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In re Sharkey

United States District Court, E.D. Michigan, Southern Division

November 15, 2017

IN RE STEVEN G. SHARKEY and SANDRA E. SHARKEY, Debtors.
v.
STEVENSON AND BULLOCK, PLC, Appellee. STEVEN G. SHARKEY and SANDRA E. SHARKEY, Appellants,

          THOMAS J. TUCKER UNITED STATES BANKRUPTCY JUDGE

          OPINION AND ORDER AFFIRMING THE BANKRUPTCY COURT'S APRIL 6, 2017 ORDER REGARDING MOTION TO ALLOW ADMINISTRATIVE EXPENSE FILED BY STEVENSON AND BULLOCK, PLC (BANKRUPTCY DKT. NO. 194)

          PAUL D. BORMAN UNITED STATES DISTRICT JUDGE

         This is an appeal of the Bankruptcy Court's decision to reimburse as administrative expenses certain costs incurred by law firm Stevenson & Bullock, PLC (“Creditor/Appellee”) when it objected to exemptions claimed by Steven and Sandra Sharkey (“Debtor/Appellants”) in their Chapter 13 bankruptcy proceedings.

         In particular, Debtor/Appellants challenge the Bankruptcy Court's reliance on the Sixth Circuit decision Mediofactoring v. McDermott (In re Connolly N. Am., LLC), 802 F.3d 810 (6th Cir. 2015), which Debtor/Appellants claim the Bankruptcy Court impermissibly extended by applying it to this case.

         The legal issue that underlies the appeal is this: in Connolly, the Sixth Circuit held that administrative expenses under 11 U.S.C. § 503(b)(3)(D), nominally available only in Chapter 9 and Chapter 11 cases, could be awarded to a creditor in a Chapter 7 proceeding owing to special circumstances present in that case. Did the Bankruptcy Court err in relying on Connolly to do the same in this Chapter 13 case? For the reasons articulated below, this Court holds that it did not, and therefore affirms the decision of the Bankruptcy Court.

         I. BACKGROUND

         On March 25, 2016, Debtor/Appellants jointly filed a voluntary petition for Chapter 7 bankruptcy. (In re Sharkey, Bankr. Case No. 16-44445, ECF No. 1, Voluntary Petition (Chapter 7).) Among the assets listed on the petition are two annuities, the combined stated value of which is $96, 675: “The Hartford Annuity, ” valued at $78, 897, and the “Nationwide Annuity, ” valued at $17, 778. (Id. at 13.) The two annuities are also included on a list of property that Debtor/Appellants claim as exempt from the bankruptcy estate, and the petition's stated legal basis for exempting the annuities is 11 U.S.C. § 522(d)(10)(E).[1] (Id. at 17.)

         The Designated Bankruptcy Record indicates that after Debtor/Appellants filed their bankruptcy petition, Michael A. Stevenson was appointed the Chapter 7 Trustee in the proceeding, and his law firm, Stevenson & Bullock, PLC (Creditor/Appellee in this appeal), was retained to represent him in his capacity as Trustee. (See ECF No. 4, Designated Bankruptcy Record at 51, Pg ID 64.)

         On June 22, 2016, the case was converted from a Chapter 7 bankruptcy to a Chapter 13 bankruptcy, and a new Trustee was appointed. Two months later, Creditor/Appellee successfully applied for an administrative expense allowance in the amount of $6, 480.34 for its work in representing the Trustee before the case was converted to Chapter 13. (See Designated Bankruptcy Record at 51, Pg ID 64.) That work included filing an objection to Debtor/Appellants' claim of exemptions (including the Hartford Annuity and the Nationwide Annuity), but the objection was mooted when the case was converted to Chapter 13. (See Id. at 51-52, Pg ID 63-64.) Thus, Creditor/Appellee's role shifted at that point in the proceeding. Creditor/Appellee had been Trustee Stevenson's counsel when the case was a Chapter 7 bankruptcy; after it was converted to Chapter 13, Creditor/Appellee was simply a creditor that was owed for the work it did before the conversion.

         Litigation over the exemption status of the Hartford Annuity and the Nationwide Annuity continued after the Chapter 13 conversion. That litigation included two more sets of objections filed by Creditor/Appellee regarding Debtor/Appellants' attempt to exempt the annuities. (See Designated Bankruptcy Record at 52-53, Pg ID 64-65.) Notably, the Chapter 13 Trustee (i.e., Creditor/Appellee's successor) filed a concurrence with the Bankruptcy Court regarding Creditor/Appellee's final and successful objection to the exemption.[2] (See Id. at 50, Pg ID 62.) Ultimately, on February 16, 2017, the Bankruptcy Court sustained Creditor/Appellee's objection to Debtor/Appellants' claimed exemption of the annuities, and disallowed those claims. (See Id. at 59-78, Pg ID 71-90.)

         Four days later, Creditor/Appellee filed a Motion to Allow Administrative Expense Pursuant to 11 U.S.C. § 503(b). (Designated Bankruptcy Record at 82-98, Pg ID 94-110.) In that motion, Creditor/Appellee pointed out that as a result of its successful objection to Debtor/Appellants' claimed exemptions in the two annuities, Debtor/Appellants would now have to “pay all administrative claims and unsecured creditors 100% of their claims with interest, which is more than the Debtors had proposed to pay in their First Amended Chapter 13 Plan.” (Id. at 85, Pg ID 97.) Because this “directly and substantially benefitted the bankruptcy estate by helping the estate preserve its interest in the Annuities, ” Creditor/Appellee argued, Creditor/Appellee was entitled to an administrative expense claim for the costs it incurred in bringing about that result. Creditor/Appellee therefore requested an order allowing it a second administrative expense claim, this time in the amount of $32, 694.76. (Id. at 85-86, Pg ID 97-98.)

         After the parties briefed Creditor/Appellee's Motion to Allow Administrative Expenses, the Bankruptcy Court conducted a hearing on the motion on April 6, 2017. After hearing argument from the parties, the Bankruptcy Court stated that Creditor/Appellee's motion would be granted to the extent that it sought reasonable attorney fees and expenses incurred by Creditor/Appellee in successfully objecting to the claimed exemptions in the annuities. The Bankruptcy Court further stated that it would reserve the decision on the precise amount for a later date. (Designated Bankruptcy Record at 153-54, Pg ID 165-66.) The Bankruptcy Court stated on the record that it based its decision on Mediofactoring v. McDermott (In re Connolly N. Am., LLC), 802 F.3d 810 (6th Cir. 2015), in which the Sixth Circuit upheld the award of an administrative expense in a Chapter 7 case under 11 U.S.C. 503(b)(3)(D), the same Bankruptcy Code provision at issue in this case. (See Designated Bankruptcy Record at 359-60, Pg ID 371-72.) The Bankruptcy Court also rejected Debtor/Appellants' argument based on Lamie v. United States Trustee, 540 U.S. 526 (2004), in which the U.S. Supreme Court analyzed a separate Bankruptcy Code provision-11 U.S.C. § 330(a), which permits reimbursement of professional fees in certain circumstances-and concluded that reimbursements under that provision may be awarded only if the attorney or accountant is employed by the bankruptcy trustee with the approval of bankruptcy court. (See Id. at 360-61, Pg ID 372-73.) Finding that Connolly was controlling and that Lamie did not require a contrary result, the Bankruptcy Court stated that Creditor/Appellee's motion would be granted, and that Creditor/Appellee would be awarded the administrative expense that it had requested. (See Id. at 358-62, Pg ID 370-74.)

         On the same day (April 6, 2017), the Bankruptcy Court entered an Order Regarding Motion to Allow Administrative Expense Filed by Stevenson and Bullock, PLC. (In re Sharkey, Bankr. Case No. 16-44445, ECF No. 194 (“April 6, 2017 Order”); Designated Bankruptcy Record at 153-54, Pg ID 165-66.) In the April 6, 2017 Order, the Bankruptcy Court granted Creditor/Appellee's motion, and stated that Creditor/Appellee would be “allowed an administrative expense in the amount of the reasonable attorney fees and expenses incurred by [Creditor/Appellee], after the conversion of this case to Chapter 13, in successfully objecting to [Debtor/Appellants'] claimed exemptions in the scheduled assets described as ‘The Hartford Annuity' and the ‘Nationwide Annuity.'” (Id.) The Bankruptcy Court further stated in the April 6, 2017 Order that it would hold a hearing regarding the precise dollar amount of the administrative expense on April 20, 2017, and that it would rule on that issue on that date. (See id.)

         Debtor/Appellants challenged the Bankruptcy Court's April 6, 2017 Order via the instant appeal, which was filed on April 20, 2017. (ECF No. 1, Notice of Appeal from Bankruptcy Court.) The following day, the Bankruptcy Court entered an opinion and order setting the amount of the administrative expense claim at $23, 289.76. (Designated Bankruptcy Record at 6-13, Pg ID 18-25.) The dollar amount of the administrative expense awarded by the Bankruptcy Court is not at issue in this appeal.

         The parties fully briefed this appeal. (ECF No. 5, Debtor/Appellants' Br.; ECF No. 7, Creditor/Appellee's Br.; ECF No. 9, Debtor/Appellants' Reply.) This Court held a hearing on August 16, 2017, and now issues the following ruling.

         II. LEGAL STANDARDS

         District courts review factual findings of bankruptcy courts for clear error, and their legal conclusions de novo. See In re Batie, 995 F.2d 85, 88-89 (6th Cir. 1993). As there are no material factual disputes in this case, this Court's review is de novo.

         III. ANALYSIS

         The U.S. Bankruptcy Code empowers Bankruptcy Courts to award “administrative expenses” to certain persons in certain circumstances, to be paid from the bankruptcy estate. See 11 U.S.C. § 503. The Bankruptcy Code affords administrative expense claims higher priority than almost any other type of claim. See 11 U.S.C. § 507(a)(2).

         11 U.S.C. § 503(b)(3)(D) (“§ 503(b)(3)(D)”) is the Bankruptcy Code provision at the heart of this appeal. In context, § 503(b)(3)(D) relevantly provides:

After notice and a hearing, there shall be allowed administrative expenses . . . including . . . the actual, necessary expenses, other than compensation and reimbursement specified in paragraph (4) of this subsection, incurred by . . . a creditor . . . in making a substantial contribution in a case under chapter 9 or 11 of this title . . . .

11 U.S.C. § 503(b).

         The “paragraph (4)” referenced in the provision quoted above, in turn, provides that administrative expenses are also allowed for

reasonable compensation for professional services rendered by an attorney or an accountant of an entity whose expense is allowable under subparagraph . . . (D) . . . of paragraph (3) of this subsection, based on the time, the nature, the extent, and the value of such services, and the cost of comparable services other than in a case under this title, and ...

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