Opinion ID: 1458245
Heading Depth: 1
Heading Rank: 3

Heading: The FDIC's claim is entitled to only ninth priority in the Chapter 7 proceeding

Text: The district court held that Imperial owed the FDIC $18,375,800 based on its obligation under the performance guaranty. Per 11 U.S.C. § 365( o ), which mandates immediate payment of deficits to federal depository institutions, the court ordered Imperial to cure its deficit as a condition of remaining in Chapter 11. Alternatively, the court noted that Imperial could convert to Chapter 7, in which case its unsatisfied cure obligation [would] have the status and priority in the Chapter 7 case which it is accorded under applicable bankruptcy law. Imperial converted to Chapter 7, and litigation over the status of the FDIC's claim ensued. The district court determined that the FDIC's claim was entitled to administrative priority in the Chapter 7 case under 11 U.S.C. § 507(a)(2). The Trustee argues that §§ 365( o ) and 507 of the Bankruptcy Code relegate the FDIC's claim to ninth priority. The FDIC argues that the district court correctly accorded its claim administrative priority. The priority of a claim arising from an uncured deficit under § 365( o ) is an issue of first impression. Section 365( o ) was enacted as part of the Comprehensive Thrift and Bank Fraud Prosecution and Taxpayer Recovery Act of 1990, which constitutes Title XXV of the Crime Control Act of 1990, Pub.L. No. 101-647, § 2522, 104 Stat. 4859, 4866. As part of its response to the savings and loan crisis, Congress sought to prevent parties affiliated with federal depository institutions from using bankruptcy to evade commitments to maintain capital reserve requirements of a Federally insured depository institution. H.R.Rep. No. 681(I), at 179 (1990), reprinted in 1990 U.S.C.C.A.N. 6472, 6585; Resolution Trust Corp. v. Firstcorp., Inc. (In re Firstcorp, Inc.), 973 F.2d 243, 246 (4th Cir. 1992). Section 365( o ) accomplished this goal by taking away a trustee's ordinary power to avoid a debtor's executory contracts under § 365(a). [15] Id. at 180, reprinted in 1990 U.S.C.C.A.N. 6472, 6586. The statute provides that [i]n a case under chapter 11 of this title, the trustee shall be deemed to have assumed (consistent with the debtor's other obligations under section 507), and shall immediately cure any deficit under, any commitment by the debtor to a Federal depository institutions regulatory agency. 11 U.S.C. § 365( o ). This assumption and cure mechanism has been interpreted to require a trustee to immediately pay any deficit to a federal depository institution as a condition of remaining in Chapter 11. Firstcorp, 973 F.2d at 247. If a debtor cannot `immediately' cure a deficit under a capital maintenance commitment that exists at the time of a bankruptcy filing, then § 365( o ) requires that debtor to proceed not under Chapter 11 but under Chapter 7, to which § 365( o ) does not apply. Id. In addition to its assumption and immediate cure requirement, § 365( o ) addresses the priority of a claim arising from an obligation under a capital maintenance commitment. The second portion of the statute provides that any claim for a subsequent breach of ... obligations [under a commitment to maintain the capital of a federally insured depository institution] shall be entitled to priority under section 507. The reference to § 507 in § 365( o ) directs the reader to § 507(a)(9). That provision, also enacted as part of the Comprehensive Thrift and Bank Fraud Prosecution and Taxpayer Recovery Act of 1990, places unsecured claims based on any commitment by the debtor to a Federal depository institutions regulatory agency... to maintain the capital of an insured depository institution in ninth priority in a bankruptcy case. [16] The plain language of § 365( o ) and § 507(a)(9) suggests that the FDIC's claim under the performance guaranty  the result of a subsequent breach of an obligation under a capital maintenance commitment  is entitled to ninth priority. The district court instead held that the FDIC's claim was entitled to administrative priority under § 507(a)(2), which allows second priority to administrative expenses including the actual, necessary costs and expenses of preserving the estate. 11 U.S.C. §§ 507(a)(2), 503(b)(1). [17] It found that Imperial's failure to cure its deficit to the FDIC was equivalent to an obligation arising from an executory contract, defined in the bankruptcy context as a contract in which the obligations of both the bankrupt and the other party to the contract are so far unperformed that the failure of either to complete performance would constitute a material breach. Fenix Cattle Co. v. Silver (In re Select-A-Seat Corp.), 625 F.2d 290, 292 (9th Cir. 1980) (per curiam) (internal quotation mark omitted). Reasoning that obligations arising from executory contracts are generally accorded administrative priority in the bankruptcy context, Collingwood Grain, Inc. v. Coast Trading Co. (In re Coast Trading Co.), 744 F.2d 686, 692 (9th Cir.1984), and retain that status in Chapter 7 cases, 11 U.S.C. § 726, the district court held that the FDIC's claim was entitled to administrative status in its Chapter 7 case. While initially plausible, this reasoning is ultimately unpersuasive. First, we note that to the extent there is any ambiguity in the meaning of §§ 507(a)(9) and 507(a)(2), § 507(a)(9)'s specific reference to debtors' commitments to federal depository institutions to maintain the capital of an insured depository institution should govern over § 507(a)(2)'s more general provision which arguably could cover the same subject matter. See Fourco Glass Co. v. Transmirra Prods. Corp., 353 U.S. 222, 228-29, 77 S.Ct. 787, 1 L.Ed.2d 786 (1957) (Specific terms prevail over the general in the same or another statute which otherwise might be controlling. (internal quotation marks omitted)). More importantly, we simply fail to see how Imperial's obligation to the FDIC constitutes an administrative expense. Administrative expenses are defined in the Bankruptcy Code as the actual, necessary costs and expenses of preserving the estate. 11 U.S.C. § 503(b)(1). [18] We recognize that, generally, an executory contract that the trustee assumes post-petition under § 365(a) is accorded administrative priority for the purpose of encourag[ing] third parties to contract with the bankruptcy estate for the benefit of the estate as a whole. Boeing N. Am., Inc. v. Ybarra (In re Ybarra), 424 F.3d 1018, 1026 (9th Cir. 2005). However, the Trustee's assumption of Imperial's executory contract with the FDIC when it filed for Chapter 11 cannot be equated with a trustee's assumption of an ordinary executory contract. Under § 365(a), a trustee can choose to assume or a reject an executory contract. Section 365( o ) creates an exception to the trustee's assume or reject power, Firstcorp, 973 F.2d at 247, because when the contract at issue is a capital maintenance agreement with a federal depository institution, the trustee automatically assumes the contract when it files for Chapter 11 under § 365( o ). Because of the required assumption, the stated rationale for according claims arising from assumed executory contracts administrative status  encouraging debtors to transact with the estate  is not implicated. Accordingly, the FDIC's claim is not an administrative expense as it is not an actual, necessary cost of preserving Imperial's Chapter 7 estate. It must instead be granted ninth priority per the specific language in § 507(a)(9). A holding to the contrary would lead to nonsensical results. The parties agree that had Imperial initially filed under Chapter 7, the FDIC's claim would be in ninth priority. Section 365( o ) never comes into play in Chapter 7 cases, so the FDIC's claim would necessarily be categorized as an allowed unsecured claim[ ] based upon any commitment by the debtor to a Federal depository institutions regulatory agency (or predecessor to such agency) to maintain the capital of an insured depository institution under § 507(a)(9). In contrast, based on the district court's analysis, the FDIC's claim is entitled to administrative priority in this case simply because Imperial initially filed for Chapter 11. We see no principled reason why a Chapter 7 debtor should be treated differently based on whether it initially filed in Chapter 11 or Chapter 7, when in either case the debtor ends up in Chapter 7 without benefiting from Chapter 11 reorganization possibilities. See United States v. Middleton, 231 F.3d 1207, 1210 (9th Cir.2000) (We are instructed to avoid, if possible, an interpretation that would produce `an absurd and unjust result. . . .') (quoting Clinton v. City of New York, 524 U.S. 417, 429, 118 S.Ct. 2091, 141 L.Ed.2d 393 (1998)). Granting the FDIC's claim administrative status would also erroneously read language into § 365( o ) that does not appear in the statute. A debtor with an uncured capital maintenance obligation to a federal depository institution cannot reorganize under Chapter 11 unless it first cures its deficit, and it can avoid the immediate cure obligation only by liquidating under Chapter 7. Indeed, while the district court held that the FDIC's claim was entitled to administrative priority in Chapter 11 and retained that status in Chapter 7, in actuality Imperial was unable to even enter Chapter 11 due to its failure to cure its deficit under 11 U.S.C. § 365( o ). We believe that preclusion of reorganization under Chapter 11 is the only consequence Congress prescribed for a debtor who fails to cure its obligation under § 365( o ), and that we would be adding to the statute if we instead held that debtors faced the additional consequence of administrative priority post-conversion. See Franklin Sav. Corp. v. Office of Thrift Supervision, 303 B.R. 488, 502 (D.Kan.2004) (The remedy for a debtor's inability to cure the capital deficiency is that the debtor may be prohibited from proceeding under Chapter 11, not that the FDIC be entitled to a superpriority claim.); see also Firstcorp, 973 F.2d at 248 (Section 365( o ) was intended to prevent bank holding companies from us[ing] a Chapter 11 reorganization to jettison the subsidiary in an effort to enhance [their] own financial position and that of its creditors.... If the holding company is not financially able to satisfy its capital maintenance obligations, then § 365( o ) denies it the opportunity to reorganize under Chapter 11, leaving liquidation under Chapter 7 as its only option.). Last, our result is not undermined by the Fourth Circuit's decision in Firstcorp, as the FDIC suggests. Firstcorp held that a debtor was required to immediately cure any deficits in capital maintenance obligations owed to federal depository institutions upon filing for Chapter 11 under § 365( o ). 973 F.2d at 247-48. In reaching that holding, the Fourth Circuit addressed the reference to § 507 in § 365( o ), which the debtor argued relegated the FDIC's claim to ninth priority, rather than immediate cure status. Id. In an effort to explain the reference to § 507, the court drew a distinction between obligations arising from a pre-petition breach of a capital maintenance commitment and obligations arising from a post-petition or subsequent breach of a capital maintenance commitment. It held that pre-petition breaches had to be cured immediately upon filing for Chapter 11, while post-petition breaches in Chapter 11 cases were entitled only to ninth priority. See id. at 248 (the reference to § 507 merely indicates that breaches in capital maintenance obligations that arise after the bankruptcy filing are subject to the priority scheme of § 507). The Firstcorp court interpreted the scope of the immediate cure obligation under § 365( o ) in a Chapter 11 case only, and never purported to address the priority of any claims. Id. at 247-48. The court explicitly declined to address the priority of claims arising from post-petition breaches in Chapter 11 cases, id. at 248 n. 4, and the issue confronting us here-the priority of a claim arising from a pre-petition breach post-conversion to Chapter 7-was never even raised before the Firstcorp court, id. at 247-48. Thus, although Firstcorp held that the reference to § 507 in § 365( o ) suggested that postpetition or subsequent breaches of capital maintenance obligations would be entitled to ninth priority in Chapter 11 cases, it does not foreclose our conclusion that a debtor's failure to cure a pre-petition capital maintenance obligation is also subject to the § 507 priority scheme post-conversion to Chapter 7. Accordingly, we hold that a failure to cure a § 365( o ) deficit in a Chapter 11 case does not give rise to an administrative priority in a Chapter 7 case. Rather, the FDIC's claim attributable to Imperial's failure to cure its debt is entitled only to ninth priority under §§ 365( o ) and 507(a)(9). We thus remand to the district court for further proceedings consistent with this opinion.