83 F.

3d 1360
64 USLW 2768, 35 Collier Bankr.Cas.2d 1398,
29 Bankr.Ct.Dec. 178

In re GLADOS, INC., Debtor.

U.S. TRUSTEE, Plaintiff-Appellant,
v.
Jere M. FISHBACK and Lawrence S. Kleinfeld, DefendantsAppellees.
No. 95-2849.

United States Court of Appeals,

Eleventh Circuit.
May 28, 1996.

T. Patrick Tinker, U.S. Trustee's Office, Tampa, FL, for Appellant.

Jere M. Fishback, St. Petersburg, Florida, pro se and for DefendantsAppellees.
Appeal from the United States District Court for the Middle District of
Florida.
Before EDMONDSON and DUBINA, Circuit Judges, and LOGAN* ,
Senior Circuit Judge.
DUBINA, Circuit Judge:

The United States Trustee ("UST") 1 appeals the district court's judgment
affirming the bankruptcy court's judgment. The bankruptcy court held that
pursuant to 11 U.S.C. 726(a)(5), a trustee may receive interest on his or her
compensation dating from the trustee's appointment and that professionals other
than the trustee may receive interest on their fees dating from the submission of
their fee applications. Because we disagree with both the bankruptcy court and
the district court's conclusions, we reverse the district court's judgment.

I. STATEMENT OF THE CASE

On September 30, 1983, Glados, Inc. (the "Debtor") filed a voluntary petition
for relief under Chapter 11 of the Bankruptcy Code (the "Code"). The case was
converted to Chapter 7 with the bankruptcy court's approval on February 8,
1985. Lawrence S. Kleinfeld (the "Trustee") was appointed as interim Chapter
7 trustee. At the time, the Debtor had no assets other than two pending legal
actions: (1) a claim in the United States District Court for the Middle District of
Florida against the Debtor's insurance company to recover insurance proceeds
resulting from the destruction of the Debtor's business by fire; and (2) a claim
against the Debtor's former landlord for wrongful eviction. The Trustee was
substituted as plaintiff in the pending lawsuits and sought to employ counsel.
On September 9, 1985, the bankruptcy court approved the Trustee's application
to employ the law firm of Kleinfeld & Fishback (hereinafter "Trustee's
counsel") on a contingency fee basis. Following six years of litigation, the
Trustee's counsel obtained favorable judgments in both lawsuits and thus
secured substantial litigation proceeds for the estate. The insurance company
appealed the judgment to this court and ultimately to the United States Supreme
Court. The judgment was affirmed.

The Trustee's counsel filed a motion in the district court seeking an award of
attorneys' fees. On June 6, 1986, the district court granted this motion and
awarded the Trustee's counsel the sum of $79,200. On March 14, 1988, the
Trustee's counsel filed a second motion for attorneys' fees for work performed
at the appellate level. On September 18, 1991, the Debtor's insurer paid the
estate $129,402.12, which represented the trial level fees plus accrued postjudgment interest. The Trustee and the Debtor's insurer compromised on a fee
for the appellate work in the sum of $80,000, and on January 23, 1992, the
bankruptcy court approved this compromise.

Following the liquidation of the estate's assets, all secured and unsecured
claims, including administrative expenses, were fully paid, and a surplus
remained. On July 21, 1992, the Trustee filed a Preliminary Report of the
Estate along with his application for compensation. The Trustee's counsel filed
their fee application which included a request for the fees awarded in the
insurance litigation in addition to fees for other work performed on behalf of
the Trustee. The bankruptcy court then issued a Notice of Preliminary Report
of Estate Funds and Notice of Surplus Funds to all creditors and parties in
interest. This Notice advised all creditors of the availability of surplus funds to
pay additional claims if filed. On September 29, 1992, the Debtor's counsel
filed their fee application. However, on February 16, 1993, the bankruptcy
court deferred ruling on the fee applications until it had determined whether the
estate contained sufficient funds for the payment of fees.

On February 25, 1993, the bankruptcy court informed the Trustee of the
allowed amounts of all administrative expenses.2 Using this information, which
included the compensation awards for the Trustee and the Trustee's counsel as
determined under 330, the Trustee prepared a proposed order allowing
administrative expenses, authorizing disbursements, and directing the payment
of dividends. The proposed order provided that following the full payment of
all claims, the estate would have surplus funds which would be used to pay
interest on the fees of the Trustee, the Trustee's counsel, and the Debtor's
counsel pursuant to 726(a)(5). The UST objected to the proposed distribution
solely based on the allocation of surplus funds for interest. Billy Ray Addison,
the largest unsecured creditor, joined in the UST's objection.

Following a hearing on the UST's objection, the bankruptcy court entered an

order on September 30, 1993. The bankruptcy court's order allowed
administrative fees and expenses to the Trustee, the Trustee's counsel, and the
Debtor's counsel. In addition, the order provided for the payment in full of all
priority and unsecured claimants and allocated the remaining $77,711.82 of
surplus funds as interest on the administrative fees and expenses. The
bankruptcy court also concluded under 726(a)(5) that interest on a trustee's
fees accrues from the date that the trustee is appointed and that interest on a
non-trustee professional's fees accrues from the date of the filing of the fee
application. Moreover, the bankruptcy court held that if other litigation caused
the professional to file a fee application with another court, interest on those
fees would accrue from the date the professional filed the fee application with
the other court. The bankruptcy court advised using the federal judgment rate
of interest in effect on the date the Chapter 7 case was filed or, if the case was
originally filed under another chapter, the interest rate on the date of conversion
to Chapter 7. Consequently, the bankruptcy court awarded the Trustee's counsel
$73,400.68 in interest, the Trustee $4,008.42 in interest, and the Debtor's
counsel $302.72 in interest. Such payments consumed the surplus. The UST
appealed to the district court, which affirmed the bankruptcy court's order. The
UST then perfected this appeal.

II. ISSUES
We address the following issues on appeal:
7

1. whether a trustee may, pursuant to 11 U.S.C. 726(a)(5), receive interest on

his or her compensation in a case dating from the trustee's initial appointment;
and
2. whether professionals other than the trustee may, pursuant to 11 U.S.C.

2. whether professionals other than the trustee may, pursuant to 11 U.S.C.

726(a)(5), receive interest on their compensation dating from the professionals'
submission of their fee applications.

III. STANDARD OF REVIEW

9

Because the district court functions as an appellate court in reviewing

bankruptcy court decisions, this court is the second appellate court to review
bankruptcy court cases. Haas v. Internal Revenue Service, 31 F.3d 1081, 1083
(11th Cir.1994), cert. denied, --- U.S. ----, 115 S.Ct. 2578, 132 L.Ed.2d 828
(1995). This court reviews determinations of law, whether from the bankruptcy
court or the district court, de novo. Id. We review the bankruptcy court's factual
findings under the clearly erroneous standard of review. Id.

IV. DISCUSSION
10

This case is novel in that rarely will a Chapter 7 case result in assets that exceed
the amount necessary to satisfy creditors and administrative expenses. In the
event of a surplus, the Code allows for trustees and other professionals to
receive interest on their fees. This case revolves around the issue of when such
interest begins to accrue. The bankruptcy court and the district court found that
the Trustee is entitled to interest from the date of his or her appointment and
that the Trustee's counsel is entitled to interest from the date of the filing of a
fee application. The UST argues that the Code and case law throughout the
country allow interest on trustee and other professional fees to accrue only from
the time of the court's fee award, and not from the time of the appointment or
the submission of an application.

A. Statutory Basis
11

Section 726 of the Code establishes the distribution system governing a

trustee's disbursement of funds at the close of a Chapter 7 case. Subsection (a)
describes the general priorities of the different types of claims against the estate
in paragraphs one through four. Paragraph five provides for the payment of
interest on such claims. After all claims and any interest on such claims have
been paid, any remaining funds are distributed to the debtor pursuant to
paragraph six.

12

A complete understanding of interest paid pursuant to 726(a)(5) necessarily

involves a review of several additional sections of the bankruptcy code. Section
726(a)(5) provides:

13

(a) Except as provided in section 510 of this title, property of the estate shall be

13

(a) Except as provided in section 510 of this title, property of the estate shall be
distributed--

14

(5) fifth, in payment of interest at the legal rate from the date of the filing of the
petition, on any claim paid under paragraph (1), (2), (3), OR (4) of this
subsection ...

15

Section 726(a)(5)'s reference to 726(a)(1) results in a series of references to

various sections of the Code. First, 726(a)(1) provides:

16

(a) Except as provided in section 510 of this title, property of the estate shall be
distributed--

17

(1) first, in payment of claims of the kind specified in, and in the order
specified in, section 507 of this title, ...
Section 507 provides, in relevant part:

18

(a) The following expenses and claims have priority in the following order:

19

(1) First, administrative expenses allowed under section 503(b) of this title, and
any fees and charges assessed against the estate under chapter 123 of title 28 ...
Section 503(b)(2) states:

20

(b) After notice and a hearing, there shall be allowed administrative expenses,
other than claims allowed under section 502(f) of this title, including--

21

(2) compensation and reimbursement awarded under section 330(a) of this title.

22

Consequently, claims for compensation or reimbursement of expenses are

claims "of the kind specified in ... section 507" to the extent that such claims
are for "compensation and reimbursement awarded under section 330(a)."
Section 330(a) provides that after meeting notice requirements, "the court may
award to a trustee, an examiner, a professional person employed under section
327 or 1103 ... reasonable compensation for actual, necessary services rendered
... and reimbursement for actual, necessary expenses."

23

The problem with the district court's statutory analysis is that it ends with
726(a)(5)'s "any claim paid," thereby ignoring the phrase in section 503(b)(2)

that reads "compensation and reimbursement awarded under section 330."

Despite the long statutory progression, courts addressing the issue of trustee
and professional interest on administrative expenses have faced a dilemma:
24
Courts
have recognized that administrative claims, including attorneys' fees pursuant
to 11 U.S.C. 330(a), are entitled to interest under 726(a)(5) when there is a
surplus in the estate.... But, while determining that administrative claims are entitled
to interest, the courts have nevertheless been faced with a quandary. Specifically, the
courts are required to pay interest under 726(a)(5) "at the legal rate from the date
of the filing of the petition on any claim paid under ... this subsection." However,
professional compensation allowable under 330(a) often does not arise as a claim
until near or at the end of the case, when a court enters a fee award.
25

In re Chiapetta, 159 B.R. 152, 159 (Bankr.E.D.Penn.1993) (citations omitted).

The appellees argue that the language of 726(a)(5) clearly provides that
interest should be paid from the time of the filing of the petition. However, the
bankruptcy court and the district court disagreed with this proposition and so
limited accrual to the time of appointment.3 The conflict inherent in a literal
reading of 726(a)(5) is thoroughly explored in the case law from around the
country.

B. Case Law
26

The bankruptcy court and the district court failed to consider sufficiently the
existing case law. While the Eleventh Circuit has not specifically addressed the
issue presented in this case, the Ninth Circuit addressed it in Boldt v. Crake (In
re Riverside-Linden Inv. Co.), 945 F.2d 320 (9th Cir.1991). Multiple
jurisdictions have followed the decision in Riverside-Linden, including Chief
Bankruptcy Judge Paskay in In re Brown, 190 B.R. 689 (Bankr.M.D.Fla.1996).

27

In Riverside-Linden, the court addressed the issue of interest on trustee's

counsel fees and held that professionals are entitled to interest on their fees
from the time of the court's fee award and not from the time of appointment.
See Riverside-Linden, 945 F.2d at 324. The Ninth Circuit noted that a literal
reading of 726(a)(5) without reference to the remainder of the Code would be
illogical:

28 claims existing prior to the filing of the bankruptcy petition, a date-of-filing

For
accrual date is appropriate and mandated under the plain language of the statute....
For a claim to Section 330(a) attorney's fees arising subsequent to filing, however, a
literal application of the statute makes little sense; interest cannot accrue on fees for
services which have not yet been performed. See, e.g., Bob Jones Univ. v. United

States, 461 U.S. 574, 586, 103 S.Ct. 2017, 2025-2026, 76 L.Ed.2d 157 (1983) ("it is
a well established canon of statutory construction that a court should go beyond the
literal language of a statute if reliance on that language would defeat the plain
purpose of the statute")....
29

Id. at 323-24 (citation and internal quotation omitted). The Ninth Circuit further
concluded:

30 provision which defines attorney's fees as a compensable administrative

The
expense, Section 503(b), refers to "compensation and reimbursement awarded under
section 330." ... It is not until the fees have been awarded by the bankruptcy court
pursuant to Section 330, therefore, that they become an administrative expense
entitling them to treatment as a claim under Section 726(a)(5).
31

Id. at 324.

32

Riverside-Linden has been consistently followed in subsequent decisions

addressing interest on trustee and non-trustee professional fees under 726(a)
(5). See, e.g., Chiapetta, 159 B.R. at 159-60 (neither trustee nor trustee's
counsel entitled to interest until after the award of fees at the close of the case);
In re Motley, 150 B.R. 16, 18-20 (Bankr.E.D.Va.1992) (trustee not entitled to
pre-award interest under 726(a)(5)); In re Commercial Consortium, 135 B.R.
120, 127 (Bankr.C.D.Cal.1991) (trustee's counsel may not receive pre-award
726(a)(5) interest, but the court may award current rates as compensation for
delay). Furthermore, courts have held that professionals employed on behalf of
a bankruptcy estate are not entitled to compensation or interest on this
compensation until the final fee awards are made under 330. See In re Child
World, Inc., 185 B.R. 14 (Bankr.S.D.N.Y.1995); In re Caribou Partnership III,
152 B.R. 733 (Bankr.N.D.Ind.1993).

33

Riverside-Linden was favorably cited and followed by Chief Judge Paskay in

Brown, in which the trustee sought to recover interest from the date of his
appointment and the trustee's counsel sought interest from the date of his fee
application. See Brown, 190 B.R. at 689. Chief Judge Paskay noted that neither
the bankruptcy court's decision in the present case (Glados ) nor its appeal
decision (Fishback ) were published and are therefore not binding precedent. Id.
at 690. As Chief Judge Paskay stated, "In this Court's view, the District Court's
analysis [in Fishback ] is an oversimplification of the law." Id. The court noted
the problems with a literal interpretation of 726(a)(5):

34literal interpretation of 726(a)(5) produces uncontemplated results as to interest

A
allowable to attorneys and trustees, whose administrative expenses arise subsequent

to filing. For instance, if the attorney for the trustee is not employed until two years
into the administration of the case it would, in effect, permit the attorney to earn
interest on those fees when he did not perform any work. Equally, the trustee would
be encouraged to delay the administration of the estate to allow the accrual of
interest in a surplus case.
35

Id. at 691.

36

Chief Judge Paskay also explained that the award of interest to the trustee is
contrary to the purpose of 326(a), which sets limits on the amount of trustee
compensation based on the total distribution made to creditors. Id. at 690. The
bankruptcy court noted that there is no mention of the accrual of interest in
326(a). Id. In Motley, the bankruptcy court determined that interest was
inappropriate pursuant to the reasoning of Riverside-Linden and concluded that
the inconsistency between 326(a) and 726(a)(5) constitutes an additional
ground for denying interest to the trustee:

37appears to this Court that the formula fixing the 326(a) compensation for [the]
It
trustee actually provides for the trustee to benefit from interest earned without a
court award of fees. Section 326(a) calculates a trustee's fee based on the
distribution to creditors. Assets remaining in the estate after payment of all claims
allow for the payment of interest in those claims under 726(a)(5). If the trustee
pays 726(a)(5) interest on claims, ... the trustee earns a fee on the interest paid on
creditors' claims by virtue of the fee formula of 326(a). Then allowing [trustee]
Ames' claim for interest on the fees provided by 326(a) would amount to two bites
of the apple and would result in a disincentive for trustees to distribute assets in a
timely manner. Under [trustee] Ames['] reading of the Code and cases, a trustee
could delay final distribution, as was done in this six-year-old case, allow the
interest earned on assets converted to cash to accumulate in escrow, earn a fee on the
distribution of those assets (which now include earned interest) in satisfaction of
claims, and as a part of his compensation petition for interest on his fee under
726(a)(5). In contrast to Ames' illogical, unjust, and capricious scheme, the Code
fairly provides for the trustee to benefit from a commission earned from the payment
of interest on claims of creditors.4
38

Motley, 150 B.R. at 20. The purpose of a Chapter 7 case is to administer

efficiently the liquidation of the estate for the benefit of the creditors. Providing
an incentive for the trustee to delay the conclusion of the case would thus be
counterproductive.

39

The district court concluded that the Trustee's counsel could collect interest on
their fees from the date of the filing of a fee application, because once the

application is filed, there is evidence of work performed thus giving rise to a

claim. District Court Order at 12. Arguing that Riverside-Linden and the UST
construe the term "claim" too narrowly, the district court cited our opinion in In
re St. Laurent, 991 F.2d 672 (11th Cir.1993) in support of the proposition that
the term "claim" should be interpreted as broadly as possible. However, we
conclude based on the statutory analysis, case law, and common sense, that
attorneys' fees are not entitled to treatment as compensable claims until
compensation is awarded under 330(a). See 11 U.S.C. 503(b)(2); RiversideLinden, 945 F.2d at 324; Brown, 190 B.R. at 691; Huisinga v. Craig & Nichols
(In re Byrd), 151 B.R. 925 (D.S.D.1993) (denial of pre-award interest to
debtor's counsel); Chiapetta, 159 B.R. at 159-60; Caribou Partnership III, 152
B.R. at 740-41 (denying debtor's counsel pre-award interest); Commercial
Consortium, 135 B.R. at 127.
40

Admittedly, plain language is preferable in statutory construction, but as this

court has held: "Rules of statutory construction dictate that the plain meaning is
conclusive, 'except in the "rare cases [in which] the literal application of a
statute will produce a result demonstrably at odds with the intent of its
drafters." ' " In re Colortex Industries, Inc., 19 F.3d 1371, 1375 (11th Cir.1994)
(quoting United States v. Ron Pair Enterprises, Inc., 489 U.S. 235, 242, 109
S.Ct. 1026, 1031, 103 L.Ed.2d 290 (1989)) (quoting Griffin v. Oceanic
Contractors, Inc., 458 U.S. 564, 571, 102 S.Ct. 3245, 3250, 73 L.Ed.2d 973
(1982)). Allowing interest to accrue prior to actual awards is contrary to the
remainder of the statutory scheme, as well as to the case law interpreting it.
Consequently, we hold that the bankruptcy court and the district court
incorrectly concluded that trustees should be awarded interest from the date of
appointment and other professionals from the date of submission of their fee
applications. Moreover, we are persuaded by Chief Judge Paskay's published
opinion in Brown, which expressly rejects the bankruptcy court and the district
court's unpublished conclusions.

C. Availability of Interim Fees and the Peculiarity of the Middle District's Custom
41
42

The appellees urge us to consider the policy argument that out of fairness they
should receive interest in order to compensate for the delay that results from the
Middle District of Florida's policy of refusing to entertain interim fee
applications until the close of the case, despite the fact that such fees are
provided for in 331. Both the bankruptcy court and the district court relied
upon this policy justification in their decisions to allow for interest to accrue
contrary to the Code and existing case law. Nevertheless, we will not ignore
statutory provisions and case law, as well as common sense, simply because of
procedural peculiarities in the Middle District of Florida.

43

The district court's opinion proposed to distinguish the prior case law under
726(a)(5) on the basis that in those other jurisdictions interim compensation
was available. However, as the UST points out, the important component of the
Riverside-Linden decision is the statutory analysis of 726(a)(5) and related
sections. Another important distinction is that although the professional in
Riverside-Linden had not filed an interim fee application, later cases citing
Riverside-Linden or its progeny and stressing the availability of interim
compensation are generally Chapter 11 cases. See Byrd, 151 B.R. at 926
(debtor's counsel's fees); Caribou Partnership III, 152 B.R. at 735 (debtor's
counsel's fees). Chapter 7 cases involve situations quite different from those
arising under Chapter 11 cases. In a Chapter 7 case there is generally no
operating business from which ongoing expenses can be paid. As a result, most
Chapter 7 cases do not possess sufficient funds from which to pay interim
compensation until the end of the case when all the assets of the insolvent
debtor have been collected and liquidated and all litigation has been completed.
Because the objective of Chapter 7 is the expeditious administration of the
estate, courts have been indisposed to award interim fees for fear that awarding
such fees would provide the trustee with an incentive to prolong the
administration of the estate. See In re Domino Investments, Ltd., 82 B.R. 608,
609 (Bankr.S.D.Fla.1988) (denying interim compensation in order to encourage
timely administration of the estate).

44

Pursuant to 331, trustees and other professionals in Chapter 7 cases are

allowed to file applications for interim fee awards. Notwithstanding this fact, in
Chapter 7 cases many bankruptcy courts are reluctant to consider such
applications until the close of the case because of the permissive language of
331 and the policy justification of efficiently conducting the close of the estate.
See generally Commercial Consortium, 135 B.R. at 120; Domino Investments,
82 B.R. at 609. The Middle District of Florida does not consider interim fee
applications in Chapter 7 cases because it does not have sufficient time due to
its heavy case load.5

45

In Commercial Consortium, concluding that 331 does not exclude Chapter 7

cases from the discussion of interim fees, the court held that bankruptcy courts
should entertain interim fee applications from professionals in Chapter 7 cases.
Commercial Consortium, 135 B.R. at 124. In doing so, the court rejected the
policy argument that requiring counsel to wait until completion of the case will
encourage a more rapid closing. Id. The court reasoned that this policy
justification was not adequately supported by its underlying necessary
assumptions that counsel can control the speed of the closing of a Chapter 7
case and that the administration of Chapter 7 cases can usually be completed
quickly enough to make interim compensation unnecessary. Id. The court

acknowledged that the appropriateness of interim fees is dependent upon such

factors as the current availability of funds, the existence of other accrued
administrative obligations of the same or higher priority that may deplete the
funds, the continuing need for funds to pay necessary administrative expenses
in the future, and the inability to file a final fee application in the near future.
Id. at 124-25. The court also placed the burden on the professional seeking
payment to present sufficient evidence to persuade the court that such fees
should be disbursed. Id. at 125.
46

The appellees argue that because the bankruptcy courts in the Middle District
of Florida do not consider interim fee applications in Chapter 7 cases, they
should be entitled to interest to compensate them for the delay.6 Unlike the
situation in Commercial Consortium, however, we are not directly presented
here with the issue of failure to consider interim fee applications. Consequently,
we decline to require the Middle District of Florida to entertain such
applications. Moreover, in holding that trustees and trustees' counsel are
entitled to interest accruing only from the date of the award, we decline to
express an opinion on the Middle District's practice of refusing to review
interim fee applications.

V. CONCLUSION
47

For the foregoing reasons, we reverse the district court's judgment affirming the
bankruptcy court's judgment and remand this case for further proceedings
consistent with this opinion.

48

REVERSED and REMANDED.

Honorable James K. Logan, Senior U.S. Circuit Judge for the Tenth Circuit,
sitting by designation

The UST is an official of the United States Department of Justice charged by

statute with the duty to oversee and supervise the administration of bankruptcy
cases. 28 U.S.C. 586(a). The UST is expressly given standing under 11
U.S.C. 307 to raise and be heard on any issue under Title 11, except that the
UST may not file a reorganization plan under Chapter 11

The bankruptcy court awarded the Trustee $8,927.25 in fees and $56.15 in
expenses. The Trustee's counsel was awarded $227,612.12 in fees and
$1,515.02 in expenses. The Trustee's counsel's compensation award consisted
of $79,200 for the district court litigation as well as $50,202.12 in judgment

interest on that award, $80,000 for the appellate work, and $18,210 for the
balance of services provided by the Trustee's counsel
3

The appellees have not filed any cross-appeals and in fact ask that the district
court's judgment be affirmed in all respects. The appellees assert later in their
brief that the bankruptcy court and district court's holding with respect to
interest on professional fees was "a well-reasoned compromise." Appellees' Br.
at 17

The appellees argue that Motley is distinguishable from the present case
because the Motley court was influenced by the fact that no interim fee
applications were filed. In the Middle District of Florida no interim fee
applications are entertained in Chapter 7 cases. We will discuss the effect of the
Middle District of Florida's practice regarding interim fee applications infra

The bankruptcy court stated:

It is the practice of this Court to defer ruling on professional fee applications
until the closing of the case in order to assist the Court in the administration of
its large case load. If the Court were to follow the position asserted by the
United States Trustee, professionals would never receive interest on their
administrative expense claims and professionals would be unduly prejudiced
because of this Court's inability to promptly rule on fee applications when they
are filed.
Bankruptcy Court's Order at 7.

One method of compensating for delay is the use of current rather than
historical rates in determining fee amounts. See Commercial Consortium, 135
B.R. at 126-127