American State Bank v. Marks (In Re MacNeil)

102 B.R. 766, 1989 Bankr. LEXIS 1346, 19 Bankr. Ct. Dec. (CRR) 1200, 1989 WL 92747

• Court: United States Bankruptcy Appellate Panel for the Ninth Circuit
• Decided: August 11, 1989
• Docket: BAP No. OR-88-1877-MeJMo, Bankruptcy No. 386-02740-S7
• Status: Published

Opinions

PER CURIAM:

I

We are asked to review a decision which gave a superpriority claim arising during the course of a liquidation priority over competing claims which emanated from Section 507(b). We AFFIRM.

II

FACTS

Donald E. and Sharlee L. MacNeil (“Mac-Neils”) were in the business of selling and servicing recreational vehicles. They financed their inventory through American State Bank (“ASB”) and CIT Financial Services (“CIT”), giving each creditor a blanket security interest in the vehicles they floored. Shortly after filing for reorganization under Chapter 11, the MacNeils sold a vehicle from this inventory for $30,-200.00. When CIT subsequently moved for relief from the automatic stay and alternatively for adequate protection, the Mac-Neils were ordered to place these sale proceeds into a segregated account.

ASB and CIT thereafter entered into a court-approved stipulation with the Mac-Neils, whereby the three parties agreed that the MacNeils would transfer the sale proceeds from their existing bank account to a new cash collateral account at ASB. No funds were ever deposited, however, for around the time the MacNeils’ case was converted to Chapter 7 for purposes of liquidating their estate, both the MacNeils and the money disappeared.

ASB and CIT filed proofs of claim in the converted case and urged the trial court to award them a superpriority administrative claim under Section 507(b) in an amount equal to the absconded funds. They further urged that the superpriorities so established were to be paid ahead of all other administrative claims, including those arising during the course of the liquidation. The newly appointed trustee objected to the request, contending that neither creditor had fulfilled the prerequisites for a superpriority claim and that, even if such prerequisites had been met, that their claims were subordinate to the administrative expenses of the Chapter 7. He urged that paramount priority for Chapter 7 administrative expenses was indispensable because the estate was seeking reimbursement for several alleged preferential transfers and such prosecutions would likely fail if he were unable to secure guarantees of ultimate priority for the attorneys pursuing the matters. According to the trustee, a successful prosecution could result in substantial judgments giving both ASB and CIT, as well as Chapter 7 administrative claimants, full satisfaction.

The trial court bypassed the issue of whether ASB and CIT had indeed acquired valid superpriority claims, holding instead that such claims would be subordinate to Chapter 7 administrative claims in any event. This appeal followed.

Ill

STANDARD OF REVIEW

The issue on appeal is whether superpri-ority claims arising under Section 726(b) have priority over superpriority claims emanating from Section 507(b). It is a question of law subject to de novo review. See In re Windmill Farms, Inc., 841 F.2d 1467, 1469 (9th Cir.1988).

IV

DISCUSSION

Where competing administrative claims arise through the operation of Sections 507(b) and 726(b) and the assets with which they are to be paid are unlikely to be sufficient to satisfy both, an ultimate priority must be established. Upon careful review of the relevant statutory language and the policies underlying both provisions, we conclude that the post-conversion claims under Section 726(b) must prevail.

Administrative claims incurred under Section 503(b) following the conversion of a reorganization case are entitled to superpri-ority over like claims incurred prior to conversion. 11 U.S.C. § 726(b).¹ The failure of adequate protection in a reorganization case is plainly an administrative expense of that case and is therefore subject to the payment of any and all administrative expenses which may arise during a superced-ing liquidation.² Claims intended to compensate failed adequate protection are extended priority only over those expenses incurred prior to conversion.

Looking beyond the language of the relevant statutes to the policy underlying Section 726(b), it is evident that the superpriority status for “burial expenses” was intended to encourage capable trustees and other professionals to partake in liquidation to maximize the benefit for those who seek satisfaction of their claims against the estate. See In re Roundwood Corp., Inc., 72 B.R. 296, 299 (Bankr.D.S.C.1987); In re J.R. Research, Inc, 65 B.R. 747, 751 (Bankr.D.Utah 1986); In re Codesco, Inc., 18 B.R. 225, 227 (Bankr.S.D.N.Y.1982). By according ultimate priority to claims arising under Section 726(b), we simply ensure that a liquidation will be carried out consistent with the expressed will of Congress: “[tjhose who must wind up the affairs of a debtor’s estate must be assured of payment, or else they will not participate in the liquidation or distribution of the estate.” H.R.Rep. No. 95-595, 95th Cong., 1st Sess. 186-187 (1977); 1978 U.S.Code Cong. & Admin.News, 5787, 6147. If we were to permit the superpriority claims of CIT and ASB, conceding for purposes of argument that they exist at all, to be paid before the administrative claims of those who seek to administer the liquidation of the MacNeils’ estate, there would arise an unacceptable risk that the existing actions might never be pursued. Such an occurrence might sharply reduce the overall return to creditors.

We agree with the trial court that the collective estate in a liquidation is composed of more than just the Section 507(b) superpriority creditor. We find, in the words of the trial court, that the trustee has discretion to do the “reasonable thing” and that “the reasonable thing may be to use the war chest provided by the dregs left over [from reorganization] to chase assets that might be available to pay not just the [507(b)] superpriority but the rest of the [claims, as well].”

Y

CONCLUSION

The language and policies underlying the Bankruptcy Code command that claims accorded priority under Section 726(b) be given ultimate priority over claims emanating from Section’ 507(b).

AFFIRMED.

1 . "Administrative expenses" were given priority by Congress relative to other claims to estate assets because "the estate as a whole is benefit-ted if general [i.e., unsecured] creditors subordinate their pre-bankruptcy claims in order to secure goods and services necessary to an orderly and economical administration of the estate after the petition is filed." See 11 U.S.C. § 503(b); In re Alchar Hardware Co., Inc., 759 F.2d 867, 868-69 (11th Cir.1985); In re Yermakov, 718 F.2d 1465, 1470 (9th Cir.1983).

2 . Section 507(b) furnishes a superpriority administrative claim to creditors whose adequate protection fails. See 11 U.S.C. § 507(b); In re Center Wholesale, Inc., 759 F.2d 1440, 1451 (9th Cir.1985); Collier on Bankruptcy ¶ 507.04 at 507-26, ¶ 507.05 at 507-50 (15th ed. 1988).