Glados, Inc., In re, 95-2849

• Decision Date: 28 May 1996
• Docket Number: No. 95-2849,95-2849
• Citation: 83 F.3d 1360
• Parties: , 35 Collier Bankr.Cas.2d 1398, 29 Bankr.Ct.Dec. 178 In re GLADOS, INC., Debtor. U.S. TRUSTEE, Plaintiff-Appellant, v. Jere M. FISHBACK and Lawrence S. Kleinfeld, Defendants-Appellees.
• Court: U.S. Court of Appeals — Eleventh Circuit

Page 1360

83 F.3d 1360

64 USLW 2768, 35 Collier Bankr.Cas.2d 1398,

29 Bankr.Ct.Dec. 178

In re GLADOS, INC., Debtor U.S. TRUSTEE, Plaintiff-Appellant, v. Jere M. FISHBACK and Lawrence S. Kleinfeld, Defendants-Appellees.

No. 95-2849.

United States Court of Appeals Eleventh Circuit.

May 28, 1996.

T. Patrick Tinker, U.S. Trustee's Office, Tampa, FL, for Appellant.

Jere M. Fishback, St. Petersburg, Florida, pro se and for Defendants-Appellees.

Appeal from the United States District Court for the Middle District of Florida.

Before EDMONDSON and DUBINA, Circuit Judges, and LOGAN ^*, Senior Circuit Judge.

DUBINA, Circuit Judge:

The United States Trustee ("UST") ¹ 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.

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 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 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...