In Re Beale
This сase is before me on the motion of Revolution Portfolio, LLC (“Revolution”) for allowance of an administrative expense claim (“Revolution’s Motion”).
I.Jurisdiction
Jurisdiction lies pursuant to
II.Issue
The only question before me is whether Revolution shall be allowed an administrative expense claim for the actual and necessary expenses incurred during its efforts to locate property concealed by the Debt- or. The Bankruptcy Code 1 allows for such a claim, but only for a “creditor that recovers, after the court’s approval, for the benefit of the estate any property transferred or concealed by the debtor ...” Section 503(b)(3)(B) (emphasis added). The parties agree that property which had been concealed by the debtor was recovered for the benefit of the estate. 2 The question is whether Revolution satisfies the other two requirements of section 503(b)(3)(B): (1) does Revolution qualify as a “creditor that rеcovers”? and (2) what effect does the phrase “after the court’s approval” have on its claim? Revolution also argues that section 503(b)(3)(B) is merely illustrative and not an exhaustive list of circumstances in which administrative expenses may be grantеd to a creditor. 3 Finally Revolution makes a public policy argument. 4 Although other courts have addressed these issues, this appears to be a case of first impression in the Seventh Circuit. I will address each of these issues in turn.
III.Facts
The relevant facts are not complicated and are, for the most part, uncontested. On March 5, 2004, Revolution and three other creditors filed an involuntary petition for relief against the Debtor under chapter 7. As of the petition date, Revolution was a partially secured judgement creditor of the Debtor with a clаim in the amount of $7,300,000. On April 5, 2004, an order for relief was entered, and a trustee was appointed to administer the chapter 7 bankruptcy estate. On May, 5 2004, a motion by the trustee to employ Freeborn
&
Peters, LLP as special counsel was denied. Freeborn
&
Peters, as counsel for Revolution, had conducted investigations into the Debtor’s finances prior to the petition date. Freeborn & Peters continued to act as counsel for Revolution after the petition date. Between the petition date and August 31, 2004, Revolution incurred legal fees and expenses of over $1 million.
5
The efforts of Revolution were significant in assisting the trustee to recover several million dollars for the estate from assets transferred by the Debtor. On April 5, 2006, a settlement agreement
The trustee supports Revolution’s Motion and agrees that the information provided by Revolution and its counsel “proved valuable” in the negotiations with the Debtor and in the settlement agreemеnt that was eventually reached. 7 As part of the settlement reached between the trustee and Revolution, the trustee agreed to support Revolution’s administrative claim request to the extent of $575,000. Only the United States Trustee has objected to Revolution’s Motion.
IY. Discussion
Section 503(b)(3)(B) reads as follows:
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 spеcified in paragraph (4) of this subsection, incurred by -
(B) a creditor that recovers, after the court’s approval, for the benefit of the estate any property transferred or concealed by the debtor;
1. Whether Revolution qualifies as a “creditor that recovers”
Although not addressed in depth by any party, the interpretation of the language “a creditor that recovers” is pertinent to the issue at hand. Revolution argues that it is not fatal to its claim that it was the trustee, and not Revolution, that actually recovered the property. In suppоrt of its position it points to two cases. In
In re Maghazeh,
Although the trustee followed up on these leads and negotiated a settlement with the debtor, [the creditor’s] efforts were instrumental in the discovery of the assets for the estate. Although [the creditor] did not obtain prior court approval, efforts such as these by creditors on behalf of the estate and resulting in a benefit to all creditors should be encouraged, and the Court will not deny him compensation on that basis. In re Rumpza,54 B.R. at 109 .
The court cites no authority and, beyond the quote above, makеs no mention of section 503(b)(3)(B).
The case cited by the United States Trustee in opposition to Revolution’s Motion does confront this issue. The court in
In re Blount,
2. The meaning of “after the court’s approval”
Whichever interpretation of “a creditor that recovers” is adopted, the determinative issue herе is the meaning of “after the court’s approval.” Whether this court considers “a creditor that recovers” to be an issue of standing, or merely a reference to a creditor whose actions have led to the recovery of proрerty, the issue of prior court approval is critical.
On its face section 503(b)(3)(B) seems to clearly require prior court approval as a prerequisite to the allowance of an administrative expense, but Revolution is able to point to some case law from other circuits that support its position. 9 These cases generally take the equitable position that it would be unfair to not reimburse the creditor its expenses for actions that were so beneficial to the estate. The courts in these cases have granted retroactive or nunc pro tunc approval as a way to satisfy section 503(b)(3)(B). In the instant case, however, I already denied a motion to appoint Freeborn & Peters as special counsel. Rеvolution is now, for all intents and purposes, attempting to circumvent that order.
The majority of courts that have dealt with this issue have adopted a plain meaning approach to section 503(b)(3)(B) and denied administrative expenses sought by creditоrs that did not have prior court approval. 10 At no point in the written or oral arguments could Revolution or the bankruptcy trustee provide a logical rationale for ignoring the plain meaning of section 503(b)(3)(B). I agree with the plain meaning interprеtation of this section and find that it does not allow for administrative expenses in this case.
3. Whether § 503(b)(3)(B) is an exhaustive list
Revolution also argues that even if its claim does not fall into one of the categories of allowed administrative expenses of section 503(b), its claim shоuld still be allowed because the word “including” renders the following categories illustrative and not exhaustive. In making this argu
This view is supported by the history of the section. Section 64 of the Bankruptcy Act of 1898 previously allowed creditors to recover administrative expenses incurred in recovering property of the bankruptcy estate. Section 64 did nоt require prior court approval. When section 64 of the Act was recodified into section 503 of the Code, Congress deliberately added the language of the statute requiring prior court approval, apparently to ensure that the сosts were reasonable and that the efforts were necessary and not repetitive. The general rule is that changes in statutory language show Congress’ intent to depart from the old law. 11
Because Revolution’s situation is expressly addressed by seсtion 503(b)(3)(B), I will not ignore the express language of the code and create, in essence, another category of allowable administrative expenses for creditors that recover without court approval. 12
Nor do I find persuasive any of the policy arguments рresented by Revolution. I do not believe that denying Revolution’s Motion will “have a chilling effect upon creditor participation within a bankruptcy proceeding.” 13 Instead, adhering to the plain meaning of section 503(b)(3)(B) will result in bankruptcy proceedings which are more orderly and in which the role of the chapter 7 trustee will be protected. This holding will also prevent over-eager creditors from duplicating the work of the trustee and then looking to the court for administrative expense claims.
V. Conclusion
Although I recognize that the efforts of Revolution in this case were immensely helpful to the trustee in recovering a large amount of property for the benefit of the estate, I conclude that the proper decision is to deny the motion.
For the above reasons, Revolution’s Motion will be DENIED. A separate order will be entered.
Notes
.
. Much of the $7.2 million recovered by the trustеe from the "liquidation of assets in which the debtor had concealed his true interest or transferred his interest to third parties.” Revolution's Motion p.6 ¶ 17.
. Revolution's Reply p.3 ¶ 4-5.
. Revolution's Motion p.9 ¶ 26.
. Pursuant to a settlement agreement, Revolution is only seeking $575,000 as an administrative expense.
. The exact figure may increase if the trustee is able to liquidate other assets.
. Revolution's Reply p. 5-6 ¶ 10.
. Maxwell Response ¶ 13.
.
See
e.g.
In re Antar,
.
See
e.g.
Xifaras v. Morad (In re Morad),
.
See Shamrock Oil & Gas Co. v. Sheets,
. To do so might very well constitute an impermissible reordering of priorities.
See In re Kmart Corp.,
359 F.3d
866, 871 (7th
Cir.)
(cert, denied,
.In re Antar,