Commercial Law World - Issue 1, 2018 - 23
PETER M. GANNOTT
proves inadequate. Section 507(b) contains the following
If the trustee, under section 362, 363, or 364 of
this title, provides adequate protection of the
interest to a holder of a claim secured by a lien
on property of the debtor and if, notwithstanding
such protection, such creditor has a claim
allowable under subsection (a)(2) of this section
arising from the stay of action against such
property under section 362 of this title, from
the use, sale, or lease of such property under
section 363 of this title, or from the granting of a
lien under section 364(d) of this title, then such
creditor's claim under such subsection shall have
priority over every other claim allowable under
The purpose behind § 507(b) is to encourage
creditors to conduct business with the post-petition
debtor and to "compensate those who expend new
resources attempting to rehabilitate the estate."4
In exchange, the creditors will be afforded an
administrative priority claim to be paid ahead of other
prepetition creditors.5 The legislative history adds little
to understanding how this section is to be interpreted.6
Moreover, to the extent that the legislative history
suggests that this section provides secured creditors with
broad new rights, this history conflicts with the plain
meaning of § 507(b) and the courts will not follow it.7
The Elements of an
Claim Under § 507(b)
Section § 507(b) is limited to protecting the "interest
of a holder of a claim secured by a lien on property of
the debtor." The relevant "interest" to be protected is the
11 U.S.C. § 507(b).
Bonapfel v. Nalley Motor Trucks (In re Carpet Ctr. Leasing Co., Inc.),
991 F.2d 682, 685 (11th Cir. 1993), amended, reh'g., en banc, denied, 4
F.3d 940 (11th Cir. 1993), and cert. denied. 127 L.Ed. 2d 388, 114 S.Ct.
1069, U.S. (1994).
In re J.F.K. Acquisitions Group, 166 B.R. 207, 211 (Bankr. E.D.N.Y.
In re Ralar Distribs., Inc., 166 B.R. 3, 8 (Bankr. D. Mass. 1994) aff'd,
182 B.R. 81 (D. Mass. 1995), aff'd, 69 F.3d 1200 (1st Cir. 1995).
Ford Motor Credit Co. v. Dobbins, 35 F.3d 860, 872, n. 8 (4th Cir.
1994); Vincent Prop., Inc. v. Five Star Partners, L.P. (In re Five Star
Partners, L.P.), 193 B.R. 603, 609-610 (Bankr. N.D. Ga. 1996).
value of the creditor's "secured claim," as that concept is
defined by § 506 of the Code.8 Such a secured creditor
may be the holder of a real estate mortgage, a bank with
a lien on all assets, a receivables lender, an equipment
lender, the holder of a statutory lien or any number of
other types of entities. The burden of establishing a
claim under § 507(b) rests with the secured creditor by
a preponderance of the evidence.9 If the movant fails to
meet its burden of proof, the expense claim will fall to
the level of general unsecured creditors.10
Courts have identified three threshold elements that
must be satisfied by the creditor to be entitled to an
administrative superpriority claim. First, the creditor
must have been previously awarded adequate protection
that failed to protect the value of the collateral. Second,
the creditor must hold a claim that is allowable under
§ 507(a)(2), which, in turn, requires that the claim is
allowed as an administrative expense claim under §
503(b). Accordingly, the creditor must demonstrate that
it incurred "the actual necessary costs and expenses
of preserving the estate."11 Third, the claim must have
arisen from either the imposition of the automatic stay
under § 362, or the use, sale or lease of the collateral
under § 363, or granting of a lien under §364(d).12
In short, § 507(b) requires consideration of multiple
Bankruptcy Code sections to determine if the secured
creditor is entitled to a superpriority administrative
1. The Adequate Protection
The first element of a § 507(b) claim requires that the
creditor prove the debtor or trustee provided adequate
protection under §362, §363 or §364 of the Code.13
"Adequate protection" is a term of art defined in §
361 of the Code that is meant to assure that a lender's
economic position is not worsened while the automatic
stay prevents the creditor from foreclosing on its
Branch Banking & Trust Co. v. Beaman (In re Constr. Supervision
Servs., Inc.), 2016 U.S. Dist. LEXIS 61444 (E.D.N.C. May 9, 2016).
See e.g. In re Scopac, 624 F.3d 274, 284 (5th Cir. 2010) opinion modified on denial of reh'g, 649 F.3d 320 (5th Cir. 2011); Ford Motor Credit
Co. v. Dobbins, 35 F.3d 860, 866 (4th Cir. 1994).
In re DBSI, Inc., 407 B.R. 159, 165 (Bankr. D. Del. 2009).
11 U.S.C. § 503(b).
Ford Motor Credit Co. v. Dobbins, 35 F.3d 860, 865 (4th Cir. 1994).
In re Campbell, 205 B.R. 288 (Bankr. D. Colo 1997) (Adequate
protection provided in Chapter 13 plan did not give rise to a§ 507(b),
claim because the payments did not arise under §362, §363 or §364).