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An Eastern District of Michigan Bankruptcy Court (“Court”) recently held that a supplier to a bankrupt debtor was entitled to receive immediate payment on its 20-day administrative expense notwithstanding an outstanding avoidable transfer. More specifically, based on the Bankruptcy Code’s explicit distinction between a claim and an administrative expense, the Court found that section 502(d) of the Bankruptcy Code prevents payment of any claim of any entity that received an avoidable transfer, but does not preclude payment of an administrative expense.

What does this mean?

In bankruptcy cases, creditors file proofs of claim for amounts they believe are owed by the debtor. Conversely, administrative expenses are actual and necessary expenses usually incurred during a bankruptcy case to help the debtor through the reorganization. Expenses qualified as “administrative expenses” by the Bankruptcy Code are especially beneficial to creditors because administrative expenses are entitled to priority payment before other creditors. Although most administrative expenses arise during a bankruptcy, section 503(b)(9) the Bankruptcy Code provides special treatment for the value of any goods received by the debtor within 20 days leading up to the commencement of the bankruptcy case. Creditors who believe that they are entitled to payment based on section 503(b)(9) are able to file a request for payment of those administrative expenses with the court, and receive priority treatment regarding those expenses. As you may have guessed, the nature of section 503’s priority treatment does not always sit well with those charged to protect the bankruptcy estates and their assets.

Background

In In re Energy Conversion Devices, Inc., et al., (“ECD”) Ameri-Source Specialty Products (“Ameri-Source”) timely filed a general unsecured proof of claim for steel that it supplied to the debtor United Solar Ovonic LLC (“USO”). Ameri-Source then filed a proof of claim for its administrative expense for steel that it supplied to USO during the 20 days immediately preceding commencement of the bankruptcy case. Ameri-Source subsequently filed a motion for allowance of its §503(b)(9) administrative expense (“503(b)(9) Motion”), roughly four months after filing its administrative expense claim and two months after the debtors’ confirmed plan became effective. Ameri-Source filed its 503(b)(9) Motion to compel the liquidation trustee (“Trustee”) to pay the administrative expense immediately.

The Trustee objected to the 503(b)(9) Motion arguing, inter alia, that Ameri-Source received payments from USO during the 90-day period preceding the bankruptcy case (“Preference Period”), and that section 502(d) of the Bankruptcy Code mandates disallowance of any claim unless Ameri-Source returns those Preference Period payments (“Preference Payment”). In other words, the Trustee argued that it did not have to pay the administrative expenses unless Ameri-Source first paid back money that it received during the Preference Period.

With a split of authority, and without guidance from the Sixth Circuit, the Court sought to determine what, if any, distinction exists in the Bankruptcy Code between a “claim” and an “administrative expense.” Some courts reason that all administrative expense requests are subject to disallowance based on language in section 502(d) that the court shall disallow any claim of any entity that received a Preference Payment. Other courts, however, including the Second Circuit Court of Appeals, have held that section 503(b) “administrative expense” claims are distinguished by the Bankruptcy Code from other “claims”.

The Court's analysis


The Court referenced the Second Circuit’s explanation that Congress intended to differentiate between claims and administrative expenses, and that sections 501 and 502 of the Bankruptcy Code provide a procedure for the allowance of claims entirely separate from the procedure for allowance of administrative expenses under section 503. For example, under sections 501 and 502 of the Bankruptcy Code, creditors may file a proof of claim which is deemed allowed unless a party in interest files an objection. Under section 503, however, an entity may timely file a request for payment of an administrative expense which shall be allowed after notice and a hearing. Unlike section 503 administrative expense procedure requiring a request for payment, notice and a hearing, section 501 and 502 proofs of claim, unless objected to, are simply deemed allowed.

Moreover, Congress explicitly limited section 502(d) by qualifying it as an exception to only 502(a) and 502(b) by including the introductory language “[n]otwithstanding subsections (a) and (b) of this section...” Had Congress wanted to qualify 502(d) as an exception also to section 503, it could have, and would have, included such language. The Court also referenced the Second Circuit’s reasoning that section 502(d)’s mandatory disallowance of claims language would directly contradict, and conflict with, the mandatory allowance of administrative expenses language in section 503(b). The Court further noted the discussion in In re Plastech Engineered Products, Inc., and that court’s conclusion that the prepetition nature of section 503(b)(9) administrative expenses does not make it subject to section 502(d).

The Court held that Ameri-Source’s administrative expense must be paid in full immediately. In its holding, the Court relied heavily on the explicit congressional intent to distinguish a “claim” from an “administrative expense,” and section 502(d)’s prefatory language that referenced only section 502 and not section 503. Claimants entitled to payment from debtors should be mindful of the Bankruptcy Code’s requirements, whether that amount is unsecured or an administrative expense entitled to priority payment. McDonald Hopkins’ Business Restructuring and Bankruptcy Practice understands the complexities of the claims administration process, and can help you decipher the Bankruptcy Code to maximize results.

For more information, please contact:

Stephen M. Gross
248.220.1337
sgross@mcdonaldhopkins.com

Jeffrey S. Grasl
248.220.1336
jgrasl@mcdonaldhopkins.com

Jason L. Weiner
248.593.2943
jweiner@mcdonaldhopkins.com

The twists and turns of business restructuring are complex and demanding. Our attorneys approach every case with creativity and insight to ensure the solutions are cost-effective and practical. At every turn, you can be confident that our attorneys will guide you through the process, always providing practical and informed advice. We are positioned to respond to the special demands of a variety of matters in a wide range of industries, including health care, automotive, retail/distribution, real estate/construction, telecommunications, and mining/exploration.

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