The Fourth Circuit cleaned up one mess that Congress made with its sloppy drafting of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. The case dealt with retroactive application of Section 724(b)(2) governing the subordination of tax liens to administration claims.
Before BAPCPA, Section 724(b)(2) subordinated tax liens to administrative expenses incurred in chapter 11 cases converted to chapter 7. Congress believed that the law encouraged professionals in hopeless reorganizations to run up fees at the expense of taxing authorities.
BAPCPA intended to change the law by giving tax liens priority over administrative claims arising in converted chapter 11 cases. As a result of the drafting error, the plain language of BAPCPA did not change the result. Tax liens were still subordinated to chapter 11 costs.
In the Bankruptcy Technical Corrections Act of 2010, Congress fixed the mistake by explicitly providing that Section 724(b)(2) now subordinates tax liens only to chapter 7 administrative costs.
The case in the Fourth Circuit entailed a chapter 11 case filed after BAPCPA but before the technical amendments. The case converted to chapter 7 after the technical amendments.
The debtor’s chapter 11 counsel had allowed fees of $220,000, but the chapter 7 trustee recovered less than $500,000 available for distribution.
Because the Internal Revenue Service had a tax lien of more than $1 million, the debtor’s attorneys would get nothing unless the original (and literally interpreted) version of BAPCPA applied and subordinated tax liens to chapter 11 costs. Consequently, the lawyers contended that the technical amendments should not be applied retroactively.
The bankruptcy court and the district court both applied the technical amendments, meaning that the chapter 11 lawyers got nothing. The Fourth Circuit reached the same result in a Jan. 26 opinion by Circuit Judge Pamela Harris.
Judge Harris construed the Supreme Court’s 1994 Landgraf opinion to mean that statutes are not applied retroactively without “clear congressional intent.” She then said that employing the technical amendments would make bankruptcy law “clear and easy to administer.” Otherwise, requiring a trustee to decide which law to apply “would complicate the process significantly.”
Nonetheless, Judge Harris decided that the case did not entail retroactivity because conversion occurred after the technical amendments were adopted. She cited Landgraf for the proposition that a law is not acting retroactively “‘merely because it is applied in a case arising from conduct antedating the statute’s enactment.’”
Holding that the most recent version of Section 724(b)(2) applied, she said the lawyers only had an inchoate expectation,” not a “vested right” under existing law protected by rules on retroactivity.
Judge Harris explicitly declined to rule on whether courts should follow the plain language in the original version of BAPCPA or construe the statute to mean what Congress intended but didn’t accomplish.