The Sixth Circuit disagreed with a sister appeals court by allowing creditors in chapter 7 to have an administrative claim for a “substantial contribution,” even though Section 503(b)(3)(D) only lists chapters 9 and 11 as the types of cases where they are allowed.
The Sept. 21 opinion by Circuit Judge Bernice B. Donald evidently represents the minority view. According to the dissent by Circuit Judge Kathleen M. O’Malley, the Third Circuit and at least 25 lower courts have held that a creditor’s substantial contribution claim can succeed only in chapters 9 and 11.
Three creditors contributed to a chapter 7 case by initiating proceedings that resulted in removing the trustee. The substitute trustee sued the former trustee and an insurance company, resulting in a settlement characterized by the bankruptcy judge as contributing in part to a “substantial benefit” to the estate and creditors. The bankruptcy judge nonetheless denied a substantial contribution claim, saying it was not authorized by subsection (b)(3)(D).
Judge Donald reversed, beginning her analysis by saying that “equitable principles govern the exercise of bankruptcy jurisdiction.” She largely based her decision on use of the word “including” before the list of administrative claims enumerated in subsection (b).
Given the use of “including,” Judge Donald said Congress left the door open for courts to award administrative claims for expenses not specifically mentioned in Section 503(b)’s subsections.
The plain meaning of the subsection did not require denying the claim, Judge Donald said, because the statute nowhere says that expenses of the sort cannot be allowed in chapter 7. She also said the result was not compelled by the canon of construction known as “expressio unis est exclusion alerius,” or the “expression of one thing excludes the other.”
To Judge Donald’s way of thinking, denying reimbursement “would disincentivize participation in the bankruptcy process” and “impugn the fundamental notion of bankruptcy’s equitable relief.”
The Sixth Circuit disagreed with a sister appeals court by allowing creditors in chapter 7 to have an administrative claim for a “substantial contribution,” even though Section 503(b)(3)(D) only lists chapters 9 and 11 as the types of cases where they are allowed.