Mediofactoring v. McDermott (In re Connolly N. Am., LLC)

• Decision Date: 21 September 2015
• Docket Number: No. 13–2489.,13–2489.
• Citation: 802 F.3d 810
• Parties: In re CONNOLLY NORTH AMERICA, LLC, Debtor. Mediofactoring ; Coface Argentina, Plaintiffs–Appellants, v. Daniel M. McDermott, United States Trustee, Defendant–Appellee.
• Court: U.S. Court of Appeals — Sixth Circuit

802 F.3d 810

In re CONNOLLY NORTH AMERICA, LLC, Debtor.Mediofactoring ; Coface Argentina, Plaintiffs–Appellants

v.Daniel M. McDermott, United States Trustee, Defendant–Appellee.

No. 13–2489.

United States Court of Appeals, Sixth Circuit.

Argued: June 26, 2014.

Decided and Filed: Sept. 21, 2015.

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.

Before WHITE, DONALD, and O'MALLEY,^* Circuit Judges.

DONALD, J., delivered the opinion of the court in which WHITE, J., joined. O'MALLEY, J. (pp. 819–25), delivered a separate dissenting opinion.

OPINION

BERNICE BOUIE DONALD, Circuit Judge.

In a case under Chapter 7 of the Bankruptcy Code,¹ 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 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.

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.2013) (quoting RadLAX Gateway Hotel, LLC v. Amalgamated Bank, ––– U.S. ––––, 132 S.Ct. 2065, 2070–71, 182 L.Ed.2d 967 (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 776 (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 Zingale ), 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 Bank of Marin v. England, 385 U.S. 99, 103, 87 S.Ct. 274, 17 L.Ed.2d 197 (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, 94 S.Ct. 1005, 39 L.Ed.2d 260 (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, 109 S.Ct. 1026, 103 L.Ed.2d 290 (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, 120 S.Ct. 1942, 147 L.Ed.2d 1 (2000) ; see also Ron Pair, 489 U.S. at 241, 109 S.Ct. 1026. 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:

(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...