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 approach."30 2. The Administrative Expense Claim Requirement 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 § 503(b). 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). 30 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"). 31 In re Bailey Tool & Mfg. Co., 2018 Bankr. LEXIS 154 (N.D. Tex. Jan. 23, 2018). 32 11 U.S.C. § 507. 33 11 U.S.C. § 503. 34 In re Jartran, Inc., 732 F.2d 584, 586 (7th Cir. 1984). 35 Nat'l Union Fire Ins. Co. v. VP Bldgs., Inc., 606 F.3d 835, 837-38 (6th Cir. 2010). 29 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 arise post-petition.44 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). 38 Caradon Doors and Windows, Inc. v. Eagle-Picher Industries, Inc., 447 F.3d 461, 464 (6th Cir. 2006). 39 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. 2006). 40 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). 41 In re Nat'l Steel Corp, 316 B.R. 287, 300 (Bankr. N.D. Ill. 2004). 42 246 B.R. 591 (B.A.P. 8th Cir. 1999), 43 Id., at 594. 44 In re Marotta, 479 B.R. 681, 690 (Bankr. M.D. N.C. 2012). 45 732 F.2d, 584, 586-587 (7th Cir. 1984). 36 37 CLLA.ORG 25