Hartford Underwriters Insurance v. Magna Bank, N.A. (05/30/2000)

By: Katie Lewis, Medill News Service

Questions presented

Does a post-petition administrative creditor in a bankruptcy case have standing under 11 U.S.C. Section 506(c) to seek payment of its administrative claim from the property of a bankruptcy estate that is encumbered by a secured creditor's lien?

Brief

On Sept. 5, 1991, Hen House Interstate, Inc., a convenience store, roadside restaurant and service station chain, filed for bankruptcy under Chapter 11 of the United States Bankruptcy Code. Under Chapter 11, Hen House did not have to liquidate its assets and instead was viewed as a functioning business. Hen House attempted to reorganize its business and restructure the debt.

In order for Hen House to operate under Chapter 11 as a continuing business, it was required to purchase workers compensation insurance for its employees. The Hartford Insurance Company provided workers compensation to Hen House from Sept. 1, 1991 through Sept. 1, 1992. However, Hen House failed to reorganize its business and subsequently, could not make the insurance payments.

By the end of 1992, Hen House owed Hartford $52,000. On Jan. 20, 1993, the case converted from Chapter 11 to Chapter 7 and liquidation of Hen Houses assets began. The court appointed aee for Hen Houses estate.

On June 29, 1993, Hartford filed a claim for payment of the insurance against Magna Bank, which was in charge of Hartfords assets. Hartford filed a complaint with the Bankruptcy Court in Missouri, asking the court to recover the unpaid workers compensation premiums Hen House owed for the coverage they were provided. But Magna Bank objected to Hartfords claim, thus making Hartford and Magna competitors of the secured creditors lien.

Attorneys for Hartford based it claim on the 506(c) statute which permits the claim it filed to recover Hen Houses assets if Hartfords actions benefited the company. In this case, Hartfords actions did benefit Hen House because providing insurance allowed Hen House to continue operating as a business.

On Aug. 14, 1996, the Bankruptcy Court ruled in favor of Hartford, finding, under a 1993 opinion of the 8th Circuit Court of Appeals, that the insurance company had standing to seek recovery under section 506(c) and ordered the surcharge of Magnas collateral. The U.S. District Court affirmed on Sept. 10, 1997, and Magna appealed to the 8th Circuit Court of Appeals.

A panel of the 8th Circuit also affirmed, but two of the three judges questioned the courts earlier 1993 opinion. The case, United States, IRS v. Boatmens First National Bank, held that non-trustees have standing under section 506(c) to surcharge a secured creditors collateral.

On en banc review of the three-judge panel ruling, a deeply-divided 8th Circuit 11-judge panel reversed the previous courts decision 6-5. It held that under the 506(c) statute, only theee of the estate, Magna Bank, had the right to recover the assets.

However, in dissent, Judge Heaney wrote for five judges: ""Today this court overrules six years of 8th Circuit law, rejects the views of four other circuits, and ignores the teaching of the leading bankruptcy treatise.""

The Supreme Court granted certiorari on Nov. 8, 1999. The American Insurance Association filed an amicus brief with the Court on behalf of Hartford to support the right of members to claim assets directly.

On May 30, 2000, the Court affirmed, holding that the bankruptcy code does not provide an administrative claimant an independent right to seek payment of its claim from property encumbered by a secured creditor's lien.

Justice Antonin Scalia wrote the unanimous opinion for the Court.