Hartford Underwriters v. Union Planters Bank NA - Oral Argument
Transcript:
Argument of G. Eric Brunstad, Jr.
Chief Justice Rehnquist: We'll hear argument next in Number 99-409, the Hartford Underwriters Insurance Company v. the Union Planters Bank.
Mr. Brunstad.
Mr. Brunstad: Mr. Chief Justice, and may it please the Court:
In the century preceding the enactment of the Bankruptcy Code in 196... 1978, this Court and other Federal courts recognized and enforced the rule that an unpaid administrative claimant in a bankruptcy case can come to court and have his or her claim paid if the expense benefited the secured party.
The Federal courts also recognized the rule that a trustee who pays a claim may come and seek to charge the secured party's collateral if there was a benefit to the secured party.
In enacting section 506(c) of the Bankruptcy Code, Congress recognized the right of the trustee, and the issue before the Court today is whether Congress' recognition of the right of the trustee was therefore intended to abrogate the other pre-code practice, which is that the administrative claimant could come to court and have the claim paid.
Chief Justice Rehnquist: So you're simply arguing that if the code says nothing, the pre-code practice applies, notwithstanding something like 506(c)?
Mr. Brunstad: Yes, Your Honor.
As the Court stated 2 years ago in the Cohen case, cited in our brief, at 523 U.S. at 221, we will not read the Bankruptcy Code to erode past bankruptcy practice absent a clear indication that Congress intended such a departure.
Justice O'Connor: Well, here, Congress said the trustee...
Mr. Brunstad: That's correct, Your Honor.
Justice O'Connor: can bring it, and it doesn't talk about the creditor, so maybe that's a change.
I mean, it's pretty clear language.
Mr. Brunstad: Yes, it is, Your Honor, but I think that the part that Congress recognized was the tip of the iceberg.
As this Court made clear in the Wilson case, which we cite in our brief, the rule which this Court recognized was that the unpaid administrative claimant could come forward and have the claim paid.
Now, we know under the Bankruptcy Code that Congress will codify some of the equitable doctrines that preceded its enactment, and yet this Court has recognized other equitable...
Justice O'Connor: Well, I mean, this just looks like pretty clear language.
Did your client ask the trustee to take action?
Mr. Brunstad: Actually, Your Honor, yes, my client did.
Justice O'Connor: Yes.
Mr. Brunstad: And the trustee's position was that the trustee had no interest in this case and would not pursue it.
Justice Kennedy: Could you have asked the judge to instruct the trustee to exercise his discretion to collect the... to impose the surcharge?
Mr. Brunstad: Yes, we could have asked the Bankruptcy Court to do that, but we think that the... it would have been futile, because the trustee had no funds whatsoever to engage in litigation with the secured party.
Justice Kennedy: So that it would have been abuse, an abuse of discretion for the trustee to go ahead and seek the surcharge?
Mr. Brunstad: It would have been, Your Honor, completely futile, plus I think Your Honor would have to recognize in this case that the trustee having no interest in recovery because the trustee had not paid the claim in the first place, one could argue that the trustee having no interest and no incentive and no ability, it simply could not have happened.
Justice Kennedy: Did the trustee in your view in this case have the discretion either to seek the surcharge or not to seek the surcharge?
Mr. Brunstad: Well, if the trustee had wanted to do so for free, certainly the trustee could have pursued the claim.
Justice Kennedy: Do you think, if you were the counsel for the trustee, you would have told the trustee that he has discretion not to pursue the surcharge?
Mr. Brunstad: Yes, Your Honor, I would, because the State of...
Justice Kennedy: So now we're in the position where the code says, with its... within the trustee's discretion not to pursue the surcharge, and yet the creditor can force it.
That seems a little odd to me.
Mr. Brunstad: Well, Your Honor, our position is not that the creditor can force the trustee to do it.
Our position is that the creditor can pursue the claim directly.
Justice Kennedy: It still seems odd to me.
If the trustee has the discretion not to do so, for the creditor to force it, it seems to me to be in effect controlling the discretion of the trustee.
Mr. Brunstad: I think perhaps, Your Honor, the question here is not whether the trustee has discretion.
It would be whether the trustee has the ability.
In this case, the trustee having no funds to litigate with the secured party simply could not pursue the claim.
Chief Justice Rehnquist: If you had had a prior arrangement with the trustee... I don't know whether you did or not... could an action be brought in State court on the basis of representations?
Mr. Brunstad: We think, Your Honor, that the remedy here is a remedy under the bankruptcy laws.
Chief Justice Rehnquist: Yes, I didn't... that's not the question I asked you.
Mr. Brunstad: Okay.
Chief Justice Rehnquist: I thought maybe the Eighth Circuit had reserved the question of whether there was some right you had to go into Federal court on diversity or State law.
Mr. Brunstad: I think, Your Honor, that the Eighth Circuit, the en banc decision was merely saying that the only question here is whether there is a question under Federal law.
Chief Justice Rehnquist: What did the panel opinion say?
Mr. Brunstad: The panel opinion, Your Honor, said that we had the right under section 506(c).
There was no mention of any alternative right.
Chief Justice Rehnquist: Had you brought any claims in the district court, or any other court?
Mr. Brunstad: No, Your Honor, we had not.
This is the exclusive means of recovery which we are...
Justice O'Connor: I'm curious about a prior question about what 506(c) covers.
Mr. Brunstad: Yes, Your Honor.
Justice O'Connor: The text of 506(c) says the trustee may recover from property securing an allowed secured claim the reasonable, necessary costs and expenses of preserving or disposing of such property, and I think we're dealing here with Workman's Comp...
Mr. Brunstad: Yes, Your Honor.
Justice O'Connor: premiums that were incurred after the original Chapter 11 proceeding was begun...
Mr. Brunstad: Correct.
Justice O'Connor: in an attempt to keep the business going.
It didn't have anything to do with a cost and expense of preserving the real property, did it?
Mr. Brunstad: It did, Your Honor.
In this case the assets in question were operating businesses... gas stations, restaurants... and in order to operate those businesses the debtor had to have Worker's Comp insurance or it could not operate at all, so but for the provision of the insurance there would have been no operation.
Justice Scalia: Mr....
Justice Kennedy: Yes, but if they operate at a loss, that's not much of a benefit to the secured creditor.
That's the whole problem, is these people have been operating.
Mr. Brunstad: Well, Your Honor, I think that the difference is that between liquidation value and going concern value of the gas station.
Justice O'Connor: Well, put it this way.
I'm not sure... I mean, if your client had been hired to go paint the building, or to repair the plumbing, I can understand how it would fit under 506(c), but to incur an expense for paying these premiums for Workman's Comp to run the business, as opposed to actually enhancing the real property or the building, I'm not sure I see how it fits under 506 at all...
Mr. Brunstad: Well, Your...
Justice O'Connor: instead of 503(a).
Mr. Brunstad: Well, Your Honor, you never get to 506 unless you go through 503.
503 allows the administrative expense and creates a class of administrative expense claimants.
Justice O'Connor: Presumably your client is within that general category.
Mr. Brunstad: There is no dispute, Your Honor, that our claim was allowed as a proper administrative expense.
Justice O'Connor: But you just want to go now against the real property because that's the only thing there is, I guess.
Mr. Brunstad: Correct.
506(c) articulates...
Justice O'Connor: Yes.
Mr. Brunstad: a priority for certain claims.
Justice O'Connor: Okay, but why doesn't it... isn't it limited to something that actually enhances the property as opposed to the broader 503 claim?
Mr. Brunstad: Your Honor, in this case it's undisputed that our claim provided a benefit to the secured party, and the reason that it did was because the value which the bank realized from the sale of these businesses as a going concern was actually much greater than the value that they would have received if the gas station had shut down.
Picture the storage tanks under a gas station which is not operating or generating revenue.
Typically, those operations sell for very little money.
If, however, you have an operating store, and some of these stores are, in fact, still operating, but with different owners, the value is much more, so the bank got the benefit of the difference in value because the debtor was able to operate in a going concern value and those values were preserved.
That is, of course, one of the purposes of Chapter 11.
Justice Scalia: Mr. Brunstad, I have...
Chief Justice Rehnquist: Who can speak to engage a client such as yours to continue?
Is it the trustee?
Do you have to have an arrangement with the trustee?
Mr. Brunstad: Well, I think Your Honor should understand that the trustee and creditors are adversaries, and that it would not be... it would be unseemly in the least for a creditor, who is adversary to a trustee, to have to hire the adversary to pursue the creditor's claims.
Chief Justice Rehnquist: Yes, but in the first place, after bankruptcy, who authorizes your client to continue paying for Workman's Compensation?
Mr. Brunstad: Oh, I see.
Well, in this case, Your Honor, our client did not even know of the bankruptcy.
The debtor concealed that fact from us, so we've continued to provide the services without knowledge of the bankruptcy.
Chief Justice Rehnquist: Without any authorization from the trustee?
Mr. Brunstad: Well, it was authorized, Your Honor, but in the Chapter 11 context it doesn't quite work that way.
What happens is that when the debtor, who is in possession of all of the estate, the case is filed, the debtor continues to operate as it had.
Section 1108 of the Bankruptcy Code provides for the continued operation of the businesses, and the ordinary expenses which the debtor would incur in operating the businesses continued to be paid.
Chief Justice Rehnquist: Now, but is the debtor authorized to incur expenses which will be ultimately classified as administrative expenses?
Mr. Brunstad: Yes, Your Honor, and that... expenses that are incurred in the ordinary course, the debtor is authorized by statute to continue to incur those expenses, and in this case what we have, Your Honor, is an involuntary creditor.
We have the insurance company who provided insurance because the debtor could not get it in the market, and it was an assignment through the assigned risk pool, so as an involuntary creditor Hartford had to continue to provide the insurance.
Justice Kennedy: Even when the premiums were not paid?
Without...
Mr. Brunstad: Once the premiums were not paid, the Hartford then went and issued a default notice to the debtor...
Justice Kennedy: No, my question is this.
Mr. Brunstad: Yes, Your Honor.
Justice Kennedy: Let's assume the current premium has not been paid.
Mr. Brunstad: Yes, Your Honor.
Justice Kennedy: Does Hartford, under Missouri law, have the requirement to continue to provide the coverage?
Mr. Brunstad: For a period of time, yes, because...
Justice Kennedy: How long?
Mr. Brunstad: contractually there is a 30-day notice period before the policy can be cancelled.
Justice Kennedy: For just 30 days?
Mr. Brunstad: That's what the contract provides.
Justice Kennedy: But you seek for some 6 or 7 months, am I right?
Mr. Brunstad: Yes, Your Honor, but what happened during that period of time was that initially a part of the premium was paid when the application for the insurance was submitted, so that was covered for a period of time.
The way these policies work...
Justice Kennedy: up front.
Mr. Brunstad: I believe it was over $25,000.
Justice O'Connor: Could not the insurer have said in a situation like this, the debtor is in Chapter 11, I'm not going to be at risk, put up the whole thing in front?
Mr. Brunstad: If we had known about the Chapter 11, perhaps we could have done that, but we did not know, Your Honor.
Justice O'Connor: As soon as you found out about it, couldn't you say, at this point we stop until you pay the premium in advance?
Mr. Brunstad: We did not find out until after the policy was terminated, Your Honor.
Justice Souter: How does that relate to your argument that you were required to provide insurance anyway because this individual, or the company would have been within the assigned risk pool?
Mr. Brunstad: Your Honor, what happened was that they tendered their application with part of the premium, and then the... a period of time went by.
Premiums are calculated on an audit basis, meaning the debtor has to submit their payroll reports to the insurer.
Then the insurer calculates the premiums based upon the number of persons who are employed times a certain rate.
The debtor in this case neglected to send those monthly reports, so Hartford sent an auditor in.
The auditor conducted the audit, went back to Hartford, Hartford calculated the premium and then sent a demand to the debtor.
The debtor paid part of the premium.
Now, all of this took a lot of time to happen.
After the debtor paid a part of the premium, the second installment, in addition to the one that was with the initial application, it was not enough to carry through the term, but by the time the Hartford went and said, you haven't paid the full amount, we were 30 days away from the termination of the policy, so it was too late to cancel.
Justice Souter: So all you're saying is, we had to start insuring.
When we could stop insuring was in fact a complex function of the audit.
Mr. Brunstad: Correct, Your Honor.
Justice Souter: Okay.
Justice Scalia: Could I ask you about section 506, which is on page 2 of your brief?
Mr. Brunstad: Yes, Your Honor.
Justice Scalia: It says the trustee may recover necessary costs and expenses of preserving or disposing.
Now, I assume that he can't recover them until they've been expended.
Mr. Brunstad: That's correct, Your Honor.
Justice Scalia: Well...
Mr. Brunstad: When the trustee... the trustee...
Justice Scalia: That's a reasonable reading of it.
Mr. Brunstad: Correct, Your Honor.
Justice Scalia: Isn't it also a reasonable reading of it that he can't recover them unless he has expended them?
I mean, I'm...
Chief Justice Rehnquist: Correct, Your Honor.
Justice Scalia: When the trustee...
Well, but that's not the position you're taking.
In response to other questions here, you have assumed that the trustee could sue to recover money that he didn't expend but that you expended.
Mr. Brunstad: I think that the best reading of the statute, Your Honor, on its plain meaning, is that the trustee, when the trustee expends, then the trustee recovers.
Justice Scalia: Right.
Mr. Brunstad: But under prior practice, that was not necessarily the rule.
Under prior practice, trustees could recover whether they expended or not, and individual claimants could recover whether they expended or not, and the problem that the court faces...
Justice Scalia: So long as somebody else had expended.
I mean, somebody has to have expended.
You acknowledge...
Mr. Brunstad: Somebody has to be out some dollars before they can recover, and it has to be an administrative, allowable administrative expense before you get to 506(c).
Justice Scalia: You agree that the most straightforward reading of the statute is that the trustee can recover any money that he's expended...
Mr. Brunstad: Correct.
Justice Scalia: in securing the...
Mr. Brunstad: That's correct, Your Honor, but that doesn't, of course, tell us what to do when the trustee has not expended and the individual claimant is out...
Justice Ginsburg: You would agree, Mr. Brownlee, that the standard situation in which 506 applies is where the trustee has paid out cash, and...
Mr. Brunstad: Where the trustee has paid out cash...
Justice Ginsburg: and then he gets back that cash from the security, from the sale of the secured property.
Mr. Brunstad: Correct, Your Honor, and that has always been the uniform rule in the Federal courts including as articulated by this Court.
Justice Ginsburg: So how often has 506 applied to credit transactions?
Mr. Brunstad: It applies in almost every single case, Your Honor, in one way or another, where there is a secured party.
The problem that we face, Your Honor, is that in some cases...
Justice Ginsburg: No, I mean practically.
You've just said the standard instance in which 506 is used is, the trustee pays out dollars, and then the property is sold, and he gets those dollars back from the top of the price.
Mr. Brunstad: Correct, but that presupposes, Your Honor, that the trustee paid the expense first, and that presupposes the trustee had funds, unencumbered funds to pay these...
Justice Ginsburg: All I'm suggesting is that that is the core situation to which 506 applies.
Mr. Brunstad: It is the...
Justice Ginsburg: I thought you agreed with me.
Mr. Brunstad: It is the logical situation, the paradigm which Congress seemed to have had in mind, and now what we must do is fill in the gap for the part that Congress didn't seem to have in mind, and so the question becomes, do we follow the pre-code practice to fill the gap?
Justice Ginsburg: Well, that's... you know, you keep talking about pre-code practice, and I looked at your cases, and there isn't all that pre-code practice.
I mean, there's the one decision that you're relying on from this Court before there was any bankruptcy legislation, and then another one that's an admiralty case.
Mr. Brunstad: The Poznan case was an admiralty case, that's correct, Your Honor.
Justice Ginsburg: That doesn't show a very solid pre-code practice.
Mr. Brunstad: Well, Your Honor, the case which we rely on from this Court, the Wilson case, I think quite clearly addressed the specific problem and provided the specific solution that we're seeking.
In the lower court decisions, as the bankruptcy laws evolved up to the point of the Bankruptcy Code, those courts relied on Wilson for the proposition that the administrative claimant has the right to come to the court and have its claim paid when it has not been paid, and one of the cases that we cite in our brief is a case involving... bear with me for one minute, Your Honor.
It is the Louisville case, Louisville Storage Company case, 21 F. Supp. at 897, where the Court, citing Wilson, said, quote, it has always been the rule, inherent in general principles of equity, that the lienholder must bear the expense of bankruptcy administration, which is solely for his benefit, or to which he consents, or to which he causes, and there, and in those other cases relying on Wilson, the courts would allow on occasion the unpaid administrative claimant to come forward and have their claim paid.
So Wilson is the lodestar, in a sense, and the lower Federal courts followed it.
Justice Ginsburg: Yes, but you're relying on one rather old Supreme Court decision and some lower court decisions following it up.
I'm just suggesting that that is not a very strong peg for claiming this understood pre-code practice.
Mr. Brunstad: Well, Your Honor, it was uniform.
There were no opinions to the contrary, and the... this practice, I would submit, Your Honor, is more established than the pre-code practice which this Court was willing to accept in Midlantic for the proposition that a trustee's power to abandon carries with it the corollary that the trustee cannot abandon in violation of certain health and safety requirements under applicable State law.
Chief Justice Rehnquist: Well, isn't it possible Congress might have wanted to change this, figuring that what you describe as pre-code practice would attract a certain amount of leeches who wanted to get at the secured property?
Mr. Brunstad: Well, Your Honor, the rule, I think, is one which initially five courts of appeals, and the Eighth Circuit changed its mind, had adopted and the courts had no ability administering.
I don't think there's any evidence, Your Honor, that Congress intended to change the practice.
In fact, the only evidence in the legislative history is that Congress intended to maintain the status quo, so there's no... there being no evidence of an intent to change, the presumption, I think, is that, and properly so, given the nature of what we're talking about, the bankruptcy laws, that the pre-code practice endures.
Justice Kennedy: If the trustee chose to seek these funds to surcharge the property and, either by an accounting entry or by the actual receipt of cash, received $25,000, would that be paid 100 percent to you, or could the trustee say, well now, I have my own administrative expenses, too, and other, and there are other administrative... how does that work?
Mr. Brunstad: If the trustee has paid the claim from unencumbered funds of the estate, and the trustee then seeks to recover it from the secured party's collateral, and the trustee is basically replenishing the estate and then the funds would be distributed, but in that situation, of course, the administrative claimant is paid in full...
Justice Kennedy: No, but in my hypothetical he's not quite sure, and so he goes to court seeking authority to pay.
He gets it.
Does that go just to you, or does it go to other administrative claimants as well?
Mr. Brunstad: It would go to us if we were the only section 506...
Justice Kennedy: No, there are other ones.
Mr. Brunstad: Well, those claimants' claims are not entitled to the priority that section 506(c) provides.
If those claims did not provide a benefit to the secured party...
Justice Kennedy: They say they did.
Mr. Brunstad: Oh, if they did, and they were properly also 506(c) claimants...
Justice Kennedy: They claim that, but he just seeks authority to recover the money for you, and then it's there in the pot.
Doesn't everybody get to share it?
Mr. Brunstad: If those other claimants' claims were determined ultimately by the court to be entitled to 506(c), we would share with other 506(c) claimants.
Justice Kennedy: Do you have to do that under your theory of the case, where you yourself can sue?
Mr. Brunstad: Yes.
Justice Kennedy: So once you get a surcharge you have to share it with everybody else?
Mr. Brunstad: I think it's important to understand, Your Honor, that in the bankruptcy case the timing of when claims are presented is not what's important.
At the end of the case, after all claims have been cut off by a bar date and then determined, those... that is when the distributions can be made.
Justice Kennedy: I know.
Well, you help me with my question.
What happens if you prevail and you succeed in a surcharge?
Do you have to share with other administrative claimants who have made a claim?
Mr. Brunstad: If they have 506(c) rights, yes.
Justice Souter: Now, are there priorities within the 506(c) administrative claimants?
Mr. Brunstad: No.
All 506(c) claimants are equal.
Justice Souter: Including those pre-conversion and post conversion?
Mr. Brunstad: No. 506(c) only applies, Your Honor, to post petition.
Justice Souter: Ah.
Okay.
Justice Breyer: What happens pre-petition if a debtor has a huge claim against, say, General Motors that requires a lawsuit, let's say, millions of dollars, and the trustee, thinking it isn't that great a claim, won't bring the lawsuit...
Mr. Brunstad: Yes.
Justice Breyer: but the creditor, who's a big creditor...
Mr. Brunstad: Yes.
Justice Breyer: thinks I'd certainly like this money in the estate...
Mr. Brunstad: Yes.
Justice Breyer: I want him to bring the lawsuit.
What happens?
Can the creditor sue General Motors directly?
Mr. Brunstad: Your Honor, we believe that the Court answered that question in Meyer v. Flemming...
Justice Breyer: Yes, and what's the answer?
Mr. Brunstad: which is cited in our brief, and the answer is that of course the lawsuit should not be allowed to lapse.
The creditor can come and bring the cause of action.
Justice Breyer: So the creditor can bring his own lawsuit in that case for the benefit of the estate because the trustee wouldn't.
Mr. Brunstad: Correct, Your Honor.
Justice Breyer: And you say that's really the same principle here.
Mr. Brunstad: Correct, Your Honor, and I think...
Justice O'Connor: What could Hartford have done here to protect itself?
I mean, what's conceivably...
Mr. Brunstad: Conceivably...
Justice O'Connor: out there to protect Hartford?
Mr. Brunstad: Well...
Justice O'Connor: Is no notice required to be given to people post petition in a Chapter 11?
Mr. Brunstad: Notice is required, Your Honor.
It should have been done.
It was not done in this case to the Hartford, so the Hartford was without notice.
But let's... assuming that Hartford had notice, what could Hartford have done?
Well, being an involuntary creditor, and having to provide insurance as long as the premium was paid, very little, and Hartford's relief is section 506(c).
Just like when the United States comes in and cleans up an environmental site post petition, and the cleanup of the site benefits the secured party by increasing the value of the collateral, the United States in that situation, courts have recognized, can then come to court and say, the trustee has not paid our administrative expense for cleanup because the trustee has no unencumbered funds to do so and the courts have said, well, you may surcharge the collateral to the extent that it benefited the secured party.
Now, if that were not the rule, and the trustee had no funds to pay the United States' cleanup cost, then essentially the United States would be subsidizing the recovery of the secured party, who would walk away with the full value of the collateral, having the benefit of the cleanup cost, but not have to pay that cost from the collateral, and this Court's principle, which is... it's articulated in Burnham v. Bowen, in Wilson, a whole line of cases, is that that is not the bankruptcy rule.
Justice O'Connor: Was this property... was the business ultimately sold as a going concern here?
Mr. Brunstad: Yes, Your Honor.
During the case... the stores were sold during the course of the Chapter 11 case.
In fact, that was planned from the beginning.
In our appendix there is, at one of the pull-outs that we have, which shows the budget and what the parties were to expend, listed at the top... and this is page 175a... you will see at the top, stores to close, and this was the exhibit that was attached to the order on the first day of the bankruptcy, and it shows that there were... identifies a number of stores to be closed, and in fact a number of the stores were closed and sold as going concerns, and the bank realized the proceeds from those sales, so the bank got the benefit of the going concern, and our simple point is that...
Justice Ginsburg: But a number of them weren't.
I mean, the thing eventually ended up in Chapter 7, and it was liquidated.
Mr. Brunstad: After the stores were sold...
Justice Ginsburg: All of them?
Mr. Brunstad: I believe all of them.
There may have been one or so, but...
Chief Justice Rehnquist: Mr. Brunstad...
Mr. Brunstad: No, all of them were, Your Honor.
Yes, all of them were.
Chief Justice Rehnquist: Mr. Brunstad, in Midlantic, which you say is the case that stands for the proposition of bringing forward pre-code practice if Congress doesn't... we said in codifying the judicially developed rule of abandonment, Congress also presumably included the established corollary, et cetera.
Mr. Brunstad: Yes, Your Honor.
Chief Justice Rehnquist: Now, what rule are you saying that 506(c) codified that should bring with it your position?
Mr. Brunstad: 506(c) codified the tip of the iceberg of the...
Chief Justice Rehnquist: Well, the tip of the iceberg really isn't a very... I mean...
Mr. Brunstad: Certainly, Your Honor.
Chief Justice Rehnquist: It's certainly... Midlantic is much narrower than saying the statutory... is just the tip of the iceberg, that we bring all sorts of other things with it.
Mr. Brunstad: Well, I think, Your Honor, in this case, what should come with 506(c) is the undisputed established pre-code practice.
There is no contrary precedent, contrary to Wilson.
Chief Justice Rehnquist: Yes, but it's... Midlantic is talking about, they're codifying something and you can tell from the language of the section that they're codifying it.
You can't tell from 506(c) that they're codifying anything as broad as you say, it seems to me.
Mr. Brunstad: Well, Your Honor, the bankruptcy codifies in section 553 rights of set-off.
That says nothing about rights of recoupment, yet in bankruptcy that was an established right and this Court in Ritter v. Cooper said it's well-settled that recoupment applies in bankruptcy, so this Court in construing the bankruptcy laws has not been shy about incorporating and recognizing its...
Chief Justice Rehnquist: Yes, but set-off and recoupment seem much closer to one another than 506(c) and what you're talking about.
Mr. Brunstad: Well, I think, Your Honor, that actually the opposite is true, and what we're talking about here is a rule that the administrative claimant can come, which is inextricably intertwined with the right of the trustee.
The general principle is the same.
I think it's important to emphasize that bankruptcy proceedings are in rem, and that the bankruptcy court, as this Court made clear in the Adair case, that it is the responsibility of the court, the bankruptcy court to see to it that the in rem assets, which are in custodia legis, are, in fact, distributed properly.
Chief Justice Rehnquist: Yes, but that's a general statement that really I don't see... how does that aid you in this particular case, when you're talking about 506(c)?
Mr. Brunstad: Because Adair is the case, Your Honor, which articulated the rule which we're relying on here, the general rule that the administrative expenses must be paid out of the secured party's collateral to the extent of the benefit and the court... it would I think be... lead to an absurd result to say that if the trustee doesn't come to court, that the bankruptcy court has no authority to allocate the charges properly, and if the bankruptcy court has authority to do so, any party in interest in the case should be able to come to court to say to the court, this is how it must be done.
Justice Scalia: Well, that would be all the more so if you interpreted 506(c) as allowing the trustee to recover only those expenses that he has paid.
Mr. Brunstad: Correct, Your Honor.
Justice Scalia: I think your case gets harder if you read 506(c) to say that the trustee may also recover on your behalf expenses that you've paid.
I don't read it that way, but you apparently do.
Mr. Brunstad: Well, Your Honor, I think Your Honor's reading is the correct reading.
In response to Your Honor's prior question I think it was... my response was that pre-code practice allowed either way.
I think Your Honor's reading is the best reading, and that the administrative claimant, following pre-code practice, can come to court when the trustee has not paid the claim.
Chief Justice Rehnquist: Under what section?
Mr. Brunstad: Under what section, Your Honor?
Justice Scalia: Yes.
Mr. Brunstad: Well, the bank... under pre-code practice, the lower courts often would invoke this rule as a gloss on the court's power to allow administrative claims in addition.
Chief Justice Rehnquist: But to me that is the difficulty with your position, and the cases where we've said pre-code practice, you can point to a section and say, yes, this brings... this says (a), but it also means the corollary to (a) under prior practice, but you don't have an alternative section to point to.
506(c) doesn't help you.
Mr. Brunstad: Well, neither does the doctrine of recoupment, Your Honor, or the doctrine of ear-marking or substantive consolidation, and those are all equitable doctrines which endure under the...
Justice Ginsburg: Mr. Brownlee, I'm not... you made a major shift from your brief in response to Justice Scalia's question, and so I'd really like to know what your position is.
That is, you made a big thing about 50(c)... it wasn't the trustee only.
It was the trustee and Carrot Mark... your client, but now you say Justice Scalia has the better reading and 506 has nothing to do with this case, so which one is it?
Mr. Brunstad: It does, Your Honor, because 506(c) clearly recognizes that expenses of the kind which we are talking about are chargeable against the secured party's collateral, and the question in an in rem bankruptcy proceeding where we're simply talking about dividing up assets, who's going to get what, the question is, can a party in interest come to court and say, this expense should be put in this bucket, or moved here, because the trustee has no incentive or ability to come to court to say it should be so.
And where the... because the bankruptcy court has the power under 105, under its general equitable powers, which this Court recognized recently in the energy resources cases to be quite broad, to allocate...
Justice Ginsburg: Are you dropping your reliance on 506?
Mr. Brunstad: No, Your Honor.
506(c) recognizes that the expense of the kind which we are talking about here is chargeable.
All we are saying is simply, the Court should adopt the gloss which the courts adopted pre-enactment of the bankruptcy code, that individual claimants, parties at interest, unpaid administrative claimants can come to court and say, the trustee won't act, we get to have this particular expense...
Chief Justice Rehnquist: Come to court under 506(c)?
Because that's the question presented in your petition for certiorari.
Mr. Brunstad: The Court, under 506(c), following pre-code practice, could rule, and... I think it doesn't make any difference, Your Honor, whether you rely on 506(c) directly or on pre-code practice, but I think that you can rely on section 506(c).
Chief Justice Rehnquist: Well, if you can't, you lose on the question presented.
Mr. Brunstad: Well, our position, Your Honor, is that you can.
Chief Justice Rehnquist: Your time has expired.
Mr. Brunstad: Yes, Your Honor.
Thank you.
Argument of Robert H. Brownlee
Chief Justice Rehnquist: We'll hear now from you, Mr. Brownlee.
Mr. Brownlee: Good morning, Mr. Chief Justice, may it please the Court:
I don't know if it would make any difference in the Justices' rulings, but I'd like to... my friend and colleague Mr. Brunstad misspoke on a couple of questions, one I believe by Justice Kennedy.
I may be wrong about that, because I think it was the first question in the argument, where Hartford indicated it had asked the trustee to proceed and the trustee had refused.
In the blue brief at page 5, note 4, it is stated, Hartford did not request the trustee to pursue its claim under section 506(c) because the law in the Eighth Circuit as it existed at that time permitted administrative claimants to pursue such claims on their own behalf, citing the Boatmen's case, which was overruled by the Eighth Circuit.
In fact, not even that is really so.
When the Boatmen's case was decided, the one that was overruled in this case, the issue was at contest in the Hartford v. Magna case, Magna being the predecessor of my client, so I believe Mr. Brunstad misspoke in response to the answer to that question.
Justice O'Connor: Well, how could Hartford have avoided losing its claim here, do you think, if there was something that was obtained when the business was sold as an ongoing business, and assuming that the Workman's Comp insurance somehow benefited the property?
Mr. Brownlee: Justice O'Connor, Hartford's policies were such in this case... you can look at the record below... that it did not know that it was insuring a debtor for a period of some 15 months or so.
The one thing Hartford could have done, I believe, although I don't intend to tell them how to run their business in any... and I don't mean this in any way derogatorily or in a pejorative manner... would have been to have some procedures in place so that they would have known, even though the debtor... I have no evidence that the debtor did notify them.
Bankruptcy is and always has been somewhat creditor emptor, and it is true in this case that there's no evidence that Hartford was actually notified.
There is evidence in this case on the record below that Hartford knew that it had a series of quarterly bills that were going unpaid, and so it couldn't have found out.
Had Hartford known earlier, before the case was converted to a 7, and before the case was in a total liquidation mode, Hartford could have come to court, Hartford could have asked to terminate the policy based on nonpayment, at least cut its losses, and also Hartford could have tried to take steps to persuade the bankruptcy court perhaps while there were still funds in the estate to allow it within an administrative claim and force the payment of that claim.
Bankruptcy has a lot to do with timing, especially in a reorganization case that's going downhill.
Hartford in fact is correct that it did not know until substantially later.
If the Justice's question is, how could Hartford have protected itself after the fact, once we got to March of 1993, or whatever the record will show the date was that it learned, Hartford cannot protect itself under 506(c), I submit.
506(c) says the trustee may recover.
Justice Breyer: Well, what happens in... I don't know that that Meyer case really answers the question, but what happens in the case of a pre-petition, a pre-petition debtor, the pre-petition debtor has a giant claim against General Motors, a lawsuit...
Mr. Brownlee: Okay.
Justice Breyer: and the trustee doesn't bring the claim, and one of the creditors says, I'd like to bring it.
Now, Meyer dealt with the case of the debtor having filed the suit, not a creditor.
It could be taken as authority for the creditor.
So what happens?
Is it the case that creditors in such circumstances simply go and bring their own lawsuits in the name of the estate instead of the trustee doing it?
Mr. Brownlee: Well, Justice Breyer, if I could just observe first of all in the Meyer case, it's my reading of the Meyer case that while the Court allowed the principle of the second debtor to proceed with the prefiled proof of claim in the first bankruptcy, it was clear that any recovery would be on behalf of the estate, which is not something that Hartford seeks here.
Hartford seeks a nonshare.
Justice Breyer: I know, but what I'm trying to do for my own purposes is to find an analogy, and I know it's a rough analogy, but I would like to know just for my own purposes what happens, and it must happen often, of when a trustee doesn't bring a lawsuit to get some money for the estate, that a big creditor thinks he ought to bring.
Does bankruptcy normally work... this can't be unusual.
Mr. Brownlee: It's not unusual.
Justice Breyer: And in such circumstances there are two possibilities.
One is that you bring a suit to sue the trustee and make him do it.
Another possibility is, you bring your own lawsuit but it... somehow you're standing in the shoes of the trustee.
Mr. Brownlee: Both exist.
Justice Breyer: Both exist.
All right.
If the...
Mr. Brownlee: You can file a motion...
Justice Breyer: Fine.
Mr. Brownlee: in the bankruptcy court to compel the trustee to act...
Justice Breyer: Okay.
Justice O'Connor: or you can seek what is known in many of the cases as derivative standing.
Justice Breyer: Fine.
Now, if that's so in that circumstance, why shouldn't that be so in this circumstance?
Mr. Brownlee: Because in this circumstance Hartford didn't follow that procedure.
Hartford didn't ask the trustee to act.
Hartford didn't ask the bankruptcy court to force the trustee to act, and Hartford didn't go to the bankruptcy court having made a record on that subject and said, you know, somebody needs to sue Union Planters because we think there's a pretty good 506(c) claim...
Justice Breyer: And now, in your view as a bankruptcy lawyer, if they had, I mean, is that a good way to resolve the problem?
You say, look, you're a creditor.
You're a post petition creditor.
You have a right to get your money, but you'll have to go first to the trustee, because otherwise there are going to be those leeches, you know, or there are going to be all these people running around.
Is that a good resolution?
Mr. Brownlee: Well, Justice, it's not the leeches issue, it's the quality-of-distribution-among-creditors-of-equal-rank issue.
If the trustee, who is clothed under 506(c) with the responsibility to pursue this right, this action to obtain funds that were otherwise the property of the secured creditor, either doesn't proceed in her own behalf, or there isn't a court order that allows whatever surrogate, Hartford or whomever, to proceed in the name of the estate and on behalf of the estate, then you're going to have a circumstance where that recovery is going to be, as Hartford seeks here, kept to itself and not shared with other creditors of equal rank.
Justice Kennedy: Where does...
Justice Souter: Well, can't...
Justice Kennedy: the court have the authority to allow Hartford to proceed, under what section of the code?
Mr. Brownlee: There is none.
Justice Souter: Hartford...
Mr. Brownlee: I'm not aware of a statutory basis, Justice, for derivative standing.
Justice Kennedy: All right, but...
I thought that in response to Justice Breyer you said, now, you go to the trustee and the court, and if the trustee doesn't want to do it, then you ask the court for authority to do it on your own, but now you're saying that a court doesn't have... can't allow you to do it.
Mr. Brownlee: The bankruptcy courts have developed a body of law wherein they will... some will grant what is called derivative standing, and the cases are cited in the briefs.
As a matter of fact, the best example of them is in the amici for the petitioner, when the AIA and the National Union suggests that even under the preference section and the fraudulent conveyance sections, which also start with the words, the trustee may recover, that there are cases which have allowed third parties...
Justice Kennedy: Are those proper cases, and proper holdings in your view?
Mr. Brownlee: Justice, I don't think... I know that this Court doesn't need to decide whether derivative standing is appropriate on a Nation-wide basis for us to win this case, because I don't think this Court should hold, and I hope it doesn't hold the 506(c), the word trustee means anything other than trustee.
I don't think you should hold that it means... because I don't think there is any established pre-code practice and, if there were, the statute is sufficiently clear.
It shouldn't...
Justice Kennedy: Well, then I'm not sure why your answer to Justice Breyer isn't that the Hartford goes to the Court, it asks to order the trustee, if the court and the trustee give no relief, there's nothing Hartford can do.
Mr. Brownlee: Well, Justice Breyer...
Justice Kennedy: I don't know why you didn't say it that way.
Mr. Brownlee: I understood asked me a factual question, Justice Kennedy.
I don't mean to argue with you.
In practice, and I'm in the trenches a heck of a lot more than I'm in the appellate courts, in practice bankruptcy courts will occasionally, if a trustee refuses to act, call a creditor or another party with the right to act in the estate's name on behalf of the estate to pursue the claim if the court feels that it should...
Chief Justice Rehnquist: Is that pursuit in the bankruptcy court...
Mr. Brownlee: In the bankruptcy...
Chief Justice Rehnquist: or in the plenary action?
Mr. Brownlee: In the bankruptcy court.
Chief Justice Rehnquist: In the bankruptcy...
Mr. Brownlee: Now, there is another...
Justice Souter: If we assume that is correct, then, if we assume that is a proper practice, then if Hartford had done two things differently, Hartford would be entitled to recover, I take it, on the assumption that there may be a derivative action, and the two different things are, number 1, Hartford would have to have gone to the trustee, and the trustee would have had to indicate refusal.
Mr. Brownlee: Right.
Justice Souter: And number 2, Hartford, in bringing its suit, would have to have captioned it, Hartford ex rel, or Trustee ex rel Hartford, rather than Hartford, and if those two facts had been different, assuming derivative actions are appropriate, Hartford could recover here.
Am I right, or am I missing something?
Mr. Brownlee: I don't precisely disagree with the way it's phrased, Justice Souter.
You're basically right.
Hartford would have had to get a court order that said, that established the trustee was not proceeding...
Justice Souter: Okay.
Now, why does it have to get the court order if there's no statutory section on it?
Mr. Brownlee: I'm not here to argue whether derivative standing is the right approach.
Every bankruptcy court...
Justice Souter: Right, but if we assume derivative standing is... I'm making that assumption... what difference does it make whether Hartford gets the court order or doesn't get the court order?
Mr. Brownlee: Because...
Justice Souter: Is it merely orderly procedure?
Mr. Brownlee: No, because if Hartford recovers it has to share with all other creditors of equal rank.
Justice Souter: Well, Hartford has indicated that that's exactly what it will do, although that's I guess an easy concession, because it says there aren't any.
Mr. Brownlee: If you could hear me for a minute on that.
Justice Souter: Yes.
Mr. Brownlee: I believe your question earlier to Mr. Brunstad was pre-conversion or post conversion, and his answer was pre-petition or post petition.
Those are big differences.
There aren't any administrative creditors pre-petition.
Pre-conversion and post conversion...
Justice Souter: Ah.
Ah, okay.
You're right.
Mr. Brownlee: in an 11 that goes to a 7, there can be a bundle of administrative creditors on both sides.
In fact, under 726(b) of the Bankruptcy Code, the post conversion administrative creditors in fact do have a priority, so...
Justice Souter: Well...
Mr. Brownlee: while he says there wouldn't be any others, that's not so...
Justice Souter: Okay.
Let's assume for the sake of argument, then, that I misspoke or he misspoke on that.
Mr. Brownlee: He did misspeak.
Justice Souter: He's... I will make the further assumption that any recovery would be subject to the claims of all others in the same class that Hartford is in.
Mr. Brownlee: Correct.
Justice Souter: Now, if that would be the legal effect of Hartford's recovery here, is the only thing, then, that prevents Hartford from doing that the failure of Hartford to have gone to the trustee in the first place and said, let me bring a derivative action?
Mr. Brownlee: If you are in a district where a judge will allow derivative standing in the name of the trustee, that's correct, because 506(c) talks about an action to recover by the trustee.
The bankruptcy court in a number of districts will allow that.
In a number of districts, some bankruptcy courts are critical of that.
But in any event, Hartford came here, and there has been I think a shift in the briefs, quite frankly, as I understand the argument, or maybe I just misperceived it.
Hartford came here on the merits briefs to ask the court assembled to rule that under 506(c)'s meaning, 506(c) could deemed to say, the trustee may recover, da-da, da-da, comma, and any unpaid administrative creditor may also recover under this section, and if that unpaid administrative creditor does recover under this section, it will have a super priority claim over all other administrative creditors as described in section 507(a).
Now, that's a big mouthful, but from a little section that says the trustee may recover, for Hartford to win on the merits briefs, all those things I just said, I respectfully submit, have to be engrafted onto a simple statute that gives the trustee in bankruptcy under limited circumstances as defined under the merits the right to...
Justice Stevens: Mr....
Does the record tell us whether there are other administrative creditors now competing for this money?
Mr. Brownlee: It does not, Justice Stevens, and I did not have the case below...
Justice Stevens: I had understood the record to indicate that this was the only administrative creditor, and that in no event would there be money available for any other, either general creditors or post petition creditors.
Mr. Brownlee: I can tell you this, Justice Stevens... I did not have the case below, so I'm not going to tell you something I don't know, obviously.
We called up from the archives the final report.
The final report doesn't say, so I can't tell you that.
I can tell you that Union Planners' predecessor had a $4 million loan, we lost a million and a half in principal, all of our interest, and all of our attorney's fees and costs.
If there was any other administrative creditor in the case, they didn't get paid.
Now, whether, as a matter of fact, there was another group there is unknown.
Intuitively, I would suggest to the court that Hartford went to a lot of trouble to make this end run if it was the only unpaid administrative creditor, because it could have made a simple demand on the trustee and taken its shot for derivative standing, and I would also like to suggest something else...
Justice Stevens: Well, but let me just...
Mr. Brownlee: Go ahead, Justice Stevens.
I'm sorry.
Justice Stevens: One other question.
Am I correct in assuming that they did satisfy the requirements of 503(a) and (b)?
Mr. Brownlee: They satisfied the requirements of 503(a) in that they... I'm trying to think which is which.
They made... in the same motion that they sued under 506(c), they made a request for payment of their administrative claim, and I believe they made a...
Justice Stevens: The bankruptcy judge allowed it.
Mr. Brownlee: Yes, and I made... I believe they made a request for allowance and payment.
Justice Stevens: Yes.
Mr. Brownlee: So I... it's my belief that they did follow 503 at least.
Justice Stevens: You see, the thing that troubles me about your position... it's a very difficult case, but the thing that troubles me about your position is, it seems to me it makes 503(a) and (b) meaningless.
Mr. Brownlee: Well, let me try to respond to that.
503(a) says you can file a request for an administrative claim or you can file a request for a payment of it, and that's fine.
I mean, any creditor ought to be able to file a proof of claim.
Unsecured creditors can.
Secured creditors can.
I certainly couldn't imagine why administrative creditors shouldn't be allowed to.
Anybody can ask for payment from the estate, but 503 talks about a direction to the estate to seek payment.
Creditors can't typically sue secured creditors as if they could sue outside under State law, to go back to a question you previously asked, Justice.
Within the bankruptcy, the Bankruptcy Code's... I believe the Court's language in some cases in looking at plain meaning has been a consistent and coherent scheme, has been that creditors deal with the estate, and the estate deals with creditors.
Hartford wants to deal with us.
They want to call us outside, and they don't have any way to do that except to make the argument that's made on the merits briefs and partially made today, although there may have been a shift in argument, that they can do it under 506(c).
Now, I would suggest to the Court that the Congress was not totally unmindful when it adopted the code of the possibility that inter... that there might be intercreditor fights under some circumstances, under some hypotheticals.
In fact, Congress enacted section 510, and in 510(c), which is the equitable subordination section, the Congress said that on application to a court, after noticing a hearing, the court can subordinate all or part of one creditor's claim to all or part of another creditor's claim, or give the lien to the estate if it wanted, under general principles of equitable subordination.
Now, the rule isn't the same as the substantive rule the trustee must meet to recover ordinary and necessary expenses of preserving the estate and benefit of the creditor under 506(c), but 510(c) does provide a remedy, but Hartford wasn't willing to share.
Justice O'Connor: Is it ever used in these administrative expense areas, that section, 510?
Mr. Brownlee: It's used a lot in winner liability type claims, or any kind of claim where you've got some sort of equitable misconduct, Justice O'Connor.
I have not personally, and I... that doesn't mean it's not used, and I have not researched the issue.
Justice O'Connor: What about the...
Mr. Brownlee: I do not know how often it is used.
Yes, Justice Ginsburg.
Justice O'Connor: Mr. Brownlee, what about the suggestions that petitioner made of the clean-up costs, or even the Government.
It's an ongoing operation, and there are tax liabilities.
She said that your position means that a Good Samaritan, or a Government agency who comes in and cleans up the toxic junk gets nothing...
Mr. Brownlee: Well...
Justice O'Connor: and the Government would get no tax.
How do you deal with those cases?
Mr. Brownlee: Well, in the first place, in terms of... and I gather your question is, a volunteer comes along post petition and cleans up the property, which directly benefits the property, or the secured creditor.
Justice O'Connor: Well, he... I'm addressing... I don't remember precisely how he put it in his brief.
I'm sure you focused on it, so you remember better than I do.
He talked about...
Mr. Brownlee: I'm not sure about that.
Justice O'Connor: the clean-up costs that could be incurred by a private contractor or by a Government agency to decontaminate the property.
Mr. Brownlee: Well, if the case is in a Chapter 7, the case is...
Justice O'Connor: This... it has to be...
Mr. Brownlee: Okay.
Justice Ginsburg: when it was in 11, because that's what made it possible for the thing to go on.
Mr. Brownlee: If the case is in Chapter 11, and the debtor hires a private contractor to come in and clean up dirty property, and that contractor does it, and the court finds that the reasonable and necessary, all of that is met, which it obviously sounds like on those facts, most bankruptcy courts would find that, and the estate becomes insolvent, and the contractor has not protected itself and gotten paid, then the contractor is his administrative claimant in the bankruptcy and is treated of equal rank with all others, and if that's unfortunate, and that means the statute's broke, then the Congress ought to fix the statute.
Justice Ginsburg: So you would... that's a very candid answer.
It wouldn't make any difference whether a Government agency came in to do the clean-up, having been authorized by the debtor?
Mr. Brownlee: I'm not aware, Justice Ginsburg, of any super priority for administrative creditors inter se under the 507 priorities of the Bankruptcy Code, except for the one that Hartford asks you today to judicially engraft onto a statute which only provides for the trustee to recover.
I'm not aware of...
Justice Breyer: Is it the case that if the trustee... the trustee himself goes and brings this lawsuit against Justice... she can do it.
I mean, the trustee can do this under 506(c).
Mr. Brownlee: Absolutely.
Justice Breyer: And, say, collects $10 million, which happened to be the cost of the contracted-for clean-up.
Mr. Brownlee: Okay.
Justice Breyer: All right.
So now there's $10 million in the trustee's hand.
Now, there are another $20 million of administrative expenses that were not related to preserving the property.
Now, does that $10 million... does the trustee give that $10 million to the toxic waste contractor that helped to preserve the property, or does that toxic waste contractor get only one-third and two-thirds has to go to these other administrative claimants who had nothing to do with preserving the property?
Mr. Brownlee: It's even worse, Justice Breyer.
First, the trustee takes the trustee's fees and expenses and expenses of counsel off the top...
Justice Breyer: Well, that's all right.
I don't object to find...
Mr. Brownlee: And then it goes two-thirds, one-third.
Justice Breyer: It does.
Mr. Brownlee: I am not aware of...
Justice Breyer: But then there's... that...
Mr. Brownlee: Unless there...
Justice Breyer: Yes.
Mr. Brownlee: Make sure I don't misspeak as an officer of the court.
Justice Breyer: Yes, mm-hmm.
Mr. Brownlee: Unless there is some Federal statute that grants a priority outside of bankruptcy to clean up contractors because of the importance of the environmental laws, where you'd have a clash between Federal statutes.
Justice Breyer: So then this is a bigger...
Mr. Brownlee: I'm not aware of a bankruptcy priority.
Justice Breyer: All right, so the... (c) has as its purpose simply getting money from the secured creditor into the estate.
It doesn't have as its purpose giving that money to the people who incurred the expense.
Mr. Brownlee: Oh, no, Your Honor.
Distribution...
Justice Breyer: Is different.
Mr. Brownlee: is governed by 726...
Justice Breyer: Wow.
Mr. Brownlee: in a liquidation.
Justice Breyer: And what was the prior practice?
Was the prior practice that when the... our secured toxic waste person... nonsecured, sorry.
The toxic waste person sues against the collateral, and apparently can get the money.
Did that toxic waste person get to keep the whole thing, or did the toxic waste person have to put it in the estate and share it with the other nonrelated administrative claimants?
Mr. Brownlee: I am not sure that I'm aware of a toxic waste case pre...
Justice Breyer: No, no, it wouldn't have been toxic waste.
What I mean is, a person...
Mr. Brownlee: Certainly not in the 1800's.
Justice Breyer: A 506(c)... a 506(c) creditor, and then there are non-506(c)'s, but 503(a) creditors, and when the 506(c) creditor brought the suit... I know there wasn't a 506(c) at that time...
Mr. Brownlee: I didn't mean to be cute.
Justice Breyer: but I mean, that kind of a person brings the suit, collects the $10 million, did he get to keep the whole $10 million, or did he have to throw it in the pool and he only got one-third and the non-506(c) administrative creditors got two-thirds?
What happened?
Mr. Brownlee: My best answer, and I don't want you to think this is a dodge, because I don't mean it to be, is it's my understanding of the pre-code practice was that it was all over the lot in terms of the equitable rule...
Justice Breyer: So this is quite...
Mr. Brownlee: what the judges decided to do.
We cited at page 44 of the red brief an article by Toth which recounts some of the history to the... the article itself is in the West New England Law Review.
It recounts a lot of the history to the predecessor to 506(c), and in that article it concludes that, as Collier's did in 1978, which we also cite on that page, that there was no firmly established rule as...
Justice Breyer: Why would you want to allow such a person, i.e., a 506(c) person, to get from the secured creditor money that he isn't going to keep and he in fact is going to give to two other people...
Mr. Brownlee: Because...
Justice Breyer: who, vis-a-vis the secured creditor, shouldn't get it?
Mr. Brownlee: Because, Justice... because of the equality of distribution rules of the Bankruptcy Code.
There are administrative claim creditors, and there is not a super priority that says you're a 506(c) creditor, because creditors don't have the right to pursue the action under 506(c).
Congress never intended 506(c)...
Justice O'Connor: My question is...
Mr. Brownlee: to be... allow you to bring that case.
It was for the trustee only, so a fortiori it was to be distributed to all the creditors of equal rank, and that's what Congress decided in 1978.
Justice O'Connor: Mr. Brownlee...
Mr. Brownlee: Yes, Justice O'Connor.
Justice O'Connor: my question is related, and it seemed to me in reading the text of 506(c) and 503 that not every administrative expense under 503(a) would fit under 506.
Mr. Brownlee: I agree with that.
Justice O'Connor: 506 is limited to the reasonable, necessary costs and expenses of preserving or disposing of the secured property.
Mr. Brownlee: I agree with Your Honor.
Justice O'Connor: And presumably some wages and salaries don't fit under that.
Maybe some insurance premiums don't fit under that.
It would depend on what it was.
Am I right?
Mr. Brownlee: Yes, you're absolutely right.
Justice Kennedy: Mr. Brownlee, going...
Justice O'Connor: I mean, I could see that 506(c) would be related to things like painting the building, or paying the real estate commission to sell it.
Is that right?
Mr. Brownlee: Your Honor, I know you're way past this, but I wished at one point you'd been a bankruptcy judge in our district.
I couldn't agree with you more.
Justice Stevens: Well, let me...
Mr. Brownlee: But some courts will find an implied benefit, or find some reason...
Justice Stevens: But wait a minute...
Mr. Brownlee: to try to toss these things into 506(c) on the merits.
That's not the case here we're talking about.
Justice Stevens: But let's clarify one thing here.
Mr. Brownlee: Yes, Justice Stevens.
Justice Stevens: I thought you had agreed that if this action had been brought by the trustee, because the trustee had expended this very money, 506(c) would apply.
Mr. Brownlee: If this action had been brought by the trustee...
Justice Stevens: So the fact that it's insurance premiums doesn't distinguish it from paint on the buildings.
Mr. Brownlee: We fought it below.
Justice Stevens: And you lost on it.
Mr. Brownlee: And we lost.
Justice Stevens: Yes.
Mr. Brownlee: I don't think we'd lose in every court.
Justice Stevens: No, but for the purposes of our decision...
Mr. Brownlee: For the purpose of this case...
Justice Stevens: we assume that this is just like paint on the buildings or something like that.
Justice Souter: Mr. Brownlee...
Mr. Brownlee: You're absolutely right.
Yes, Justice.
Justice Souter: do you have this answer to Justice Breyer's one-third, two-third hypothetical?
I mean, it's a problem for your case, and I thought the answer might be this, but tell me if I'm wrong.
Assuming derivative standing... the premise of my other question.
Assume it again.
If the one administrative creditor has administrative standing, what he will do, I presume, is to bring an action on behalf of all administrative creditors, so he will not nearly collect his insurance premium.
He will collect the charges of all other administrative creditors, and therefore he will get in a... theoretically 100 percent of what is owed, and so he will get his one-third, and they will get their two-thirds, and everybody will be whole.
Is that the answer to the problem?
Mr. Brownlee: Well, if every administrative creditor qualified to be a surcharging creditor under the standards of 506(c)...
Justice Souter: Right.
Right, yes.
Mr. Brownlee: But you're assuming every administrative creditor in the estate does so qualify, and I suggest to you that that hypothetically is an interesting question...
Justice Souter: Okay, dumb assumption.
Mr. Brownlee: but it doesn't happen in practice.
Justice Souter: But to the extent that that assumption would be true, is that the way we avoid the one-third, two-third problem?
Mr. Brownlee: To the extent that that assumption is true, if every administrative claim in a case qualifies for a surcharge... let me make sure I understand your hypothetical.
Justice Souter: Yes.
Yes.
Mr. Brownlee: And the trustee refuses to act, which is... I won't go into the inconceivability of that, because it would be such a large claim that very few trustees would not be highly incentivized, but if...
Justice Souter: We'll assume the trustee is broke and so on, but assume it anyway.
Mr. Brownlee: If it was a large case the trustee would be fixing to get unbroke very quickly when she won, but I don't mean to argue.
Justice Souter: No.
Mr. Brownlee: Under that assumption, the trustee refuses to act, the bankruptcy court refuses to direct the trustee to act, the bankruptcy court refuses to appoint a new trustee who will act, and the bankruptcy decides, in the exercise of its discretion, without any direct statutory authority, to grant derivative standing, and the Hartford brings the claim in the name of the estate on behalf of all the administrative claims in the estate, and wins on the merits of the individual little lawsuits it will have to prove reasonable, necessary, direct benefit, secured creditor, if that's the hypothetical, then yes, they'll recover and you'll avoid the one-third, two-third problem.
Justice Kennedy: Okay.
Suppose a pipe in the building is leaking.
They need a plumbing contractor immediately, or the building's going to be wrecked.
You represent the plumbing contractor, and he comes to you and says, I want to be sure I get paid.
How... what are the different ways he can do it?
Mr. Brownlee: In practice?
Justice Kennedy: Yes.
Mr. Brownlee: I'd call the bank.
I'd bypass the bankruptcy court entirely.
I'd call the bank and say...
Justice Kennedy: And anything else...
Mr. Brownlee: I'd call the bank and say, you're building's...
Justice Kennedy: you're at risk of...
Mr. Brownlee: going to fall in and it's your collateral.
You want to give me the money, I'll fix it, and if you don't, I'll stand by and take a picture of it while it falls in.
Justice Kennedy: And anything else you're...
Unidentified Justice: [Laughter]
Justice Kennedy: Anything else you're at risk of having to share with the other administrative creditors?
Mr. Brownlee: Absolutely, Justice.
Justice Scalia: Do you... on what basis does the trustee have the right to sue for money that the trustee hasn't expended?
Mr. Brownlee: There is a line of authority, Justice Scalia, and it may be the better one.
It can be traced to the statement in, I believe, the floor reports in the legislative history that's in the briefs, where there's a reference to the moneys that the trustee has expended, or some phrase to that effect.
It escapes me, the precise phrasing.
It's that really 506(c) isn't intended to collect unpaid administrative claims.
It's intended only for the trustee to bring an action to recover those administrative claims that the trustee has paid out that justify to tag the bank to bring it back in and...
Justice Scalia: Right.
Mr. Brownlee: split up the deficiency.
That opinion was adopted in the plurality opinion in K & L Lakeland in the Fourth Circuit, but as I read that opinion there wasn't enough votes in the Fourth, even though the Fourth is a JKJ circuit, which was the other circuit on our side, other than this case, which I hope is affirmed at the end of this argument, to make that part of circuit law.
This Court doesn't have to decide that today, but I would agree with the Justice that that is a strong read of the real congressional meaning of the words, but the plain meaning of these words fit if you want to include an attack on unpaid administrative claims.
It just makes it real complicated, and it makes for the kinds of questions that we've discussed today.
If there are no further questions, Mr. Chief Justice...
Chief Justice Rehnquist: Thank you, Mr. Brownlee.
The case is submitted.
