Disagreeing with the Third Circuit, a majority of courts and his own Bankruptcy Appellate Panel, Bankruptcy Judge Mark Houle of Riverside, Calif., concluded that he has discretion to allow a “substantial contribution” claim in chapter 7, not just in chapters 9 and 11.
Section 503(b)(3)(D) allows a creditor to have an administrative claim for making a “substantial contribution in a case under chapter 9 or 11 of this title.”
The Sixth Circuit held in Mediofactoring v. McDermott (In re Connolly North America LLC), 802 F.3d 810 (6th Cir. Sept. 21, 2015), that bankruptcy courts have discretion to allow an administrative claim to a creditor in chapter 7 who made a substantial contribution. Recognizing that it was creating a split of circuits, the Sixth Circuit said that the Third Circuit, along with 86% of bankruptcy and district courts, disallows substantial contribution claims in chapter 7.
To override the implication of the statute and the doctrine of “expressio unis est exclusio alerius,” the Sixth Circuit latched onto the use of “including” in Section 503(b) to conclude that the enumerated list of claims that qualify for administrative status is not exclusive.
In his April 3 opinion, Judge Houle recognized that the Ninth Circuit BAP disallowed a similar claim in chapter 7 in In re United Educ. & Software, 2005 Bankr. Lexis 3408, 2005 WL 6960237 (B.A.P. 9th Cir. 2005). However, Judge Houle said that the BAP’s analysis was “illogical” and “grammatically improper.”
Judge Houle therefore held that “where a creditor has made a substantial contribution to a chapter 7 case, the bankruptcy court has discretion to allow an administrative expense in accordance with the equities of the case.”
Notably, the trustee supported allowance of the claim. Judge Houle allowed the administrative claim in a reduced amount.
To read ABI’s discussion of Mediofactoring, click here.