# U ni te d S ta te s B an kr up tc y A pp el la te P an el For the Eig hth Circu it

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No. 1 3- 60 07

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In re: Neta l, In c.

ll ll ll ll ll ll ll ll ll ll l Deb to r

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Uni te d S ta te s o f Am eri ca, In te rn al Rev en ue Serv ic e

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Mov an t - Ap

pe ll an t

v.

Ri ck D. Lang e, Ch ap te r 7 Tru st ee; Co nt ract or s, Lab or ers , Team st ers an d Eng in eers Pen si on Pla n; Co nt ract or s, Lab or ers , Team st ers an d En gi ne ers Heal th

an d Welfa re Pl an ; In te rn at io na l Un io n o f Ope rat in g En gi ne ers , Loca l No . 57 1

ll ll ll ll ll ll ll ll ll ll l Obj ect or

s - Ap pe ll ees

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__ __ __ __ __ App eal fro m

Uni te d S ta te s B an kr up tc y Co ur t fo r th e Dis tri ct of Ne br as ka - Om ah a

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Su bm it te d: Ju ly 25, 2 01 3 Fil ed : Se pt em

be r 13 , 20 13

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Befo re KRESSEL, SCHERM ER an d S HODEEN, Ban kr up tc y Ju dg es

.

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SCHERM ER, Ban kr up tc y Ju dg eThe Uni te d St at es of Am eri ca (th e “ Gov ern m en t” ) ap pe al s fro m or de rs of th e

ba nk ru pt cy co ur t de nyin g: (1 ) th e Gov ern m en t’s m ot io n to ap pr ov e it s su pe rp rio rit y ad m in is tra ti ve ex pe ns e cl ai m un d e r § 50 7( b) of Tit le 11 of th e Uni te d St at es Co de (th e “ Ban kr up tc y Co de ”); (2 ) th e Gov ern m en t’s Mot io n fo r Evid en ti ar y Hea ri ng (th e

“ Evi de nt ia ry Heari n g Mo ti on ”); an d (3 ) th e m ot io n of th e Gov ern m en t to al te r or

am en d th e ba nk ru pt cy co ur t’s de n i a l o f i t s m ot io n fo r a § 50 7( b) ad m in is tra ti ve

ex pe ns e cl ai m

. W e ha ve juri sd ic ti on ov er th is ap pe al fro m th e fin al or de rs of th e ba nk ru pt cy co ur t. Se e 28 U.S.C. § 15 8( b)

. Fo r th e reas on s se t fo rth be lo w, we

rev ers e th e ba nk ru pt cy co ur t’s de ni al of th e Gov ern m en t’s Ev i d e n t i ary Heari ng M o t i o n, an d rem an d th is cas e to th e ba nk ru pt cy co ur t fo r de te rm in at io n of th e

am ou nt , if an y , of t he Gov ern m en t’s cl ai m un de r § 5 07 (b ).

IS SUE
The is su e in th is ap pe al is whe th er the ba nk ru pt cy co ur t abu se d it s di sc ret io n whe n it de ni ed th e Gov ern m en t th e op po rtu ni ty to co nd uc t di sc ov ery an d pr od uc e

ev id en ce.

BACKGRO UND On Nov em

be r 5, 20 09
, Neta l, In c. (th e “ Deb to r”) fil ed a vo lu nt ary pe ti ti on fo r rel ie f un de r Ch ap te r 11 of th e Ban kr up tc y C o d e. On th e pe ti ti on da te , th e Gov ern m en t he ld a fe d e r a l t a x l i en , a nd cl ai m ed th at it he ld a fir st pr io rit y se cu rit y in te res t i n t he Debt or ’s cas h c ol la te ral

.

The Deb to r an d th e Gov ern m en t ag reed th at th e Deb to r co ul d co nt in ue to us e th e Gov ern m en t’s c a s h c o l la te ral
, an d th at th e Gov ern m en t wou ld be gr an te d a
rep la cem en t li en in th e Deb to r’s po st -p et it io n cas h co ll at eral to th e sa m e ex te nt as it s li en on th e pr e-p et it io n cas h co ll at eral

. The Deb to r an d th e Gov ern m en t al so ag reed
th at , to th e ex te nt th at th e ad eq ua te pr ot ect io n p r o v i d e d un de r th ei r ag reem en t was in ad eq ua te to pr ot ect th e Gov ern m en t ag ai n s t po st -p et it io n di m in ut io n in th e va lu e of th e co ll at eral
, th e Gov ern m en t wou ld be en ti tl ed to a su pe rp rio rit y ad m in is tra ti ve

2ex pe ns e cl ai m un de r § 50 7( b)

. The ba nk ru pt cy co ur t ap pr ov ed cas h co ll at eral

ag reem en ts of t he Debt or an d t he Gov ern m en t.

Unf or tu na te ly, th e Deb to r’s Ch ap te r 1 1 reo rg an iz at io n at te m pt was

un su cces sf

ul

. In 20 11
, th e Deb to r’s Ch a p t e r 1 1 cas e was co nv ert ed to Ch ap te r 7.
The re were in su ffi ci en t fu nd s t o p ay all cla im s.

Afte r th e Deb to r’s cas e was co n v e r t e d to Ch ap te r 7, th e Gov ern m en t fil ed a

m ot i o n t o a pp ro ve it s su pe rp rio rit y ad m in is tra ti ve ex pe ns e cl ai m un de r § 50 7( b)
, ba se d on an al l e ge d di m in ut io n in th e va lu e of th e Gov ern m en t’s co ll at eral

. The
Co nt r a c t o r s, Lab or ers , Team st ers an d Eng in eers Heal th an d W el fare Pl an ; C on tra ct or s, Lab or ers , Team st ers an d Eng in eers Pen si on Pl an an d In te rn at io na l
Uni on o f O pe rat in g Eng in eers , Lo cal No. 57 1 (th e “ Ben efi t Pl an s” ) ob jecte d to th e Gov ern m en t’s § 50 7( b) m ot io n, on th e ba si s th at , un de r Ban kr up tc y Co de § 72 4( b)
, pl an co nt rib ut io ns o w e d t o th em fo r th e 18 0 da y s pr e-p et it io n ha d pr io rit y ov er th e Gov ern m en t’s § 50 7( b) cl ai m

. Ri ck D. Lan ge , Ch ap t e r 7 tru st ee (th e “ Trus te e”),
ob jecte d to th e Gov ern m en t’s § 50 7( b) m ot io n “ to th e ex te nt th e [m ]oti on se ek s to al te r th e pr io rit ie s [u nd er Ban kr up tc y Co de § 72 6( b) ]. ” The Gov ern m en t ul ti m at el y
ag reed to th e Tru st ee’s p os it io n re ga rd in g t he pri or it y of c la im s.

The ba nk ru pt cy c ou rt he ld a he ari ng on th e Gov ern m en t’s § 50 7( b) m ot io n. At th e he ari ng , th e Be n e fit Pl an s rai se d, fo r th e fir st ti m e, a di sp ut e reg ard in g th e

am ou nt of th e Gov ern m en t’s § 50 7( b) cl ai m

. The Ben efi t Pl an s al le ge d th at th e Gov ern m en t fai le d to pr es en t fact s or ev id en ce in su pp or t of it s cl ai m

. At th e he ari ng , th e Gov ern m en t st at ed th at pr io r to th at ti m e, th e am ou nt of it s cl a i m h a d n o t b een ch al le ng ed , a nd it req ue st ed th at , i f th e co ur t fo un d a fac tu al di sp ut e co nc ern in g it s
req ue st fo r a su pe rp rio r i t y ad m in is tra ti ve ex pe ns e cl ai m , th e co ur t al lo w th e Gov ern m en t ad di ti on al ti m e to co nd uc t di sc ov ery. Th e ba nk ru pt cy co ur t to ok th e

m at te r un de r ad vi se m en t.

3Th e reaf te r, an d be fo re th e ba nk ru pt cy co ur t is su ed it s ru li ng on th e § 50 7( b)

m ot io n, th e Gov ern m en t fil ed it s writ te n Evi de nt ia ry Heari ng Mo ti on

. In th e Evi de nt ia ry Heari ng Mo ti on , th e Gov ern m en t req ue st ed an ev id en ti ary he ari ng on it s § 50 7( b) m ot io n if t h e b a n k r u pt cy co ur t fo un d th e ex is te nc e of a fact ua l qu es ti on ,

as ki ng fo r ad di ti on al ti m e to co nd uc t di sc ov ery pr io r to su ch he ari ng

. The ba nk ru pt cy

co ur t en te red a writ te n or de r, da te d Sep te m be r 26
, 20 12
, de nyin g th e Gov ern m en t’s

m ot io n fo r ap pr ov al of it s § 50 7( b) cl ai m be cau se th e ba nk ru pt cy co u r t de te rm in ed
th at § 72 4( b) go ve rn ed th e cl ai m

. The sa m e da y , th e ba nk ru pt cy co ur t al so en te red 1

a te xt or de r on th e do ck et , de nyin g th e Gov ern m en t’s Evi de nt ia ry Heari n g Mo ti on

an d refe rri ng th e pa rti es to th e writ te n or de r en te red th e sa m e da y on th e Gov ern m en t’s m ot io n fo r a § 50 7( b) cla im

.

The Gov ern m en t th en fil ed a m ot i on as ki ng th e ba nk ru pt cy co ur t to al te r or

am en d it s de c i s i o n de nyin g th e Gov ern m en t’s req ue st fo r a cl ai m un de r § 50 7( b)

. Afte r a h e a rin g, th e ba nk ru pt cy co ur t de ni ed th e m ot io n to al te r or am en d.
Acco rd in gl y , th e Gov ern m en t’s § 50 7( b) cla im was n ev er l iq ui da te d.

The Gov ern m en t as se rts two cl ai m s: (1 ) a se cu red cl ai m ; an d (2 ) an un se cu red

su pe rp rio rit y ad m in is tra ti ve ex pe ns e cl ai m un de r § 50 7( b)

. And
, th e es ta te ha s two

po ol s of m on ey : (1 ) on e su bjec t to th e Gov ern m en t’s li en ; (2 ) on e th at is no t su bjec t

to th e Gov ern m en t’s li en , bu t it is su bjec t to th e m ot io n fo r a su pe rp rio rit y ad m in is tra ti ve ex pe ns e cl ai m un de r § 50 7( b)

. At or al arg um en t, th e Gov ern m en t

co nc ed ed th at it s se cu red cl ai m is su bjec t to th e te rm s of Ban kr up tc y Co de § 72 4( b)
,

m ak in g it su bo rd in at e to ot he r cl ai m s in acco rd an ce wit h th at st at ut e. At is su e in th is

ap pe al is whe th er th e Gov ern m en t is en ti tl ed to an un se cu red su pe r p r i o r i t y cl ai m

un de r § 5 07 (b ).

The bankruptcy court also enter ed a text order deny ing the Gover nment’s § 507(b) 1 motion and refe rring the par ties to the written orde r ente red the same da y

.

4STANDARD OF REVIEW

W e rev ie w th e ba nk ru pt cy co ur t’s fin di ng s o f f act fo r cl ear erro r, an d it s

co nc lu si on s of la w d e n o v o

. Fir st Na t’l Ban k of Ola th e, Ka ns as v. Pon to w (In re Pon to w), 1 1 1 F

. 3 d 6 04
, 60 9 (8 th Ci r. 19 97 )). The ba nk ru pt cy co ur t ha s di sc ret io n
reg ard in g whe th er to ho ld an ev id en ti ary he ari ng , an d su ch a de ci si on is rev ie wed fo r

an ab us e of di sc ret io n. In re Ant ho ny , 48 1 B.R. 60 2, 61 5 (D. Neb

. 20 12 ) (ci ti ng Tr iSt at e Fin ., L LC v. Lo va ld

, 52 5 F.3 d 64 9, 65 5 (8 th Ci r. 20 08 ); Ro b e r t s v. Pier ce (In

re Pier ce ), 43 5 F.3 d 89 1, 89 2 (8 th Ci r. 20 06 )). “ A co ur t ab us es it s di sc ret io n ‘w he n it s ru li ng is fo un de d on an erro r of la w or a m is ap pl ic at io n of la w to th e fact s.’ ” Vaf er In v. Gro up , L .L.C. v. Ca se ( I n r e Vi s i on ai re Co rp .), 29 9 B.R. 53 0, 53 3 (B.A.P. 8t h
Ci r. 20 03 ) (q uo ti ng Pon to w, 11 1 F .3d at 6 09 an d Sh ol da n v . Diet z (I n r e S ho ld an ),
10 8 F .3d 88 6, 8 88 (8t h C ir. 1 99 7) ).

DISCUSS IO N Ban kr up tc y Co de § 50 7( b) , t he st at ut e un de r whi ch th e Gov ern m en t br ou gh t it s m ot io n, s ta te s t ha t i f th e tr us te e o r de bt or in po ss es si on :

un de r se ct io n 36 2, 36 2, or 3 6 4 of [th e Ban kr up tc y Co de ], pr ov id es ad eq ua te pr ot ect io n of th e in te res t of a ho ld er o f a c l a i m se cu red by a li en on pr op ert y of th e de bt or an d if, no t wit hs ta nd in g su ch pr ot ect io n,

su ch cred it or ha s a cl ai m al lo wab le u nd er su bs ect io n (a)( 2) of th is

se ct io n ari si ng fro m th e st ay of act io n a g a i n st su ch pr op ert y un de r

se ct io n 36 2 of [th e Ban kr up tc y C o de ], fro m th e us e, sa le
, or le as e of

su ch pr op ert y un de r se ct io n 36 3 of [th e Ban kr up tc y Co de ], or fro m th e gr an ti ng of a li en un de r se ct io n 3 64 (d ) of [th e Ban kr up tc y

Co de ], th en

su ch cred it or 's cl ai m un de r su ch su bs ec t i o n s h al l ha ve pr io rit y ov er

ev ery ot he r cl ai m

all owa bl e u nd er s uc h s ub se ct io n.

11 U.S.C. § 50 7( b)

. In tu rn , § 50 7( a)(2 ) pr ov id es an un se cu red se co nd pr io rit y cl ai m fo r “ ad m in is tra ti ve ex pe ns es al lo wed un de r se ct io n 50 3( b) of [th e Ban kr up tc y Co de ].

. . .” 11 U.S.C. § 50 7( a)(2 ). Sect io n 5 03 (b )(1 )(A) pr ov id es th at “ [a]fter no ti ce an d

a he ari ng , th ere sh al l be al lo wed ad m in is tra ti ve ex pe ns es

. . . in cl ud in g

. . . th e act ua l,

ne ces sa ry co st s an d ex pe ns es of pr es erv in g th e es ta te

. . . .” 11 U.S.C. § 50 3( b) (1 )(A).

5Ban kr up tc y Co de § 72 4( b)
, th e pr o v i s i on up on whi ch th e ba nk ru pt cy co ur t

rel ie d, is ti tl ed “ [t]reat m en t of cert ai n li en s.” 11 U.S

. C

. § 72 4( b)

. It se ts fo rth th e

or de r fo r di st rib ut io n of “ [p ]rop ert y i n w h i c h t he es ta te ha s an in te res t an d th at is

su bjec t to a li en th at is no t av oi da bl e un de r [th e Ban kr up tc y Co de ]

. . . an d th at

se cu res an al lo wed cl ai m fo r a ta x, or pr oc eed s of su ch pr op ert y

. . . .” Id

. (em ph as is
ad de d)

.

The or ig in al or de r of th e ba nk ru pt c y co ur t, da te d Sep te m be r 26
, 20 12
, pr ov id es th e fo cu s fo r th is ap pe al

. Th a t o r d e r w a s de ci de d on a pu rel y le ga l ba si s, ho ld in g th at § 72 4 (b ) go ve rn s, an d de nyin g th e Gov ern m en t’s m ot io n fo r a

su pe rp rio rit y ad m in is tra ti ve ex pe ns e cl ai m un de r § 50 7( b)

. Howev er, th e Gov ern m en t cl ai m s a § 50 7( b) un se cu red su pe rp rio rit y ad m in is tra ti ve ex pe ns e; no t

a se cu red cla im

ari si ng fro m

a li en , as i s d is cu ss ed un de r § 7 24 (b ). There fo re, § 7 24 (b ) do es no t ap pl y

to th e Gov ern m en t’s u ns ecu red cla im

.

As st at ed ab ov e, § 50 3( b) (1 )(A) refe rs to al lo wan ce of a n a d m in is tra ti ve

ex pe ns e “ [a]fter no ti ce an d a he ari ng .” 11 U.S.C. § 50 3( b) (1 )(A). In ad di ti on , whe n th e Be ne fit Pl an s an d th e Trus te e ob jecte d, th e Gov ern m en t’s req ue st fo r an ad m in is tra ti ve ex pe ns e cl ai m be cam e a co nt e s t e d mat te r un de r Fed eral Ru le of
Ban kr up tc y Pro ced ur e 90 14

. Fed

. R. Ban kr

. P. 90 14

. Ru le 90 14 (a) st at es th at “ [i]n

a co nt es te d m at te r no t ot he rwis e go ve rn ed by th es e ru le s, rel ie f sh al l be req ue st ed by

m ot io n, an d re as on ab le no ti ce an d an op po rt un it y fo r he ar in g sh al l be af

fo rd ed th e
pa rt y ag ai ns t wh om re li ef is so ug ht .” Fed . R. Ban kr . P. 9 01 4( a) (em ph as is ad de d)

. Pu rs ua nt to Ban kr

up tc y Co de § 10 2( 1) (A), th e ph ras e “ aft er no ti ce an d a he ari ng ” is
de fin ed a s “af

t e r su ch no ti ce as is ap pr op ria te in th e pa rt ic ul ar ci rc ums ta nc es , an d

su ch op po rtu ni ty for a h eari ng as i s ap pr op ria te in th e p ar ti cu la r ci rc ums ta nc es

. . . .” 11 U.S.C. § 1 02 (1 )(A) (e m ph as is ad de d)

. 2

Rule 9014(c) also makes other rules applicable to contested matters, including rules 2
reg arding discovery

.

6Und er th e ci rcu m st an ces of th is ca se , th e ba nk ru pt cy co ur t ab us ed it s di sc ret io n

whe n it de ni ed th e Go v e r n men t th e ch an ce to co nd uc t di sc ov ery an d pr es en t

ev id en ce. The ba nk ru pt cy co ur t ba se d it s ru li ng on th e in co rrec t le ga l co nc lu si on th at § 72 4( b) ap pl ie d to th e su pe rp rio rit y ad m ini str at ive ex pe ns e cl ai m of th e Gov ern m en t. The § 50 7( b) m ot io n by th e Gov ern m en t se t fo rth th e am ou nt of th e cl ai m as se rte d,

as well as it s pr io rit y

. The writ te n ob jecti on s to th e § 50 7( b) m ot io n co nt es te d th e
pr io rit y of th e Gov ern m en t’s cl ai m

. It was no t un ti l th e he ari ng on th e § 50 7( b) cl ai m th at th e Gov ern m en t was ap pr is ed of th e fact th a t t h e r e w as an is su e reg ard in g th e

am ou nt of th e cl ai m

. At th at po in t an d go in g fo rward
, th e Gov ern m en t m ad e cl ear it s d es ire to co nd uc t d is co ve ry an d p res en t ev id en ce.

CONCLUSI ON
Fo r th e reas on s st at ed ab ov e, we rev ers e th e ba nk ru pt cy co ur t’s de ni al of th e Gov ern men t ’s Evi de nt ia ry Heari ng Mo ti on , an d we rem an d th is cas e to th e ba nk ru pt cy

co ur t fo r de te rm in at io n o f th e am ou nt , if an y , of t he Gov ern m en t’s
§ 5 07 (b ) cl ai m

.

7