United States v. Lange (In re Netal, Inc.)
498 B.R. 225
| 8th Cir. BAP | 2013Background
- Debtor Netal, Inc. filed Chapter 11 on Nov. 5, 2009; the United States held a federal tax lien and claimed a first-priority interest in the Debtor’s cash collateral.
- Debtor and Government agreed Debtor could use cash collateral and that Government would receive a replacement post-petition lien; they also agreed Government could seek a § 507(b) superpriority administrative claim if adequate protection proved insufficient.
- Debtor’s plan failed; case converted to Chapter 7 in 2011 and estate funds were insufficient to pay all claims.
- After conversion, the Government moved for allowance of a § 507(b) unsecured superpriority administrative expense for post-petition diminution in collateral value; Benefit Plans and the Chapter 7 Trustee objected (priority/distribution issues under § 724(b) and § 726(b)).
- At hearing the Benefit Plans first disputed the amount of the Government’s § 507(b) claim; Government requested discovery and an evidentiary hearing. The bankruptcy court denied the § 507(b) motion on legal grounds (applying § 724(b)) and denied the Government’s motion for an evidentiary hearing; the Government’s § 507(b) claim was never liquidated.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether § 724(b) controls distribution over a § 507(b) unsecured superpriority claim | Gov: § 507(b) governs an unsecured superpriority administrative expense claim distinct from secured lien treatment under § 724(b) | Benefit Plans/Trustee: § 724(b) applies to the Government’s claims and dictates distribution priority | Court: Bankruptcy court erred applying § 724(b) to the Government’s asserted unsecured § 507(b) claim |
| Whether the Government was entitled to discovery and an evidentiary hearing on amount of its § 507(b) claim | Gov: When amount was first contested at hearing, it was entitled to discovery and an evidentiary hearing under § 503(b) and Rule 9014 | Benefit Plans: Amount was not previously challenged; no further proceedings needed | Held: Bankruptcy court abused its discretion by denying discovery/evidentiary hearing; remanded to determine amount of § 507(b) claim |
| Whether Rule 9014 and § 503(b)’s "after notice and a hearing" require process tailored to circumstances | Gov: Those provisions require appropriate notice and opportunity to be heard, including discovery when factual disputes arise | Opponents: No separate evidentiary process necessary here | Held: Court emphasized § 503(b) and Rule 9014 require appropriate hearing opportunities; denial was error |
| Standard of review for denial of evidentiary hearing | Gov: Abuse of discretion review; record shows misapplication of law | Opponents: Bankruptcy court acted within discretion | Held: Appellate court found abuse of discretion because ruling rested on incorrect legal conclusion (application of § 724(b)) |
Key Cases Cited
- First Nat’l Bank of Olathe, Kansas v. Pontow, 111 F.3d 604 (8th Cir. 1997) (standard: facts reviewed for clear error; law reviewed de novo)
- TriState Fin., LLC v. Lovald, 525 F.3d 649 (8th Cir. 2008) (discretionary rulings on hearings reviewed for abuse of discretion)
- Roberts v. Pierce (In re Pierce), 435 F.3d 891 (8th Cir. 2006) (abuse of discretion standard for evidentiary hearing rulings)
- Sholdan v. Dietz (In re Sholdan), 108 F.3d 886 (8th Cir. 1997) (definition of abuse of discretion as error of law or misapplication)
- Vafer Inv. Group, L.L.C. v. Case (In re Visionaire Corp.), 299 B.R. 530 (8th Cir. BAP 2003) (abuse of discretion arises from legal error)
- In re Anthony, 481 B.R. 602 (D. Neb. 2012) (discussing bankruptcy court discretion to hold evidentiary hearings)