S. MARTIN TEEL, Jr., Bankruptcy Judge.
This addresses the application (titled Petition for Payment of Compensation to Special Legal Counsel) (Dkt. No. 948) filed by Ronald L. Gibson of Ruff, Bond, Cobb, Wade & Bethune, LLP, seeking allowance under § 330(a)(1) of the Bankruptcy Code (11 U.S.C.) and Fed. R. Bankr. P. 2016 of a claim for compensation for acting as special counsel for the chapter 7 trustee, Wendell W. Webster. For reasons discussed below, the debtor, Stephen Thomas Yelverton, lacks standing to object to the application because he has no financial stake in the outcome of the application. His objection to the application, the only objection filed regarding the application, will be dismissed on that basis. As explained later, Webster and his own law firm are the only parties that would be adversely affected by an allowance of Gibson's application. They have consented to Gibson's fee application. Upon the court's ruling on Gibson's application, Webster is ready to bring his administration of the case to a close. The court has examined the fee application, and finds the fees to be reasonable. Accordingly, the court will allow the application.
This case began as a case under chapter 11 of the Bankruptcy Code, with Yelverton serving as a debtor in possession, but the case was converted to a chapter 7 case. Webster was first appointed as an interim trustee under 11 U.S.C. § 701 and became the trustee under 11 U.S.C. § 702(d) when no one else was elected trustee. Webster obtained approval of a settlement with Yelverton's siblings that resulted in the bankruptcy estate receiving $110,000. As Webster testified at the hearing on his application for compensation, these are the sole funds Webster has on hand to distribute.
Yelverton's former spouse, Alexandra N. Senyi de Nagy-Unyom, has a nondischargeable claim for a domestic support obligation of $612,600.
As explained later, under 11 U.S.C. § 507(a)(1)(C), the two allowed claims for § 503(b)(2) administrative expenses, totaling $138,593.38, are entitled to priority over all other claims against the $98,800 in non-exempt estate funds. However, Gibson's claim, if allowed, will share the same level of priority. Even if Gibson's application is denied, the two allowed claims for § 503(b)(2) administrative expenses will exhaust the estate, leaving nothing to distribute to Senyi or to holders of other claims in this case.
Yelverton objected to Gibson's fee application, but the court's previous allowance of $138,593.38 in § 503(b)(2) administrative expenses eliminated Yelverton's financial stake in any claim by Gibson for compensation, thereby depriving Yelverton of standing to object to Gibson's application. The two reasons why Yelverton previously had standing to object to Gibson's application no longer apply.
Yelverton has sought reimbursement of expenses he incurred as a debtor in possession when this case was pending as a chapter 11 case. He had standing to object to any claim only if the claim's allowance would reduce the amount he would receive on his claim. When, even if an attorney's application for compensation is denied, a party holding a claim against the estate will not receive a distribution from the estate, that party lacks the necessary financial stake as a claimant to have standing to object to the attorney's application. See In re Runnels Broadcasting Sys., LLC, No. 7-02-14217 JR, 2009 WL 4611447, at *3 (Bankr. D.N.M. Dec. 1, 2009) (finding that a law firm lacked standing to object to a chapter 7 trustee's application for compensation when the law firm would not receive a distribution on its chapter 11 administrative expense claim even if the court denied the trustee's compensation application).
Here, under 11 U.S.C. § 726(b), Yelverton's chapter 11 expense claim is not payable until after allowed administrative expense claims incurred in the chapter 7 case have been paid. After the distribution of the $98,800 of non-exempt estate funds in partial payment of allowed § 503(b)(2) administrative expenses incurred by Webster and his law firm in the chapter 7 case (which already stand at $138,593.38), nothing will be left to pay Yelverton's claim for reimbursement of expenses incurred in the chapter 11 case regardless of whether Gibson's application is denied. Accordingly, Yelverton's claim for reimbursement related to his original chapter 11 case does not provide Yelverton with standing to object to Gibson's application in the final chapter 7 case, unless and until the aforementioned allowance of the $138,593.38 of § 503(b)(2) administrative expenses is set aside by way of appeal, or otherwise, in an amount sufficient to free up estate funds for potential payment on Yelverton's chapter 11 administrative expense claim.
As already noted, Senyi has a nondischargeable claim for a domestic support obligation of $612,600. Yelverton would have standing to object to Gibson's application if defeating that application would result in Senyi receiving a payment on her claim. See McGuirl v. White, 86 F.3d 1232, 1235-36 (D.C. Cir. 1996).
If there were no administrative expense claims in the case, Senyi's claim would be entitled to priority over all other claims in the case by reason of 11 U.S.C. § 507(a)(1)(A). However, 11 U.S.C. § 507(a)(1)(C) provides an exception to this priority by providing that:
For the reasons that follow, § 507(a)(1)(C) accords the aforementioned $138,593.38 in allowed § 503(b)(2) administrative expenses priority over Senyi's domestic support obligation claim.
Section 507(a)(1)(C) limits the administrative expenses to which it may accord priority to three types of administrative expenses, namely, "the administrative expenses of the trustee allowed under paragraphs (1)(A), (2) and (6) of section 503(b)," to the exclusion of all administrative expenses allowed under 11 U.S.C. § 503(b). For example, administrative expenses allowed under § 503(b)(1)(B) for certain taxes are not eligible for such possible priority under § 507(a)(1)(C). Instead, such tax administrative expenses are accorded a lower level of priority under 11 U.S.C. § 507(a)(2) and would only be paid after § 507(a)(1)(A) and (B) domestic support obligation claims.
However, the three types of administrative expenses that are eligible for priority under § 507(a)(1)(C) are accorded such priority only "to the extent that the trustee administers assets that are otherwise available for the payment of such [§ 507(a)(1)(A) or (B) domestic support obligation] claims."
When there are no domestic support obligations in a case, all administrative expense claims incurred during the pendency of the case in chapter 7 share (with certain other claims) a first level of priority under § 507(a)(2). However, when there are domestic support obligations of the character described in § 507(a)(1)(A) or (B), the priority scheme is altered:
In other words, when there are allowed unsecured claims for domestic support obligations described in either § 507(a)(1)(A) or § 507(a)(1)(B), the administrative expenses of the trustee allowed under § 503(b)(1)(A), (2), and (6) are elevated to a higher priority than other allowed administrative expense claims only "to the extent that the trustee administers assets that are otherwise available for the payment of [allowed unsecured claims for domestic support obligations specified in § 507(a)(1)(A) and (B)]."
This limiting language ("to the extent that the trustee administers assets that are otherwise available for the payment of [allowed unsecured claims for domestic support obligations specified in § 507(a)(1)(A) and (B)]") has been accurately described as "vague terminology appearing nowhere elsewhere in the Code" and as "obscure terminology[.]" Lynne F. Riley, BAPCPA at Ten: Enhanced Domestic Creditor Protections and Enforcement Rights, 90 Am. Bankr. L. J. 267, 278 (2016). However, its meaning is readily discernible.
The limiting language of § 507(a)(1)(C) does not provide that the specified expenses enjoy priority only "to the extent that the trustee administers assets that are otherwise available for the payment of such [§ 507(a)(1)(A) and (B) domestic support obligation] claims"
The purposes served by the language "to the extent that the trustee administers assets that are otherwise available for the payment of such claims [under § 507(a)(1)(a) or (b)]" in § 507(a)(1)(C) are two-fold. First, this limiting language contemplates the possibility that the expenses awarded priority under § 507(a)(1)(C) may exhaust the estate's assets, thereby leaving nothing to be paid on the § 507(a)(1)(A) and (B) claims. The assets a trustee administers are "otherwise available" to pay the § 507(a)(1)(A) and (B) claims, but not if the administrative expenses accorded priority under § 507(a)(1)(C) exhaust the assets of the estate. It is not necessary that the § 507(a)(1)(A) and (B) claims receive a distribution in order for priority to be accorded the administrative expenses specified in § 507(a)(1)(C). See In re Barker, No. 11-04346-TOM-7, 2015 WL 2208356, at *5 (Bankr. N.D. Ala. May 8, 2015).
Second, the limiting language assures that the priority under § 507(a)(1)(C) does not exceed the amount of the § 507(a)(1)(A) and (B) claims. Administrative expense claims generally enjoy second priority under 11 U.S.C. § 507(a)(2) after any § 507(a)(1)(A) or (B) domestic support obligation claims, but the administrative expense claims specified in § 507(a)(1)(C) have a higher priority than both § 507(a)(1)(A) and (B) domestic support obligation claims and other administrative expense claims enjoying only a § 507(a)(2) priority. Without § 507(a)(1)(C)'s limiting language ("to the extent that the trustee administers assets that are otherwise available for the payment of such claims [under § 507(a)(1)(A) or (B)]"), § 507(a)(1)(C) would provide:
If § 507(a)(1)(C) were written that way, the types of administrative expense claims eligible for priority under § 507(a)(1)(C) would enjoy a priority over all other administrative expense claims even if there were no § 507(a)(1)(A) or (B) domestic support obligation claims in the case, or even if existing domestic support obligation claims were far less than the funds the trustee had on hand to distribute. The limiting language in the actual § 507(a)(1)(C) provision thus explains that assets are "otherwise available" to pay § 507(a)(1)(A) and (B) claims only to the extent of the amount of the funds that would be needed to pay those § 507(a)(1)(A) and (B) claims.
To elaborate, consider first a case in which there are no claims under § 507(a)(1)(A) or (B). In that instance, § 507(a)(1)(C) has no applicability. The provision only applies "to the extent that the trustee administers assets that are otherwise available for the payment of such claims [under § 507(a)(1)(A) or (B)]." Without that limiting language, the trustee's administrative expenses "allowed under paragraphs (1)(A), (2), and (6) of section 503(b)" would be accorded priority over all other administrative expenses of the trustee, including, for example, taxes allowed under § 503(b)(1)(B). Instead, because of the limiting language, the result is that when there are no claims under § 507(a)(1)(A) or (B), all administrative expenses share the same level of priority under § 507(a)(2).
Consider second a case in which there are claims accorded priority under § 507(a)(1)(A) or (B). In such a case, the limiting language ("to the extent that the trustee administers assets that are otherwise available for the payment of such claims [under § 507(a)(1)(A) or (B)]") controls the extent to which the trustee's administrative expenses under § 503(b)(1)(A), (2) and (6) are entitled to first priority under § 507(a)(1)(C) instead of sharing with other administrative expense claims only a § 507(a)(2) level of priority. For example, if there are claims under § 507(a)(1)(A) or (B) but they do not exceed the funds the trustee is to distribute, the trustee will have administered funds equal to the § 507(a)(1)(A) and (B) claims plus additional funds that are not "otherwise available for the payment of such claims [under § 507(a)(1)(A) or (B)]." A trustee is not entitled to a § 507(a)(1)(C) priority in an amount that exceeds the § 507(a)(1)(A) and (B) claims.
Consider a case in which the estate consists of a single 11 U.S.C. § 550(a) recovery of $300,000, and in which the only allowed claims are:
The trustee would be entitled to assert that $100,000 of the § 503(b)(2) expenses, but no more, are entitled to a § 507(a)(1)(C) priority. After payment of $100,000 of the § 503(b)(2) claim, and payment of the $100,000 § 507(a)(1)(A) claim, the distribution of the remaining $100,000 of estate funds would be governed by § 507(a)(2), with the $100,000 remainder of the trustee's § 503(b)(2) claim sharing pro rata with the $50,000 tax claim enjoying the same § 507(a)(2) level of priority.
Limiting § 507(a)(1)(C) priority to expenses the trustee specifically incurred in administering assets that are otherwise available for payment of § 507(a)(1)(A) and (B) claims would lead to unwarranted outcomes and would place unwarranted burdens on the court in administering § 507(a)(1)(C) is readily evident. As an example of an unwarranted outcome, consider a case in which the trustee incurred $50,000 in allowed administrative expenses in a promising but ultimately unsuccessful effort to recover under 11 U.S.C. § 550(a) a transfer that was allegedly avoidable under 11 U.S.C. § 547(b). That $50,000 in allowed administrative expenses would not have been incurred by the trustee in administering assets used toward the payment of the § 507(a)(1)(A) and (B) domestic support obligations claims, even though the trustee undertook the efforts for the benefit of the holders of § 507(a)(1)(A) and (B) claims.
Furthermore, not all administrative expenses of a trustee are incurred in administering assets. For example, part of a trustee's duties under 11 U.S.C. § 704(a) include:
It is unlikely that Congress intended to place on the courts the unwarranted burden of ascertaining which expenses were incurred in performing those types of duties versus which expenses were incurred by the trustee in administering assets used toward the payment of § 507(a)(1)(A) and (B) domestic support obligation claims, a requirement not expressly written in § 507(a)(1)(C).
To recapitulate, all that is required for a trustee's allowed § 503(b)(2) administrative expenses to enjoy first priority under § 507(a)(1)(C) is that "the trustee administers assets that are otherwise available for the payment of such [§ 507(a)(1)(A) and(B)] claims," and the trustee is not required to show that he incurred the claimed administrative expenses in administering such assets.
Here, the trustee's administrative expense claims of $138,593.38 were allowed as administrative expenses under § 503(b)(2), classified as "compensation and reimbursement awarded under section 330(a) of this title." Accordingly, the $138,593.38 in administrative expenses in this case are the type of expenses that may enjoy priority under § 507(a)(1)(C) as "administrative expenses of the trustee allowed under paragraph[] . . . (2) . . . of section 503(b)." Section 507(a)(1)(C) accords priority to the $138,593.38 "to the extent that the trustee administers assets that are otherwise available for the payment of" Senyi's domestic support obligation claim. The trustee holds $98,800 in non-exempt funds, and that $98,800 is "otherwise available" for the payment of Senyi's claim, which exceeds $600,000. Accordingly, the $138,593.38 of allowed administrative expense claims are entitled to priority over Senyi's claim under § 507(a)(1)(C)and the entirety of the non-exempt funds will be used in payment of those administrative expense claims (plus any amount allowed as an administrative expense claim of Gibson).
Even if § 507(a)(1)(C) priority for a trustee's administrative expenses extended to only those expenses incurred in administering assets available to pay the § 507(a)(1)(A) and (B) domestic support obligation claims, the only meaningful asset Webster has administered is the $110,000 settlement fund (and the causes of action and rights that were the subject of that settlement), of which only $98,800 are non-exempt funds that would be "otherwise available" to pay Senyi's claim. The allowed § 503(b)(2) administrative expenses, so far, total $138,593.38. Webster's allowed commission of $8,190.00 is based on the $98,800 non-exempt estate funds, and necessarily is an expense incurred in administering that $98,800. That leaves $90,610 of estate funds at issue. A review of the application that led to Webster's law firm's allowed § 503(b)(2) administrative expenses of $130,403.38 readily reveals that at least $90,610 (that is, at least roughly 69.5%) of those expenses were incurred in administering that asset — namely, by way of engaging in litigation related to the $110,000 settlement and the claims and rights it settled. The litigation that entailed the administration of that asset (the settlement fund) included:
It is hard to identify time entries that could be considered as not incurred in the administration of the $98,800 non-exempt estate.
The allowed § 503(b)(2) administrative expenses of $138,593.38 and Gibson's claim are the only claims asserted in this case that are of the type for which § 507(a)(1)(C) priority might apply (a priority limited to § 503(b)(1)(A), (2), and (6) claims). Because they hold allowed § 507(a)(1)(C) claims entitled to priority over Senyi's claim and over claims accorded only § 507(a)(2) priority or lower priority, Webster and his law firm are the only parties with standing to object to Gibson's application, and they have no objection to Gibson's application. Although there may or may not be an administrative tax claim under § 503(b)(1)(B) in this case, the holder of such a tax claim would enjoy priority only under § 507(a)(2) and would be junior to the allowed administrative expense claims of $138,593.38.
For the foregoing reasons, Yelverton lacks standing at this juncture to object to Gibson's application. At this juncture, Yelverton has no financial stake in the outcome of Gibson's application because the denial of Gibson's application would not have any impact on Yelverton. Accordingly, an order has been entered that allows Gibson's application. If circumstances change such that a disallowance of Gibson's claim could result in funds being distributed to Senyi, Yelverton can pursue a motion under Fed. R. Civ. P. 60(b)(5) to vacate the order and to have the court hear Yelverton's objection to Gibson's claim.
This view is accurate so far as it goes, but to the extent that it suggests that the trustee's administrative expenses must have been incurred in administering assets that are available to pay the § 507(a)(1)(A) and (B) domestic support obligations, it goes too far and would result in unwarranted outcomes and impose unwarranted burdens on the courts that Congress did not likely intend.
