United States Court of Appeals

Fifth Circuit



## FILED

April 1, 2005

Charles R. Fulbruge III

Clerk UNITED STATES COURT OF APPEALS

For the Fifth Circuit

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 Texas2

(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 ti me period when no

claim in fact existed. The UST urged, alternatively, that interest

should accrue fromthe date the bankruptcy court awards

compensation to the trustee. The bankruptcy court followed a third

path in determining that the relevant statute denies intere st 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 bankrupt cy 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

c ontained a surplus of approximately $10,700. The Trustee

thereafter su bmitted to the bankruptcy court an Application for

Compe nsation and Report of Proposed Distribution (the “Final

Report”), in which the Truste e proposed to pay interest on

administrative claims that the Trustee argued are mandated in1 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 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 d uring 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 dat e 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 co urt conducted a hearing during which both

parties presented their respective argume nts. 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, the2 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. S ee 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 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 ap plication of the plain language of the applicable

statutory pr ovisions. 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 vi ews, 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 interes t 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.5 DISCUSSION

Whether the district court erred in determining that 11 U.S.C. §

726(a)(1) precludes the recovery of interest for admi nistrative

fees and expenses.

We review de novo the district court’s statutory

interpretation of 11 U.S.C. § 726(a)

. S ee United States v.

Phillips , 303 F.3d 548, 550 (5th Cir. 2002).

As a preliminary matter, it should be note d 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). S ee 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 pe tition, 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 und er section 501.” I d. § 726(a)(1), (a)(2)(A).

Section 507, in turn, refers to administra tive expenses under §

503(b). I d. § 507(a)( 1). Section 503(b) allows administrative

expenses for “compensation and reimbursement awarded under section

330(a) of this title.” I d. § 503(b)(2). Finally, § 330(a)

provides that “the court may award to a trustee, an examiner, a

professional person

. . . reasonable compensation for actual,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 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 I n 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 Sect ion

726(a)(5).7

Id. at 324.

The Eleventh Circuit followed another line of rea soning 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 accu mulate 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). S ee 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 t he 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 its4 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 preamendment 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, a nd in the order specified in,

section 507 of this title . . . .

11 U.S.C. § 726(a)(1) (1994). Conspicuously absent from the preamendment 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 thi s provision necessarily

affects our analysis here.

8 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

v iew holds that interest must be paid on the trustee’s fee s and

expenses “from the date of the filing of the petition.” S ee 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 V ogt

, the Louisiana

bankruptcy court held that § 726(a)(5) is unambiguous and thereby9

authorize s accrual of interest on a trustee’s claim immediately

upon the petition’s filing. 2 50 B.R. at 283-84. The court there,

however, tempered its decision, recognizing that its holding “will

place us in the unenvi able position of having created a

one-court-strong minority view, in conf lict 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 V ogt 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 w he n

interest on administrative fees and expenses are reco verable, 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 5075 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 I n 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 s ection 501 of this title,” and that § 501

10 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 t heir 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.” I d. § 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]ltho ugh § 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.” I n re

Reed

, 312 B.R. 83 2, 839 (N.D. Tex. 2004) (“ R eed II ”). 5 Nor is aspecifically 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 p etition) are

necessarily elimi nated as holders of “claims.” I d. (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 l imited

partnership; or

(C) warrant or right, other than a right to convert, to

purchase, sell, or subscribe to a share, securi ty, or

interest of a kind specified in subparagraph (A) or (B)

of this paragraph.

11 U.S.C. § 101(16).

11 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 § 7 26(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, p roof

of which is filed under section 501 of this title , is deemed

allowed, unless a party in interest . . . objects.” 1 1 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. I n re Klein

, 78 F.3d at 28. The court7 Neither § 503(b)(2) nor § 503(a) provides for the recovery

of interest.

12 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 I n 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.” I d. 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 ex penses sought by trustees in bankruptcy

proc eedings are clearly allowed under § 503(b)(2), with payment

authorized by § 503(a). 7 S ee 11 U.S.C. § 503(b)(2) (providing that

admin istrative expenses shall be allowed for “compensation and

reimbursement awarded under section 330(a) of this title”); id. §

503(a) (“An entity may timely f ile a request for payment of an

administrative expense . . . .”).

Additionally, we conclude that to interpret § 726(a) as urged8 We further note that n othing in the 2005 Bankruptcy Reform

Act recently passed by the United States Senate affects our

interpretation of § 726. S ee Bankruptcy Abuse Prevention and

Consumer Protection Act of 2005, S. 256, 109th Congress (2005).

13 by the Trustee (and followed by the minority view) would produce

results at odds with Congress’s intention in drafting the

legislation. 8 T he 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 i f 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.” R eed 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 A FFIRM the final judgment of the

district court essentially for the reasons stated in its order.14