James Angell v. Stubbs & Perdue, P.A. , 811 F.3d 166 ( 2016 )

PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 15-1316
In Re: HENRY LONDON ANDERSON, JR.,
Debtor.
-------------------------
STUBBS & PERDUE, P.A.,
Appellant,
v.
JAMES B. ANGELL, Chapter 7 Trustee,
Trustee – Appellee,
and
UNITED STATES OF AMERICA,
Appellee.
Appeal from the United States District Court for the Eastern
District of North Carolina, at Wilmington. James C. Fox, Senior
District Judge. (7:14-cv-00079-F; 10-00809-8-SWH)
Argued: December 9, 2015 Decided: January 26, 2016
Before WILKINSON, KEENAN, and HARRIS, Circuit Judges.
Affirmed by published opinion. Judge Harris wrote the opinion,
in which Judge Wilkinson and Judge Keenan joined.
ARGUED: Trawick Hamilton Stubbs, Jr., STUBBS & PERDUE, P.A.,
New Bern, North Carolina, for Appellant. Paul Andrew Allulis,
UNITED STATES DEPARTMENT OF JUSTICE, Washington, D.C.; James B.
Angell, HOWARD, STALLINGS, FROM, HUTSON, ATKINS, ANGELL & DAVIS,
P.A., Raleigh, North Carolina, for Appellees. ON BRIEF: Joseph
Z. Frost, STUBBS & PERDUE, P.A., Raleigh, North Carolina, for
Appellant. Caroline D. Ciraolo, Acting Assistant Attorney
General, Thomas J. Clark, Tax Division, UNITED STATES DEPARTMENT
OF JUSTICE, Washington, D.C.; Thomas G. Walker, United States
Attorney, OFFICE OF THE UNITED STATES ATTORNEY, Raleigh, North
Carolina; Nicholas C. Brown, HOWARD, STALLINGS, FROM, HUTSON,
ATKINS, ANGELL & DAVIS, P.A., Raleigh, North Carolina, for
Appellees.
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PAMELA HARRIS, Circuit Judge:
Stubbs & Perdue, P.A. (“Stubbs”) represented Henry L.
Anderson, Jr. (the “Debtor”) in bankruptcy proceedings, and is
owed approximately $200,000 in legal fees from that
representation. But the Debtor also is subject to nearly $1
million in secured tax claims, and the estate has insufficient
funds to pay both Stubbs’s fees and the tax claim. In practical
terms, this case is about which of those claims takes priority
in a Chapter 7 liquidation under the Bankruptcy Code.
The answer is found in § 724(b)(2) of the Bankruptcy Code,
11 U.S.C. § 724(b)(2). And under the version of § 724(b)(2) in
effect when the bankruptcy court rendered its decision, it is
clear that the secured tax claim takes priority over Stubbs’s
claim to fees. Stubbs argues, however, that application of
current law to its claim would have an impermissible retroactive
effect, and that it can prevail under the prior version of
§ 724(b)(2) that should govern this case. Like the bankruptcy
court and the district court, we disagree, and we therefore
affirm the judgment of the district court.
I.
A.
On February 3, 2010, the Debtor filed a voluntary petition
for relief under Chapter 11 of the Bankruptcy Code, which
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governs reorganizations of debtors’ estates. Shortly
thereafter, the bankruptcy court approved Stubbs to serve as the
Debtor’s counsel. In July of 2011, the IRS filed a proof of
claim against the estate in the amount of $997,551.80, of which
$987,082.88 was secured by the Debtor’s property interests.
During the pendency of the Debtor’s Chapter 11 case, the
bankruptcy court entered five orders approving compensation to
Stubbs for legal services, for a total of slightly more than
$200,000. The allowance of Stubbs’s fees, as the “actual” and
“necessary” expenses of preserving the Debtor’s estate, gave
Stubbs an unsecured claim for “administrative expenses” against
the estate. See 11 U.S.C. §§ 330(a), 503(b). The Bankruptcy
Code establishes a hierarchy of unsecured creditors like Stubbs,
and as an administrative expense claimant, Stubbs holds second-
priority status under § 507(a)(2) of the Code. See 11 U.S.C.
§ 507(a)(2).
On November 17, 2011, after the Debtor failed to
demonstrate that he could effectuate a final plan of
reorganization under Chapter 11, the Debtor’s bankruptcy case
converted to one under Chapter 7, which governs liquidations.
The bankruptcy court then appointed James B. Angell (the
“Trustee”) as the Chapter 7 Trustee.
The Trustee was able to accumulate $702,630.25 for
distribution to the estate’s creditors. He estimated that total
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Chapter 7 administrative expenses would amount to $278,921.42,
leaving the Debtor’s estate with just $423,708.83 – far short of
what would be required to satisfy the IRS’s secured tax claim of
nearly $1 million and Stubbs’s unsecured Chapter 11
administrative expense claim of roughly $200,000. 1 So unless
Stubbs’s unsecured claim took priority over the secured claim of
the IRS, Stubbs would not collect its fees. Whether Stubbs
could “subordinate” the IRS’s claim in this manner was governed
by 11 U.S.C. § 724(b)(2), and that provision is the focus of
this case.
B.
The general rule in bankruptcy is that secured claims are
satisfied from the collateral securing those claims prior to any
distributions to unsecured claims. See 11 U.S.C. §§ 506, 725;
In re Midway Airlines, Inc., 383 F.3d 663, 669 (7th Cir. 2004).
Secured claims, in other words, take priority. Under that
general rule, the IRS’s claim in this case would be paid first
and nothing would be left for payment on Stubbs’s unsecured
claim for administrative expenses incurred during the Chapter 11
proceeding.
1 Stubbs’s total allowed compensation amounted to
$213,408.06. But because the Debtor paid $27,977.85 of Stubbs’s
fees, Stubbs is now owed $185,430.21.
5
But in Chapter 7 liquidations, there is a limited exception
to this norm. Under § 724(b)(2) of the Bankruptcy Code, certain
unsecured creditors may “step into the shoes” of secured tax
creditors in Chapter 7 liquidation proceedings, so that when the
collateral securing the tax claims is sold, the unsecured
creditors are paid first. If Stubbs’s claim for Chapter 11
administrative expenses was among the unsecured claims covered
by § 724(b)(2), then — and only then — could it recover from the
estate.
Because the history of § 724(b)(2) is directly relevant to
this case, we cover it in some detail. Until 2005 (and before
any of the events at issue here), § 724(b)(2) was relatively
uncomplicated, providing all holders of administrative expense
claims, like Stubbs, with the right to subordinate secured tax
creditors in Chapter 7 liquidations. See 11 U.S.C. § 724(b)(2)
(2000). But that statutory scheme was criticized on the ground
that it created perverse incentives, encouraging Chapter 11
debtors and their representatives to incur administrative
expenses even where there was no real hope for a successful
reorganization, to the detriment of secured tax creditors when
Chapter 7 liquidation ultimately proved necessary. See In re
K.C. Mach. & Tool Co., 816 F.2d 238, 248 (6th Cir. 1987)
(Merritt, J., dissenting).
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In 2005, Congress responded with a fix. Under the
Bankruptcy Abuse Prevention and Consumer Protection Act of 2005,
Pub. L. No. 109–8, 119 Stat. 23 (the “BAPCPA”), Congress sought
to limit the class of administrative expenses covered by
§ 724(b)(2), excluding claims for the expenses incurred during
prior Chapter 11 proceedings. In other words, in order “to
provide greater protection for holders of tax liens . . . from
erosion of their claims’ status by expenses incurred under
chapter 11 of the Bankruptcy Code,” H.R. Rep. No. 109–31(I), at
100 (2005), unsecured Chapter 11 administrative expense claims
would no longer take priority over secured tax claims in Chapter
7 liquidations.
Thanks to a drafting error, however, it is not clear that
Congress accomplished what it set out to do. The Bankruptcy
Code is complicated, and the original version of § 724(b)(2)
covered claims for unsecured administrative expenses through
cross reference to 11 U.S.C. § 507(a)(1), a provision that gave
such claims first priority as among other unsecured claims. See
11 U.S.C. § 507(a)(1) (2000). So when Congress amended
§ 724(b)(2) to exclude Chapter 11 administrative expenses, it
did so by clarifying that subordination rights would extend “to
any holder of a claim of a kind specified in section 507(a)(1)”
— that is, administrative expenses — “(except that such expenses
. . . shall be limited to expenses incurred under chapter 7 of
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this title and shall not include expenses incurred under chapter
11 of this title).” 11 U.S.C. § 724(b)(2) (2006) (emphasis
added). And it would have worked — except that in a separate
amendment, the BAPCPA simultaneously altered the § 507 priority
scheme for unsecured claims, dropping administrative expense
claims from first to second and moving them from § 507(a)(1) to
§ 507(a)(2). See § 212, Pub. L. No. 109-8. The end result was
that the exclusion of Chapter 11 expenses inserted into
§ 724(b)(2), read literally, did not apply to the administrative
expenses that were its target, but instead to the new set of
claims now enumerated under § 507(a)(1).
That was the state of affairs when the Debtor filed his
initial Chapter 11 petition in February of 2010. At the time,
none of this was of particular importance, because § 724(b)(2)
applies only in Chapter 7 liquidations and not in Chapter 11
reorganizations. See 11 U.S.C. § 103(b). And ten months later,
while the Debtor’s case remained in Chapter 11, Congress
corrected its error with the Bankruptcy Technical Corrections
Act of 2010, Pub. L. No. 111-327, 124 Stat. 3557 (the “BTCA”).
The BTCA made “technical” changes to the Bankruptcy Code, see
id., necessitated by a “number of technical drafting errors” in
the BAPCPA. See 156 Cong. Rec. H7161 (daily ed. Sept. 28, 2010)
(statement of Rep. Scott) (“This bill before us today is simply
a technical cleanup of the [BAPCPA].”). In particular, the BTCA
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coupled the parenthetical excluding Chapter 11 expenses with a
cross-reference to § 507(a)(2), where unsecured claims to
administrative expenses are now enumerated, clarifying that
Chapter 11 administrative expense claimants do not hold
subordination rights under § 724(b)(2). See § 2(a)(27), Pub. L.
No. 111-327.
Congress enacted the corrected BTCA version of § 724(b)(2)
in December 2010. It was not until eleven months later, in
November 2011, that the Debtor’s bankruptcy case converted from
Chapter 11 to Chapter 7, implicating § 724(b)(2) for the first
time. Now in a Chapter 7 proceeding, Stubbs could invoke
§ 724(b)(2)’s exception to the general rule that unsecured
claims like its own take a back seat to secured claims like the
IRS’s — but only if its claim to Chapter 11 administrative
expenses was covered by the governing version of § 724(b)(2).
C.
For guidance on this question, the Chapter 7 Trustee filed
a Motion in Aid of Distribution before the bankruptcy court.
The Trustee, with the support of the United States, took the
position that the version of § 724(b)(2) then in effect — the
corrected BTCA version — controlled, and that under that
provision, there is no question but that Stubbs’s unsecured
claim to Chapter 11 administrative expenses is excluded. And
even under the prior BAPCPA version of § 724(b)(2), the Trustee
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and the United States argued, it is clear enough that Stubbs is
not entitled to subordinate the IRS’s secured tax claim.
Stubbs filed an objection. It did not dispute that it had
no subordination rights under the current BTCA version of
§ 724(b)(2). But it argued that regardless of Congress’ intent,
the plain language of the prior version of § 724(b)(2) did
entitle it to subordinate the IRS’s secured tax claim. And
according to Stubbs, application of the new and corrected
version of § 724(b)(2) would have an impermissible retroactive
effect, cutting off its right to recover for Chapter 11
administrative expenses incurred before Congress fixed its
drafting error.
The bankruptcy court agreed with the Trustee and dismissed
Stubbs’s objection. In re Anderson, No. 10-00809-8-RDD, 2014 WL
590481 (Bankr. E.D.N.C. Feb. 14, 2014). It held, first, that
the BTCA version of § 724(b)(2) governs this case, under the
normal rule that “a court is to apply the law in effect at the
time it renders its decision.” Id. at *2–3 (quoting Bradley v.
Sch. Bd. of Richmond, 416 U.S. 696, 711 (1974)). The
presumption against retroactivity described in Landgraf v. USI
Film Products, 511 U.S. 244 (1994), the court reasoned, has no
bearing here: The BTCA version of § 724(b)(2) already was in
effect when the case converted to Chapter 7, so application of
current law would have no retroactive effect on Stubbs’s right
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to subordinate tax liens in a Chapter 7 proceeding. 2014 WL
590481, at *3.
In the alternative, the bankruptcy court found that even
under the BAPCPA version of § 724(b)(2), Stubbs would hold no
right to subordinate the IRS’s secured tax claim. Analyzing
“the passage of the BTCA, its legislative history, and the
legislative history of [the BAPCPA] Section 724(b)(2),” the
court thought it “clear that Congress intended to exclude
Chapter 11 professional expenses when a case is converted to
Chapter 7.” Id. at *4.
The district court affirmed the decision of the bankruptcy
court. In re Anderson, No. 7:14-cv-00079-F, 2015 WL 892363
(E.D.N.C. Feb. 26, 2015). Like the bankruptcy court, the
district court held that the law in effect at the time of
decision — the BTCA version of § 724(b)(2) — governs the case.
Because Stubbs had no vested right to subordinate under
§ 724(b)(2) “until the case was converted to one under Chapter
7, some eleven months after Congress had already passed the
BTCA,” the court reasoned, application of current law would have
no retroactive effect within the meaning of Landgraf. Id. at
*3. Having found that the BTCA version of § 724(b)(2) applies
and precludes Stubbs’s claim to subordination, the district
court did not decide whether the same result would follow under
the BAPCPA version of § 724(b)(2).
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This timely appeal followed.
II.
A.
This court reviews the judgment of a district court sitting
in review of a bankruptcy court de novo. Jacksonville Airport,
Inc. v. Michkeldel, Inc., 434 F.3d 729, 731 (4th Cir. 2006). We
review the bankruptcy court’s findings of fact for clear error
and its conclusions of law de novo. Id. Whether § 724(b)(2)
empowers Stubbs to subordinate the IRS’s secured tax claim is a
pure question of law.
B.
The Supreme Court has identified two rules for interpreting
statutes that, like § 724(b)(2), do not specify their temporal
reach. See Landgraf, 511 U.S. at 264. The first is that, as a
general rule, “a court is to apply the law in effect at the time
it renders its decision.” Id. (quoting Bradley, 416 U.S. at
711); see Velasquez-Gabriel v. Crocetti, 263 F.3d 102, 108 (4th
Cir. 2001) (“[N]ormally a court is to apply the law in effect at
the time it renders its decision.” (citation and internal
quotation marks omitted)). The second is effectively an
exception to the first: Because retroactivity is disfavored, a
court should not apply the law currently in effect if it would
have a “retroactive effect” on conduct predating the law’s
12
enactment, “absent clear congressional intent favoring such a
result.” Landgraf, 511 U.S. at 280. Combined, these principles
dictate that a court apply the law in effect at the time it
renders its decision, unless that law would operate
retroactively without clear congressional authorization. See
Gordon v. Pete’s Auto Serv. of Denbigh, Inc., 637 F.3d 454, 458
(4th Cir. 2011) (describing Landgraf framework for analysis).
The bankruptcy and district courts concluded that this is
the ordinary case, in which the law in effect at the time of
decision — here, the BTCA version of § 724(b)(2) — applies.
Stubbs, on the other hand, argues that this case is the
exception, because application of the BTCA version of
§ 724(b)(2) to its claim for Chapter 11 administrative fees,
incurred and approved prior to enactment of the BTCA, would have
an impermissible retroactive effect. 2 We agree with the
bankruptcy and district courts, and conclude that Stubbs’s claim
is governed and foreclosed by the BTCA version of § 724(b)(2).
A rule that courts should apply the law in effect when they
render their decisions has the advantage of being clear and easy
2 On appeal, Stubbs limits its retroactivity challenge to
the $105,783.08 in Chapter 11 legal fees approved by the
bankruptcy court prior to the BTCA’s enactment date of December
22, 2010. Before the district court, Stubbs had argued that the
BTCA version of § 724(b)(2) could not be applied to a total of
$153,471.86 in unpaid fees, which included fees incurred before
the BTCA was enacted but approved only after enactment.
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to administer. And that is especially important in the
bankruptcy context. Chapter 7 trustees have a fiduciary duty to
make already-complex calculations in an expeditious manner, see
In re Thompson, 965 F.2d 1136, 1145 (1st Cir. 1992), and we have
recognized “a public policy interest in reducing the number of
ancillary suits that can be brought . . . so as to advance the
swift and efficient administration of the bankrupt’s estate,” In
re Richman, 104 F.3d 654, 656–57 (4th Cir. 1997). Requiring
Chapter 7 trustees to distinguish between and apply different
versions of the Bankruptcy Code, on the other hand, would
complicate the process significantly, necessitating an
additional level of discovery and analysis. The result would be
the potential for substantial delays in administration and
increased exposure for bankruptcy trustees, who are subject to
personal liability on claims for improper distribution. Cf.
Yadkin Valley Bank & Trust Co. v. McGee, 819 F.2d 74, 76 (4th
Cir. 1987) (trustee subject to liability for negligently failing
to reduce the assets of the estate to money as expeditiously as
possible).
Stubbs argues, however, that it would be unjust to apply
the BTCA version of § 724(b)(2) retroactively to disallow
payment on its unsecured claim for Chapter 11 fees. See
Landgraf, 511 U.S. at 265 (presumption against retroactivity
flows from “[e]lementary considerations of fairness”). Prior to
14
the BTCA, Stubbs contends, it was entitled to subordinate the
IRS’s secured claim under § 724(b)(2); denying it that right as
to Chapter 11 administrative expenses approved before the BTCA’s
passage would have an impermissible “retroactive effect” under
Landgraf. We disagree.
The problem with Stubbs’s argument is its premise: that
Stubbs held subordination rights under § 724(b)(2) before the
BTCA was enacted in December 2010. Before the BTCA was enacted,
§ 724(b)(2) had no application to the Debtor’s case at all. It
afforded Stubbs no entitlement to subordinate the IRS’s secured
tax claim for the threshold reason that it simply did not apply
in the Chapter 11 proceedings that began in this case in early
2010 and did not end until November 2011, eleven months after
the BTCA’s passage. The pre-BTCA version of § 724(b)(2) that
Stubbs invokes, in other words, never controlled this case. By
the time the case converted to Chapter 7 in November 2011,
implicating § 724(b)(2) for the first time, the BAPCPA version
of § 724(b)(2) had been superseded already by the corrected BTCA
version. Like the bankruptcy and district courts, 2015 WL
892363, at *3; 2014 WL 590481, at *3, we think this sequence of
events is dispositive of Stubbs’s retroactivity argument.
We recognize, of course, that the BTCA version of
§ 724(b)(2) is being applied in this case to conduct — the
incurrence and approval of legal fees in the Chapter 11
15
proceeding — that predates the provision’s enactment. But as
the Supreme Court has made clear, that by itself does not
trigger Landgraf’s presumption against retroactivity. Landgraf,
511 U.S. at 269 (statute does not operate retroactively “merely
because it is applied in a case arising from conduct antedating
the statute’s enactment”); see Gordon, 637 F.3d at 459. Nor
does application of a new statute to old conduct have a
retroactive effect under Landgraf whenever it “upsets
expectations based in prior law.” 511 U.S. at 269. Before
enactment of the BTCA, Stubbs may have expected that if the
Debtor’s Chapter 11 bankruptcy case at some point converted to
Chapter 7, then it would acquire a right to subordinate the
IRS’s secured claim under § 724(b)(2). 3 But such an inchoate
expectation is not the kind of “vested right[] acquired under
existing laws” that, if frustrated, gives rise to retroactivity
concerns. Id. (citation omitted); see Jaghoori v. Holder, 772
3Even that expectation, we note, would rest on the
contested proposition that because of a drafting error, the
BAPCPA version of § 724(b)(2) cannot be read to effectuate
Congress’ undisputed intent to exclude Chapter 11 expenses from
subordination rights. We need not decide that question of
statutory interpretation, given our holding that it is the BTCA
version of § 724(b)(2), and not the BAPCPA version, that applies
to this case. But given the confusion and flux surrounding the
BAPCPA iteration of § 724(b)(2), any expectation Stubbs may have
had that it could prevail under that provision should the
Debtor’s case convert to Chapter 7 was doubly contingent. Cf.
Velasquez-Gabriel, 263 F.3d at 108–09 (likelihood of success
under prior statute may inform retroactivity analysis).
16
F.3d 764, 771–72 (4th Cir. 2014) (finding impermissible
retroactive effect where application of new statute “takes away
or impairs vested rights acquired under existing laws” (citation
omitted)).
For its argument to the contrary, Stubbs relies primarily
on In re J.R. Hale Contracting Co., 465 B.R. 218 (Bankr. D.N.M.
2011), in which a bankruptcy court held impermissibly
retroactive the application of the BTCA version of § 724(b)(2)
to a claim for Chapter 11 administrative expenses incurred prior
to the BTCA’s enactment. Id. at 224–25. But on the single fact
most critical to our holding — that the pre-BTCA version of
§ 724(b)(2) was at no time applicable to this case — J.R. Hale
is not on point. In J.R. Hale, unlike this case, the underlying
bankruptcy case converted from Chapter 11 to Chapter 7 almost
two years before enactment of the BTCA, so that the BAPCPA
version of § 724(b)(2) did in fact govern the case for a period
of time before the BTCA correction. See id. at 219. That
distinction is fundamental to our analysis.
As we have emphasized, the retroactivity inquiry is a
particularized one, asking “not whether the statute may possibly
have an impermissible retroactive effect in any case, but
specifically whether applying the statute to the person
objecting would have a retroactive consequence in the disfavored
sense.” Gordon, 637 F.3d at 459 (emphasis in original)
17
(citations and internal quotation marks omitted). We need not
decide here whether application of the BTCA version of
§ 724(b)(2) in a case that converted to Chapter 7 while the
prior version still controlled, as in J.R. Hale, would have an
impermissible retroactive effect. It is enough for present
purposes that J.R. Hale is no authority for finding
retroactivity as “to the person objecting” in this case, in
which the pre-BTCA version of § 724(b)(2) never had any
controlling effect.
Accordingly, and like the district court, we hold that the
bankruptcy court properly applied the BTCA version of
§ 724(b)(2) in effect when it rendered its decision. Under that
provision, it is clear that Stubbs is not entitled to
subordinate the IRS’s secured tax claim in favor of its
unsecured claim to Chapter 11 administrative expenses. Whether
the same result would have obtained under the pre-BTCA version
of § 724(b)(2), as urged by the Trustee and the United States,
is a question we need not reach.
III.
For the foregoing reasons, we affirm the judgment of the
district court.
AFFIRMED
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