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

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Amicus Curiae Brief
- **Published:** January 1, 2000
- **Citation:** 530 U.S. 1

## Text

~~ ee
t i nee,

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 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

; ' (
j

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.

10
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

iv

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

2

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

3

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

4

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

5

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

6

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

7

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.

9

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],

10

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-

>
7
i

Zz

11

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).

12

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

13

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

14

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

15

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

16

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).

?
4
;
&

17

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

18

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 |

19

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.

20

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,
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
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

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385014_0336%3A09. Public record. Not legal advice.