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

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DEC 22174 n

No. 99-409 “22 1999

In THE

Supreme Court of the United States

HARTFORD UNDERWRITERS INSURANCE COMPANY,

w. Petitioner,

MAGNA BANK, N.A..,

Respondent.

On Writ of Certiorari to the

United States Court of Appeals

for the Eighth Circuit

BRIEF OF AMICI CURIAE

AMERICAN INSURANCE ASSOCIATION AND

NATIONAL UNION FIRE INSURANCE

COMPANY OF PITTSBURGH, PA.

IN SUPPORT OF PETITIONER

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

MICHELLE A. LEVITT Counsel for Amici Curiae

b NATIONAL UNION FIRE American Insurance

INSURANCE COMPANY Association and National

OF PITTSBURGH, PA. Union Fire Insurance

70 Pine Street Company of Pittsburgh, Pa.

New York, NY 10270

(212) 770-7075

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

TABLE OF CONTENTS

TINE <exsninictnemieptiiitagpitsiiesseenisinpnatinninatnsiiinvitnticdeviiininnedie

I. THERE IS A PRESUMPTION THAT THE

II.

ITI.

BANKRUPTCY CODE CONTINUED PRE-

CODE PRACTICE THAT CAN BE OVER-

COME ONLY BY UNAMBIGUOUS STATU-

TORY LANGUAGE TO THE CONTRARY......

UNDER PRE-CODE PRACTICE CODIFIED

IN SECTION 506(c), THIRD PARTIES HAD

A DIRECT REMEDY FOR RECOVERY OF

THEIR EXPENSES FROM SECURED COL-

SAP TEUITTED <p-dcttnssicnsistnitghneniniebasttninastggaupidisndeinenmentts

THE LANGUAGE OF SECTION 506(c) RE-

FLECTS NO INTENTION TO RESTRICT

PRE-CODE PRACTICE ON CLAIMANT

SEEDED <iiriccectuscinestenencionsopantpeissesiiinninduiaagheniiipun

GETREEEET ccctarsiiisntiduntingsinnnatevniniintsiniéenttiiianeiinleabioalbediiin

Page

TABLE OF AUTHORITIES

CASES: Page

Adair v. Bank of Am. Nat'l Trust & Sav. Ass’n,

A a 11

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

> ee 11

Bank of Am. Nat’l Trust & Sav. Ass’n v. 208

North LaSalle St. Partnership, 119 S. Ct. 1411

EBROST EES EE Int ene Set aE 8

Bates v. United States, 522 U.S. 23 (1997) ............. 14

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

Ltd. (In re Gibson Group, Inc.), 66 F.8d 1436

ETE RE So 16

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

Bolton Rd. Med. Ctr.), 433 F. Supp. 369 (N.D.

A a 11

Cohen v. De La Cruz, 523 U.S. 213 (1998) ............. 5, 7, 16

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

797 F.2d 1361 (5th Cir. 1986) ............................. 17

County of Clark v. United States, 284 F.2d 885

RI ES 10

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

El Paso Natural Gas Co. v. Neztsosie, hig S. Ct.

EGE VEE Ree ee ee aaa 13

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

ES 10

Ford Motor Credit Co. v. Reynolds & Reynolds

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

I 18

Guinee v. Toombs (In re Kearing), 170 B.R. 1

I I i cineeenann 19

Herman & MacLean v. Huddleston, 459 U.S. 375

ER 13, 17

Ilinois Dep’t of Public Aid v. Schweiker, 707 F.2d

I ee 13

Kelly v. Robinson, 479 U.S. 36 (1986) ..................... 7, 8,18

Lindh v. Murphy, 521 U.S. 320 (1997) ................... 14

In re Lochmiller Indus., Inc., 178 B.R. 241 (Bankr.

Er 19

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

138 U.S. 501 (1891) ..6, 9, 10

; ' (

iii

TABLE OF AUTHORITIES—Continued

In re Louisville Storage Co., 21 F. Supp. 897

(W.D. Ky. 1936), aff'd, 93 F.2d 1008 (6th Cir. i

a a ee

sstieatta Nat’l Bank v. New Jersey Dep’t of En-

vironmental Protection, 474 U.S. 494 (1986).... 8

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) ............. 10

New York Dock Co. v. S.S. Poznan, 274 U.S. 117

| a ee 6, 11, 12

Official Unsecured Creditors Comm. of Suffola, Inc.

v. United States Nat'l Bank (In re Suffola, Inc.),

2 F.3d 977 (Oth Cir. 1908) ........................220.....-- 17

Patterson v. Shumate, 504 U.S. 753 (1992) ............. 15, 16

Pennsylvania Pub. Welfare Dep’t v. Davenport,

be ££, _ 5, 7

Ratzlaf v. United States, 510 U.S. 135 (1994)........ 16

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

SEE 10

Russello v. United States, 464 U.S. 16 (1983)........ 14

In re Telesphere Communications, Inc., 148 B.R.

525, 531 (Bankr. N.D. Ill. 1992) ........................... 19

Ticonic Nat’l Bank v. Sprague, 303 U.S. 406

CE cccrsstrnsnsimnnssensnnnnmmennesetasennmuamnntndeannatingenonaines 20

United Sav. Ass’n v. Timbers of Inwood Forest

Assocs., Ltd. (In re Timbers of Inwood Forest),

793 F.2d 1380 (5th Cir. 1986), aff'd, 484 U.S.

EEE 19

United Sav. Ass'n v. Timbers of Inwood Forest

Assocs., Ltd., 484 U.S. 365 (1988) ...................... passim

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

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

lO 2,8

Unsecured Creditors Comm. of Debtor STN En-

ters., Inc. v. Noyes (In re STN Enters.), T79

| fl). lL 17

In re Vernon Sand & Gravel, Inc., 109 B.R. 255

(Bankr. N.D. Ohio 1989) .....................------esecs-eeees 18, 19

Warren v. Palmer, 310 U.S. 132 (1940) ................. 11

TABLE OF AUTHORITIES—Continued

STATUTES: Page

11 U.S.C. § 2a(1) (repealed) . 15

11 U.S.C. § 44a (repealed) 15

11 U.S.C. § 45 (repealed)... 15

11 U.S.C. § 109(a) ............ ane

11 U.S.C. § 321. SEG LRT AR, 14

11 U.S.C. § 362(a) 3

u USC. see (1) (A) ....... 4

S.C. § 506(¢) 2.0.00... passim

ren 18

11 U.S.C. § 544(a) .... 16

MMAR Raa ena 16

11 U.S.C. § 547(b) ....................... 16

On 16

11 USC. 6660) CS 16

kt ARNE RRR TEG aN Gael 14

LEGISLATIVE MATERIALS:

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

I GUUETE Secesisnsteticiinenithierbinetthnieeitabi tia 5,9

COURT RULES:

S. Ct. R. 37.6 1

MISCELLANEOUS:

4 Lawrence P. King, et al., Collier on Bankruptcy

(15th ed. rev. 1999) ...... siniideniinbiimaemanie’ 9, 17,18

Black’s Law Dictionary (6th ed. 1990) .................. 15

Webster’s Third New International Dictionary

NE ee ee eRe 15

In THE

Supreme Court of the United States

No. 99-409

HARTFORD UNDERWRITERS INSURANCE COMPANY,

¥ Petitioner,

MAGNA BANK, N.A..,

Respondent.

On Writ of Certiorari to the

United States Court of Appeals

for the Eighth Circuit

BRIEF OF AMICI CURIAE

AMERICAN INSURANCE ASSOCIATION AND

NATIONAL UNION FIRE INSURANCE

COMPANY OF PITTSBURGH, PA.

IN SUPPORT OF PETITIONER

INTEREST OF THE AMICI

brief in support of the petitioner.

amicus curiae AIA.

Amici curiae American Insurance Association (“AIA”)

j and National Union Fire Insurance Company of Pitts-

burgh, Pa. (“National Union”) respectfully submit this

1 Pursuant to Supreme Court Rule 37.6, amici curiae state that

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

whole or in part and no person or entity, other than amici curiae

and AIA’s member companies, made a monetary contribution to

the preparation or submission of this brief. Petitioner Hartford

Underwriters Insurance Company (“Hartford”) is a member of

AIA is a national trade association consisting of over

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

panies write workers’ compensation insurance throughout

the country and account for approximately 42 percent of

all such insurance sold by privately-owned insurers. Na-

tional Union is one of the largest workers’ compensation

insurers in the country, with direct written premiums of

nearly $400 million in 1998. National Union is a mem-

ber company of American International Group, whose

members wrote $1.3 billion in direct premiums for work-

ers’ compensation insurance during that same period.

AIA has frequently participated as amicus curiae in liti-

gation raising issues of importance to workers’ compen-

sation insurers.

AIA’s members and National Union have a substantial

interest in this case because it will determine whether they

have an effective remedy for nonpayment of premiums for

workers’ compensation insurance sold to employers in

bankruptcy proceedings. Every state except Texas re-

quires employers, in order to finance workers’ compensa-

tion benefits paid to injured employees, to purchase work-

ers’ compensation insurance or to self-insure. Insolvent

businesses do not qualify to self-insure and, if they fail to

purchase insurance, may be shut down by state labor

departments. Thus, in order for a bankrupt business to

continue in operation and attempt to reorganize success-

fully under chapter 11 of the Bankruptcy Code, it must

purchase workers’ compensation coverage.

Insurers, however, will be unwilling to underwrite such

insurance for an insolvent employer unless there are ade-

quate remedies for collecting premiums where the debtor

does not or cannot pay (as occurred in this case). In-

surers that write post-petition coverage for bankrupt em-

ployers are unsecured creditors. Frequently, the debtor

has few if any unencumbered assets out of which to pay

unsecured creditors. See, e.g., United States v. Ron Pair

Enters., Inc., 489 U.S. 235, 247 n.9 (1989) (“{I]t is not

unusual for commercial lenders to obtain a lien on almost

all of the debtor’s property.”). As a result, an insurer’s

recourse to the debtor’s secured assets frequently is the

only meaningful remedy for nonpayment of premiums.

The provision at issue in this case, section 506(c) of

the Bankruptcy Code, 11 U.S.C. § 506(c) (1994), af-

fords such a remedy. It allows workers’ compensation

insurers providing post-petition coverage to recover, as

claimants for administrative expenses, unpaid premiums

out of the debtor’s secured assets to the extent the insur-

ance preserves or enhances that collateral. Workers’ com-

pensation insurance coverage usually protects the secured

creditor’s collateral because it facilitates the employer's

reorganization as an ongoing business, which tends to

maximize the value of its assets. In this case, for ex-

ample, workers’ compensation insurance sold by petitioner

Hartford allowed the debtor to continue in business for

a period of time sufficient to enable it to sell off parts of

the enterprise as viable businesses.

The decision of the Eighth Circuit deprives insurers of

any meaningful remedy under section 506(c). Insurers

(as well as other administrative expense claimants) are

prohibited from seeking an order directly from the bank-

ruptcy court requiring payments out of the secured col-

lateral. Instead, the insurer is placed at the sufferance of

the trustee’s discretion in deciding whether to pursue the

insurer’s claim. Unlike the insurance carrier, the trustee

has no economic incentive to seek payment aggressively.

By the time of nonpayment, the insurance already has

been provided and, under the Bankruptcy Code, the trus-

tee generally will take the position that the insurance may

not be canceled regardless of nonpayment absent relief by

the bankruptcy court from the automatic stay. See 11

U.S.C. § 362(a) (1994). Additionally, under state in-

surance law, nonpayment of premium does not relieve the

carrier of its obligation to pay benefits for injuries occur-

ring while the policy was in force, even though the in-

surer has no premium dollars funding the payment of

such claims.

AIA and National Union thus seek reversal of the deci-

sion below in order to restore to insurers a remedy that

was well-established decades ago under pre-Bankruptcy

Code practice and that Congress intended to preserve

when it adopted section 506(c).?

SUMMARY OF ARGUMENT

A debtor’s insolvency obviously creates a high risk that

post-petition vendors to the debtor will not be paid.

Two provisions of the Bankruptcy Code alleviate this risk

and thereby encourage suppliers to provide goods and

services necessary to preserve the debtor’s assets. Section

503(b)(1)(A) gives priority to the payment of “admin-

istrative expenses” including “the actual, necessary costs

and expenses of preserving the estate... .” 11 U.S.C.

§ 503(b)(1)(A) (1994). However, because the debtor

frequently has insufficient unsecured assets out of which

to pay such administrative expenses, section 506(c) pro-

vides for recovery from the debtor’s secured assets of “the

reasonable, necessary costs and expenses of preserving, or

disposing of, [the secured] property to the extent of any

benefit to the holder of such claim.” 11 U.S.C. § 506(c)

(1994).

Notwithstanding that the very purpose of section 506(c)

is to protect the claimant’s right to recover administrative

2 Both petitioner and respondent have consented to the filing of

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

Office of the Clerk of this Court.

_ aa OE

expenses, the Eighth Circuit in this case denied the claim-

ant its remedy of direct recourse to the bankruptcy court

and instead gave the trustee exclusive power to decide

whether to pursue the claim for expenses. Hartford

Underwriters Ins. Co. v. Magna Bank, N.A. (In re Hen

House Interstate, Inc.), 177 F.3d 719 (8th Cir. 1999)

(“Hen House”). The lower court reasoned that the stat-

ute’s reference to “{t]he trustee” but the omission of any

explicit reference to the administrative expense claimant

made it clear that “only” the trustee could pursue the

claim. Jd. at 722.

The fundamental flaw in the lower court’s decision was

its failure to consider the pre-Bankruptcy Code practice

in the area of administrative expenses. Congress intended

that the Code preserve prior bankruptcy practice except

in specific instances where it desired to make a change.

Accordingly, in interpreting the Code, this Court has pre-

sumed that Congress continued “ ‘past bankruptcy prac-

tice absent a clear indication that Congress intended .. .

a departure... .’” Cohen v. De La Cruz, 523 U.S. 213,

221 (1998) (quoting Pennsylvania Pub. Welfare Dep't

v. Davenport, 495 U.S. 552, 563 (1990)).

In this case, continuity is not a mere presumption but

an expressly-stated legislative purpose. The authors of

section 506(c) intended it to “codiffy] current law.”

H.R. Rep. No. 95-595, at 357 (1977), reprinted in 1978

U.S.C.C.A.N. 5787, 6313. This Court thus has recog-

nized that “[{t]he Code rule on administrative expenses

merely continues pre-Code law.” United Sav. Ass'n v.

Timbers of Inwood Forest Assocs., Ltd., 484 U.S. 365,

379 (1988).

The pre-Code practice contradicts the lower court’s in-

terpretation of section 506(c). Claimants for administra-

tive expenses long have been permitted to present their

claims directly to the bankruptcy court rather than through

the trustee. See, e.g., Louisville, Evansville & St. Louis

R.R. v. Wilson, 138 U.S. 501 (1891). The rationale of

these decisions was the same as for present day section

506(c): “The most elementary notion of justice would

seem to require that services or property furnished” for

the “benefit” of property held as collateral “should be

paid from” such property “as an ‘expense of justice.’”

New York Dock Co. v. S.S. Pozman, 274 U.S. 117, 121

(1927) (citation omitted).

There is nothing in the language of section 506(c) that

unambiguously reflects any congressional intention to

change this pre-Code practice. To the contrary, Congress

itself characterized that language as preserving the pre-

Code practice.

What the Eighth Circuit characterized as the “plain

meaning” of section 506(c) is really an application of

the maxim of statutory interpretation known as expressio

unius est exclusio ulterius. From the reference to “trus-

tee,” the lower court inferred an intention to exclude all

others including the claimants for administrative expenses

whose interests are protected by this provision. But the

expressio unius inference is merely one among many tools

of statutory construction. It does not, in itself, discern a

statute’s plain meaning where other interpretive tools such

as pre-Code practice, legislative history and the statutory

purposes suggest a contrary interpretation. At worst, the

language of section 506(c), properly read in the context

of other Code provisions, is ambiguous on the question

of a direct remedy for administrative expense claimants.

In such instances, this Court consistently has referred to

the pre-Code practice, not inferences from inexact statu-

tory language, as the best indicator of legislative intent.

That pre-Code practice unambiguously supports the right

of claimants to petition the bankruptcy court directly for

payment out of secured assets.

ARGUMENT

I. THERE IS A PRESUMPTION THAT THE BANK-

RUPTCY CODE CONTINUED PRE-CODE PRAC-

TICE THAT CAN BE OVERCOME ONLY BY UN-

AMBIGUOUS STATUTORY LANGUAGE TO THE

CONTRARY

This Court has crafted a specific rule for interpretation

of the Bankruptcy Code. There is a presumption that

Congress intended to preserve pre-Code prac ice unless

the applicable provision unambiguously indicates to the

contrary. This rule derives from the legislature’s intent

to maintain continuity in the national bankruptcy system.

“The present text of Title 11, commonly referred to as

the Bankruptcy Code, was enacted in 1978 to replace the

Bankruptcy Act of 1898 ... .” Kelly v. Robinson, 479

U.S. 36, 44 (1986). Although the Code made many

changes in the prior provisions, its purpose otherwise was

to preserve the existing bankruptcy system. In order to

effectuate this policy of continuity, this Court has refused

to “ ‘read the bankruptcy code to erode past bankruptcy

practice absent a clear indication that Congress intended

such a departure... .2” Cohen v. De La Cruz, 523

U.S. at 221 (quoting Pennsylvania Pub. Welfare Dep't

v. Davenport, 495 U.S. at 563).

In order to overcome this presumption of continuity,

the Court has required that the language of the provision

in issue be so unambiguous as to compel a result con-

trary to pre-Code practice. See United Sav. Ass'n, 484

U.S. at 380 (“{A] major change in the existing rules

would not likely have been made without specific provi-

sion in the text of the statute . . . .”); Kelly v. Robinson,

479 U.S. at 47 (declining “to hold that the new Bank-

ruptcy Code silently abrogated” judicial decisions “con-

struing the old Act”).

To be sure, there have been many differences of opin-

ion concerning whether particular statutory language is

so clear-cut as to require a divergence from pre-Code

practice. See, e.g., Dewsnup v. Timm, 502 U.S. 410

(1992); Ron Pair Enters., 489 U.S. 235. But those deci-

sions finding the statutory language to be ambiguous in-

variably have looked to the pre-Code practice as the prin-

cipal guide for interpretation. See Bank of Am. Nat'l

Trust & Sav. Ass'n v. 203 North LaSalle St. Partnership,

119 S.Ct. 1411, 1417 (1999) (“history is helpful” in

understanding the “inexact language of the Code”); see

also Midlantic Nat'l Bank v. New Jersey Dep’t of Envi-

ronmental Protection, 474 U.S. 494 (1986); Kelly v.

Robinson, 479 U.S. 36; United Sav. Ass'n, 484 U.S. 365.

This rule of statutory construction applies in construing

section 506 equally as it does in interpreting other provi-

sions of the Code. See United Savings Ass'n, 484 US.

365 (construing section 506(b)); Dewsnup v. Timm,

502 U.S. 410 (construing section 506(d) ).

Accordingly, in determining whether section 506(c)

permits a claimant to present its claim directly to the

bankruptcy court, this Court’s method of analysis is well-

established. Pre-Code practice should be examined to

determine if claimants for administrative expenses were,

prior to 1978, permitted to pursue their claims directly.

If so, then Congress is presumed to have preserved that

remedy unless language in section 506(c) unambiguously

indicates that the legislature intended to nullify prior law.

II. UNDER PRE-CODE PRACTICE CODIFIED IN SEC-

TION 506(c), THIRD PARTIES HAD A DIRECT

REMEDY FOR RECOVERY OF THEIR EXPENSES

FROM SECURED COLLATERAL

“Section 506(c) was intended by Congress as a codifi-

cation of the long, but somewhat inconsistent, line of

cases decided under (and, in some instances, prior to)

the former Bankruptcy Act expressing and applying the

equitable principle that a lienholder may be charged with

the reasonable costs and expenses incurred by the estate

that are necessary to preserve or dispose of the lien-

holders collateral to the extent that the lienholder derives

a benefit as a result.” 4 Lawrence P. King, et al., Collier

on Bankruptcy § 506.05, at 506-126 (15th ed. rev.

1999); see also H.R. Rep. No. 95-595, at 357, reprinted

in 1978 U.S.C.C.A.N. at 6313; United Sav. Ass'n, 484

U.S. at 379 (“The Code rule on administrative expenses

merely continues pre-Code law.”). That “pre-Code law”

allowed claimants who provided services during bank-

ruptcy or receivership to bring claims directly against

secured collateral.

This 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 author-

ized an attorney to recover $300 from the sale proceeds

of collateral in payment 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

question is presented to the court as to the liability

of the property for any claim, the court is not fore-

closed by the order of appointment [of the receiver],

but may consider and determine equitably the extent

of liability 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

rightfully 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 under pre-Code

practice was the very same unjust enrichment principle as

embodied in section 506(c): “We think it may fairly

be held that the [secured] party who takes the benefit of

such a service [by an administrative claimant] ought to

pay for it; and that equity may properly decree payment

therefor.” Id. at 507.

A similar ruling was made in In re Rotary Tire &

Rubber Co., 2 F.3d 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 a $35,000 mortgage. Id. at 364. The lower court

held, and the Sixth Circuit affirmed, that the brokers were

entitled to priority for premiums because the insurance

preserved the value of the mortgaged property. Id.*

3 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 previously-secured assets of corporation for wages incurred to

preserve the assets); County of Clark v. United States, 284 F.2d

885, 886 (9th Cir. 1960) (court did not question right of county to

seek recovery of tax claim from sale proceeds subject to tax lien of

United States, but denied recovery to county on the basis that taxes

were “of no benefit to the United States”); First W. Sav. & Loan

Ass’n v. Anderson, 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. Hen-

The pre-Code rule in bankruptcy was itself based on a

more general principle that “the cost of protecting a fund

in court is everywhere recognized as a dominant charge

on that fund.” Adair v. Bank of Am. Nat'l Trust & Sav.

Ass'n, 303 U.S. 350, 360-61 (1938). This principle

“applies even in ordinary bankruptcy proceedings since

the secured creditor benefits from the disbursement.” /d.

at 361 (footnote omitted). The Court has described the

power to charge expenses against court-protected property

as “an in rem jurisdiction springing from possession of

the property which is necessary in order that the court

may adequately care for the property.” Warren v. Palmer,

310 U.S. 132, 139 (1940).

In applying this longstanding principle outside of bank-

ruptcy, this Court did not limit the remedies for recovery

to actions by court representatives on behalf of the claim-

ant but also allowed the claimant to proceed directly

against the secured parties whose collateral was benefited.

New York Dock Co. v. S.S. Poznan, 274 U.S. 117

(1927), is an exemplar of this direct remedy. A vessel

with cargo was seized by a United States marshal and

held in his custody while docked at a wharf. The wharf

owner then sought recovery of payment for his services

from the proceeds of the ship’s sale. Respondents, the

derson, 274 F.2d 419, 422 (5th Cir. 1959) (both trustee and

attorneys were parties to action for recovery of fees from mort-

gagee’s collateral); In re Louisville Storage Co., 21 F. Supp. 897

(W.D. Ky. 1936), aff'd, 938 F.2d 1008 (6th Cir. 1938) (employee of

debtor prevailed in his request seeking to charge his wages against

the lienholder, as did trustee and attorneys who sought recovery of

their fees and expenses) ; 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).

owners of the cargo who held liens on the ship, objected.

Id. at 118-19.

Reversing the Second Circuit, the Court held that the

wharf owner was entitled to preferential payment from

the proceeds prior to any distribution to the lienholders:

The most elementary notion of justice would seem

to require that services or property furnished upon

the authority of the court or its officer, acting within

his authority, for the common benefit of those inter-

ested in a fund administered by the court, should be

paid from the fund as an ‘expense of justice.’

Id. at 121 (citation omitted). For present purposes, the

salient feature of the Court’s holding was its permission

for the wharf owner to bring its claim directly rather than

through the government official who administered the col-

lateral (the marshal). The Court emphasized that it was

applying the “familiar rule of courts of equity when ad-

ministering a trust fund or property in the hands of

receivers.” Id. (emphasis added).

In sum, the pre-Code bankruptcy practice, derived

from general equity practice, allowed administrative ex-

pense claimants such as Hartford to proceed directly to

bankruptcy court to obtain payment out of the collateral

of secured creditors so long as the goods or services pro-

vided by the claimant had protected that collateral. This

was an integral feature of the pre-1978 practice that Con-

gress intended to preserve in section 506(c).

Ill. THE LANGUAGE OF SECTION 506(c) REFLECTS

NO INTENTION TO RESTRICT PRE-CODE PRAC-

TICE ON CLAIMANT REMEDIES

Nothing in the language or history of section 506(c)

provides any indication that Congress desired to deny

claimants a direct remedy for recovery of administrative

expenses even though they had such a remedy under

prior law. The legislative history, far from evidencing

any intention of changing prior law, indicates that Con-

gress intended to preserve it. Nor does the plain meaning

of the statutory language, read in the context of related

provisions, compel a conclusion at odds with the pre-Code

practice and legislative history.

The Eighth Circuit’s decision is premised almost en-

tirely on the canon of statutory construction referred to as

expressio unius est exclusio alterius. The lower court

read the reference in section 506(c) to the trustee, com-

bined with the failure to explicitly mention the claimants

on whose behalf the trustee acted, as making it “clear and

unambiguous” that the claimant lacks a direct remedy.

Hen House, 177 F.3d at 723. In reaching that conclu-

sion, the Eighth Circuit erroneously elevated one among

many tools of statutory construction to trump other

maxims of legislative construction that point to a con-

trary interpretation.

Expressio unius is nothing more than a possible negative

inference to be drawn from the mention of one thing but

not another. But “[n]ot every silence is pregnant” and

thus expressio unius is not an absolutist rule of statutory

construction. Illinois Dep’t of Public Aid v. Schweiker,

707 F.2d 273, 277 (7th Cir. 1983); see also El Paso

Natural Gas Co. v. Neztsosie, 119 S. Ct. 1430, 1439

(1999) (“[nJow and then, silence is not pregnant”). For

instance, this Court has held that maxims such as expressio

unius have “ ‘long been subordinated to the doctrine that

courts will construe the details of an Act in conformity

with its dominating general purpose.” Herman &

MacLean v. Huddleston, 459 U.S. 375, 387 n.23 (1983)

(citation omitted); see also El Paso Natural Gas Co.

v. Neztsosie, 119 S. Ct. at 1438 (rejecting “most zealous

application of the maxim expressio unius est exclusio

alterius” ).

Expressio unius is, rather, only one of several methods

available to interpret section 506(c). See, e.g., Lindh

v. Murphy, 521 U.S. 320, 337 (1997) (Rehnquist,

C.J., dissenting) (criticizing majority decision because it

“relies on one canon of statutory interpretation, expressio

unius est exclusio alterius, to the exclusion of all others”).

In addition to ignoring pre-Code practice, the Eighth Cir-

cuit failed to consider other principles of statutory con-

struction that regularly have been applied by the Court

in bankruptcy cases. In particular, “‘[w]here Congress

includes particular language in one section of a statute

but omits it in another section of the same Act, it is

generally presumed that Congress acts intentionally and

purposely in the disparate inclusion or exclusion.’” Bates

v. United States, 522 U.S. 23, 29-30 (1997) (quoting

Russello v. United States, 464 U.S. 16, 23 (1983)).

There are several provisions in the Bankruptcy Code

where Congress inserted the term “only” to restrict the

eligibility of parties to participate in bankruptcy proceed-

ings. For example, with respect to the most important

eligibility question under bankruptcy law—who may be

a debtor—section 109(a) provides that “only a person

that resides or has a domicile, a place of business, or

property in the United States, or a municipality, may be

a debtor under this title.” 11 U.S.C. § 109(a) (1994)

(emphasis added). Subsection (b) through (f) of sec-

tion 109, which define the entities that are eligible for

relief under the various chapters of the Bankruptcy Code,

also uniformly use the word “only” to restrict eligibility.

11 U.S.C. § 109(b)-(f). Similarly, section 321(a), gov-

erning eligibility of trustees, states that “[a] person may

serve as trustee in a case under this title only if such

person” meets the requirements set forth therein. 11

U.S.C. § 321(a) (emphasis added). And section 702(a)

provides that “[a] creditor may vote for a candidate for

trustee only if such creditor” meets various requirements.

11 U.S.C. § 702(a) (emphasis added).

Sections 109, 321 and 702 illustrate that Congress used

the term “only” when it wanted to be clear about its

exclusion of all but the named parties from eligibility for

coverage under the Code. Undoubtedly, this was be-

cause the plain meaning of “only” is exclusionary, that is,

the term is synonymous with “solely” or “exclusively.”

Webster's Third New International Dictionary 1577

(1981); see also Black’s Law Dictionary 1089 (6th ed.

1990) (“only” means “solely,” “exclusive,” “nothing else

or more”).

Congress’ approach when it wanted to limit remedies

or eligibility is confirmed by its selective usage of the

term “only.” The word “only” did not appear in any of

the Bankruptcy Act provisions that were the predecessors

to sections 109, 321 and 702(a). See 11 U.S.C. § 2a(1)

(repealed); 11 U.S.C. § 45 (repealed); 11 U.S.C. § 44a

(repealed). Congress’ deliberate amendment of these pro-

visions to insert the word “only” but its omission in others

indicates a conscious decision to make the former provi-

sions exclusive but the latter provisions nonexclusive. Cf.

Patterson v. Shumate, 504 U.S. 753, 758 (1992) (when

Congress meant to refer to state law under the Bank-

ruptcy Code, it used the term “state law”).

Thus, the omission of the modifier “only” when the

trustee is mentioned in section 506(c) strongly suggests

that Congress did not intend to limit the claimant from

direct recourse to the bankruptcy court. Rather, if Con-

gress had wanted to change pre-Code practice and deny

a direct remedy to administrative expense claimants, “one

would expect Congress to have made unmistakably clear

its intent to” do so by providing that “only” the trustee

could seek recovery. Cohen v. De La Cruz, 523 US. at

222.

Another relevant maxim of statutory interpretation is

that “equivalent words have equivalent meaning when

repeated in the same statute.” Cohen v. De La Cruz, 523

U.S. at 220 (citing Ratzlaf v. United States, 510 U.S.

135, 143 (1994)). For example, in Patterson v. Shumate,

the Court noted that its construction of the term “appli-

cable nonbankruptcy law” as used in section 541(c)(1),

to include both federal and state law, “accords with pre-

vailing interpretations of that phrase as it appears else-

where in the Code.” 504 U.S. at 758-59 n.2.

The “prevailing view” of other provisions of the Code

worded similarly to section 506(c) is that non-trustees

have the right to seek relief directly rather than through

the trustee only. For example, the “avoidance” provisions

of the Code uniformly provide that “the trustee . . . may

avoid” various liens and transfers without express refer-

ence to any other party in interest. 11 U.S.C. §§ 544(a),

545, 547(b) (1994); 11 US.CS. §548(a) (Supp.

1999); 11 U.S.C. §549(a) (1994) (emphasis added).*

A majority of circuit courts, nevertheless, have held that

creditors and their committees may bring such avoidance

actions. See 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 right

to bring suit under sections 547 and 548 to recover

4“Avoidance” provisions 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).

;

preferential or fraudulent conveyances); Coral Petroleum,

Inc. v. Banque Paribas-London, 797 F.2d 1351, 1362-63

(Sth Cir. 1986) (unsecured creditors committee had right

to bring action under section 547); Unsecured Creditors

Comm. of Debtor STN Enters., Inc. v. Noyes (In re STN

Enters.), 779 F.2d 901, 904 (2d Cir. 1985) (committee

had right to bring preference action); Official Unsecured

Creditors Comm. of Suffola, Inc. v. United States Nat'l

Bank (In re Suffola, Inc.), 2 F.3d 977, 979 n.1 (9th Cir.

1993) (same).

Finally, this Court has held that expressio unius “can-

not properly be applied to a situation . . . where the

remedial purposes of the Act{] would be undermined by

a presumption of exclusivity.” Herman & MacLean v.

Huddleston, 459 U.S. at 387 n.23. That would be true

here. Section 506(c) is an exception to the general rule

that “the expenses associated with administering a bank-

ruptcy estate are not chargeable to a secured creditov’s

collateral or claim, but must be borne out of the un-

encumbered assets of the estate.” See 4 Lawrence P.

King, et al., Collier on Bankruptcy 4 506.05, at 506-125.

The purpose of this exception “is the prevention of a

windfall to the secured creditor: a secured creditor should

not reap the benefit of actions taken to preserve the se-

cured creditor’s collateral without paying the cost.” /d.

That purpose would be thwarted if the party protecting

the collateral cannot sue directly to recover payment but

must rely on the trustee’s discretionary decision to assert

the claim. The trustee lacks the same economic incentive

as the claimant to pursue recovery. “[I]f the trustee does

not have available funds to pay the claimant, the trustee

has no economic incentive to seek a recovery under Sec-

tion 506(c) with respect to amounts that will be paid over

to the claimant. As a result, the secured creditor may

obtain a windfall at the expense of the unpaid claimant.”

4 Lawrence P. King, et al., Collier on Bankruptcy,

€ 506.05, at 506-142-43.

This case is an example of tais disincentive. The trus-

tee had little reason to press Hartford’s claim because the

automatic stay provision in section 362 may have pre-

vented Hartford from canceling the insurance and be-

cause Hartford was obligated to pay claims under the

policy even in the event of nonpayment of premium. An

interpretation of section 506(c) as precluding the claim-

ant from asserting its claim in bankruptcy court would

thus be inconsistent with the equitable principle underly-

ing this provision—prevention of unjust enrichment. See

Kelly v. Robinson, 479 U.S. at 49 (“There is an over-

riding consideration that equitable principles govern the

exercise of bankruptcy jurisdiction.”).

Conversely, an interpretation of section 506(c) as

denying a direct remedy to claimants is not necessary, as

the lower court reasoned, to prevent preferential trezt-

ment of one claimant compared to other claimants or

other unsecured creditors. Hen House, 177 F.3d at 723;

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

Co. (In re JKJ Chevrolet, Inc.), 26 F.3d 481, 484 (4th

Cir. 1994). The Code expressly affords the adminis-

trative expense claimant a priority over pre-petition un-

secured creditors. 11 U.S.C. § 507(a).

Nor would affording a direct remedy to claimants such

as Hartford give them a preference over other administra-

tive expense claimants not contemplated by the Code.

Numerous bankruptcy courts have recognized that, “from

a practical standpoint,” equality of treatment among ad-

ministrative claimants “does not exist.” In re Vernon

Sand & Gravel, Inc., 109 B.R. 255, 257 (Bankr. N.D.

Ohio 1989). This is because so-called “operational pay-

ments” made by the trustee or debtor in the ordinary

aa |

course of business—for example, for employee wages,

utilities, supplies and taxes—are paid in full during the

course of the bankruptcy proceeding. Id.; see also In re

Lochmiller Indus., Inc., 178 B.R. 241, 247 (Bankr. S.D.

Cal. 1995); Guinee v. Toombs (In re Kearing), 170 B.R.

1, 7 (Bankr. D.D.C. 1994); In re Telesphere Communi-

cations, Inc., 148 B.R. 525, 531 (Bankr. N.D. Ill. 1992).

Such payments are treated as final and not subject to

later disgorgement; otherwise, if these expenses were sub-

ject to a pro-rata reduction, businesses operating under

chapter 11 could not retain employees, use outside vend-

ors or pay for utilities. Vernon Sand & Gravel, 109

B.R. at 257. The result is a “de facto” preference for

operational payments, which are paid in full when services

are rendered, over other administrative expenses. Tele-

sphere Communications, 148 B.R. at 531. Indeed, if the

insurance premiums owed to Hartford had been paid in

a timely manner, there would have been no question that

Hartford would have been entitled to keep the money—

notwithstanding any inequality of treatment that would

have resulted.

More generally, concerns about preferential treatment

do not apply where the source of the funds to pay the

claimant is secured collateral rather than unencumbered

assets, as is the case under section 506(c). The principle

of equitable distribution applies only to distribution of

unencumbered assets, and not to the proceeds of col-

lateral. See, e.g., United Sav. Ass'n v. Timbers of Inwood

Forest Assocs., Ltd. (In re Timbers of Inwood Forest),

793 F.2d 1380, 1387 (Sth Cir. 1986), aff'd, 484 US.

365 (1988). This in part explains why creditors with

oversecured claims are entitled to recover interest (which

comes from collateral) notwithstanding preferential treat-

ment of the secured creditor while undersecured creditors

are not since the payment would come from unencum-

bered assets to the detriment of other unsecured creditors.

Cf. Ticonic Nat'l Bank of Sprague, 303 U.S. 406, 411-12

(1938) (holding that doctrine of equal distribution does

not apply when source of payment is res subject to lien

rather than unencumbered assets).

In summary, the lower court’s exclusive reliance on

expressio unius was misplaced for several reasons. The

inference of exclusionary intent is inconsistent with the

more explicit wording Congress used in other Code pro-

visions where it wanted to restrict the rights of a party in

interest. The Eighth Circuit’s reading also squarely con-

flicts with the equitable and remedial objective of section

506(c), which was to insulate volunteer sellers to the

debtor from the risk of nonpayment. Of most importance,

nothing in the language of section 506(c) contradicts

Congress’ stated intent of preserving pre-Code practice,

including the direct remedy afforded to administrative

expense claimants.

CONCLUSION

The jud t of the Eighth Circuit should be reversed.

f Respectfully submitted,