517 U.S. 535116 S.Ct. 1524134 L.Ed.2d 748
UNITED STATESv.NOLAND, TRUSTEE FOR DEBTOR FIRST TRUCK LINES, INC.Certiorari to the United States Court of Appeals for the Sixth Circuit.
No. 95-323.
Supreme Court of the United States
Argued March 25, 1996
Decided May 13, 1996

Syllabus*
The Internal Revenue Service filed claims in the Bankruptcy Court for  taxes, interest, and penalties that accrued after debtor First Truck  Lines, Inc., sought relief under Chapter 11 of the Bankruptcy Code but  before the case was converted to a Chapter 7 bankruptcy.  The court  found that all of the IRS's claims were entitled to first priority as  administrative expenses under 11 U. S. C. Section(s) 503(b)(1)(C) and  507(a)(1), but held that the penalty claim was subject to ``equitable  subordination'' under Section(s) 510(c), which the court interpreted as  giving it authority not only to deal with inequitable Government  conduct, but also to adjust a statutory priority of a category of  claims. The court's decision to subordinate the penalty claim to the claims of the general unsecured creditors was affirmed by the District  Court and the Sixth Circuit, which concluded that postpetition,  nonpecuniary loss tax penalty claims are susceptible to subordination by  their very nature.
Held:  A bankruptcy court may not equitably subordinate claims on a  categorical basis in derogation of Congress's priorities scheme.  The  language of Section(s) 510(c), principles of statutory construction, and  legislative history clearly indicate Congress's intent in its 1978  revision of the Code to use the existing judge-made doctrine of  equitable subordination as the starting point for deciding when  subordination is appropriate.  By adopting "principles of equitable subordination," Section(s) 510(c) allows a bankruptcy court to reorder a  tax penalty when justified by particular facts.  It is also clear that  Congress meant to give courts some leeway to develop the doctrine.  However, a reading of the statute that would give courts leeway broad  enough to allow subordination at odds with the congressional ordering of priorities by category is improbable in the extreme.  The statute would  then empower a court to modify the priority provision's operation at the  same level at which Congress operated when it made its  characteristically general judgment to establish the hierarchy of claims  in the first place, thus delegating legislative revision, not  authorizing equitable exception. Nonetheless, just such a legislative  type of decision underlies the reordering of priorities here.  The Sixth  Circuit's decision runs directly counter to Congress's policy judgment  that a postpetition tax penalty should receive the priority of an administrative expense. Since the Sixth Circuit's rationale was inappropriately categorical in nature, this Court need not decide whether a bankruptcy court must always find creditor misconduct before a  claim may be equitably subordinated.  Pp. 3-9.  48 F. 3d 210, reversed  and remanded.
Souter, J., delivered the opinion for a unanimous Court.
Justice Souter delivered the opinion of the Court.


1
The issue in this case is the scope of a bankruptcy court's power of equitable subordination under 11 U. S. C. Section(s) 510(c).  Here, in the absence of any finding of inequitable conduct on the part  of the Government, the Bankruptcy Court subordinated the Government's  claim for a postpetition, noncompensatory tax penalty, which would  normally receive first priority in bankruptcy as an "administrative  expense," Section(s) 503(b)(1)(C), 507(a)(1). We hold that the  bankruptcy court may not equitably subordinate claims on a categorical  basis in derogation of Congress's scheme of priorities.


2
In April 1986, First Truck Lines, Inc., voluntarily filed for relief under Chapter 11 of the Bankruptcy Code, and in the subsequent  operation of its business as a debtor-in-possession incurred, but failed  to discharge, tax liabilities to the Internal Revenue Service.  First  Truck moved to convert the case to a Chapter 7 liquidation in June 1988,  and in August 1988 the Bankruptcy Court granted that motion and  appointed respondent Thomas R. Noland as trustee.  The liquidation of  the estate's assets raised insufficient funds to pay all of the  creditors.


3
After the conversion, the IRS filed claims for taxes, interest,  and penalties that accrued after the Chapter 11 filing but before the  Chapter 7 conversion, and although the parties agreed that the claims  for taxes and interest were entitled to priority as administrative  expenses, Section(s) 503(b), 507(a)(1), and 726(a)(1),1 they  disagreed about the priority to be given tax penalties.  The Bankruptcy  Court determined that the penalties (like the taxes and interest) were  administrative expenses under Section(s) 503(b) but held them to be  subject to equitable subordination under Section(s) 510(c).2  In so  doing, the Court read that section to provide authority not only to deal with inequitable conduct on the Government's part, but also to adjust a  statutory priority of a category of claims.  The Bankruptcy Court  accordingly weighed the relative equities that seemed to flow from what  it described as "the Code's preference for compensating actual loss  claims," and subordinated the tax penalty claim to those of the general  unsecured creditors.  In re First Truck Lines, Inc., 141 B. R. 621, 629   (SD Ohio 1992).  The District Court affirmed.  Internal Revenue Service  v. Noland, 190 B. R. 827 (SD Ohio 1993).


4
After reviewing the legislative history of the 1978 revision to  the Bankruptcy Code and several recent appeals cases on equitable  subordination of tax penalties, the Sixth Circuit affirmed, as well.  In  re First Truck Lines, Inc., 48 F. 3d 210 (1995).  The Sixth Circuit  stated that it did


5
"not see the fairness or the justice in permitting the Commissioner's claim for tax penalties, which are not being assessed  because of pecuniary losses to the Internal Revenue Service, to enjoy an  equal or higher priority with claims based on the extension of value to  the debtor, whether secured or not. Further, assessing tax penalties  against the estate of a debtor no longer in existence serves no punitive  purpose.  Because of the nature of postpetition, nonpecuniary loss tax  penalty claims in a Chapter 7 case, we believe such claims are  susceptible to subordination.  To hold otherwise would be to allow  creditors who have supported the business during its attempt to  reorganize to be penalized once that effort has failed and there is not  enough to go around."  Id., at 218.


6
See also Burden v. United States, 917 F. 2d 115, 120 (CA3 1990);  Schultz Broadway Inn v. United States, 912 F. 2d 230, 234 (CA8 1990); In  re Virtual Network Services Corp., 902 F. 2d 1246, 1250 (CA7 1990).  We  granted certiorari to determine the appropriate scope of the power under  the Bankruptcy Code to subordinate a tax penalty,  516 U. S. ___ (1995),  and we now reverse.


7
The judge-made doctrine of equitable subordination predates Congress's revision of the Code in 1978.  Relying in part on our earlier  cases, see, e.g., Comstock v. Group of Institutional Investors, 335 U.  S. 211 (1948); Pepper v. Litton, 308 U. S. 295 (1939); Taylor v.  Standard Gas & Elec. Co., 306 U. S. 307 (1939), the Fifth Circuit, in  its influential opinion in In re Mobile Steel Co., 563 F. 2d 692, 700   (CA5 1977), observed that the application of the doctrine was generally  triggered by a showing that the creditor had engaged in "some type of  inequitable conduct."  Mobile Steel discussed two further conditions  relating to the application of the doctrine: that the misconduct have "resulted in injury to the creditors of the bankrupt or conferred an  unfair advantage on the claimant," and that the subordination "not be  inconsistent with the provisions of the Bankruptcy Act." Ibid.  This  last requirement has been read as a "reminder to the bankruptcy court  that although it is a court of equity, it is not free to adjust the  legally valid claim of an innocent party who asserts the claim in good  faith merely because the court perceives that the result is  inequitable."  DeNatale & Abram, The Doctrine of Equitable Subordination  as Applied to Nonmanagement Creditors, 40 Bus. Law. 417, 428 (1985).  The district courts and courts of appeals have generally followed the  Mobile Steel formulation, In re Baker & Getty Financial Services, Inc.,  974 F. 2d 712, 717 (CA6 1992).


8
Although Congress included no explicit criteria for equitable subordination when it enacted Section(s) 510(c)(1), the reference in  indicates congressional intent at least to start with existing doctrine.  This conclusion is confirmed both by principles of statutory  construction, see Midlantic Nat. Bank v. New Jersey Dept. of  Environmental Protection, 474 U. S. 494, 501 (1986) ("The normal rule of  statutory construction is that if Congress intends for legislation to  change the interpretation of a judicially created concept, it makes that  intent specific.  The Court has followed this rule with particular care  in construing the scope of bankruptcy codifications") (citation  omitted), and by statements in the legislative history that Congress  "intended that the term `principles of equitable subordination' follow existing case law and leave to the courts development of this principle," 124 Cong. Rec. 32398 (1978) (Rep. Edwards); see also id., at  33998 (Sen. DeConcini).  In keeping with pre-1978 doctrine, many Courts  of Appeals have continued to require inequitable conduct before allowing  the equitable subordination of most claims, see, e.g., In re  Fabricators, Inc., 926 F. 2d 1458, 1464 (CA5 1991); In re Bellanca  Aircraft Corp., 850 F. 2d 1275, 1282-1283 (CA8 1988), although several  have done away with the requirement when the claim in question was a tax  penalty. See, e.g., Burden, supra, at 120; Schultz, supra, at 234; In  re Virtual Network, supra, at 1250.


9
penalty, since the Code's requirement that a Chapter 7 trustee must  distribute assets "in the order specified in . . . section 507," (which  gives a first priority to administrative expense tax penalties) is  subject to the qualification, "[e]xcept as provided in section 510 of  this title . . . ."  11 U. S. C. Section(s) 726(a).  Thus, "principles  of equitable subordination" may allow a bankruptcy court to reorder a  tax penalty in a given case.  It is almost as clear that Congress meant  to give courts some leeway to develop the doctrine, 124 Cong. Rec. 33998 (1978), rather than to freeze the pre-1978 law in place.  The question  is whether that leeway is broad enough to allow subordination at odds  with the congressional ordering of priorities by category.


10
The answer turns on Congress's probable intent to preserve the  distinction between the relative levels of generality at which trial  courts and legislatures respectively function in the normal course.  Hence, the adoption in Section(s) 510(c) of "principles of equitable  subordination" permits a court to make exceptions to a general rule when  justified by particular facts, cf. Hecht Co. v. Bowles, 321 U. S. 321,  329 (1944) ("The essence of equity jurisdiction has been the power of  the Chancellor to do equity and to mould each decree to the necessities  of the particular case").  But if the provision also authorized a court to conclude on a general, categorical level that tax penalties should  not be treated as administrative expenses to be paid first, it would  empower a court to modify the operation of the priority statute at the  same level at which Congress operated when it made its  characteristically general judgment to establish the hierarchy of claims  in the first place.  That is, the distinction between characteristic  legislative and trial court functions would simply be swept away, and  the statute would delegate legislative revision, not authorize equitable  exception. We find such a reading improbable in the extreme. "Decisions about the treatment of categories of claims in bankruptcy proceedings  . . . are not dictated or illuminated by principles of equity and do not  fall within the judicial power of equitable subordination . . . ."  Burden, 917 F. 2d, at 122 (Alito, J., concurring in part and dissenting  in part).


11
Just such a legislative type of decision, however, underlies the  Bankruptcy Court's reordering of priorities in question here, as  approved by the District Court and the Court of Appeals. Despite  language in its opinion about requiring a balancing of the equities in  individual cases, the Court of Appeals actually concluded that  "postpetition, nonpecuniary loss tax penalty claims" are "susceptible to  subordination" by their very "nature."  48 F. 3d, at 218.  And although  the court said that not every tax penalty would be equitably  subordinated, ibid., that would be the inevitable result of consistent  applications of the rule employed here, which depends not on individual  equities but on the supposedly general unfairness of satisfying "postpetition, nonpecuniary loss tax penalty claims" before the claims  of a general creditor.


12
The Court of Appeals's decision thus runs directly counter to Congress's policy judgment that a postpetition tax penalty should receive the priority of an administrative expense, 11 U. S. C. regardless of Noland's argument that the Bankruptcy Court made a distinction between compensatory and noncompensatory tax penalties, for  this was itself a categorical distinction at a legislative level of  generality.  Indeed, Congress recognized and employed that distinction  elsewhere in the priority provisions: Congress specifically assigned 8th  priority to certain compensatory tax penalties, see Section(s)  507(a)(8)(G), and 12th priority to prepetition, noncompensatory  penalties, see Section(s) 726(a)(1), and (4).3


13
The Sixth Circuit, to be sure, invoked a more modest authority  than legislative revision when it relied on statements by the  congressional leaders of the 1978 Code revisions, see 48 F. 3d, at 215,  217-218, and it is true that Representative Edwards and Senator  DeConcini stated that "under existing law, a claim is generally  subordinated only if [the] holder of such claim is guilty of inequitable  conduct, or the claim itself is of a status susceptible to  subordination, such as a penalty or a claim for damages arising from the  purchase or sale of a security of the debtor."  124 Cong. Rec. 32398   (1978) (Rep. Edwards); see also id., at 33998 (Sen. DeConcini).  But  their remarks were not statements of existing law and the Sixth  Circuit's reliance on the unexplained reference to subordinated  penalties ran counter to this Court's previous endorsement of priority  treatment for postpetition tax penalties.  See Nicholas v. United  States, 384 U. S. 678, 692-695 (1966).  More fundamentally, statements  in legislative history cannot be read to convert statutory leeway for judicial development of a rule on particularized exceptions into delegated authority to revise statutory categorization, untethered to  any obligation to preserve the coherence of substantive congressional  judgments.


14
Given our conclusion that the Sixth Circuit's rationale was inappropriately categorical in nature, we need not decide today whether  a bankruptcy court must always find creditor misconduct before a claim  may be equitably subordinated.  We do hold that (in the absence of a  need to reconcile conflicting congressional choices) the circumstances  that prompt a court to order equitable subordination must not occur at  the level of policy choice at which Congress itself operated in drafting  the Bankruptcy Code. Cf. In re Ahlswede, 516 F. 2d 784, 787 (CA9)  ("[T]he [equity] chancellor never did, and does not now, exercise  unrestricted power to contradict statutory or common law when he feels a fairer result may be obtained by application of a different rule"),  cert. denied sub nom. Stebbins v. Crocker Citizens Nat. Bank, 423 U. S.  913 (1975); In re Columbia Ribbon Co., 117 F. 2d 999, 1002 (CA3 1941)  (court cannot "set up a subclassification of claims . . . and fix an  order of priority for the sub-classes according to its theory of  equity").


15
In this instance, Congress could have, but did not, deny noncompensatory, postpetition tax penalties the first priority given to  other administrative expenses, and bankruptcy courts may not take it  upon themselves to make that categorical determination under the guise  of equitable subordination.  The judgment of the Court of Appeals is  reversed, and the case is remanded for further proceedings consistent  with this opinion.


16
It is so ordered.



*
 The syllabus constitutes no part of the opinion of the Court but has been prepared by the Reporter of Decisions for the convenience  of the reader.  See United States v. Detroit Lumber Co., 200 U. S. 321,  337.


1
 Section 507(a)(1) provides, in relevant part: "(a) The following expenses and claims have priority in the following order: (1)  First, administrative expenses allowed under section 503(b) of this  title . . . ."  Under Section(s) 503(b)(1), administrative expenses  include "any tax . . . incurred by the estate" (with certain exceptions  not relevant here), as well as "any fine [or] penalty . . . relating to   [such] a tax . . . ." Section 726(a)(1) adopts the order of payment  specified in Section(s) 507 for Chapter 7 proceedings.
principles of equitable subordination, subordinate for purposes of  distribution all or part of an allowed claim . . . ."


3
 Noland argues that "although the penalties at issue arose postpetition," this claim should be viewed as a prepetition penalty  because a "reorganized debtor is in many respects similar to a  prepetition debtor . . . [and] the conversion of [this] case to chapter  7 was tantamount to the filing of a new petition." Brief for Respondent  16, n. 7.  But we agree with the Sixth Circuit, see In re First Truck  Lines, Inc., 48 F. 3d 210, 214 (1995), that the penalties at issue here  are postpetition administrative expenses pursuant to 11 U. S. C.  Section(s) 348(d), 503(b)(1).  Although Section(s) 348(d) provides that  a "claim against the estate or the debtor that arises after the order  for relief but before conversion in a case that is converted under  section 1112, 1208, or 1307 of this title, other than a claim specified  in section 503(b) of this title, shall be treated for all purposes as if  such claim had arisen immediately before the date of the filing of the  petition," the claim for priority here is "specified in section 503(b)"  and Congress has already determined that it is not to be treated like  prepetition penalties.  Noland may or may not have a valid policy  argument, but it is up to Congress, not this Court, to revise the determination if it so chooses.


