In re Javed

¶1Creditors' distributions in bankruptcy cases are governed by the priority scheme codified in the U.S. Bankruptcy Code.1 That scheme is designed to ensure fair and equitable distributions to similarly-situated creditors. Consequently, courts generally are reluctant to deviate from the statutory priority scheme, absent clear guidance from Congress that the requested deviation is appropriate. One such statutory directive is found in section 503 of the Code, which permits courts to allow the payment of certain kinds of postpetition claims, commonly referred to as administrative expenses, ahead of other creditors. 11 U.S.C. § 503.2

¶2College Park Den, Inc. ("CPD"), a general unsecured creditor in this case, seeks such an administrative expense claim. Specifically, CPD filed a motion requesting, among other things, an administrative expense claim for making a substantial contribution to the estate (the "Request"). ECF 166, at 11-12. The Request is based on certain actions taken by CPD in this chapter 7 case that, CPD alleges, identified assets and assisted the Chapter 7 Trustee in the performance of his duties for the benefit of all creditors. As such, the Court must consider whether Congress intended creditors in a chapter 7 case to be eligible to receive an administrative expense claim *617on account of substantial contributions to the estate or the case more generally under section 503(b) of the Code.

¶3Section 503(b) authorizes administrative expense claims for substantial contributions by creditors in chapter 9 and chapter 11 cases, but it does not specifically mention creditors in chapter 7 cases. Given the language of section 503(b) of the Code and the role of a trustee in a chapter 7 case, the Court finds that only extraordinary circumstances warrant the award of an administrative expense claim to an individual creditor in a chapter 7 case. The Court has carefully reviewed the record in this case, including the statements of the Chapter 7 Trustee concerning CPD's actions. For the reasons set forth below, the Court concludes that CPD is entitled to a limited administrative expense claim in the amount of $7,987.50 for certain actions by CPD that made a substantial contribution to the above-captioned Debtor's estate before the Chapter 7 Trustee was actively engaged in the case.

¶4I. Relevant Background

¶5The Debtor filed this chapter 7 case on July 25, 2017. ECF 1. The Debtor appears to have filed this case as a result of, among other things, various prepetition lawsuits relating to his construction company, Shani Construction ("Shani"). Two creditors who were plaintiffs in two of those prepetition lawsuits have been particularly active in this case. First, CPD obtained a prepetition state court judgment against the Debtor and Shani in the amount of $971,794.31 as compensatory damages, $350,000.00 as punitive damages, $64,025.00 as liquidated damages, and $74,696.60 for attorney's fees and costs (the "CPD Judgment"). Adv. Pro. 17-00312, ECF 1. Second, Chesapeake Employers Insurance Company ("CEIC") filed a state court lawsuit against the Debtor and Shani, which the parties resolved by a prepetition Settlement Agreement. The Debtor and Shani defaulted under that agreement, however, and CEIC obtained a Confessed Judgment against them in state court in the amount of $138,000.00, plus costs (the "CEIC Judgment"). Adv. Pro. 17-00396, ECF 1.3

¶6Shortly after the petition date, CPD filed an adversary proceeding against the Debtor seeking to hold the claims underlying the CPD Judgment nondischargeable in this case under section 523 of the Code. Adv. Pro. 17-00312, ECF 1. CPD also, on August 12, 2017, filed a Motion for Rule 2004 Examination of the Debtor. ECF 18. Both of these filings occurred prior to the Debtor's meeting of creditors under section 341 of the Code and the active engagement of the Chapter 7 Trustee in this case. See, e.g. , ECF 8, 36, 51, 53.

¶7Based on the record, it appears that CPD's early actions in this case contributed at least in part to the Debtor disclosing certain assets that allegedly had been transferred prepetition by the Debtor to his spouse or other family members or not otherwise disclosed in the Debtor's bankruptcy documents. The Debtor amended his Schedules of Assets and Liabilities and Statement of Financial Affairs to reflect these omissions. ECF 71, 73, 87, 90, 102. CPD's knowledge of the Debtor's prepetition financial affairs as a result of the state court litigation and CPD's early actions in this case appears to have provided useful information to the Chapter 7 Trustee and to have resulted in asset recoveries for the benefit of the estate.

¶8*618As noted in the Court's Order Addressing Sanctions for Civil Contempt (the "Sanctions Order"), CPD continued to aggressively pursue the Debtor through various actions in this chapter 7 case.4 ECF 196. CPD took these actions despite the engagement of the Chapter 7 Trustee, the consent order deeming CPD's claim nondischargeable in this case, and the passing of the deadline to object to the Debtor's general discharge.5 Although individual creditors are entitled to protect their interests in any bankruptcy case, the bankruptcy trustee is responsible for collecting and administering the Debtor's assets for the benefit of the estate in a chapter 7 case. 11 U.S.C. §§ 704, 323. Consequently, any request for compensation by a creditor for actions taken in a chapter 7 case must be carefully scrutinized based on the facts of the particular case, the nature of a chapter 7 process, and the language of the Code.6

¶9II. Analysis

¶10Section 503(a) of the Code allows an entity to request payment of an administrative expense claim.711 U.S.C. § 503(a). The Code does not define the term "administrative expense," but courts generally focus on when the expense was incurred and its relation to the bankruptcy estate. For example, the United States Court of Appeals for the Fourth Circuit has stated that "an administrative expense has two defining characteristics: (1) the expense and right to payment arise after the filing of bankruptcy, and (2) the consideration supporting the right to payment provides some benefit to the estate." CIT Commc'n Fin. Corp. v. Midway Airlines Corp. (In re Midway Airlines Corp.) , 406 F.3d 229, 237 (4th Cir. 2005) (internal citations omitted).8 Section 507 of the Code grants a second priority status to administrative expense claims allowed under section 503(b). 11 U.S.C. § 507(a)(2). This priority status, in turn, requires a trustee or debtor in possession to pay allowed administrative expense claims before making any distributions to holders of lower priority claims or general unsecured creditors. 11 U.S.C. § 726(a). As such, if the Court grants the Request, CPD would receive some distributions in this case ahead of other general unsecured creditors.

¶11*619A. Administrative Expense Claims Generally

¶12Section 503(b) of the Code provides a non-exclusive list of permissible administrative expense claims.911 U.S.C. § 503(b). This list identifies nine categories of potential administrative expenses. One such category speaks to efforts by creditors in bankruptcy cases. Specifically, section 503(b)(3) allows administrative expense claims for, among other things, "the actual, necessary expenses ... incurred by ... (D) a creditor, an indenture trustee, an equity security holder, or a committee representing creditors or equity security holders other than a committee appointed under section 1102 of this title, in making a substantial contribution in a case under chapter 9 or 11 of this title." 11 U.S.C. § 503(b)(3).10 Section 503(b)(4) also authorizes the payment of "reasonable compensation for professional services rendered by an attorney" on behalf of a creditor in connection with a claim allowed under section 503(b)(3). 11 U.S.C. § 503(b)(4).

¶13Although section 503(b) is, by its terms, a non-exclusive list, courts take different approaches regarding a creditor's ability to submit an administrative expense claim for making a substantial contribution to a chapter 7 estate. The majority of courts appear to reject any claim for substantial contribution by creditors in a chapter 7 case.11 These courts generally reason that " '[w]hen a subsection directly addresses the type of administrative expense sought, the restrictions in it cannot be avoided by appealing to the non-exclusive nature of § 503(b).' " In re Engler , 500 B.R. 163, 174 (Bankr. M.D. Fla. 2013) (internal citations omitted).

¶14Some courts, however, take a more flexible approach, considering the totality of the circumstances when analyzing any given administrative expense request under section 503. For example, in In re Connolly North America, LLC , the United States Court of Appeals for the Sixth Circuit reversed the lower courts' decisions and *620held that a chapter 7 creditor could seek a substantial contribution claim under section 503 of the Code. 802 F.3d 810 (6th Cir. 2015). The Sixth Circuit explained, "[w]e have noted previously that the Bankruptcy Code itself encourages an expansive reading of § 503(b). The statute explains in § 102(3) that the terms ' "includes" and "including" are not limiting[.]' ... Consequently, we held that Congress's failure to expressly designate a given expense as allowable under § 503(b) does not mean that it is excluded." Id. at 816 (internal citations omitted).12 The Sixth Circuit also distinguished the case before it from the Supreme Court's decision in RadlAX Gateway Hotel, LLC v. Amalgamated Bank , and the general statutory interpretation canon that "the specific governs the general." Id. at 818 (discussing RadLAX , 566 U.S. 639, 132 S.Ct. 2065, 182 L.Ed.2d 967 (2012) ).13 According to the Sixth Circuit, the section of the Code at issue in RadLAX did not involve any variation of the term "include" and Congress could have, but did not, exclude administrative expense claims for creditors in chapter 7 cases.14Connolly , 802 F.3d at 818.

¶15B. Substantial Contribution Claims in Chapter 7 Cases

¶16The issue of allowing administrative expenses for substantial contributions in a chapter 7 case is a difficult matter. The chapter 7 process is premised on the appointment of a bankruptcy trustee to administer the estate for the benefit of creditors.15See, e.g.,11 U.S.C. §§ 704, 323 ;

¶17*621SunTrust Bank v. Matson (In re CHN Constr., LLC) , 531 B.R. 126, 130 (Bankr. E.D. Va. 2015) ("The trustee is a disinterested party who serves in a fiduciary capacity"). Independent actions by creditors during the chapter 7 case potentially could conflict with, duplicate, or undermine the trustee's efforts on behalf of the estate and all creditors. This is very different from the situation in a chapter 9 or chapter 11 case, in which the debtor typically is in control of its property as either a municipal debtor or a debtor in possession. 11 U.S.C. §§ 901, 902(1), 902(5), 904, 1107. A bankruptcy trustee generally is not monitoring the case and administering property under those chapters.16 As a result, independent monitoring and actions by creditors in a chapter 9 or chapter 11 case could potentially provide a very meaningful benefit to the case and all creditors.

¶18The Court finds the reasoning of the Sixth Circuit in Connolly persuasive and consistent with the general structure of the Code.17 As the Sixth Circuit observed, "[i]t makes good sense that in providing the[ ] examples [in section 503(b) ], Congress would expressly mention Chapters 9 and 11 in the context of creditor activity making a 'substantial contribution,' but not Chapter 7. In both Chapters 9 and 11, as a matter of course, a creditor will spend its own time and resources to benefit the estate; however, in all but the most atypical Chapter 7 case (such as the instant case), the U.S. trustee fulfills this role." Connolly , 802 F.3d at 817. Interpreting section 503(b) as endorsing substantial contribution claims in chapters 9 and 11, but not necessarily excluding such claims in other chapters, aligns with the language and structure of the statute. It provides helpful guidance to courts in assessing the most common kinds of administrative expenses while enabling courts to provide similar compensation in those rare instances deserving of consideration.

¶19That said, the Court is mindful of potential hazards in allowing administrative expense claims for creditors under a substantial contribution theory in chapter 7 cases. A bankruptcy filing is intended to, among other things, stop the race to the courthouse by individual creditors and provide a debtor with an opportunity to catch her financial breath. See, e.g. , *622In re Schwartz-Tallard , 803 F.3d 1095, 1100 (9th Cir. 2015) ; see alsoIn re Pinkney , 2002 WL 433151, at *3 (Bankr. M.D.N.C. Mar. 8, 2002). That breathing spell benefits not only the debtor but also the debtor's creditors by preventing the debtor's assets from being captured by particular creditors or drained by multi-faceted creditor litigation. See, e.g. , Schwartz-Tallard , 803 F.3d at 1100. As noted above, independent creditor actions also could impede the trustee's efforts on behalf of all creditors.

¶20Based on the foregoing, the Court finds a general presumption against awarding substantial contribution claims to creditors in a chapter 7 case.18 The Court further finds, however, that a creditor in a chapter 7 case should have the opportunity to rebut this presumption. The creditor bears the burden of proof on any request for an administrative expense claim under section 503(b) of the Code. See, e.g. , Tidewater Fin. Co. v. Henson , 272 B.R. 135, 138 (D. Md. 2001), aff'd sub nom.In re Henson , 57 F. App'x 136 (4th Cir. 2003) ("In resolving § 503(b) requests, a court must observe the modifiers 'actual' and 'necessary' with scrupulous care, and the creditor bears the burden of proving his claim. In re Merry-Go-Round Enterprises, Inc.,180 F.3d 149, 157 (4th Cir.1999)."). In a case like the one before the Court, the creditor must establish facts supporting the request, including that the creditor's conduct was warranted under the particular circumstances of the case. In other words, the creditor must demonstrate that its actions were not intended to thwart or impede the chapter 7 process, but that the actions were necessary under the circumstances and provided a substantial benefit to the estate.

¶21C. CPD's Request for a Substantial Contribution Claim

¶22CPD argues that its discovery and other actions against the Debtor since the petition date have made a substantial contribution to the estate. CPD states that, "without in any way intending to slight the efforts of the Trustee, it was the efforts of CPDI that lead to the recovery of all of the assets which the Estate has recovered, and the further enhancement of the Estate by insisting that the list price on the Debtor's residence be higher than recommended by the realtor retained by the Estate." Mot. ¶ 54, ECF 166. Although the Court does not agree with this statement in its entirety, the Court does believe that certain of CPD's early actions provided a meaningful benefit to the estate.

¶23The Court notes that creditors in a chapter 7 case may cooperate with the bankruptcy trustee and provide the trustee with information that enhances the value of the estate. The structure of the chapter 7 process-where the trustee is charged with collecting and distributing assets and those assets represent the only source of recovery for most general unsecured creditors-provides an appropriate incentive, in most cases, for general unsecured creditors to cooperate with the trustee. The Court recognizes, however, that exceptions to this incentive structure may exist, particularly where the creditor is secured or not subject to the bankruptcy discharge. The Court thus proceeds cautiously in discerning whether, and the extent to which, CPD may be entitled to an administrative expense claim. Indeed, the Court does not intend to upset the general distribution *623scheme, and related incentives, built into the Code by Congress.

¶24In light of the foregoing, the Court must carefully analyze CPD's conduct, both in terms of potential benefit to the estate and the purpose and timing of such conduct. For example, CPD's decision to share its valuation assessment of the Debtor's residence occurred after the Chapter 7 Trustee secured the deed to the property and had decided to list the property for sale. Given that such sale would limit any creditor's recovery from the property, the Code already provided proper incentive for CPD to cooperate with the Trustee to maximize the property's value. To determine otherwise could create an incentive structure in which creditors withheld information from the Trustee unless rewarded with an administrative expense claim.

¶25Nevertheless, the Court views CPD's conduct prior to the active engagement of the Chapter 7 Trustee differently.19 As acknowledged by the Trustee, that conduct streamlined the Trustee's process for obtaining certain kinds of information and recovering at least four vehicles for the benefit of the estate.20 CPD's prepetition litigation and general familiarity with the Debtor allowed it to move more quickly than the Chapter 7 Trustee initially, thereby creating efficiencies for the Trustee and the estate. The Trustee's swift recovery and sale of the vehicles underscore the value provided to the estate-it is tangible and not just theoretical value. See, e.g., ECF 125. CPD's actions in this limited context were actual and necessary expenses and provided a substantial benefit to the chapter 7 estate. 11 U.S.C. § 503(b).

¶26III. Conclusion

¶27The Court concludes that CPD's actions early in the case-i.e., before the closing of the Debtor's final meeting of creditors on or about October 27, 2017, and the active engagement of the Chapter 7 Trustee-provided a substantial benefit to the Debtor's estate and case more generally.21 The *624Court thus will grant CPD an allowed administrative expense claim in the amount of $7,987.50 under section 503(b) of the Code. This amount represents the attorney's fees incurred by CPD in this case from August 10, 2017, through and including October 18, 2017. Mot. Ex. 1 at 15, ECF 166. The Court further notes that the Chapter 7 Trustee did not oppose CPD's Request and the amount awarded herein generally accords with that suggested by CEIC in its opposition papers. ECF 177; Record Aug. 21, 2018 Hrg. at 10:37:50. The Court also underscores the unique circumstances of this case and its position that, for the many reasons set forth above, a substantial contribution claim for a creditor in a chapter 7 case should be the rare exception rather than the rule. The Court will enter a separate Order consistent with this Memorandum Opinion.