Traison Explains the Significance
So what are the ramifications of the Connolly decision?
Should creditors view their role in Chapter 7 cases differently? After succeeding in his litigation, Traison shared
a number of insights regarding the Connolly decision’s
implications for the future.
“At the end of the day, the client was happy, and
we managed to provide significant benefits to the stakeholders in the case. It’s particularly nice to be able to
deliver a win for a client, while simultaneously building
precedent,” he says.
But more than that, he views the decision as a
signal to creditors that their participation in Chapter 7
liquidations should be encouraged and that attorneys
representing creditors should view their role (as long
as the client is willing to make the effort with them)
“As members of a profession that can directly influence how the courts make law, we have the opportunity
and privilege of advocating for change to benefit individuals beyond just our individual clients,” Traison says.
Creditors Should Engage in Chapter 7
Traison expanded on the idea that decisions like this
ought to fuel engagement by creditors in Chapter 7
liquidations across the board. “If [creditors] know that
they may be able to recoup the cost of pursuing claims
that can augment the value for all creditors, they are
incentivized to participate more actively in the bankruptcy process. Creating an upside for creditors ought
to enhance the bankruptcy process overall,” he says.
Traison’s victory before the Sixth Circuit Court of
Appeals in the Connolly case also serves as a useful
reminder to creditors’ rights attorneys that, when you
put forth an effort on your client’s behalves, attorneys
have the unique ability to help clients shape policy,
build precedent and be agents of change on an individual and much broader basis. abfj
JACK O’CONNOR is an associate at Sugar Felsenthal Grais
& Hammer, based in Chicago.
The bankruptcy court granted Coface’s motion to
remove the predecessor trustee, over the objection of the
U.S. Trustee’s office, and a new trustee (the successor
trustee) was appointed to replace him. The bankruptcy
court further directed that a disinterested Chapter 7
panel trustee be appointed from another jurisdiction,
the Northern District of Ohio, to ensure objectivity.
Immediately upon his appointment, the successor
trustee employed special counsel to pursue the litigation claims against the predecessor trustee for gross
negligence in handling the accounting firm litigation.
All the while, Coface, through Traison and his firm,
provided informal assistance to the successor trustee’s
special counsel in an effort to ensure the litigation
yielded funding for creditor recoveries. The litigation
ultimately resulted in a significant settlement for the
Creditors Recover Expenses
Following the settlement, Coface filed a motion to allow,
as an administrative expense in the Chapter 7 case,
$164,336 in costs and fees associated with removing
the predecessor trustee, and for its role in prosecuting
and resolving the estate’s claims against the predecessor trustee. Coface argued that a creditor’s application for administrative expense status in a Chapter 7
case should be granted, under the bankruptcy court’s
§ 105(a), when the services performed have substantially benefited the estate, and assisted the successor
trustee in the recovery of assets, even if the application
does not fall within one of the enumerated categories
set forth in § 503(b).
Although there were no objections by any creditor
or other party, and although the successor trustee
supported the request, the U.S. Trustee’s office
opposed the motion, on the basis that § 503(b) of the
Bankruptcy Code provided no specifically-enumerated
basis to allow administrative expense claims in Chapter
7 proceedings. The bankruptcy court agreed and denied
the motion. Coface appealed to the district court, which
affirmed the bankruptcy court’s decision. Coface then
appealed to the Sixth Circuit.
In an opinion filed on September 21, 2015, the
Sixth Circuit reversed and remanded the district court’s
decision, adopting an expansive reading of § 503(b)’s
inclusive language, that allows for “bankruptcy courts
to reimburse expenses not specifically mentioned in
§ 503(b)’s subsections.” 2 The court ultimately struck
down the U.S. Trustee’s and lower courts’ strict
reading of the Bankruptcy Code, leaving the motion
unopposed on remand to the bankruptcy court. And
finally, in early 2016, the bankruptcy court entered
an order granting the motion and allowing Coface its
requested fees and expenses in the case as administrative expenses under § 503(b) by application of its
equitable authority under § 105(a).
2 In re Connolly North America, LLC, 802 F.3d 810, 817 (6th Cir. 2015).
Coface argued that a creditor’s application for administrative
expense status in a Chapter 7 case should be granted, under the
Bankruptcy Court’s § 105(a), when the services performed have
substantially benefited the estate, and assisted the successor
trustee in the recovery of assets, even if the application does not
fall within one of the enumerated categories set forth in § 503(b).