Commercial Law World - Issue 1, 2018 - 25
PETER M. GANNOTT
agreements receive "close scrutiny" by the court.29 The
court added that "prior court approval of adequate
protection agreements is the more prudent and preferred
2. The Administrative Expense
The plain language of § 507(b) establishes that the
second element that a creditor must establish to obtain
administrative priority is that it has a claim allowable under
§ 507(a)(2).31 Section 507(a)(2) of the Code establishes the
priorities of payment, and states as follows:
The following expenses and claims have priority in
the following order:
(2) Second, administrative expenses allowed
under section 503(b) of this title, . . .32
Accordingly, to obtain a claim under § 507(a)(2), the
creditor must establish it is entitled to a claim under §
Section 50333 of the Bankruptcy Code covers the
allowance of administrative expenses, and it provides in
relevant part as follows:
(a) An entity may timely file a request for payment of
an administrative expense, or may tardily file such
request if permitted by the court for cause.
(b) After notice and a hearing, there shall be allowed
administrative expenses, other than claims allowed
under section 502(f) of this title, including-
(1) (A) the actual, necessary costs and expenses
of preserving the estate. .
The policy of § 503(b)(1)(A) is to encourage third
parties to furnish post-petition goods and services on credit
to assist the functioning of the bankruptcy in exchange for
an administrative expense priority claim.34 Notably, the
priority status granted by § 503 is narrowly construed to
hold administrative expenses to a minimum.35 This strict
Travelers Ins. Co. v. American Agcredit Corp. (In re Blehm Land & Cattle
Co.), 859 F.2d 137, 140 (10th Cir. 1988).
Id. at 141; see also, Owens-Corning Fiberglas Corp. v. Ctr. Wholesale, Inc.
(In re Ctr. Wholesale, Inc.), 759 F.2d 1440, 1451, n. 23 (9th Cir. 1985)
(Observing that "although not literally within the provisions of section
507, Owens-Corning's injury is clearly within its spirit and deserves to be
remedied by granting its claim a superpriority").
In re Bailey Tool & Mfg. Co., 2018 Bankr. LEXIS 154 (N.D. Tex. Jan. 23,
11 U.S.C. § 507.
11 U.S.C. § 503.
In re Jartran, Inc., 732 F.2d 584, 586 (7th Cir. 1984).
Nat'l Union Fire Ins. Co. v. VP Bldgs., Inc., 606 F.3d 835, 837-38 (6th Cir. 2010).
construction implements a presumption that a bankruptcy
estate has limited resources which should be equally
distributed among all creditors.36
Courts have constructed a two-part test for determining
whether an expense is an allowable § 503(b) administrative
claim.37 First, the creditor must prove the claim arose from
a post-petition transaction with the debtor-in-possession or
trustee. And, second, the third-party must prove it supplied
goods or services that directly and substantially benefited
the estate and the associated expenses were necessary to
preserve the estate's assets.38 The creditor claiming a §
503(b)(1)(A) administrative priority claim bears the burden
of proof by a preponderance of the evidence.39
Most courts hold that the debtor's continued possession
of a creditor's prepetition collateral, in return for adequate
protection, is a post-petition transaction satisfying the first
prong of this test.40 However, it is not enough that payment
becomes due after the petition date if the transaction was
entered with the debtor prepetition.41 For example, in In
re Williams,42 a Chapter 13 debtor accrued post-petition
mortgage arrears. After the case was dismissed, the
mortgage creditor filed an application for compensation
pursuant to § 503(b). The Eighth Circuit Bankruptcy
Appellate Panel held that the application did not meet the
standards under § 503(b), because the mortgage payment
was a prepetition obligation, although the obligation arose
post-petition.43 In another case, an attorney's request for an
administrative claim to recover his prepetition Chapter 13
fees and costs was denied, because the obligation did not
The Seventh Circuit in Jartran45 explained that the first
prong of the § 503(b) test will only be met when the
Ford Motor Credit Co. v. Dobbins, 35 F.3d 860, 865-866 (4th Cir. 1994).
Devan v. Simon Debartolo Group, L.P. (In re Merry-Go-Round Enters.,
Inc.), 180 F.3d 149, 158 (4th Cir. 1999).
Caradon Doors and Windows, Inc. v. Eagle-Picher Industries, Inc., 447
F.3d 461, 464 (6th Cir. 2006).
E.g., Nat'l Union Fire Ins. Co. v. VP Bldgs., Inc., 606 F.3d 835, 837-38 (6th
Cir. 2010); In re Mid Region Petroleum, Inc., 1 F.3d 1130, 1134 (10th Cir.
1993); In re HNRC Dissolution Co., 343 B.R. 839, 843 (Bankr. E.D. Ky.
In re Carpet Center Leasing Co., 991 F.2d 682, 687 (11th Cir. 1993);
In re J.F.K. Acquisitions Group, 166 B.R. 207, 212 (Bankr. E.D.N.Y. 1994);
but see In re McLeod, 205 B.R. 76, 79 (Bankr. E.D. Tex. 1996).
In re Nat'l Steel Corp, 316 B.R. 287, 300 (Bankr. N.D. Ill. 2004).
246 B.R. 591 (B.A.P. 8th Cir. 1999),
Id., at 594.
In re Marotta, 479 B.R. 681, 690 (Bankr. M.D. N.C. 2012).
732 F.2d, 584, 586-587 (7th Cir. 1984).