Amicus Curiae Brief — Hartford Underwriters Ins. Co. v. Union Planters Bank, NA

—

! Supreme Us,

sUpionic

he | FILED

oct 8

No. 99-409 |

IN THE

Supreme Court of the United States

HARTFORD UNDERWRITERS INSURANCE COMPANY,

Petitioner,

Vv.

MAGNA BANK, N.A.,

Respondent.

On Petition for Writ of Certiorari to the

United States Court of Appeals

for the Eighth Circuit

BRIEF OF AMICUS CURIAE

AMERICAN INSURANCE ASSOCIATION

IN SUPPORT OF THE PETITION

CRAIG A. BERRINGTON MARK F. HORNING

PHILLIP L. SCHWARTZ Counsel of Record

AMERICAN INSURANCE SIDNEY P. LEVINSON

ASSOCIATION STEPTOE & JOHNSON LLP

1130 Connecticut Ave., N.W. 1330 Connecticut Ave., N.W.

Washington, D.C. 20036 Washington, D.C. 20036

(202) 828-7100 (202) 429-3000

Counsel for Amicus Curiae

American Insurance

Association

ec a TE A A AS -eEeS,

WILSON-EPES PRINTING Co.. INC. - (202) 789-0096 - WASHINGTON, D.C. 20001

1999

IMs OLERM

Ee ———————<«_ = ht

TABLE OF CONTENTS

CD Sitiicehcssdstictinsnecticbiietiamnetanes

INTEREST OF THE AMICUS ..............2..-.--0.-cseceeseneeeeneees

SUMMARY OF ARGUMENT 20uun...o...eeecceeececeeeeeeseeeeee

REASONS FOR GRANTING THE WRIT ....................

I. THE QUESTION PRESENTED HAS IMPOR-

II.

ITI.

TANCE NOT ONLY FOR THE SPECIFIC

BANKRUPTCY CODE PROVISION AT IS-

SUE BUT ALSO FOR CREDITOR STANDING

UNDER THE CODE GENERALLY ..................

THE EIGHTH CIRCUIT’S DECISION CON-

FLICTS WITH THIS COURT’S RULE THAT

REMEDIES EXISTING PRIOR TO ENACT-

MENT OF THE BANKRUPTCY CODE

SHOULD BE PRESERVED, ABSENT CON-

TRARY CONGRESSIONAL INTENT ..............

THE DECISION BELOW PRESENTS AN IS-

SUE OF GENERAL IMPORTANCE BE-

CAUSE IT UNDERMINES CONGRESSIONAL

POLICY FAVORING REHABILITATION OF

SUUEITTNIT siinaiicdidasnabeescanatateateniandeptignedtionpmapennmmangets

IIIT <actennshiscihnpnundeuntiaimdecaitienntpeiantnbdipaipenmendmnacasee

10

14

18

ii

TABLE OF AUTHORITIES

CASES: Page

In re Alaska Plywood Corp., 166 F. Supp. 423 (D.

Bins, WEBB) cccitsmceentsteiee 18

Bank of Am. Nat'l Trust & Savs. Ass’n v. 203 N.

LaSalle St. Partnership, 119 S. Ct. 1411 (1999).. 11,14

In re Brileya, 108 B.R. 444 (Bankr. D. Vt. 1989).. 9

Canadian Pac. Forest Prods. Ltd. v. J.D. Irving,

Ltd. (In re Gibson Group, Inc.), 66 F.3d 1436

( |e SS | 8,9

Carr v. Demusis (In re Carr), 34 B.R. 653 (Bankr.

D. Conn. 1983), aff'd, 40 B.R. 1007 (D. Conn.

BODE cccocscocstnceststnecinsatemmeammiian 9

In re Carter, 2 B.R. 321 (Bankr. D. Colo. 1980)... 10

Citizens & Southern Nat'l Bank v. Mullins (In re

Bolton Road Medical Ctr.), 433 F. Supp. 369

COED. Gar, BPG cencovntncencessshinisccteniiiiasandnaae 13

Cohen v. De La Cruz, 523 U.S. 213 (1998) ............. 5, 11

Coral Petroleum, Inc. v. Banque Paribas-London,

797 F.2d 1851 (5th Cir. 1986) ............................. 8

Dewsnup v. Timm, 502 U.S. 410 (1992) ................. 11

Emil v. Hanley, 318 U.S. 515 (1943) -.................... 11

Equitable Gas Co. v. Equibank N.A. (In re Me-

Keesport Steel Castings Co.), 799 F.2d 91 (3d

+ SD | ES He 9

First W. Savs. & Loan Ass’n v. Anderson, 252 F.2d

TR, fo Sa er ee 13

Ford Motor Credit Co. v. Reynolds & Reynolds Co.

(In re JKJ Chevrolet, Inc.), 26 F.3d 481 (4th

Glo. BBDE) ncencncennsiessiccesssmeniiocsssamemmammaa 17

Freeman v. Eli Lilly Federal Credit Union (In re

Freeman), 72 B.R. 850 (Bankr. E.D. Va. 1987).. 9

Hartford Underwriters Insurance Co. v. Magna

Bank, N.A. (In re Hen House Interstate, Inc.),

177 F.3d 719 (8th Cir. 1999) (en bane) ............ passim

Louisville, Evansville & St. Louis R.R. v. Wilson,

138 U.S. 501 (1891) . a

NLRB v. Bildisco & Bildisco, 465 U. s. ‘613 ( 1984). 14

National Acceptance Co. v. District No. 1, Progres-

sive Mine Workers of Am. (In re Chapman Coal

Co.), 196 F.2d 779 (7th Cir. 1952) ...........-.....-.... 13

iil

TABLE OF AUTHORITIES—Continued

Page

In re Nationwide Sports Distribs., 227 B.R. 455

Le 9

Official Unsecured Creditors Comm. of Suffola,

Inc. v. U.S. Nat'l Bank of Oregon (In re Suffola,

Ine.), 2 F.3d 977 (9th Cir. 1993) 0.0... 8

Pennsylvania Dept. of Public Welfare v. Daven-

port, 496 U.S. 552 (1990) 2.0... cece ee cece ee 11

Reading Co. v. Brown, 391 U.S. 471 (1968).......... 16

In re Rotary Tire & Rubber Co., 2 F.2d 364 (6th

SE 12

Saline State Bank v. Mahloch, 834 F.2d 690 (8th

A 8,9

Tindall v. Mavrode (In re Mavrode), 205 B.R. 716

A i)

United States v. Henderson, 274 F.2d 419 (5th

EEE ET 13

United States v. Ron Pair Enters., Inc., 489 U.S.

CE 10

Unsecured Creditors Committee of Debtor STN

Enters., Inc. v. Noye (In re STN Enters.), 779

F.2d 901 (2d Cir. 1985) ........................................ 8

Walls v. Appalachian Tire Prods., Inc. (In re

Walls), 17 B.R. 701 (Bankr. S.D. W.Va. 1982). 9

In re Webb, 932 F.2d 155 (2d Cir. 1991)... 9

In re Xonics Photochemical, Inc., 841 F.2d 198

A 8,9

STATUTES:

Federal:

a 3, 16

Te 14

11 U.S.C. § 506(c) (1994) 2.2... passim

En 4,7

I Th 4,7

I 4,7

11 U.S.C.S. § 548 (Supp. 1999) 4,7

11 U.S.C. § 549 (1994) 2. seoseiaieteneneen 4,7

Ee 9

11 U.S.C. § 1808 (1994) 0.00 9

iv

TABLE OF AUTHORITIES—Continued

State: Page

PF SS EE 16

i a Ra cee 16

Conn. Gen. Stat. § 31-284 ..00 saeaeeneahintethicianiiins 16

a ee 16

820 Til. Comp. Stat. § 3065/4 ....................................... 16

Ky. Rev. Stat. Ann. § 342.340 ................................... 16

Mass. Gen. Laws (Ann.) ch. 152, § 25A 200000. 16

Md. Code Ann., Lab. & Empl. ee Sian 16

8 RS NE 16

SS ee 16

fk & 8 | 16

eens 16

RULES:

i 9

LEGISLATIVE MATERIALS:

H.R. Rep. No. 95-595 (1977), reprinted in 1978

nn 11-12

MISCELLANEOUS:

1 COLLIER ON BANKRUPTCY © 1.01 (15th ed. 1999) .. 11

In THE

Supreme Court of the United States

No. 99-409

HARTFORD UNDERWRITERS INSURANCE COMPANY,

e Petitioner,

MAGNA BANK, N.A.,

Respondent.

On Petition for Writ of Certiorari to the

United States Court of Appeals

for the Eighth Circuit

BRIEF OF AMICUS CURIAE

AMERICAN INSURANCE ASSOCIATION

IN SUPPORT OF THE PETITION

INTEREST OF THE AMICUS

Amicus curiae American Insurance Association (“AIA”)

respectfully submits this brief in support of the petition

for writ of certiorari to the Eighth Circuit.?

AIA is a national trade association consisting of over

375 property and casualty insurers. AIA’s member com-

1 Pursuant to Supreme Court Rule 37.6, amicus curiae states that

no counsel for any party to this dispute authored this brief in whole

or in part and no person or entity, other than amicus curiae and

its member companies, made a monetary contribution to the prep-

aration or submission of this brief. Petitioner Hartford Under-

writers Insurance Company is a member of amicus curiae American

Insurance Association.

2

panies write workers’ compensation insurance throughout

the country and account for approximately 42 percent of

all such insurance sold by privately-owned insurers. AIA

frequently participates as an amicus curiae in litigation,

such as this case, raising issues of importance to its

membership.

The question presented in this case is whether a work-

ers’ compensation insurer that provides coverage to an

insolvent employer during the period of bankruptcy has

standing under section 506(c) of the Bankruptcy Code,

11 U.S.C. §506(c) (1994), to move the bankruptcy

court for payment of premiums out of the collateral of

the debtor’s secured lender. This issue is one of concern

to AIA’s members because it substantially affects their

rights in the many thousands of instances annually where

the employer insured is in bankruptcy.

State laws mandate the purchase of workers’ compen-

sation insurance by employers that cannot qualify to self-

insure, such as insolvent businesses. Accordingly, employ-

ers in chapter 11 proceedings must purchase coverage

if they are to reorganize successfully. Insurers will be

unwilling to underwrite insurance for an insolvent em-

ployer, however, unless there is adequate assurance of

payment.

Section 506(c) of the Bankruptcy Code provides such

assurance. It allows recovery of unpaid premiums from

the collateral of the debtor’s secured creditors to the ex-

tent such insurance protects the collateral. Section 506(c)

is critical for the protection of the insurer. The right to

payment out of the debtor’s unsecured assets is often an

illusory remedy when the debtor does not or cannot pay,

because the debtor rarely has any significant unencum-

bered property. Recourse to the debtor’s secured assets

is frequently the only meaningful remedy for nonpayment.

3

The decision of the Eighth Circuit deprives insurers of

this essential protection. It prohibits them from obtaining

a payment order directly from the bankruptcy court and

instead places the insurer at the sufferance of the trustee’s

discretionary decision whether to pursue the insurer’s

claim. Unlike the insurance carrier, the trustee has no

economic incentive to seek payment aggressively because,

by the time of nonpayment, the insurance already has

been provided and, under the Bankruptcy Code, cannot

be canceled regardless of nonpayment absent relief from

the bankruptcy court. See 11 U.S.C. § 362(a) (1994).

AIA’s member companies thus have a significant interest

in the outcome of this litigation because it will substan-

tially affect their ability to receive the premiums promised

for their assumption of risk and, indeed, will strongly in-

fluence their willingness to afford coverage in the first

instance.”

SUMMARY OF ARGUMENT

In this case, the Eighth Circuit denied a workers’ com-

pensation insurer standing under section 506(c) of the

Bankruptcy Code to recover unpaid insurance premiums

out of the debtor’s secured assets. The lower court reached

this conclusion notwithstanding that: (1) the debtor’s pur-

chase of such insurance was necessary in order for it to

remain in business; (2) the insurer provided the coverage

after the bankruptcy filing and thus had a priority for

payment; (3) the debtor consented to an order requiring

payment, but then did not comply with that order; (4)

the debtor had no unencumbered assets out of which the

premiums subsequently could be paid; and (5) the debt-

or’s lender consented to use of its collateral to pay neces-

2 Both petitioner and respondent have consented to the filing of

this brief, and their letter of consent has been filed with the Office

of the Clerk of this Court.

4

sary administrative expenses, including workers’ compen-

sation insurance. The Eighth Circuit rationalized this

harsh result on the grounds that section 506(c) referred

only to the “trustee” and thus did not allow a claim for

administrative expenses to be asserted by the post-filing

vendors which this provision was created to protect.

As the petition for certiorari demonstrates, this case

presents an important issue concerning an administrative

expense claimant’s rights under section 506(c), as to

which there is a 4-2 circuit court split. More broadly,

this controversy presents issues of general importance con-

cerning proper interpretation of the Bankruptcy Code, in

three respects.

First, like section 506(c), numerous other provisions

of the Bankruptcy Code explicitly refer only to the “trus-

tee” and do not mention the creditors which these provi-

sions were intended to benefit. As a prime example, the

“avoidance” provisions of the Code, governing preferen-

tial or fraudulent conveyances of the debtor’s property,

on their face identify only the “trustee” but are meant

to protect creditors by requiring the return of improperly

transferred assets. See 11 U.S.C. §§ 544(a), 545, 547(b)

(1994); 11 U.S.C.S. § 548(a) (Supp. 1999); 11 U.S.C.

§ 549(a) (1994). Under the rationale of the lower

court’s decision, creditors would be denied standing to

sue for the return of property even though they were the

parties directly injured by the unlawful conveyance.

The decision below should thus be reviewed because

the Eighth Circuit’s rule of statutory construction poten-

tially constricts creditor standing under many provisions

in the Code worded comparably to section 506(c). In-

deed, precisely because of the parallelism between section

506(c) and these other provisions, another 4-2 circuit

court split on creditor standing under the “avoidance”

5

provisions has arisen, as it has in section 506(c) cases.

This Court’s intervention is thus necessary to assure a

uniform approach by bankruptcy judges and the district

courts towards creditor standing under the Code.

Second, the decision below strips creditors of an equi-

table remedy they have had for more than a century.

Section 506(c) was intended to codify pre-Bankruptcy

Code law on the rights of claimants to recover post-filing

administrative expenses. That pre-Code law had long al-

lowed claimants that provide services to bankrupt compa-

nies to assert claims directly against the debtor’s secured

parties. See, e.g., Louisville, Evansville & St. Louis R.R.

v. Wilson, 138 U.S. 501 (1891).

This Court consistently has refused to construe the

Code “‘to erode past bankruptcy practice absent a clear

indication that Congress intended such a departure.”

Cohen v. De La Cruz, 523 U.S. 213, 221 (1998) (cita-

tion omitted). Far from intending such a reversal of the

pre-1978 law, Congress adopted section 506(c) to pre-

serve it. Accordingly, the decision below should be re-

viewed because it is in conflict with this Court's decisions

requiring deference to pre-Code practice absent a clear

expression of contrary congressional intent.

Third, the decision below subverts another important

policy of the Code—the chapter 11 policy encouraging

reorganization of debtors rather than their liquidation.

One way in which this policy is implemented is to provide

assurance of payment to suppliers of goods or services

necessary to maintain the bankrupt company as an oper-

ating business while it attempts to reorganize. The deci-

sion below frustrates this important policy without any

clear-cut legislative instruction to do so. It sends a mes-

sage to suppliers of essential goods and services that they

deal with the debtor at their peril. The Eighth Circuit's

6

ruling should thus be reviewed because it creates a signifi-

cant impediment to debtor reorganization—the primary

goal of chapter 11.

REASONS FOR GRANTING THE WRIT

I. THE QUESTION PRESENTED HAS IMPORTANCE

NOT ONLY FOR THE SPECIFIC BANKRUPTCY

CODE PROVISION AT ISSUE BUT ALSO FOR

CREDITOR STANDING UNDER THE CODE GEN-

ERALLY

As the petition demonstrates, the Eighth Circuit’s deci-

sion in Hartford Underwriters Ins. Co. v. Magna Bank,

N.A. (In re Hen House Interstate, Inc.), 177 F.3d 719

(8th Cir. 1999) (en banc) (“Hen House”) raises an im-

portant issue—an administrative expense claimant’s stand-

ing to sue under section 506(c) of the Bankruptcy Code

—on which the circuits have split 4-2. In addition, the

decision below has major ramifications for the standing

of creditors under the Code.

A debtor’s creditors have an obvious financial stake in

the bankruptcy proceeding and their interest in recovery

lies at the center of the zone of interests protected by the

Bankruptcy Code. Thus, a creditor’s claims satisfy both

the Article III “case or controversy” and prudential re-

quirements for standing. See Hen House, 177 F.3d at

726-27 (Heaney, J., dissenting). As a result, in order to

eliminate creditor standing under a particular Bankruptcy

Code provision, there must be some express indication of

Congress’ intent to make such an exception. /d. at 726. In

the Code, Congress frequently has done so by inserting lan-

guage in a specific provision expressly denying standing

to designated parties or by using the term “only” to limit

the parties with standing. See Petition, at 16-17 (citing

twenty examples of such provisions in the Code).

7

Section 506(c) contains no such exclusionary language.

It simply provides that “the trustee may recover” certain

post-filing administrative costs and expenses from a se-

cured creditor’s collateral. It does not additionally state

that “only” the trustee may seek recovery or expressly

deny a claimant's right to directly petition the bankruptcy

court where the recoverable expense was incurred by rea-

son of the claimant’s goods or services. The Eighth Cir-

cuit nevertheless held that administrative expense claim-

ants such as petitioner Hartford Underwriters Insurance

Company (“Hartford”) lack standing under section 506(c)

because that provision does not explicitly refer to them in

addition to the “trustee.”

Numerous other provisions of the Code are worded

similarly to section 506(c). As a consequence, the rule

of construction adopted in the decision below has gen-

eral significance for creditor standing. For example, the

“avoidance” provisions of the Code uniformly provide

that “the trustee may avoid” various liens and transfers

without express reference to any other party in interest.

11 U.S.C. §§ 544(a), 545, 547(b) (1994); 11 U.S.C.

§ 548(a) (Supp. 1999); 11 U.S.C. §549(a) (1994)

(emphasis added) *

Under the Eighth Circuit’s rationale in Hen House, the

single reference to “trustee” in the avoidance provisions

would be construed to deprive creditors and their com-

mittees of standing notwithstanding that they are the ones

who were injured by the preferential or improper trans-

3“Avoidance” provisons authorize recovery, on behalf of the

bankruptcy estate, of certain improper or unauthorized transfers

of money or liens made by a debtor to third parties. For example,

§ 547 authorizes the recovery of preferential transfers made within

90 days (or in the case of insiders, one year) before the bankruptcy

petition. The other provisions cited above address unperfected liens

(§ 544), statutory liens such as those for rent (§ 545), fraudulent

transfers (§ 548) and unauthorized post-petition payments (§ 549).

8

fers voidable under these provisions. Indeed, the Eighth

Circuit already has taken this view but other circuits have

disagreed—giving rise to another 4-2 circuit split over in-

terpretation of the avoidance provisions as over interpre-

tation of section 506(c). Compare Canadian Pac. Forest

Prods. Ltd. v. J.D. Irving, Ltd. (In re Gibson Group, Inc.),

66 F.3d 1436, 1438 (6th Cir. 1995) (granting individual

creditor standing to bring suit under $§ 547 and 548 to

recover preferential or fraudulent conveyances); Coral

Petroleum, Inc. v. Banque Paribas-London, 797 F.2d

1351, 1362-63 (Sth Cir. 1986) (unsecured creditors

committee had standing to bring action under § 547);

Unsecured Creditors Committee of Debtor STN Enters.,

Inc. v. Noyes (In re STN Enters.), 779 F.2d 901, 904

(2d Cir. 1985) (committee granted standing to bring pref-

erence action); and Official Unsecured Creditors Comm.

of Suffola, Inc. v. U.S. Nat'l Bank of Oregon (In re Suf-

fola, Inc.), 2 F.3d 977, 979 n.1 (9th Cir. 1993) (same),

with Saline State Bank v. Mahloch, 834 F.2d 690, 694-95

(8th Cir. 1987) (individual creditor lacked standing to

bring action to avoid lien under $544); and In re

Xonics Photochemical, Inc., 841 F.2d 198, 202 (7th Cir.

1988) (creditor held not to have standing to sue under

$$ 544(b) or 548(a)).

The arguments asserted for and against creditor stand-

ing under the avoidance provisions echo the debate over

section 506(c). Like the dissenters in Hen House, the

circuits adopting the majority rule favoring creditor stand-

ing emphasize the lack of economic incentive for a trustee

or debtor in possession to bring the avoidance action, in

contrast to the creditor, which has a direct financial stake.

Gibson Group, 66 F.3d at 1440-41; Coral Petroleum,

797 F.2d at 1363; STN Enters., 779 F.2d at 904. On the

other hand, like the majority in Hen House, the circuits

adopting the minority rule contend that allowing indi-

9

vidual creditors to sue might disproportionately benefit

them to the detriment of other unsecured creditors. Saline

State Banks, 834 F.2d at 694; Xonics Photochemical,

841 F.2d at 202.

The linkage between standing under section 506(c) and

the avoidance provisions is further reflected by the reli-

ance on section 506(c) precedent in the avoidance

cases. For example, the Sixth Circuit in Gibson Group

relied heavily on the reasoning of the Third Circuit

in Equitable Gas Co. v. Equibank N.A. (In re McKees-

port Steel Castings Co.), 799 F.2d 91 (3d Cir. 1986),

the leading circuit decision granting standing to an in-

dividual creditor under section 506(c). Gibson Group,

66 F.3d at 1443-44. This divergence in section 506(c)

and avoidance cases over the standing of parties other

than the trustee has spilled over to yet other similarly-

worded provisions of the Bankruptcy Code and Bank-

ruptcy Rules.*

4 Compare In re Brileya, 108 B.R. 444, 447 (Bankr. D. Vt. 1989)

(limited reference in § 1206 to sale of property by “trustee” includes

chapter 12 debtor-in-possession), with In re Webb, 932 F.2d 155,

158 (2d Cir. 1991) (authorizing sale by chapter 12 debtor but only

because trustee approved sale which was deemed “the functional

equivalent of his selling the property”) ; compare Tindall v. Mavrode

(In re Mavrode), 205 B.R. 716, 719 (Bankr. D.N.J. 1997) (court

authorized settlement under Bankruptcy Rule 9019 even though

motion for approval was not brought by trustee, the only party

mentioned in that rule), with In re Nationwide Sports Distribs.,

227 B.R. 455, 462 n.3 (Bankr. E.D. Pa. 1998) (language of Rule

9019(a) limits its application to the trustee); compare Freeman

v. Eli Lilly Federal Credit Union (In re Freeman), 72 B.R. 850

(Bankr. E.D. Va. 1987) (chapter 13 debtor granted authority to

avoid lien under § 544 (a) even though that provision not expressly

listed in § 1303 regarding powers of chapter 13 debtor) and Carr

v. Demusis (In re Carr), 34 B.R. 653, 655 (Bankr. D. Conn. 1983)

(same), aff'd, 40 B.R. 1007 (D. Conn. 1984), with Walls v. Appa-

lachian Tire Prods., Inc. (In re Walls), 17 B.R. 701, 703 (Bankr.

S.D. W.Va. 1982) (chapter 13 debtor lacked standing to bring

10

In sum, a pervasive split has developed between the

lower courts regarding creditor standing under the Bank-

ruptcy Code. One school of thought precludes standing by

creditors, unless expressly identified in the relevant sub-

stantive provision of the Code, notwithstanding that the

creditors have significant financial interests at stake which

that provision was designed to protect. Another school of

thought recognizes that Congress sought to protect credi-

tors with direct financial interests and therefore grants

standing absent an express denial. Supreme Court review

is thus needed to establish a uniform rule for the national

bankruptcy system.

II. THE EIGHTH CIRCUIT’S DECISION CONFLICTS

WITH THIS COURT'S RULE THAT REMEDIES

EXISTING PRIOR TO ENACTMENT OF THE

BANKRUPTCY CODE SHOULD BE PRESERVED,

ABSENT CONTRARY CONGRESSIONAL INTENT

The Eighth Circuit’s decision effectively means that a

vendor furnishing goods or services, after the bankruptcy

filing, that preserve the collateral of a secured creditor is

denied any effective remedy for nonpayment. This ruling

should be reviewed because it conflicts with (1) the pre-

Code case law that Congress intended to codify and (2)

this Court’s rule of deference to pre-Code practice.

Although interpretation of the Bankruptcy Code (like

other statutes) must begin with its language, see United

States v. Ron Pair Enters., Inc., 489 U.S. 235, 241

(1989), the meaning of section 506(c) on the question

of standing is far from “plain.” As noted above (see p. 6

infra), there are at least twenty Bankruptcy Code provi-

sions where Congress expressly limited standing, either by

using the word “only” to limit the parties with standing

preference action under § 547) and /n re Carter, 2 B.R. 321, 322

(Bankr. D. Colo. 1980) (same under § 544).

11

or by explicitly denying certain parties a direct right of

action. In contrast, section 506(c) contains no such re-

Sstrictive language. The fact that Congress chose not to

employ such language in section 506(c) creates, at a

minimum, ambiguity that justifies reference to the Code’s

legislative history and to pre-Code practice. See Dewsnup

v. Timm, 502 U.S. 410, 417 (1992); Bank of Am. Nat'l

Trust & Savs. Ass'n v. 203 N. LaSalle St. Partnership,

119 S. Ct. 1411, 1417 (1999) (referring to pre-Code

practice where language of Code is “inexact’’).

There was a federal bankruptcy practice in existence

decades before passage of the Code and, indeed, even

before enactment of the comprehensive Bankruptcy Act

of 1898 which remained in effect until promulgation of the

Code in 1978. 1 COLLIER ON BANKRUPTCY 4 1.01, at

1-3 to 1-6 (15th ed. 1999). Asa result, when Congress

amends the bankruptcy laws, “it does not write ‘on a clean

slate.” Dewsnup v. Timm, 502 U.S. at 419 (quoting

Emil v. Hanley, 318 U.S. 515, 521 (1943)). In Dewsnup,

the Court announced a rule of statutory construction

where, as here, a Code provision was ambiguous. The

courts should not interpret the Code to deny a right or

remedy that existed under pre-Code practice (or grant a

new right or remedy), without some concrete indication

in the legislative history that Congress intended to alter

the prior practice. 502 U.S. at 419-20. More recently,

this Court reaffirmed that it “‘will not read the Bank-

ruptcy Code to erode past bankruptcy practice absent a

clear indication that Congress intended such a depar-

ture.” Cohen v. De La Cruz, 523 U.S. at 221 (quoting

Pennsylvania Dept. of Public Welfare v. Davenport, 495

U.S. 552, 563 (1990) ).

The legislative history of 506(c) shows that it “codifies

current law.” H.R. Rep. No. 95-595, at 357 (1977)

12

reprinted in 1978 U.S.C.C.A.N. 5787, 6313. That “cur-

rent law” allowed claimants who provided services during

bankruptcy or receivership to bring claims directly against

secured collateral.

This pre-Code rule was established long ago. One of

the earliest cases was Louisville, Evansville & St. Louis

R.R. v. Wilson, 138 U.S. 501 (1891), where this Court

authorized an attorney to recover $300 from the sale

proceeds of collateral for legal services that enabled the

recovery and rental of train engines to the benefit of the

security holders. The Court held that the attorney had a

direct right of recovery against the property where the

receiver lacked the capacity or will to pursue the claim:

[W]hen he [the receiver] has not acted, and the ques-

tion is presented to the court as to the liability of the

property for any claim, the court is not foreclosed by

the order of appointment [of the receiver], but may

consider and determine equitably the extent of lia-

bility of the property to such claim, and what its

rights of priority may be. Hence, as the receiver did

not pay this claim, the parties in interest may right-

fully challenge its priority, even if it were within the

very letter of the order of appointment of the receiver.

id. at 506. The rationale for this rule was the very same

as for present day section 506(c): “We think it may

fairly be held that the [secured] party who takes the bene-

fit of such a service [by an administrative expense claim-

ant] ought to pay for it and that equity may properly

decree payment therefor.” Jd. at 507.

A similar ruling was made in In re Rotary Tire &

Rubber Co., 2 F.2d 364 (6th Cir. 1924). Brokers who

provided insurance during the bankruptcy sought direct

recovery of premiums against the sale proceeds of the

insured property, even though the property was subject to

13

a $35,000 mortgage. The lower court held, and the Sixth

Circuit affirmed, that the brokers were entitled to priority

for premiums in an amount equal to the mortgage, be-

cause the insurance preserved the value of the mortgaged

property. /d. at 364.

Other pre-Code decisions also allowed claimants other

than the trustee to bring claims directly against secured

property. See, e.g., National Acceptance Co. v. District

No. 1, Progressive Mine Workers of Am. (In re Chapman

Coal Co.), 196 F.2d 779, 781 (7th Cir. 1952) (union

brought successful petition to obtain first lien on previ-

ously-secured assets of corporation for wages incurred to

preserve the assets); First W. Savs. & Loan Ass'n v. An-

derson, 252 F.2d 544, 550 (9th Cir. 1958) (court held

that attorney as well as trustee entitled to first lien on

secured property for fees for services rendered); United

States v. Henderson, 274 F.2d 419, 422 (Sth Cir. 1960)

(both trustee and attorneys were parties to action for

recovery of fees from mortgagee’s collateral); Citizens &

Southern Nat'l Bank v. Mullins (In re Bolton Rd. Med.

Ctr.), 433 F. Supp. 369, 371 (N.D. Ga. 1976) (both

trustee and his attorneys were parties to proceeding for

recovery of expenses against secured property); In re

Alaska Plywood Corp., 166 F. Supp. 423, 425 (D.

Alaska 1958) (both trustee and stockholders committee

requested and received priority against mortgaged assets

superior to that of secured creditors).

The pre-Code practice codified in section 506(c) thus

demonstrates that Congress intended to preserve, not to

withhold, the right of administrative expense claimants

such as Hartford to move the bankruptcy court for pay-

ment out of the collateral of secured creditors. The peti-

tion should therefore be granted in order to review a

decision that frustrates this Congressional objective and

14

does so by ignoring this Court’s rule favoring continuity

in interpretation of the nation’s bankruptcy laws.

Ill. THE DECISION BELOW PRESENTS AN ISSUE

OF GENERAL IMPORTANCE BECAUSE IT UN-

DERMINES CONGRESSIONAL POLICY FAVORING

REHABILITATION OF DEBTORS

As this Court has recognized, the policy underlying

chapter 11 of the Bankruptcy Code is to promote reha-

bilitation of debtors by giving them time to reorganize as

going concerns, where possible, rather than being imme-

diately liquidated. NLRB v. Bildisco & Bildisco, 465 U.S.

513, 527 (1984); Bank of Am. Nat'l Trust & Savs. Ass'n

v. 203 N. LaSalle St. Partnership, 119 S. Ct. at 1421.

Section 503 was enacted to implement this policy. That

provision recognizes that, in order to maintain the debtor

as a viable business while it attempts to reorganize, there

must be some assurance of payment to suppliers of neces-

sary goods and services without which the debtor could

not continue operating. Section 503 encourages suppliers

to provide such goods and services by giving them a pri-

ority in payment over other unsecured creditors out of

the debtor’s remaining unencumbered assets. See 11

U.S.C. § 503 (1994).

The reality, however, is that the debtor often has no

such unsecured assets. In Hen House, for example, Magna

Bank had a lien on the debtor’s cash reserves. 177 F.3d

at 721. Section 506(c) has thus evolved under bank-

ruptcy law into an important complement to Section 503.

Where unencumbered assets are insufficient to pay ad-

ministrative expenses, section 506(c) allows payment out

of the collateral securing a lender’s credit, either by con-

sent or upon a showing that the expense provided a direct

benefit to the secured creditor or its collateral. This pro-

15

vides vendors with greater assurance that they will be

paid for services rendered to an insolvent business.

Section 506(c) is not adverse to the secured creditor’s

interests. Often, the value of the creditor’s collateral is

higher if the business can be preserved or sold as a going

concern. In such a case, the secured creditor benefits

from section 506(c) expenses because the lender can

recover more if the debtor successfully reorganizes than if

the debtor’s assets are liquidated at fire sale prices. Sec-

tion 506(c) thus carefully balances the chapter 11 policy

favoring reorganization with the rights of secured creditors.

The decision by the Eighth Circuit upsets this careful

balance. Vendors will not sell the debtor necessary goods

and services, and professionals will not perform services

for the bankruptcy estate, unless there is reasonable assur-

ance of receiving payment. They will not have that assur-

ance if they are prevented from directly obtaining an

order from the bankruptcy court requiring payment out of

secured collateral. The administrative expense claimant's

only remedy would then be to rely on the trustee to assert

its claim before the bankruptcy court. The trustee, how-

ever, lacks the same incentive to pursue payment because

the trustee’s mission is to preserve the debtor’s estate and

because he or she usually has higher priorities. This case

presents a concrete example of why the trustee may not

zealously protect the claimant's interests.

Workers’ compensation insurance is the quintessential

type of good or service necessary to preserve the going

concern value of a business in chapter 11. Insurance not

only provides economic protection to the employer but is

legally required. Every state except Texas requires em-

ployers, in order to finance workers’ compensation benefits

16

paid to injured employees, to purchase insurance or to

self-insure.>

In many jurisdictions, the State Labor Department can

shut down a company that fails to secure workers’ com-

pensation insurance coverage. In some states, an un-

insured employer can be sued in tort by injured employees,

who can recover substantially more than the statutorily-

prescribed workers’ compensation benefits. These tort

claims, if they occur after the bankruptcy filing, are treated

as an administrative expense that could seriously diminish

the debtor’s assets. See Reading Co. v. Brown, 391 U.S.

471, 485 (1968).

An employer that becomes insolvent and enters chapter

11 does not have the statutorily-required financial resources

to qualify for self-insurance. Insurance must therefore be

purchased from a licensed carrier. Insurers, however, will

be unwilling to provide coverage if they do not have an

effective means for obtaining payment of premiums. Out-

side of bankruptcy, the insurer may cancel a policy during

the policy period for nonpayment. But this option is not

available in bankruptcy, because the Code generally for-

bids termination of contracts with the debtor absent relief

from the automatic stay. See 11 U.S.C. § 362 (1994).

Thus, once an insurer agrees to underwrite insurance for

a bankrupt employer, it may be “locked in” and required

to pay benefits to insured employees even if the employer

defaults in payment of premiums. The trustee, in turn,

has little incentive to deplete the assets of the estate to

pay premiums because coverage is assured irrespective of

5 See, e.g., Ariz. Rev. Stat. § 23-961; Cal. Lab. Code § 3700;

Conn. Gen. Stat. § 31-284; Fla. Stat. Ann. § 440.38; 820 Ill. Comp.

Stat. § 305/4; Ky. Rev. Stat. Ann. § 342.340; Md. Code Ann., Lab.

& Empl. § 9-402; Mass. Gen. Laws (Ann.) ch. 152, § 25A; Minn.

Stat. § 176.181; Mo. Rev. Stat. § 287, 280; N.Y. Work. Comp. Law

§ 50; Va. Code Ann. § 65.2-801.

17

payment. As a result, absent direct recourse to the bank-

ruptcy court, insurers may decline to underwrite coverage

out of concern they will never be paid.

Conversely, the ruling below cannot be justified as

necessary to support the Code’s policy of protecting credi-

tor collateral. If the administrative claimant is permitted

to present its claim directly to the bankruptcy court, it

can recover only if it demonstrates that the expense was

reasonably necessary for the preservation of the debfor’s

collateral and was of direct benefit to the secured lender.

See 11 U.S.C. § 506(c) (1994).

Nor can the decision below be justified as needed to

prevent preferential treatment of one unsecured claimant

at the expense of others, as circuits adopting the minority

rule have held. See Hen House, 177 F.3d at 723: Ford

Motor Credit Co. v. Reynolds & Reynolds Co. (In re JKJ

Chevrolet, Inc.), 26 F.3d 481, 484 (4th Cir. 1994). As

the dissent in Hen House correctly points out, the whole

purpose of § 506(c) is to create a priority for certain

adm /nistrative expense claimants over other creditors. 177

F.3d at 727.

The decision below should thus be reviewed because it

is inconsistent with the general policy of chapter 11 favor-

ing reorganization and the specific tool for implementing

that policy Congress fashioned in section 506(c).

18

CONCLUSION

For the reasons stated herein, this Court should grant

the petition for review of the Eighth Circuit’s decision.

Respectfully submitted,

CRAIG A. BERRINGTON MARK «+ HORNING

PHILLIP L. SCHWARTZ Counsel of Record

AMERICAN INSURANCE SIDNEY P. LEVINSON

ASSOCIATION STEPTOE & JOHNSON LLP

1130 Connecticut Ave, N.W. 1330 Connecticut Ave., N.W.

Washington, D.C. 20036 Washington, D.C. 20036

(202) 828-7100 (202) 429-3000

Counsel for Amicus Curiae

American Insurance

Association