United States Court of Appeals
Fifth Circuit
F I L E D
UNITED STATES COURT OF APPEALS
For the Fifth Circuit April 1, 2005
Charles R. Fulbruge III
Clerk
No. 04-10298
In re WILLADEEN REED,
Debtor.
MAX R. TARBOX, Chapter 7 Trustee,
Appellant,
VERSUS
UNITED STATES TRUSTEE FOR THE NORTHERN
DISTRICT OF TEXAS,
Appellee.
Appeal from the United States District Court
For the Northern District of Texas
Before BARKSDALE, GARZA, and DeMOSS, Circuit Judges.
DeMOSS, Circuit Judge:
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.
BACKGROUND AND PROCEDURAL HISTORY
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
2
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
1
Specifically, the Trustee’s Final Report claimed interest in
the amount of $295.55 on the Trustee’s fees, $30.01 on the
Trustee’s expenses, $92.59 on the Trustee’s attorney’s fees, $3.74
on the Trustee’s attorney’s expenses, and $51.47 on the Trustee’s
accountant’s fees, for a total interest amount of $473.36.
3
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.
2
As discussed infra, only two circuit courts, the Ninth and
the Eleventh Circuits, have addressed this issue, both of which
have adopted the majority view. See In re Glados, Inc., 83 F.3d
1360, 1366 (11th Cir. 1996); In re Riverside-Linden Inv. Co., 945
F.2d 320, 323-24 (9th Cir. 1991).
4
DISCUSSION
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,
5
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.
A. The Majority View
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).
3
An award under § 330(a) is subject to the limitation
provided in § 326, which caps a trustee’s compensation by means of
a percentage formula applied to the actual amounts disbursed to the
estate’s claimants. 11 U.S.C. § 326(a).
6
Id. at 324.
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
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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
B. The Minority View
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).
In In re Smith, 267 B.R. 770 (Bankr. W.D. Tex. 2001), the
bankruptcy court concluded that trustees are entitled to interest
on their commissions and expenses from the date the bankruptcy
petition is filed. Id. at 772-73. Likewise, in Vogt, the Louisiana
bankruptcy court held that § 726(a)(5) is unambiguous and thereby
4
Importantly, we observe that the majority view adopted by
the Ninth and Eleventh Circuits is distinguishable from the instant
case because it involves the interpretation of § 726(a)(1) before
the statute was amended in 1996 into its current version. The pre-
amendment version of § 726(a)(1) provided that:
[P]roperty 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 . . . .
11 U.S.C. § 726(a)(1) (1994). Conspicuously absent from the pre-
amendment language is the reference to the provision granting
priority to section 507 claims, “proof of which is timely filed
under section 501.” 11 U.S.C. § 726(a)(1) (2003) (emphasis added).
As discussed infra, the addition of this provision necessarily
affects our analysis here.
8
authorizes accrual of interest on a trustee’s claim immediately
upon the petition’s filing. 250 B.R. at 283-84. The court there,
however, tempered its decision, recognizing that its holding “will
place us in the unenviable position of having created a
one-court-strong minority view, in conflict with a majority view
(that trustee compensation claims are not entitled to interest from
the petition date), strongly held by courts from all levels
(bankruptcy to circuit).” Id. at 253. The Vogt decision was
premised on the idea that the process of submitting a trustee’s
final report to the bankruptcy court for compensation is, in fact,
a “claim” payable under § 726(a)(1). As will be discussed infra,
whether or not such a report satisfies the claim requirements of §
507 is a matter over which there is much contention.
C. The Decisions Below
As previously stated, while most courts have addressed when
interest on administrative fees and expenses are recoverable, in
this case the bankruptcy court determined (and the district court
agreed) that the more pertinent issue is whether interest on such
fees and expenses is proper at all. For the reasons discussed
below, we find the reasoning employed by both the bankruptcy court
and the district court to be persuasive.
The basic theory underlying the holding reached by the lower
courts here is: While § 726(a)(5) allows for the payment of
interest from the date of filing on any claim paid under paragraph
(1) of § 726(a), paragraph (a)(1) refers to payment of section 507
9
claims, “proof of which is timely filed under section 501.” 11
U.S.C. § 726(a)(1) (emphasis added). The fact that § 501(a)
specifically addresses the filing of proofs of claims by creditors
and proofs of interest by equity security holders necessarily
excludes trustees from recovering interest on their compensation
and reimbursements. Id. § 501(a).
A trustee is not a “creditor” as that term is defined by the
Bankruptcy Code because a trustee does not have “a claim against
the debtor that arose at the time of or before the order for relief
concerning the debtor.” Id. § 101(10)(A). The Trustee concedes
this point, acknowledging that, in his capacity as a trustee, he
did not hold a pre-petition claim. And, as the district court
noted, “[a]lthough § 726(a)(1) at first seems to include
[administrative fees and expenses] by its reference to claims of
the kind specified in § 507, they are winnowed out by the reference
to § 501, because they are not of the kind proof of which is timely
filed under § 501 for pre-petition claims by creditors.” In re
Reed, 312 B.R. 832, 839 (N.D. Tex. 2004) (“Reed II”).5 Nor is a
5
Admittedly, the Bankruptcy Code’s reference to
“administrative expenses” under § 507 is not necessarily exclusive
of the term “claim,” and § 726(a)(5) specifically refers to “a
claim allowed under section 503(b).” In re Reed, 293 B.R. 698, 701
(Bankr. N.D. Tex. 2003) (“Reed I”) (citation and internal
quotations omitted). In fact, the bankruptcy court cites In re
Vogt as providing additional examples in the Code where references
are made to administrative “claims” under § 507(a)(1) and § 503(b).
Id. Nevertheless, taking into account the fact that § 726(a)(5)
expressly refers to claims under § 507 as claims for which proof is
“timely filed under section 501 of this title,” and that § 501
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trustee an “equity security holder,” which is defined as a “holder
of an equity security of the debtor.”6 11 U.S.C. § 101(17).
The interpretation of § 726(a) adopted herein draws support
from the Second Circuit’s decision in In re Klein Sleep Products,
Inc., 78 F.3d 18 (2d Cir. 1996). The court there was faced with
interpreting § 502(a), which addresses the allowance of filed
claims. Section 502(a) provides that “[a] claim or interest, proof
of which is filed under section 501 of this title, is deemed
allowed, unless a party in interest . . . objects.” 11 U.S.C. §
502(a) (emphasis added). The Second Circuit interpreted the
language of the provision (which is virtually identical to the
statutory language in § 726(a)(1)) as expressly precluding
administrative expenses, noting that § 501 specifically relates to
pre-petition claims. In re Klein, 78 F.3d at 28. The court
specifically makes reference to claims filed by a “creditor,”
trustees and other professionals who participate in the eventual
distribution of the debtor’s estate (and whose compensation and
expenses arise after the filing of the bankruptcy petition) are
necessarily eliminated as holders of “claims.” Id. (citations
omitted).
6
The Code defines an “equity security” as:
(A) share in a corporation, whether or not transferable
or denominated “stock”, or similar security;
(B) interest of a limited partner in a limited
partnership; or
(C) warrant or right, other than a right to convert, to
purchase, sell, or subscribe to a share, security, or
interest of a kind specified in subparagraph (A) or (B)
of this paragraph.
11 U.S.C. § 101(16).
11
further observed that administrative expenses are recoverable
through § 503. Id.
The Trustee argues that by removing trustees from the entities
eligible to receive distribution of the debtor’s estate under §
726(a), this Court would, in effect, eliminate the vehicle through
which trustees receive their administrative fees and expenses.
However, in In re Van Gerpen, 267 F.3d 453 (5th Cir. 2001), this
Court distinguished between distribution to creditors and
disbursements to trustees and their hired professionals. The Court
determined that “while the payments made on account of compensation
and other administrative expense applications must be accounted
for, it is not necessary that they be claims paid within the final
distribution.” Id. at 456 (citing In re Vogt, 250 B.R. at 282).
Disallowing trustees to recover under § 726(a) does not leave them
without a means to ultimately receive the monies they are due.
Instead, the fees and expenses sought by trustees in bankruptcy
proceedings are clearly allowed under § 503(b)(2), with payment
authorized by § 503(a).7 See 11 U.S.C. § 503(b)(2) (providing that
administrative expenses shall be allowed for “compensation and
reimbursement awarded under section 330(a) of this title”); id. §
503(a) (“An entity may timely file a request for payment of an
administrative expense . . . .”).
Additionally, we conclude that to interpret § 726(a) as urged
7
Neither § 503(b)(2) nor § 503(a) provides for the recovery
of interest.
12
by the Trustee (and followed by the minority view) would produce
results at odds with Congress’s intention in drafting the
legislation.8 The district court determined that it would “not be
satisfied with a plain-meaning-of-the-language construction that
yields an inequitable result, until it is convinced no equitable
construction of that same language is possible.” Reed II, 312 B.R.
at 838 (citing Crooks v. Harrelson, 282 U.S. 55, 60 (1930) (holding
that “interpretations of a statute which produce absurd results are
to be avoided if alternative interpretations consistent with the
legislative purpose are available”)). To preclude recovery of all
interest on a trustee’s compensation and administrative expenses is
no more untenable a result than that reached by the minority view,
which reading “allows for interest to accrue on services before
they are rendered or expenses before they are incurred.” Reed II,
312 B.R. at 839.
CONCLUSION
Having carefully reviewed the entire record of this case, and
having fully considered the parties’ respective briefing and
arguments, we find no reversible error in the district court’s
memorandum opinion. We therefore AFFIRM the final judgment of the
district court essentially for the reasons stated in its order.
8
We further note that nothing in the 2005 Bankruptcy Reform
Act recently passed by the United States Senate affects our
interpretation of § 726. See Bankruptcy Abuse Prevention and
Consumer Protection Act of 2005, S. 256, 109th Congress (2005).
13
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