- Internal Revenue Service v. Lange, Chapter 7 Trustee
- The BAP reversed the bankruptcy court's denial of the Internal Revenue Service's ("Government") motion for an evidentiary hearing on its Sec. 507(b) motion in the event the bankruptcy court found the existence of a factual question.
- Procedural context:
- The Government filed a motion to approve its superpriority administrative expense claim under Sec. 507(b) based on the dimunition in the value of its cash collateral which agreed the debtor could use before his chapter 11 case converted to chapter 7. Because the debtor's benefit plan objected to the Government Sec. 507(b) claim and questioned the amount, the Government filed a motion requesting an evidentiary hearing and the opportunity to conduct discovery. The bankruptcy court denied the Government's' Sec. 507(b) claim, finding that Sec. 727 governed the claim, and denied its request for an evidentiary hearing. Upon appeal, the BAP reversed the bankruptcy court's denial of the Government's motion for an evidentiary hearing and remanded the case to the bankruptcy court for determination of the amount, if any, of the Government's Sec. 507(b) claim.
- At the time of the debtor's chapter 11 filing, the Government held a federal tax lien, and claimed that it held a first priority security interest in the debtor's cash collateral. The bankruptcy court approved the subsequent agreement between the Government and the debtor that the debtor could use the Government's cash collateral. The agreement provided, among other things, that to the extent the adequate protection provided for under their agreement was inadequate to protect the Government against post-petition diminution in the value of the collateral, the Government would be entitled to a superpriority administrative expense claim under Sec. 507(b). A union pension benefit plan ("Plan") objected to the Government's Sec. 507(b) motion on the basis that under Sec. 724(b) plan contributions owed to them for the 180 days pre-petition had priority over the Government's Sec. 507(b) claim. The chapter 7 trustee also objected to the Government's Sec. 507(b) motion to the extent it sought to alter the priorities under Sec. 726(b). At the hearing on the Government's Sec. 507(b) motion, the Plan raised, for the first time, a dispute as to the amount of the Government's Sec. 507(b) claim. The Government requested that, if the court found a factual dispute concerning its superpriority administrative expense claim, the court allow the Government to conduct discovery. Prior to the bankruptcy court's ruling, the Government filed a motion requesting an evidentiary hearing on its Sec. 507(b) motion should the court find any factual question. The bankruptcy court denied the Government's Sec. 507(b) claim because it determined that Sec. 724(b) governed the claim, and the court also denied the Government's motion for an evidentiary hearing. The BAP, noting the language of Sections 507(b) and 507(a)(2) governing priority claims, pointed out that Sec. 503(b)(1)(A) provides that "after notice and hearing, there shall be allowed administrative expenses ... including ... the actual, necessary costs and expenses of preserving the estate." Sec. 724, the provision upon which the bankruptcy court relied, sets forth the order of distribution of property in which the estate has an interest and which is subject to a non-avoidable lien which secures an allowed claim for a tax, or proceeds of such property. The BAP observed that the bankruptcy court's order denying the Government's Sec. 507(b) motion was decided purely on a legal basis, holding that Sec. 724(b) governs. However, the BAP emphasized, the Government claimed a Sec. 507(b) unsecured superpriority administrative expense; not a secured claim arising from a lien, as discussed under Sec. 724(a). Consequently, the BAP held that Sec. 724(b) does not apply to the Government's unsecured claim. The BAP further stated that when the Plan and the chapter 7 trustee objected, the Government's request for a superpriority administrative expense claim became a contested matter under Federal Rule of Bankruptcy Procedure 9014. Rule 9014 states that in such a contested matter, "relief shall be requested by motion, and reasonable notice and an opportunity for hearing shall be afforded the party against whom relief is sought." The phrase "notice and hearing" is defined under Rule 102(1)(A) as "after such notice as is appropriate in the particular circumstances, and such opportunity for a hearing as is appropriate in the particular circumstances ... The BAP held that the bankruptcy court abused its discretion when it denied the Government the chance to conduct discovery and present evidence. The bankruptcy court based its ruling on the incorrect legal conclusion that Sec. 724(b) applied to the superpriority administrative expense claim of the Government. At the point when the Government learned that there was an issue as to the amount of its contested claim, the Government made clear its desire to conduct discovery and present evidence.
- Kressel, Schermer, and Shodeen
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