William F. Davis & Assoc., P.C. v. Caplan et al

UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF NEW MEXICO
In re:
J.R HALE CONTRACTING COMPANY, INC.,
Debtor. Case No. 7-11625-s7
WILLIAM F. DAVIS & ASSOCIATES, P.C,
Plaintiff,
v. Adversary No. 10-1192 S
MICHAEL J. CAPLAN, Trustee,
UNITED STATES DEPARTMENT OF THE TREASURY,
INTERNAL REVENUE SERVICE, and
NEW MEXICO DEPARTMENT OF TAXATION AND REVENUE
Defendants.
MEMORANDUM OPINION DENYING JOINT MOTION TO DISMISS
This is an action to determine the priority of Chapter 11
attorney’s fees under 11 U.S.C. §724(b) as amended by the
Bankruptcy Abuse Prevention and Consumer Protection Act of 2005
(“BAPCPA”). Plaintiff William F. Davis & Associates, P.C.
(“Davis”) represented Debtor prior to this underlying bankruptcy
case’s conversion from Chapter 11 to Chapter 7, and is owed
$25,127.50 in fees and costs from that representation. However,
Debtor is subject to $1,405,311.83 in secured tax claims and does
not have sufficient funds to pay both the tax liens as well as
Davis’ attorney fees. Davis argues that its claim has priority
over the tax liens under BAPCPA §724(b). Defendants United
States of America on behalf of the Internal Revenue Service and
the State of New Mexico, Taxation and Revenue Department
Case 10-01192-s Doc 22 Filed 08/29/11 Entered 08/29/11 10:58:00 Page 1 of 16

(collectively “Defendants”) disagree and have jointly moved to
dismiss. For the reasons set forth herein, the Court denies the
motion to dismiss.1
Background
This case was initiated with the filing of a chapter 11
petition by the Debtor on July 5, 2007. It was converted to
chapter 7 on February 6, 2009. Davis filed a complaint (doc 1)
and an amended complaint (doc 4) seeking the referenced relief
based on its services rendered during the chapter 11 phase of the
case. Defendants answered (doc 8) and shortly thereafter filed a	2
Joint Motion to Dismiss the Amended Complaint (“Joint
Motion”)(doc 9). At the request of the Court, Defendants
supplemented their Joint Motion (doc 13). Davis objected to the
Joint Motion (doc 14), to which Defendants replied (doc 18).3
Effect of BAPCPA §724(b)(2)
The Court has subject matter and personal jurisdiction	1
pursuant to 28 U.S.C. §§1334 and 157(b); this is a core
proceeding pursuant to 28 U.S.C. §157(b)(2)(A) and (K); and these
are findings of fact and conclusions of law as may be required by
Rule 7052 F.R.B.P.
Exemplifying an eminently utilitarian approach, the	2
Trustee has merely asked for directions on how to distribute the
funds (doc 8).
Davis generated a minor procedural brouhaha when it served	3
the amended complaint by certified mail rather than merely first
class mail. See F.R.B.P. 7004(b)(4) and (6). It then re-served
the amended complaint and an alias summons on Defendants by first
class mail, and Defendants, in another demonstration of
utilitarianism, have ceased their protests on this subject.
2
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The parties present opposing views of the meaning of
§724(b)(2). The BAPCPA version of the statute reads as follows:
(b) Property in which the estate has an interest
and that is subject to a lien that is not avoidable
under this title ... and that secures an allowed claim
for a tax, or proceeds of such property, shall be
distributed...
(2) second, to any holder of a claim of a kind
specified in section 507(a)(1)(except that such
expenses other than claims for wages, salaries, or
commissions that arise after the date of filing of the
petition, shall be limited to expenses incurred under
chapter 7 of this title, and shall not include expenses
incurred under chapter 11 of this title), 507(a)(2),
507(a)(3), 507(a)(4), 507(a)(5), 507(a)(6) or 507(a)(7)
of this title, to the extent of the amount of such
allowed tax claim that is secured by such tax lien;....
11 U.S.C. §724(b)(2) (2006). The Bankruptcy Technical
Corrections Act of 2010 (“BTCA”), signed into law on December 22,
2010, during this adversary proceeding, made several additional
changes to the language of §724(b)(2). As amended, §724(b)(2)
now reads as follows:
(2) second, to any holder of a claim of a kind
specified in section 507(a)(1)(C) or 507(a)(2)(except
that such expenses under each such section, other than
claims for wages, salaries, or commissions that arise
after the date of filing of the petition, shall be
limited to expenses incurred under this chapter, and
shall not include expenses incurred under chapter 11 of
this title), 507(a)(1)(A), 507(a)(1)(B), 507(a)(3),
507(a)(4), 507(a)(5), 507(a)(6) or 507(a)(7) of this
title, to the extent of the amount of such allowed tax
claim that is secured by such tax lien;....
11 U.S.C. §724(b)(2) (2011) (changes italicized).
Davis’ fees are §507(a)(2) expenses (“administrative
expenses allowed under section 503(b)”). Davis therefore argues
3
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that the plain meaning of the BAPCPA version of the statute
dictates that its attorney’s fees be paid prior to the tax liens.4
Defendants, on the other hand, argue that the BAPCPA version of
the statute was erroneously drafted and is widely recognized as
such, and that the BTCA version of the statute is the one the
Court ought to apply. Under that interpretation, only chapter 7
administrative expenses (and chapter 11 “wages, slaries and
commissions”) obtain the benefit of being slotted into the
“vacated” position of the subordinated taxes, and thus Davis’
chapter 11 fees would be excluded from payment.
More specifically, Defendants argue that because §507(a)(1)
deals only with domestic support obligations, it makes no sense
that the parenthetical phrase immediately following the citation
to that section talks about expenses of chapter 7 and 11 cases.
Rather, what Congress sought was to address §503(b)(2) as well,
which deals with many of the administrative claims against the
estate, and thereby by means of the parenthetical phrase excludes
chapter 11 administrative claims from the favored payment	5
treatment. And in fact Congress made this amply clear with the
Other than the chapter 7 trustee’s expenses and	4
commissions and Davis’ fees, there are no claims to be paid under
§§507(a)(1)-(7).
To be more accurate, there is in effect an exclusion from	5
the exclusion; whereas chapter 11 administrative expenses for the
most part may not (now) be paid from the funds that would
otherwise go to pay the tax liens, post-petition wages, salaries
and commissions may be paid. §724(b)(2) (parenthetical phrase).
4
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BTCA version of the statute. Defendants also cite abundant
authority for their position derived from the history of the
statutory provisions and from various commentaries.
The conundrum created by Congress’ poor drafting is not
limited to this statute. Specifically, for example, in Lamie v.
U.S. Trustee, 540 U.S. 526 (2004), the United States Supreme
Court interpreted §330(a)(1), which had been amended in 1994 to
delete payment of debtor’s chapter 7 attorney fees as a chapter 7
administrative expense. Id. at 529-530. The problem arose
because the previous version of the statute specifically allowed
such a payment, and the 1994 legislation rather clearly deleted
the words “or to the debtor’s attorney” from §330(a)(1) in error
(that is, unintentionally). Id. at 530-31. Faced with that
dilemma, the court ruled that the statute be interpreted the way
it read, not the way it “should have” read. “The starting point
in discerning congressional intent is the existing statutory
text.” Id. at 534 (citing Hughes Aircraft Co. v. Jacobson, 525
U.S. 432, 438 (1999)). “It is well established that ‘when the
statute’s language is plain, the sole function of the courts – at
least where the disposition required by the text is not absurd –
is to enforce it according to its terms.’” Lamie, 540 U.S. at
534 (quoting Hartford Underwriters Ins. Co v. Union Planters
Bank, N.A., 530 U.S. 1, 6 (2000)(further internal quotations
omitted)). While “the statute is awkward...that does not make it
5
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ambiguous.” Id. Thus Lamie requires this Court to interpret the
BAPCPA version of the statute literally, and thereby to permit
the Davis fees to be paid.
The literal reading of BAPCPA §724(b)(2) is that the
parenthetical only applies to §507(a)(1) and not §507(a)(2).
Defendant contends that this is an unacceptable interpretation
for two reasons: (1) the literal reading is not reasonable and
(2) legislative history and secondary sources show that the
placement of the parenthetical was clearly a drafting error. The
Court will first address the reasonableness of the statute.
Defendants contend that the parenthetical has no meaning if
it applies only to §507(a)(1). The parenthetical creates a
distinction between “expenses incurred under chapter 7” and
“expenses incurred under chapter 11.” 11 U.S.C. § 724(b)(2)
(2006). Defendants argue that §507(a)(1) covers only domestic
support obligations, which are claims and not expenses. Thus,
according to Defendants’ reading, under the literal reading, the
parenthetical has no meaning. There is no distinction it can
create, because there are no expenses in §507(a)(1) for it to
distinguish between. The parenthetical clearly cannot be
intended to refer to domestic support obligations.
The flaw with Defendant’s analysis of §724(b)(2), however,
is that domestic support obligations are not the only kind of
estate obligation referenced in §507(a)(1). 11 U.S.C.
6
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§507(a)(1)(C) also includes administrative expenses of the
trustee:
(C) If a trustee is appointed or elected under
701, 702, 703, 1104, 1202 or 1302, the administrative
expenses of the trustee allowed under paragraphs
(1)(A), (2) and (6) of section 503(b) shall be paid
before payment of claims under subparagraphs (A) and
(B), to the extent that the trustee administers assets
that are otherwise available for the payment of such
claims.
If the parenthetical in BAPCPA §724(b)(2) is read to apply to
§507(a)(1)(C) claims, the text is rather straightforward, since
the trustee certainly may incur expenses under chapters 11 and
chapter 7, including the “wages, salaries or commissions”
mentioned in the parenthetical. 11 U.S.C. §724(b)(2). This
meaning is supported by the fact that Congress, in enacting BTCA,
left the parenthetical phrase still applicable to a portion of
§507(a)(1) – specifically, subsection (a)(1)(C). 11 U.S.C.
§724(b)(2) (2011). Thus, pre-BTCA, the §724(b)(2) parenthetical
does have a reasonable meaning, limited though that might be: it
makes a distinction between §507(a)(1)(C) administrative expenses
incurred in chapter 7 and those incurred in chapter 11.
Defendants have marshaled lengthy legislative history and
secondary sources that rather clearly show that the placement of
the parenthetical was a drafting error, and runs directly
contrary to Congress’ intention of eliminating the “shocking
result” of “extinguish[ing] the tax lien of a city, a prior
perfected property right, and ... redistribut[ing] public
7
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revenues to a group of Chapter 11 administrative creditors....”
Morgan v. K.C. Mach. & Tool Co. (In re K.C. Mach. & Tool Co.),
816 F.2d 238, 248 (6 Cir. 1987) (Merritt, Chief Judge,	th
dissenting). However, given the fact that the BAPCPA version of
the statute makes sense as it was written, the Court need not
address the legislative history or secondary sources. “The
language before us expresses Congress' intent ... with sufficient
precision so that reference to legislative history and to
pre-Code practice is hardly necessary.” U.S. v. Ron Pair Enter.,
Inc., 489 U.S. 235, 241 (1989) (ruling that postpetition interest
is permitted on nonconsensual oversecured claims).
That being said, the Court concedes that Defendants and
their sources are undoubtedly correct in asserting that Congress
did not mean, when it passed BAPCPA, to continue to allow chapter
11 professional expenses to be paid from the funds that would
otherwise go to a properly perfected property tax lien. BTCA
makes that clear in correcting Congress’ BAPCPA error, and the
commentaries reinforce that conclusion. Had this issue arisen
some years earlier, the then prevailing standards for statutory
interpretation might well have resulted in a conclusion opposite
what the Court rules today. See, e.g., Dewsnup v. Timm, 502 U.S.
410 (1992):
We conclude that respondents' alternative position,
espoused also by the United States, although not
without its difficulty, generally is the better of the
several approaches. Therefore, we hold that § 506(d)
8
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does not allow petitioner to “strip down” respondents'
lien, because respondents' claim is secured by a lien
and has been fully allowed pursuant to § 502. Were we
writing on a clean slate, we might be inclined to agree
with petitioner that the words “allowed secured claim” must take
the same meaning in § 506(d) as in § 506(a). But, given the
ambiguity in the text, we are not convinced that Congress
intended to depart from the pre-Code rule that liens pass through
bankruptcy unaffected.
Id. at 417. (Footnote omitted.) The Dewsnup Court went on to
add the following:
When Congress amends the bankruptcy laws, it does not
write “on a clean slate.” See Emil v. Hanley, 318 U.S.
515, 521, 63 S.Ct. 687, 690-691, 87 L.Ed. 954 (1943).
Furthermore, this Court has been reluctant to accept
arguments that would interpret the Code, however vague
the particular language under consideration might be,
to effect a major change in pre-Code practice that is
not the subject of at least some discussion in the
legislative history. See United Savings Assn. of Texas
v. Timbers of Inwood Forest Associates, Ltd., 484 U.S.
365, 380, 108 S.Ct. 626, 634, 98 L.Ed.2d 740 (1988).
See also Pennsylvania Dept. of Public Welfare v.
Davenport, 495 U.S. 552, 563, 110 S.Ct. 2126, 2133, 109
L.Ed.2d 588 (1990); United States v. Ron Pair
Enterprises, Inc., 489 U.S. 235, 244-245, 109 S.Ct.
1026, 1032-1033, 103 L.Ed.2d 290 (1989). Of course,
where the language is unambiguous, silence in the
legislative history cannot be controlling. But, given
the ambiguity here, to attribute to Congress the
intention to grant a debtor the broad new remedy
against allowed claims to the extent that they become
“unsecured” for purposes of § 506(a) without the new
remedy's being mentioned somewhere in the Code itself
or in the annals of Congress is not plausible, in our
view, and is contrary to basic bankruptcy principles.
Id. at 419-420. See also Midlantic National Bank v. New Jersey
Dept. of Environmental Protection, 474 U.S. 494, 507 (1986),
characterized in Ron Pair Enter., Inc., 489 U.S. at 243 as
holding that section “554(a), which provides that ‘the trustee
9
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may abandon any property of the estate that is burdensome to the
estate,’ does not give a trustee the authority to violate state
health and safety laws by abandoning property containing
hazardous wastes.”
In so ruling, the Court sympathizes with those faced with
the difficulty of drafting legislation. Creating the text of a
statute that accurately states the intention of the drafter (to
say nothing of actually solving the problem addressed) while
avoiding unintended consequences can be devilishly exacting and
tedious. In consequence, courts have developed rules of
construction whose general aim is to uphold a statute and discern
and implement Congressional intent whenever reasonably possible –
that is, to “make it work.” And these rules even apply when the
problem arises from fundamental negligence on the part of
Congress, such as by hurriedly passing legislation without
proofreading it.
But at what point does a court go from the judicial function
of interpreting a statute to the legislative function of
rewriting a statute, especially when the legislative history upon
which a “rewriting” of the statute would be based is rather
sketchy. Lamie illustrates that problem in that the majority
found the legislative history to be ambiguous, id. at 538-542,
and the concurrence found the legislative history in fact
supported the statute as written. Id. at 542-43.
10
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These uncertainties illustrate the difficulty of
relying on legislative history here and the advantage
of our determination to rest our holding on the
statutory text.
Lamie, at 542. Once a Court begins to depart from the direct
meaning of a given text in a search for what Congress intended
(or perhaps should have intended), it quickly becomes difficult
and even random where to draw the line between mere
interpretation and rewriting the statute. In consequence, a less
intrusive and more restrained approach, such as that exhibited in
Lamie, seems appropriate. That leads to what the Court concedes
is an anomalous result in this instance: an interpretation and
application of the statute that honors its literal (and
reasonable) wording while almost certainly running contrary to
what Congress actually intended when it was rewriting the
statute. Defendants reasonably will frown at the result, but
they do have a remedy: have Congress change the statute, as it in
fact has done in this case.
If Congress enacted into law something different from
what it intended, then it should amend the statute to
conform it to its intent. “It is beyond our province to
rescue Congress from its drafting errors, and to
provide for what we might think ... is the preferred
result.” United States v. Granderson, 511 U.S. 39, 68,
114 S.Ct. 1259, 127 L.Ed.2d 611 (1994) (concurring
opinion). This allows both of our branches to adhere to
our respected, and respective, constitutional roles. In
the meantime, we must determine intent from the statute
before us.
Id. at 542.
It is true in this case that, as Defendants emphasize, one
11
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of the sponsors of BTCA made clear his view that BTCA merely
“correct[ed] these purely technical errors” and “[i]t is
important to highlight on the record that this bill does not, and
is not intended to, enact any substantive change to the
Bankruptcy Code.” Cong. Rec. H7158 (daily ed. Sept. 28, 2010)
(Statement of Rep. Scott). An after-the-fact (indeed, half a
decade after the fact) declaration by a sponsor of BTCA
interpreting the statute is not a dependable mechanism for
statutory interpretation. More to the point, “[i]t is
emphatically the province and duty of the judicial department to
say what the law is.” Marbury v. Madison, 1 Cranch 137, 178
(1803).
The disposition required by the text, that Davis be paid for
its work prior to payment of the tax liens, is not clearly
absurd, and thus this Court finds that BAPCPA §724(b)(2) did not
differentiate between chapter 11 and chapter 7 attorneys fees.
Retroactivity
However, Defendants have done Lamie one better: they have in
their support BTCA, which in effect is a clear admission by
Congress that it got the statute wrong in the BAPCPA version but
is also an attempt to fix the problem after the fact. BTCA does
not however suffice to change the result in this case.
The amended language makes clear that the parenthetical
does not apply to all of §507(a)(1), but was rather only to
12
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507(a)(1)(C), and additionally to §507(a)(2). If the 2010
amendments apply retroactively, then Defendants’ tax liens have
priority over Plaintiff’s expense, and Davis will not get paid.
Thus, whether the 2010 amendments apply retroactively is a
dispositive issue in this proceeding.
The Supreme Court dealt with an analogous situation in
Landgraf v. USI Film Products, 511 U.S. 244 (1994):
When a case implicates a federal statute enacted
after the events in suit, the court’s first task is to
determine whether Congress has expressly prescribed the
statute’s proper reach. If Congress has done so, of
course, there is no need to resort to judicial default
rules. When, however, the statute contains no such
express command, the court must determine whether the
new statute would have retroactive effect.
Id. at 281. In the instant case, BTCA itself contains neither an
effective date, nor any instruction about its application.
Pub.L. No. 111-327, Bankruptcy Technical Corrections Act of 2010.
Thus, this Court must infer whether the statute has retroactive
effect.
Following Landgraf, a statute has retroactive effect when it
“impair[s] rights a party possessed when he acted, increase[s] a
party’s liability for past conduct, or impose[s] new duties with
respect to transactions already completed”. Landgraf, 511 U.S.
at 281.
Applying BTCA would have the effect of “impair[ing] a right
a party possessed when he acted” since it would subordinate
Davis’ claim to the tax liens and thus prevent the claim from
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being paid. Landgraf, 511 U.S. at 281. Thus, applying BTCA
would run afoul of the presumption against retroactivity. As the
Supreme Court instructs, “congressional enactments and
administrative rules will not be construed to have retroactive
effect unless their language requires this result.” Id. (quoting
Bowen v. Georgetown Univ. Hosp., 488 U.S. 204, 208 (1988)). The
language of BTCA cannot be said to “require” retroactivity.
Pub.L. No. 111-327, Bankruptcy Technical Corrections Act of 2010.
The acknowledgment of an error and a command to apply the
correcting statute retroactively are obviously two different
things; BTCA is effectively the former without being the latter.
There is precedent in this district for precisely this
result. In In re Meyer, 355 B.R. 837 (Bankr. D.N.M. 2006), this
Court ruled, based upon the wording of §§1325(b) and 707(b), as
amended by BAPCPA, that over median income chapter 13 debtors may
not take charitable contributions into account in computing their
monthly plan payment. As that opinion was being written and
issued, Congress amended the statute to change that
interpretation, and so the Meyer debtors and the United States
Trustee moved the Court to change its decision. In re Meyer, 357
B.R. 635 (Bankr. D.N.M. 2006). This Court reviewed the new
statute and determined that it did not explicitly call for	6
The legislation was titled the Religious Liberty and	6
Charitable Donation Clarification Act of 2006.
14
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retroactive application. Id. at 637. The Court then ruled as
follows:
“Absent manifest injustice or intent to the contrary,
the court generally applies the law as it exists when a
decision is made.” Branding Iron Motel, Inc. v.
Sandlian Equity, Inc. (In re Branding Iron Motel,
Inc.), 798 F.2d 396, 399 n. 2 (10th Cir.1986). In this
case, the Court applied the law as it existed at the
time of the decision. If Congress wishes to pass or
amend a civil law and make it retroactive, it can do
that. See, e.g., Alvarez–Portillo v. Ashcroft, 280 F.3d
858, 863 (8th Cir.2002). However, there is a judicial
presumption against retroactivity that can only be
overcome by a clear expression of congressional intent.
Id. The Act contains no language that would make it
retroactive. Therefore, there is no ground for
reconsideration. If the Act were signed into law and
amended to be retroactive, a Motion for Reconsideration
might be well taken.
Finally, the Court finds that the Act is an
acknowledgment that BAPCPA as originally enacted
prevented above-median income debtors from deducting
charitable contributions in arriving at their plan
payment. Applying the statute as it existed when
Debtors filed their petition rather than the way that
Congress apparently had intended the statute to read
may be harsh. But, “[o]ur unwillingness to soften the
import of Congress' chosen words even if we believe the
words lead to a harsh outcome is longstanding.” Lamie
v. United States Trustee, 540 U.S. 526, 538, 124 S.Ct.
1023, 157 L.Ed.2d 1024 (2004). This Court should not
rewrite the statute as Congress may have intended;
rather, it must enforce the law as written.
Id.
Conclusion
It is frequently remarked that “elections have
consequences”, and sometimes that is even true. It is perhaps
more often true that the passage of legislation has consequences.
That is so in the instance of this statute in its BAPCPA form,
15
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although at least one of the consequences has been unintended.
For the foregoing reasons, Defendants’ Joint Motion to
Dismiss should be denied, as the relief Davis requests is
properly available. An order in conformity with this memorandum
opinion will issue.
James S. Starzynski
United States Bankruptcy Judge
Date Entered on Docket: August 29, 2011
Copies to:
William F. Davis
Attorney for Plaintiff
6709 Academy NE, Suite A
Albuquerque, NM 87109
James C Jacobsen
Attorney for NM Taxation and Revenue
111 Lomas NW Ste 300
Albuquerque, NM 87102-2368
Elizabeth A. Garcia
Attorney for New Mexico Dept of Workforce Solutions
PO Box 1928 Legal Section
Albuquerque, NM 87103
Manuel Lucero
Assistant US Attorney
PO Box 607
Albuquerque, NM 87103-0607
Michael J. Caplan
Trustee
827 E Santa Fe Ave
Grants, NM 87020-2458
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