Decided: January 26, 2016
The Fourth Circuit affirmed the judgment of the district court.
On February 3, 2010, Henry L. Anderson, Jr. (the “Debtor”) filed a voluntary petition for relief under Chapter 11 of the Bankruptcy code. Thereafter, the bankruptcy court approved Stubbs & Perdue, P.A. (“Stubbs”) to serve as the Debtor’s counsel in the bankruptcy proceedings. Stubbs is owed approximately $200,000 in legal fees from its representation of the Debtor. The Debtor is also subject to around $1 million in secured tax claims, and his estate has insufficient funds to pay both the tax claim and Stubb’s fees. This case centered on whether Stubbs could “subordinate” the IRS’s claim in this manner was governed by 11 U.S.C. § 724(b)(2).
The Fourth Circuit first discussed general bankruptcy principles. In bankruptcy, secured claims are satisfied from the collateral securing those claims prior to any distributions to unsecured claims. However, in Chapter 7 liquidations, there is a limited exception to this general rule. Under Section 724(b)(2) of the Bankruptcy Code, “certain unsecured creditors may ‘step into the shoes’ of secured tax creditors in Chapter 7 liquidation proceedings, so that when the collateral securing the tax claims is sold, the unsecured creditors are paid first.” As a result, if Stubb’s claim for Chapter 11 administrative expenses was one of the unsecured claims covered by § 724(b)(2), then, but only then, could it recover from the estate. The Fourth Circuit, however, found that under the version of § 724(b)(2) in effect at the time the bankruptcy court rendered its decision, the secured tax claim takes priority over Stubb’s claim to fees. Stubb’s argued that the application of current law to its claim would have an “impermissible retroactive effect,” and that it should prevail under the prior version of §724(b)(2), which should govern this case. The Court disagreed and found that the bankruptcy court properly applied the version of §724(b)(2) in effect when it rendered its decision. Accordingly, under that provision, the Court held that Stubbs was not entitled to subordinate the IRS’s secured tax claim in favor of its unsecured claim to Chapter 11 administrative expenses.
For those reasons, the Court affirmed the judgment of the district court.