In re Reed, 04-10298.
| Citation | 405 F.3d 338 |
| Decision Date | 01 April 2005 |
| Docket Number | No. 04-10298.,04-10298. |
| Parties | In re Willadeen REED, Debtor. Max R. Tarbox, Chapter 7 Trustee, Appellant, v. United States Trustee for the Northern District of Texas, Appellee. |
| Court | United States Courts of Appeals. United States Court of Appeals (5th Circuit) |
Max R. Tarbox (argued), Tarbox & Miller, Lubbock, TX, pro se.
Michele Marie Mansfield (argued), U.S. Dept. of Justice, Executive Office of U.S. Trustee, Washington, DC, for Appellee.
Samuel Kenneth Crocker (argued), Crocker & Niarhos, Nashville, TN, for Nat. Ass'n of Bankruptcy Trustees, Amicus Curiae.
Appeal from the United States District Court for the Northern District of Texas.
Before BARKSDALE, GARZA and DeMOSS, Circuit Judges.
Max Tarbox, a Chapter 7 Trustee (the "Trustee"), filed a final report in a bankruptcy proceeding in which the Trustee proposed to pay interest on administrative fees and expenses from the date of the filing of the petition, arguing that 11 U.S.C. § 726(a)(5) requires such a result in cases where the estate contains enough assets to redistribute a remainder to the debtor, i.e., a surplus case. The United States Trustee for the Northern District of Texas (the "UST") objected to the proposed payment, arguing that to allow interest to accrue from the date of the petition permits payment of money from the estate for a claim during a time period when no claim in fact existed. The UST urged, alternatively, that interest should accrue from the date the bankruptcy court awards compensation to the trustee. The bankruptcy court followed a third path in determining that the relevant statute denies interest on administrative fees and expenses altogether. The Trustee appealed the decision to the district court, which affirmed the finding of the bankruptcy court essentially for the reasons stated by the bankruptcy court. The Trustee timely filed the instant appeal. For the reasons set forth below, we AFFIRM.
Willadeen Reed, the debtor, filed a petition for relief under Chapter 7 in May 1999. Tarbox was subsequently appointed trustee of the bankruptcy estate. The Trustee secured approximately $42,700 in the debtor's estate for distribution to the creditors of record. After paying off the creditors, the debtor's estate contained a surplus of approximately $10,700. The Trustee thereafter submitted to the bankruptcy court an Application for Compensation and Report of Proposed Distribution (the "Final Report"), in which the Trustee proposed to pay interest on administrative claims that the Trustee argued are mandated in surplus cases by § 726(a)(5).1 The UST objected to the Final Report, essentially arguing that the Trustee was seeking to claim interest for work during a period of time that no work was being performed. The UST contended the Trustee did not earn any monies that could, in turn, earn interest between the date the petition is filed and the date the Trustee actually is awarded his fees, and therefore, the Trustee should not be allowed to claim interest on his fees during that time. The only allowable interest, argued the UST, is calculated from the time the compensation award is determined and the time it takes to pay that award.
The bankruptcy court conducted a hearing during which both parties presented their respective arguments. In May 2003, the bankruptcy court issued a memorandum opinion in which the Trustee and his professionals were awarded compensation under 11 U.S.C. § 330(a), authorized under 11 U.S.C. § 503(b)(2). The bankruptcy court further concluded, however, that the Trustee was not entitled to any interest under § 726(a)(5). In its memorandum order, the bankruptcy court cited a "majority view," which holds that a strict application of § 726(a)(1) disallows the accrual of interest on fees for services which have yet to be performed; instead, the interest on the trustee's fees accrues from the date of the award.2 The bankruptcy court also noted the "minority view," which compels a strict application of the plain language of the applicable statutory provisions. The minority view holds that § 726(a)(1) simply means what it says: interest must be paid on the trustee's compensation and expenses from the date of the filing of the petition.
After discussing both views, the bankruptcy court concluded that it could not fully agree with either position and instead developed a third view, which holds that § 726(a)(1) precludes the recovery of interest on administrative fees and expenses altogether. Specifically, the bankruptcy court determined that interest under § 726(a)(1) was only recoverable for creditors who submitted claims against the estate — not by administrators of the estate who are awarded compensation and fees for their work in settling the bankruptcy estate. The district court agreed, affirming the decision of the bankruptcy court on appeal. The district court determined that interest is not payable on administrative claims that arise during pendency of a Chapter 7 bankruptcy case for which no proof of claim is filed, even though a surplus exists. The Trustee timely filed the instant appeal.
Whether the district court erred in determining that 11 U.S.C. § 726(a)(1) precludes the recovery of interest for administrative fees and expenses.
We review de novo the district court's statutory interpretation of 11 U.S.C. § 726(a). See United States v. Phillips, 303 F.3d 548, 550 (5th Cir.2002).
As a preliminary matter, it should be noted that the application of § 726(a)(5) arises only in cases where there are assets remaining in the debtor's estate after all appropriate distributions have been made under § 726(a)(1)-(4). See In re Vogt, 250 B.R. 250, 266 (Bankr.M.D.La.2000).
Section 726(a)(5) specifically provides that "property of the estate shall be distributed ... in payment of interest at the legal rate from the date of the filing of the petition, on any claim paid under paragraph (1)." 11 U.S.C. § 726(a)(5). Paragraph (a)(1) gives priority to the "payment of claims of the kind specified in ... section 507 of this title, proof of which is timely filed under section 501." Id. § 726(a)(1), (a)(2)(A). Section 507, in turn, refers to administrative expenses under § 503(b). Id. § 507(a)(1). Section 503(b) allows administrative expenses for "compensation and reimbursement awarded under section 330(a) of this title." Id. § 503(b)(2). Finally, § 330(a) provides that "the court may award to a trustee, an examiner, a professional person ... reasonable compensation for actual, necessary services rendered ... and reimbursement for actual, necessary expenses."3 Id. § 330(a)(1)(A)-(B).
In a case of first impression in this Circuit, the precise issue we are faced with is whether § 726(a)(5) entitles a trustee to interest on his compensation and reimbursement award, and if so, at what point such interest begins to accrue. To better understand the nature of the controversy, we begin with a survey of the case law that has developed in this area.
As the bankruptcy court notes, and as described in note 2 supra, the issue of when interest on administrative fees and expenses arises has been considered by only two courts of appeals — the Ninth and the Eleventh Circuits. Both courts conclude that the better rule is to allow such fees and expenses to accumulate interest from the date the bankruptcy court awards the trustee his fees and expenses. The Ninth Circuit, in In re Riverside-Linden Investment Co., 945 F.2d 320 (9th Cir.1991), states:
The provision which defines [trustee]'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).
The Eleventh Circuit followed another line of reasoning in bolstering the majority view, noting that to award interest to the trustee at the time the debtor initially files the petition is contrary to the purpose of 11 U.S.C. § 326, which sets limits on the amount of trustee compensation. In re Glados, 83 F.3d 1360, 1365 (11th Cir.1996). Specifically, the court determined that because the trustee is paid based on the distribution to creditors, and because the trustee earns fees on the interest paid on creditors' claims pursuant to § 326(a), a trustee could delay final distribution, allow the interest earned on assets converted to cash to accumulate in escrow, and earn a fee on the distribution of those assets (which now include earned interest) in satisfaction of claims and as part of his compensation petition for interest on his fee under § 726(a)(5). See id. The Eleventh Circuit concluded, therefore, that to allow the trustee to delay the conclusion of settling the estate, while simultaneously collecting additional monies for doing so, would frustrate Chapter 7's purpose of efficiently administering the liquidation of the estate for the benefit of creditors. Id.
Recognizing that the "majority rule" diverges from the plain language approach to statutory construction, the Eleventh Circuit nevertheless reasoned that such a divergence is permissible "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." Id. at 1366 (alteration in original) (citation and internal quotation marks omitted). "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." Id.4
The minority view simply involves applying the plain language of the relevant statutory provisions. Accordingly, the minority view holds that interest must be paid on the trustee's fees and expenses "from the date of the filing of the petition." See 11 U.S.C. § 726(a)(5).
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