United States Bankruptcy Appellate Panel

For the Eighth Circuit

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No. 13-6007

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In re: Netal, Inc.

lllllllllllllllllllllDebtor

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United States of America, Internal Revenue Service

lllllllllllllllllllllMovant - Appellant

v.

Rick D. Lange, Chapter 7 Trustee; Contractors, Laborers, Teamsters and

Engineers Pension Plan; Contractors, Laborers, Teamsters and Engineers Health

and Welfare Plan; International Union of Operating Engineers, Local No. 571

lllllllllllllllllllllObjectors - Appellees

 ____________

 Appeal from United States Bankruptcy Court 

for the District of Nebraska - Omaha

 ____________

 Submitted: July 25, 2013

 Filed: September 13, 2013

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Before KRESSEL, SCHERMER and SHODEEN, Bankruptcy Judges. 

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SCHERMER, Bankruptcy Judge
The United States of America (the “Government”) appeals from orders of the

bankruptcy court denying: (1) the Government’s motion to approve its superpriority

administrative expense claim under § 507(b) of Title 11 of the United States Code

(the “BankruptcyCode”); (2) the Government’s Motion for Evidentiary Hearing (the

“Evidentiary Hearing Motion”); and (3) the motion of the Government to alter or

amend the bankruptcy court’s denial of its motion for a § 507(b) administrative

expense claim. We have jurisdiction over this appeal from the final orders of the

bankruptcy court. See 28 U.S.C. § 158(b). For the reasons set forth below, we

reverse the bankruptcy court’s denial of the Government’s Evidentiary Hearing

Motion, and remand this case to the bankruptcy court for determination of the

amount, if any, of the Government’s claim under § 507(b).

ISSUE

The issue in this appeal is whether the bankruptcy court abused its discretion

when it denied the Government the opportunity to conduct discovery and produce

evidence. 

BACKGROUND

On November 5, 2009, Netal, Inc. (the “Debtor”) filed a voluntary petition for

relief under Chapter 11 of the Bankruptcy Code. On the petition date, the

Government held a federal tax lien, and claimed that it held a first priority security

interest in the Debtor’s cash collateral. 

The Debtor and the Government agreed that the Debtor could continue to use

the Government’s cash collateral, and that the Government would be granted a

replacement lien in the Debtor’s post-petition cash collateral to the same extent as its

lien on the pre-petition cash collateral. The Debtor and the Government also agreed

that, to the extent that the adequate protection provided under their agreement was

inadequate to protect the Government against post-petition diminution in the value

of the collateral, the Government would be entitled to a superpriority administrative

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expense claim under § 507(b). The bankruptcy court approved cash collateral

agreements of the Debtor and the Government. 

Unfortunately, the Debtor’s Chapter 11 reorganization attempt was

unsuccessful. In 2011, the Debtor’s Chapter 11 case was converted to Chapter 7. 

There were insufficient funds to pay all claims. 

After the Debtor’s case was converted to Chapter 7, the Government filed a

motion to approve its superpriority administrative expense claim under § 507(b),

based on an alleged diminution in the value of the Government’s collateral. The

Contractors, Laborers, Teamsters and Engineers Health and Welfare Plan;

Contractors, Laborers, Teamsters and Engineers Pension Plan and International

Union of Operating Engineers, Local No. 571 (the “Benefit Plans”) objected to the

Government’s § 507(b) motion, on the basis that, under Bankruptcy Code § 724(b),

plan contributions owed to them for the 180 days pre-petition had priority over the

Government’s § 507(b) claim. Rick D. Lange, Chapter 7 trustee (the “Trustee”), 

objected to the Government’s § 507(b) motion “to the extent the [m]otion seeks to

alter the priorities [under Bankruptcy Code § 726(b)].” The Government ultimately

agreed to the Trustee’s position regarding the priority of claims.

The bankruptcy court held a hearing on the Government’s § 507(b) motion. 

At the hearing, the Benefit Plans raised, for the first time, a dispute regarding the

amount of the Government’s § 507(b) claim. The Benefit Plans alleged that the

Government failed to present facts or evidence in support of its claim. At the hearing,

the Government stated that prior to that time, the amount of its claim had not been

challenged, and it requested that, if the court found a factual dispute concerning its

request for a superpriority administrative expense claim, the court allow the

Government additional time to conduct discovery. The bankruptcy court took the

matter under advisement. 

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Thereafter, and before the bankruptcy court issued its ruling on the § 507(b)

motion, the Government filed its written Evidentiary Hearing Motion. In the

Evidentiary Hearing Motion, the Government requested an evidentiary hearing on its

§ 507(b) motion if the bankruptcy court found the existence of a factual question,

asking for additional time to conduct discovery prior to such hearing. The bankruptcy

court entered a written order, dated September 26, 2012, denying the Government’s

motion for approval of its § 507(b) claim because the bankruptcy court determined

that § 724(b) governed the claim. The same day, the bankruptcy court also entered 1

a text order on the docket, denying the Government’s Evidentiary Hearing Motion

and referring the parties to the written order entered the same day on the

Government’s motion for a § 507(b) claim.

The Government then filed a motion asking the bankruptcy court to alter or

amend its decision denying the Government’s request for a claim under § 507(b). 

After a hearing, the bankruptcy court denied the motion to alter or amend.

Accordingly, the Government’s § 507(b) claim was never liquidated. 

The Government asserts two claims: (1) a secured claim; and (2) an unsecured

superpriority administrative expense claim under § 507(b). And, the estate has two

pools of money: (1) one subject to the Government’s lien; (2) one that is not subject

to the Government’s lien, but it is subject to the motion for a superpriority

administrative expense claim under § 507(b). At oral argument, the Government

conceded that its secured claim is subject to the terms of Bankruptcy Code § 724(b),

making it subordinate to other claims in accordance with that statute. At issue in this

appeal is whether the Government is entitled to an unsecured superpriority claim

under § 507(b). 

The bankruptcy court also entered a text order denying the Government’s § 507(b) 1

motion and referring the parties to the written order entered the same day.

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STANDARD OF REVIEW

We review the bankruptcy court’s findings of fact for clear error, and its

conclusions of law de novo. First Nat’l Bank of Olathe, Kansas v. Pontow (In re

Pontow), 111 F.3d 604, 609 (8th Cir. 1997)). The bankruptcy court has discretion

regarding whether to hold an evidentiary hearing, and such a decision isreviewed for

an abuse of discretion. In re Anthony, 481 B.R. 602, 615 (D. Neb. 2012) (citing TriState Fin., LLC v. Lovald, 525 F.3d 649, 655 (8th Cir. 2008); Roberts v. Pierce (In

re Pierce), 435 F.3d 891, 892 (8th Cir. 2006)). “A court abuses its discretion ‘when

its ruling isfounded on an error of law or a misapplication of law to the facts.’ ” Vafer

Inv. Group, L.L.C. v. Case (In re Visionaire Corp.), 299 B.R. 530, 533 (B.A.P. 8th

Cir. 2003) (quoting Pontow, 111 F.3d at 609 and Sholdan v. Dietz (In re Sholdan),

108 F.3d 886, 888 (8th Cir. 1997)). 

 

DISCUSSION

Bankruptcy Code § 507(b), the statute under which the Government brought

its motion, states that if the trustee or debtor in possession: 

under section 362, 362, or 364 of [the Bankruptcy Code], provides

adequate protection of the interest of a holder of a claim secured by a

lien on property of the debtor and if, notwithstanding such protection,

such creditor has a claim allowable under subsection (a)(2) of this

section arising from the stay of action against such property under

section 362 of [the Bankruptcy Code], from the use, sale, or lease of

such property under section 363 of [the Bankruptcy Code], or from the

granting of a lien under section 364(d) of [the Bankruptcy Code], then

such creditor's claim under such subsection shall have priority over

every other claim allowable under such subsection.

11 U.S.C. § 507(b). In turn, § 507(a)(2) provides an unsecured second priority claim

for “administrative expenses allowed under section 503(b) of[the BankruptcyCode].

. . .” 11 U.S.C. § 507(a)(2). Section 503(b)(1)(A) provides that “[a]fter notice and

a hearing, there shall be allowed administrative expenses . . . including . . . the actual,

necessary costs and expenses of preserving the estate. . . .” 11 U.S.C. § 503(b)(1)(A). 

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Bankruptcy Code § 724(b), the provision upon which the bankruptcy court

relied, is titled “[t]reatment of certain liens.” 11 U.S.C. § 724(b). It sets forth the

order for distribution of “[p]roperty in which the estate has an interest and that is

subject to a lien that is not avoidable under [the Bankruptcy Code] . . . and that

secures an allowed claim for a tax, or proceeds of such property. . . .” Id. (emphasis

added).

The original order of the bankruptcy court, dated September 26, 2012,

provides the focus for this appeal. That order was decided on a purely legal basis,

holding that § 724(b) governs, and denying the Government’s motion for a

superpriority administrative expense claim under § 507(b). However, the

Government claims a § 507(b) unsecured superpriority administrative expense; not

a secured claim arising from a lien, as is discussed under § 724(b). Therefore, 

§ 724(b) does not apply to the Government’s unsecured claim. 

As stated above, § 503(b)(1)(A) refers to allowance of an administrative

expense “[a]fter notice and a hearing.” 11 U.S.C. § 503(b)(1)(A). In addition, when

the Benefit Plans and the Trustee objected, the Government’s request for an

administrative expense claim became a contested matter under Federal Rule of

Bankruptcy Procedure 9014. Fed. R. Bankr. P. 9014. Rule 9014(a) states that “[i]n

a contested matter not otherwise governed by these rules, relief shall be requested by

motion, and reasonable notice and an opportunity for hearing shall be afforded the

party against whom relief is sought.” Fed. R. Bankr. P. 9014(a) (emphasis added). 

Pursuant to Bankruptcy Code § 102(1)(A), the phrase “after notice and a hearing” is

defined as “after such notice as is appropriate in the particular circumstances, and

such opportunity for a hearing as is appropriate in the particular circumstances . . .

.” 11 U.S.C. § 102(1)(A) (emphasis added).

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

regarding discovery. 

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Under the circumstances ofthis case, the bankruptcy court abused its discretion

when it denied the Government the chance to conduct discovery and present

evidence. The bankruptcy court based its ruling on the incorrect legal conclusion that

§ 724(b) applied to the superpriority administrative expense claimofthe Government. 

The § 507(b) motion by the Government set forth the amount of the claim asserted,

as well as its priority. The written objections to the § 507(b) motion contested the

priority of the Government’s claim. It was not until the hearing on the § 507(b) claim

that the Government was apprised of the fact that there was an issue regarding the

amount of the claim. At that point and going forward, the Government made clear

its desire to conduct discovery and present evidence. 

CONCLUSION

For the reasons stated above, we reverse the bankruptcy court’s denial of the

Government’s Evidentiary Hearing Motion, and we remand this case to the

bankruptcy court for determination of the amount, if any, of the Government’s 

§ 507(b) claim.

 

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