PUBLISHED

UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

LANGDON M. COOPER,
Trustee-Appellant,

v.

INTERNAL REVENUE,
                                                                No. 97-2630
Creditor-Appellee,

and

LINDA W. SIMPSON,
Creditor.

Appeal from the United States District Court
for the Western District of North Carolina, at Charlotte.
Robert D. Potter, Senior District Judge.
(CA-97-180-3-P, BK-90-31936)

Argued: December 1, 1998

Decided: February 10, 1999

Before MURNAGHAN, LUTTIG, and KING,* Circuit Judges.

_________________________________________________________________

Affirmed by published opinion. Judge Luttig wrote the opinion,
which Judge Murnaghan joined.
_________________________________________________________________
*Judge King has recused himself. The decision is filed by a quorum
of the panel pursuant to 28 U.S.C. § 46(d).
COUNSEL

ARGUED: Stephen Andrew Jurs, ALALA, MULLEN, HOLLAND
& COOPER, P.A., Gastonia, North Carolina, for Appellant. Donald
Bruce Tobin, Tax Division, UNITED STATES DEPARTMENT OF
JUSTICE, Washington, D.C., for Appellee. ON BRIEF: Langdon M.
Cooper, ALALA, MULLEN, HOLLAND & COOPER, P.A., Gasto-
nia, North Carolina, for Appellant. Loretta C. Argrett, Assistant Attor-
ney General, Mark T. Calloway, United States Attorney, Gary D.
Gray, Tax Division, UNITED STATES DEPARTMENT OF JUS-
TICE, Washington, D.C., for Appellee.

_________________________________________________________________

OPINION

LUTTIG, Circuit Judge:

In this case we are presented with the question of the priority to be
accorded an untimely unsecured "priority" claim under the pre-1994
version of section 726(a) of the Bankruptcy Code. Having determined
that the district court properly classified such a claim as one under
section 726(a)(1), we affirm the judgment of the district court in favor
of appellee, the Internal Revenue Service.

I.

Bulldog Trucking, Inc., is in the midst of liquidation under Chapter
7 of the Bankruptcy Code. The company filed for reorganization
under Chapter 11 in 1990, but its case was converted to Chapter 7 in
1991. The IRS has asserted against Bulldog three"priority" unsecured
claims under 11 U.S.C. § 507(a)(7) (since renumbered as (a)(8)) for
unpaid taxes. One of the IRS' claims was timely filed; two were not.
Over the objections of appellant Langdon Cooper, trustee for Bulldog,
both the bankruptcy court and the district court held that 11 U.S.C.
§ 726(a)(1), rather than § 726(a)(3), governs all three of these claims,
regardless of tardiness. The effect of this holding is that an untimely
priority claim takes precedence over a timely "general" claim in the
order of payment, even where the priority creditor, here the IRS, had
notice of the bankruptcy proceeding.

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II.

Section 726(a) of the Bankruptcy Code establishes a hierarchy for
payment of unsecured claims in a Chapter 7 bankruptcy liquidation.
The order of payment is usually straightforward: first, priority claims;
second, timely general claims and untimely general claims when the
creditor lacked notice of the case; third, other untimely claims; fourth,
any claim for a penalty (whether secured or unsecured).

The problem we address today arises when a claim is priority and
untimely, because the plain language of the statute appears to include
such a claim both as a "priority" claim and as an "other untimely
claim." The version of section 726(a) applicable in this case provides
as follows:

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

           (1) first, in payment of claims of the kind specified in, and
          in the order specified in, section 507 of this title;

           (2) second, in payment of any allowed unsecured claim,
          other than a claim of a kind specified in paragraph (1), (3),
          or (4) of this subsection, proof of which is--

          (A) timely filed under section 501(a) of this
          title;

          (B) timely filed under section 501(b) or 501(c)
          of this title; or

          (C) tardily filed under section 501(a) of this
          title, if--

            (i) the creditor that holds such claim did not
          have notice or actual knowledge of the case in
          time for timely filing of a proof of such claim
          under section 501(a) of this title; and

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           (ii) proof of such claim is filed in time to per-
          mit payment of such claim;

           (3) third, in payment of any allowed unsecured claim
          proof of which is tardily filed under section 501(a) of this
          title, other than a claim of the kind specified in paragraph
          (2)(C) of this subsection;

           (4) fourth, in payment of any allowed claim, whether
          secured or unsecured, for any fine, penalty, or forfeiture. . . .

11 U.S.C. § 726(a) (emphasis added). The two untimely IRS claims
at issue are not only "of the kind specified in .. . section 507 of this
title," in particular section 507(a)(7), but also"allowed unsecured
claim[s] proof of which [are] tardily filed." Thus, at first blush, both
subsections (a)(1) and (a)(3) cover the claims.

We agree with the Second, Ninth, and Eleventh Circuits that in
such a case section 726(a)(1) controls. See In re Vecchio, 20 F.3d 555
(2d Cir. 1994); In re Pacific Atlantic Trading Co., 33 F.3d 1064 (9th
Cir. 1994); In re Davis, 81 F.3d 134 (11th Cir. 1996) (per curiam).
See also United States v. Cardinal Mine Supply, Inc., 916 F.2d 1087,
1091 (6th Cir. 1990) ("Subsection (a)(1) . . . makes no distinction
between tardily filed and timely filed priority claims or between tar-
dily filed claims where the priority creditor had notice or had no
notice. . . . Since [the priority of "priority" claims for taxes] is set in
the statute, it is reasonable that that priority is more important than
whether they were tardily filed").1 In particular, we adopt as our own
_________________________________________________________________
1 The Sixth Circuit has since fallen into a bit of disarray on this ques-
tion. In In re Century Boat Co., 986 F.2d 154, 158 (6th Cir. 1993), it
stated that the broad language of Cardinal Mine Supply applied only to
tardy priority creditors who lacked notice. Notwithstanding that interpre-
tation, it allowed the IRS to bring a claim under section 726(a)(1) two
years after it had received notice, because the court found no "bad faith
or unreasonable delay." Subsequently, the Sixth Circuit agreed with In
the Matter of Waindel, 65 F.3d 1307 (5th Cir. 1995), that a tardy claim
does not fall into section 726(a)(1), but it did not agree completely, and
it did so in an unpublished decision. In the Matter of Burnham, Connolly,
Oesterle, and Henry, 1996 WL 580475 (6th Cir.). The court there rele-

                     4
the Second Circuit's thorough discussion of this issue in In re
Vecchio. See 20 F.3d at 557-60.

We acknowledge that the Fifth Circuit expressed a contrary view
in In the Matter of Waindel, 65 F.3d 1307 (5th Cir. 1995), a case
decided subsequent to both Vecchio and Pacific Atlantic Trading.2
The chief argument that the Fifth Circuit offered in support of its
interpretation was that to allow tardy priority claims to be classified
under section 726(a)(1) would "unwittingly emasculate[ ]" 11 U.S.C.
§ 501(c), through their "heavy impact on a case." 65 F.3d at 1311. Or,
as Trustee Cooper argues, it would allow irresponsible priority credi-
tors to "swoop in" and wreak havoc with a delicately negotiated pay-
ment scheme. Section 501(c) allows the trustee or debtor to file a
proof of a creditor's claim if the creditor fails to do so within the time
limit. The purpose of this section, according to the court in Waindel,
is "to allow debtors to complete the list of claims against the estate
in a timely fashion and to ascertain the basis for and amounts of credi-
tors' distribution. The particular object of this salutary provision was
untimely priority claims. . . ." 65 F.3d at 1311.

We believe that the court in Waindel mixed apples with oranges
when it invoked section 501(c) to justify its interpretation of section
726(a). Section 501(c) allows debtors to protect themselves against
unfiled claims, such as taxes, that would not be discharged by the
bankruptcy proceeding, see 11 U.S.C. § 523(a)(1). By filing the claim
on his own, the debtor can have the assets of the bankruptcy estate
_________________________________________________________________
gated the IRS' claim to section 726(a)(3), but, by acknowledging that it
would categorize a late claim under section 726(a)(1) if the creditor
lacked notice, it introduced a distinction between kinds of tardy priority
claims that the court in Waindel never contemplated. See Waindel, 65
F.3d at 1311.

2 Waindel was a Chapter 13 case, but the majority felt it necessary to
interpret section 726(a) because Chapter 13 requires reference to Chapter
7 (of which section 726 is a part) prior to approval of a Chapter 13 plan.
See Waindel, 65 F.3d at 1310 & n.7. But see id. at 1313, 1314 n.6 (Duhe,
J., concurring in the judgment) (arguing that, under 11 U.S.C. § 103(b),
section 726 does not apply to Chapter 13, and confessing to being "not
quite sure how the majority reaches its final result").

                     5
pay the claim, avoiding payment himself out of his post-bankruptcy
assets. See In the Matter of Danielson, 981 F.2d 296, 297 (7th Cir.
1992).

But the debtor or trustee may take advantage of section 501(c)
regardless of whether subsection (a)(1) or (a)(3) of section 726 gov-
erns a tardy filing by the creditor himself. In fact, if a late-filing prior-
ity creditor receives section 726(a)(1) priority, the debtor or trustee
should have more incentive to avail himself of section 501(c) than
under Waindel's interpretation of section 726(a). Not only will the
debtor or trustee want to bring in the creditor as soon as possible to
avoid the risk of disruption from tardiness, but he also will have an
increased likelihood that the bankruptcy estate will be able to pay the
nondischargeable claim. Consigning such a claim to section 726(a)(3)
almost guarantees that the estate will be unable to pay the claim, ulti-
mately undermining the purposes of section 501(c), not furthering
them as the Fifth Circuit asserted. See Waindel , 65 F.3d at 1310 (not-
ing that "[t]here will hardly ever be surplus funds available" to pay
claims under section 726(a)(3)).

To the extent that Congress' amendment to section 726(a)(1) in
1994 is relevant to the prior version of that statute that we interpret
today, that amendment, essentially implementing the majority view of
the predecessor version, further undermines the policy rationale
underlying the Fifth Circuit's contrary interpretation in Waindel.
Under the new version of section 726(a)(1), the subsection applies to
a tardy priority claim so long as the claim is "filed before the date on
which the trustee commences distribution." (Congress did not in 1994
amend section 501(c), or, for that matter, anything in section 501.)
This is essentially the same consequence as under the interpretation
of the now-superseded version of section 726(a) we adopt today. See
Vecchio, 20 F.3d at 506 (acknowledging that under its interpretation
of section 726(a) tardy priority creditors would suffer "no penalty,"
but arguing that a bankruptcy court could "adequately address" any
problems by its discretion over whether to enter a disgorgement order
"if a priority claim is filed after disbursement" and by principles of
equitable subordination under 11 U.S.C. § 510(c), to which section
726(a) explicitly refers). Thus, Congress itself has now considered
and rejected the argument that tardy priority claims cannot be classi-
fied under section 726(a)(1) lest there be disruption of the entire statu-

                      6
tory repayment scheme set forth in section 726. The Trustee here has
not claimed that disbursement has occurred or that equitable subordi-
nation should apply.

Finally, unlike the Trustee, we see no conflict between our inter-
pretation of section 726(a) and our decision in In re Davis, 936 F.2d
771 (4th Cir. 1991). We held in Davis that a debtor who wished to
file a claim under section 501(c) on behalf of the IRS could not do
so, because the debtor had not demonstrated "excusable neglect," Fed.
R. Bankr. P. 9006(b), for failing to file within the time limit of Bank-
ruptcy Rule 3004. Necessary to this holding was the conclusion that
a debtor's failure to comply with Rule 3004's deadline generally bars
a filing under section 501(c). Such a holding simply does not bear
upon the issue in this case, which is priority under section 726(a)
when the creditor files tardily. Bankruptcy Rule 3002, not 3004, gov-
erns whether such a filing is timely.

We did say in Davis that a tardy creditor is"barred from filing such
a claim, whether or not there was a good reason for the failure to
timely file." 936 F.2d at 773. This observation, however, was not only
dicta but was also contrary to sections 726(a)(2)(C) and (a)(3), both
of which do allow certain untimely claims. Indeed, the court in Davis
did not even cite section 726(a), and every court to interpret the issue
we now face has forcefully rejected the argument that an untimely fil-
ing by a priority creditor bars that creditor's claim altogether. See,
e.g., Waindel, 65 F.3d at 1309 ("[T]o the extent that Rule 3002(a)
declares every untimely filed claim to be disallowed, the Rule imper-
missibly conflicts with the Code."). Not even the Trustee seriously
argues that the IRS' claim here should be barred; rather, he argues
only that we should relegate such a claim to section 726(a)(3). In such
a circumstance, Davis simply has no applicability.

Accordingly, for the reasons stated both in this opinion and by the
Second Circuit in Vecchio, the judgment of the district court is
affirmed.

AFFIRMED

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