Swimming against the tide and deepening a split of authority, courts in Michigan granted an administrative claim to a creditor for making a “substantial contribution” in a chapter 13 case, when Section 503(b)(3)(D) only explicitly authorizes claims of that type in chapters 9 and 11.
As retained counsel for a chapter 7 trustee, a law firm objected to an exemption claimed by husband and wife debtors in annuities worth about $100,000. Before the objection was adjudicated, the debtors converted the case to chapter 13. The firm was not retained in the chapter 13 case.
When the chapter 13 trustee didn’t pursue the objection, the law firm did. Ultimately, the bankruptcy court disallowed the exemption. As a result, the debtors were forced to amend their plan and provide for 100% payment to unsecured creditors.
The law firm then sought allowance of an administrative claim for having made a substantial contribution to the chapter 13 case.
The bankruptcy court in Michigan allowed the “substantial contribution” claim in the amount of about $23,000 for the lawyers’ work during the chapter 13 case, relying on Mediofactoring v. McDermott (In re Connolly North America LLC), 802 F.3d 810 (6th Cir. Sept. 21, 2015), where the Sixth Circuit held that bankruptcy courts have discretion to allow an administrative claim to a creditor in chapter 7 who made a substantial contribution.
On appeal, the debtors argued it was error to allow a “substantial contribution” claim in chapter 13, because Section 503(b)(3)(D) only explicitly authorized allowance of an administrative claim for making a “substantial contribution in a case under chapter 9 or 11 of this title.” The debtors also contended that Mediofactoring was not controlling because that case involved chapter 7, and they were in chapter 13.
Relying on Mediofactoring, District Judge Paul D. Borman of Detroit rejected the debtors’ arguments in an opinion on Nov. 15 and upheld the bankruptcy court’s allowance of a “substantial contribution” claim.
Mediofactoring, according to Judge Borman, stands for the proposition that use of the word “including” in Section 503(b) “confers discretion on a bankruptcy court to award administrative expenses on a case-by-case basis, and that the express mention of Chapter 9 and Chapter 11 in Section 503(b)(3)(D) does not negate that fact.” He also said, “Nothing about the statutory interpretation in [Mediofactoring] is unique to the Chapter 7 context.”
Judge Borman said that a “substantial contribution” claim is allowable outside of chapters 9 and 11 depending upon “the totality of the pertinent facts, and the relevant equitable considerations.”
There was “no question,” Judge Borman said, that the law firm conferred a substantial benefit because creditors stand to recover 100% as a result of disallowance of the exemption claim. Because the chapter 13 trustee did not object to the exemption, the lawyers benefitted the estate when no one else was willing to do so.
Judge Borman also rejected the argument that Lamie v. U.S. Trustee, 540 U.S. 526, 124 S. Ct. 1023, 157 L. Ed. 2d 1024 (2004), bars allowance of the administrative claim. There, the Supreme Court held that Section 330(a)(1) precludes allowance of compensation to a debtor’s counsel from estate funds if the attorneys were not retained under Section 327.
Lamie, Judge Borman said, dealt with payment of compensation under Section 330(a)(1), while the case before him was based on Section 503(b), “a different statutory provision entirely.” He said there was no authority for the notion that Lamie “has anything to do with Section 503(b)(3)(D).”
Recently, a bankruptcy court in California followed Mediofactoring, joined the minority, disagreed with the Third Circuit, declined to follow its own Bankruptcy Appellate Panel, and found discretion to allow a “substantial contribution” claim in chapter 7. In re Maqsoudi, 566 B.R. 40 (Bankr. C.D. Cal. April 3, 2017). For ABI’s discussion of Maqsoudi, click here. To read about Mediofactoring, click here.