application.
A. Statutory Basis
Section 726 of the Code establishes the distribution system
governing a trustee's disbursement of funds at the close of a
Chapter 7 case. Subsection (a) describes the general priorities of
the different types of claims against the estate in paragraphs one
through four. Paragraph five provides for the payment of interest
on such claims. After all claims and any interest on such claims
have been paid, any remaining funds are distributed to the debtor
pursuant to paragraph six.
A complete understanding of interest paid pursuant to §
726(a)(5) necessarily involves a review of several additional
sections of the bankruptcy code. Section 726(a)(5) provides:
(a) Except as provided in section 510 of this title,
property of the estate shall be distributed—
(5) fifth, in payment of interest at the legal rate from
the date of the filing of the petition, on any claim paid
under paragraph (1), (2), (3), OR (4) of this subsection ...
Section 726(a)(5)'s reference to § 726(a)(1) results in a series of
references to various sections of the Code. First, § 726(a)(1)
provides:
(a) Except as provided in section 510 of this title,
property of the estate shall be distributed—
(1) first, in payment of claims of the kind specified in,
and in the order specified in, section 507 of this title, ...
Section 507 provides, in relevant part:
(a) The following expenses and claims have priority in
the following order:
(1) First, administrative expenses allowed under section
503(b) of this title, and any fees and charges assessed
against the estate under chapter 123 of title 28 ...
Section 503(b)(2) states:
(b) After notice and a hearing, there shall be allowed
administrative expenses, other than claims allowed under
section 502(f) of this title, including—
(2) compensation and reimbursement awarded under section
330(a) of this title.
Consequently, claims for compensation or reimbursement of expenses
are claims "of the kind specified in ... section 507" to the extent
that such claims are for "compensation and reimbursement awarded
under section 330(a)." Section 330(a) provides that after meeting
notice requirements, "the court may award to a trustee, an
examiner, a professional person employed under section 327 or 1103
... reasonable compensation for actual, necessary services rendered
... and reimbursement for actual, necessary expenses."
The problem with the district court's statutory analysis is
that it ends with § 726(a)(5)'s "any claim paid," thereby ignoring
the phrase in section 503(b)(2) that reads "compensation and
reimbursement awarded under section 330." Despite the long
statutory progression, courts addressing the issue of trustee and
professional interest on administrative expenses have faced a
dilemma:
Courts have recognized that administrative claims, including
attorneys' fees pursuant to 11 U.S.C. § 330(a), are entitled
to interest under § 726(a)(5) when there is a surplus in the
estate.... But, while determining that administrative claims
are entitled to interest, the courts have nevertheless been
faced with a quandary. Specifically, the courts are required
to pay interest under § 726(a)(5) "at the legal rate from the
date of the filing of the petition on any claim paid under ...
this subsection." However, professional compensation
allowable under § 330(a) often does not arise as a claim until
near or at the end of the case, when a court enters a fee
award.
In re Chiapetta, 159 B.R. 152, 159 (Bankr.E.D.Penn.1993) (citations
omitted). The appellees argue that the language of § 726(a)(5)
clearly provides that interest should be paid from the time of the
filing of the petition. However, the bankruptcy court and the
district court disagreed with this proposition and so limited
3
accrual to the time of appointment. The conflict inherent in a
literal reading of § 726(a)(5) is thoroughly explored in the case
law from around the country.
B. Case Law
The bankruptcy court and the district court failed to consider
sufficiently the existing case law. While the Eleventh Circuit has
not specifically addressed the issue presented in this case, the
3
The appellees have not filed any cross-appeals and in fact
ask that the district court's judgment be affirmed in all
respects. The appellees assert later in their brief that the
bankruptcy court and district court's holding with respect to
interest on professional fees was "a well-reasoned compromise."
Appellees' Br. at 17.
Ninth Circuit addressed it in Boldt v. Crake (In re Riverside-
Linden Inv. Co.), 945 F.2d 320 (9th Cir.1991). Multiple
jurisdictions have followed the decision in Riverside-Linden,
including Chief Bankruptcy Judge Paskay in In re Brown, 190 B.R.
689 (Bankr.M.D.Fla.1996).
In Riverside-Linden, the court addressed the issue of interest
on trustee's counsel fees and held that professionals are entitled
to interest on their fees from the time of the court's fee award
and not from the time of appointment. See Riverside-Linden, 945
F.2d at 324. The Ninth Circuit noted that a literal reading of §
726(a)(5) without reference to the remainder of the Code would be
illogical:
For claims existing prior to the filing of the bankruptcy
petition, a date-of-filing accrual date is appropriate and
mandated under the plain language of the statute.... For a
claim to Section 330(a) attorney's fees arising subsequent to
filing, however, a literal application of the statute makes
little sense; interest cannot accrue on fees for services
which have not yet been performed. See, e.g., Bob Jones Univ.
v. United States, 461 U.S. 574, 586, 103 S. Ct. 2017, 2025-
2026, 76 L. Ed. 2d 157 (1983) ("it is a well established canon
of statutory construction that a court should go beyond the
literal language of a statute if reliance on that language
would defeat the plain purpose of the statute")....
Id. at 323-24 (citation and internal quotation omitted). The Ninth
Circuit further concluded:
The provision which defines attorney's fees as a compensable
administrative expense, Section 503(b), refers to
"compensation and reimbursement awarded under section 330."
... It is not until the fees have been awarded by the
bankruptcy court pursuant to Section 330, therefore, that they
become an administrative expense entitling them to treatment
as a claim under Section 726(a)(5).
Id. at 324.
Riverside-Linden has been consistently followed in subsequent
decisions addressing interest on trustee and non-trustee
professional fees under § 726(a)(5). See, e.g., In re Chiapetta,
159 B.R. 152, 159-60 (Bankr.E.D.Penn.1993) (neither trustee nor
trustee's counsel entitled to interest until after the award of
fees at the close of the case); In re Motley, 150 B.R. 16, 18-20
(Bankr.E.D.Va.1992) (trustee not entitled to pre-award interest
under § 726(a)(5)); In re Commercial Consortium, 135 B.R. 120, 127
(Bankr.C.D.Cal.1991) (trustee's counsel may not receive pre-award
§ 726(a)(5) interest, but the court may award current rates as
compensation for delay). Furthermore, courts have held that
professionals employed on behalf of a bankruptcy estate are not
entitled to compensation or interest on this compensation until the
final fee awards are made under § 330. See In re Child World,
Inc., 185 B.R. 14 (Bankr.S.D.N.Y.1995); In re Caribou Partnership
III, 152 B.R. 733 (Bankr.N.D.Ind.1993).
Riverside-Linden was favorably cited and followed by Chief
Judge Paskay in In re Brown, in which the trustee sought to recover
interest from the date of his appointment and the trustee's counsel
sought interest from the date of his fee application. See Brown,
190 B.R. at 689. Chief Judge Paskay noted that neither the
bankruptcy court's decision in the present case (Glados ) nor its
appeal decision (Fishback ) were published and are therefore not
binding precedent. Id. at 690. As Chief Judge Paskay stated, "In
this Court's view, the District Court's analysis [in Fishback ] is
an oversimplification of the law." Id. The Court noted the
problems with a literal interpretation of § 726(a)(5):
A literal interpretation of § 726(a)(5) produces
uncontemplated results as to interest allowable to attorneys
and trustees, whose administrative expenses arise subsequent
to filing. For instance, if the attorney for the trustee is
not employed until two years into the administration of the
case it would, in effect, permit the attorney to earn interest
on those fees when he did not perform any work. Equally, the
trustee would be encouraged to delay the administration of the
estate to allow the accrual of interest in a surplus case.
Id. at 691.
Chief Judge Paskay also explained that the award of interest
to the trustee is contrary to the purpose of § 326(a), which sets
limits on the amount of trustee compensation based on the total
distribution made to creditors. Id. at 690. The bankruptcy court
noted that there is no mention of the accrual of interest in §
326(a). Id. In In re Motley, 150 B.R. 16, 20 (Bankr.E.D.Va.1992),
the bankruptcy court determined that interest was inappropriate
pursuant to the reasoning of Riverside-Linden and concluded that
the inconsistency between § 326(a) and § 726(a)(5) constitutes an
additional ground for denying interest to the trustee:
It appears to this Court that the formula fixing the § 326(a)
compensation for [the] trustee actually provides for the
trustee to benefit from interest earned without a court award
of fees. Section 326(a) calculates a trustee's fee based on
the distribution to creditors. Assets remaining in the estate
after payment of all claims allow for the payment of interest
in those claims under § 726(a)(5). If the trustee pays §
726(a)(5) interest on claims, ... the trustee earns a fee on
the interest paid on creditors' claims by virtue of the fee
formula of § 326(a). Then allowing [trustee] Ames' claim for
interest on the fees provided by § 326(a) would amount to two
bites of the apple and would result in a disincentive for
trustees to distribute assets in a timely manner. Under
[trustee] Ames['] reading of the Code and cases, a trustee
could delay final distribution, as was done in this
six-year-old case, allow the interest earned on assets
converted to cash to accumulate in escrow, earn a fee on the
distribution of those assets (which now include earned
interest) in satisfaction of claims, and as a part of his
compensation petition for interest on his fee under §
726(a)(5). In contrast to Ames' illogical, unjust, and
capricious scheme, the Code fairly provides for the trustee to
benefit from a commission earned from the payment of interest
on claims of creditors.4
Id. The purpose of a Chapter 7 case is to efficiently administer
the liquidation of the estate for the benefit of the creditors.
Providing an incentive for the trustee to delay the conclusion of
the case would thus be counterproductive.
The district court concluded that the Trustee's counsel could
collect interest on their fees from the date of the filing of a fee
application, because once the application is filed, there is
evidence of work performed thus giving rise to a claim. District
Court Order at 12. Arguing that Riverside-Linden and the UST
construe the term "claim" too narrowly, the district court cited
our opinion in In re St. Laurent, 991 F.2d 672 (11th Cir.1993) in
support of the proposition that the term "claim" should be
interpreted as broadly as possible. However, we conclude based on
the statutory analysis, case law, and common sense, that attorneys'
fees are not entitled to treatment as compensable claims until
compensation is awarded under § 330(a). See 11 U.S.C. § 503(b)(2);
Riverside-Linden, 945 F.2d at 324; In re Brown, 190 B.R. at 691;
Huisinga v. Craig & Nichols (In re Byrd), 151 B.R. 925 (D.S.D.1993)
(denial of pre-award interest to debtor's counsel); In re
Chiapetta, 159 B.R. at 159-60; In re Caribou Partnership III, 152
B.R. at 740-41 (denying debtor's counsel pre-award interest); In
re Commercial Consortium, 135 B.R. at 127.
4
The appellees argue that Motley is distinguishable from the
present case because the Motley court was influenced by the fact
that no interim fee applications were filed. In the Middle
District of Florida no interim fee applications are entertained
in Chapter 7 cases. We will discuss the effect of the Middle
District of Florida's practice regarding interim fee applications
infra.
Admittedly, plain language is preferable in statutory
construction, but as this court has held: "Rules of statutory
construction dictate that the plain meaning is conclusive, "except
in the "rare cases [in which] the literal application of a statute
will produce a result demonstrably at odds with the intent of its
drafters.' " In re Colortex Industries, Inc., 19 F.3d 1371, 1375
(11th Cir.1994) (quoting United States v. Ron Pair Enterprises,
Inc., 489 U.S. 235, 242, 109 S. Ct. 1026, 1031, 103 L. Ed. 2d 290
(1989)) (quoting Griffin v. Oceanic Contractors, Inc., 458 U.S.
564, 571, 102 S. Ct. 3245, 3250, 73 L. Ed. 2d 973 (1982)). Allowing
interest to accrue prior to actual awards is contrary to the
remainder of the statutory scheme, as well as to the case law
interpreting it. Consequently, we hold that the bankruptcy court
and the district court incorrectly concluded that trustees should
be awarded interest from the date of appointment and other
professionals from the date of submission of their fee
applications. Moreover, we are persuaded by Chief Judge Paskay's
published opinion in Brown, which expressly rejects the bankruptcy
court and the district court's unpublished conclusions.
C. Availability of Interim Fees and the Peculiarity of the Middle
District's Custom
The appellees urge us to consider the policy argument that
out of fairness they should receive interest in order to compensate
for the delay that results from the Middle District of Florida's
policy of refusing to entertain interim fee applications until the
close of the case, despite the fact that such fees are provided for
in § 331. Both the bankruptcy court and the district court relied
upon this policy justification in their decisions to allow for
interest to accrue contrary to the Code and existing case law.
Nevertheless, we will not ignore statutory provisions and case law,
as well as common sense, simply because of procedural peculiarities
in the Middle District of Florida.
The district court's opinion proposed to distinguish the prior
case law under § 726(a)(5) on the basis that in those other
jurisdictions interim compensation was available. However, as the
UST points out, the important component of the Riverside-Linden
decision is the statutory analysis of § 726(a)(5) and related
sections. Another important distinction is that although the
professional in Riverside-Linden had not filed an interim fee
application, later cases citing Riverside-Linden or its progeny and
stressing the availability of interim compensation are generally
Chapter 11 cases. See Byrd, 151 B.R. at 926 (debtor's counsel's
fees); Caribou Partnership III, 152 B.R. at 735 (debtor's
counsel's fees). Chapter 7 cases involve situations quite
different from those arising under Chapter 11 cases. In a Chapter
7 case there is generally no operating business from which ongoing
expenses can be paid. As a result, most Chapter 7 cases do not
possess sufficient funds from which to pay interim compensation
until the end of the case when all the assets of the insolvent
debtor have been collected and liquidated and all litigation has
been completed. Because the objective of Chapter 7 is the
expeditious administration of the estate, courts have been
indisposed to award interim fees for fear that awarding such fees
would provide the trustee with an incentive to prolong the
administration of the estate. See In re Domino Investments, Ltd.,
82 B.R. 608, 609 (Bankr.S.D.Fla.1988) (denying interim compensation
in order to encourage timely administration of the estate).
Pursuant to § 331, trustees and other professionals in Chapter
7 cases are allowed to file applications for interim fee awards.
Notwithstanding this fact, in Chapter 7 cases many bankruptcy
courts are reluctant to consider such applications until the close
of the case because of the permissive language of § 331 and the
policy justification of efficiently conducting the close of the
estate. See generally Commercial Consortium, 135 B.R. at 120;
Domino Investments, 82 B.R. at 609. The Middle District of Florida
does not consider interim fee applications in Chapter 7 cases
because it does not have sufficient time due to its heavy case
load.5
In Commercial Consortium, concluding that § 331 does not
exclude Chapter 7 cases from the discussion of interim fees, the
court held that bankruptcy courts should entertain interim fee
applications from professionals in Chapter 7 cases. Commercial
Consortium, 135 B.R. at 124. In doing so, the court rejected the
policy argument that requiring counsel to wait until completion of
5
The bankruptcy court stated:
It is the practice of this Court to defer ruling on
professional fee applications until the closing of the
case in order to assist the Court in the administration
of its large case load. If the Court were to follow
the position asserted by the United States Trustee,
professionals would never receive interest on their
administrative expense claims and professionals would
be unduly prejudiced because of this Court's inability
to promptly rule on fee applications when they are
filed.
Bankruptcy Court's Order at 7.
the case will encourage a more rapid closing. Id. The court
reasoned that this policy justification was not adequately
supported by its underlying necessary assumptions that counsel can
control the speed of the closing of a Chapter 7 case and that the
administration of Chapter 7 cases can usually be completed quickly
enough to make interim compensation unnecessary. Id. The court
acknowledged that the appropriateness of interim fees is dependent
upon such factors as the current availability of funds, the
existence of other accrued administrative obligations of the same
or higher priority that may deplete the funds, the continuing need
for funds to pay necessary administrative expenses in the future,
and the inability to file a final fee application in the near
future. Id. at 124-25. The court also placed the burden on the
professional seeking payment to present sufficient evidence to
persuade the court that such fees should be disbursed. Id. at 125.
The appellees argue that because the bankruptcy courts in the
Middle District of Florida do not consider interim fee applications
in Chapter 7 cases, they should be entitled to interest to
compensate them for the delay.6 Unlike the situation in In re
Commercial Consortium, however, we are not directly presented here
with the issue of failure to consider interim fee applications.
Consequently, we decline to require the Middle District of Florida
to entertain such applications. Moreover, in holding that trustees
and trustee's counsel are entitled to interest accruing only from
the date of the award, we decline to express an opinion on the
6
One method of compensating for delay is the use of current
rather than historical rates in determining fee amounts. See
Commercial Consortium, 135 B.R. at 126-127.
Middle District's practice of refusing to review interim fee
applications.
V. CONCLUSION
For the foregoing reasons, we reverse the district court's
judgment affirming the bankruptcy court's judgment and remand this
case for further proceedings consistent with this opinion.
REVERSED and REMANDED.