The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (the “BAPCPA”) created an additional category of administrative expenses
that depart from the general rule that only postpetition expenses are afforded administrative priority. Specifically, pursuant to section 503(b)(9) of the Bankruptcy Code, creditors who provided goods to a debtor prior to the petition date are entitled to an allowed administrative expense claim for “the value of any goods received by the debtor within 20 days before the date of the commencement of a case under this title in which the goods have been sold to the debtor in the ordinary course of such debtor’s business.”1
Section 503(b)(9) creates at least two significant issues for debtors with creditors that hold qualifying prepetition claims (“Twenty-Day Claims”). First, debtors (or other plan proponents) desiring to confirm a Chapter 11 plan must provide for the payment in full of Twenty-Day Claims as a condition to confirmation under section 1129(a)(9)(A) of the Bankruptcy Code. Second, section 503(b)(9) does not expressly state when Twenty-Day Claims are to be paid, and, thus, leaves open the possibility that Twenty-Day Claims could be paid even before a plan is filed, let alone confirmed. Generally speaking, a bankruptcy court has discretion to determine when an administrative expense claim is paid,2 but how a majority of courts will exercise their discretion in interpreting the timing of payment for Twenty-Day Claims remains to be seen. Recently, two bankruptcy courts within the Third Circuit have been presented with this timing issue and have held that Twenty-Day Claims are not entitled to immediate payment.
In re Global Home Products
In re Global Home Products,3 the debtors purchased aluminum from Industria Mexicana de Aluminino, S.A. de C.V. (“IMASA”) in the twenty-day period immediately prior to petitioning for relief under Chapter 11. Following the debtors’ petitions, IMASA filed a motion for allowance and immediate payment of its section 503(b)(9) administrative expense claim (the “Motion”). The Motion requested that the Bankruptcy Court for the District of Delaware allow IMASA claims for the value of the aluminum as an administrative expense and that the debtors make payment within three business days of the Court’s entry of an order granting the Motion. The debtors and the debtors’ postpetition financing lender objected to the Motion on the grounds that immediate payment of IMASA’s claim would cause an event of default under the debtors’ various financing agreements, which only authorize payments in the ordinary course of business absent court approval. After a hearing on the Motion, the Court entered an order allowing IMASA’s claim as an administrative expense, but denied immediate payment.
In its memorandum opinion, the Court began by noting two general principles regarding the timing of payment of administrative expense claims. First, distributions prior to confirmation are generally disallowed if there is a showing that all administrative claimants may not recover in full, and, second, distributions prior to confirmation are allowed only where a creditor demonstrates that there is a necessity for payment. The Court then turned to the three factors generally considered when a court exercises its discretion on the timing of payment of administrative expense claims:
(1) prejudice to the debtors
(2) hardship to the claimant and
(3) potential detriment to other creditors.
With regard to the first factor, the Court found that there was uncontroverted evidence of prejudice to the debtors if it ordered immediate payment of IMASA’s Twenty-Day Claim. The uncontroverted evidence was the testimony of the debtors’ chief restructuring officer, who stated that immediate payment of Twenty-Day Claims would doom the debtors’ restructuring efforts for two principal reasons. First, the debtors’ borrowing ability under their postpetition financing would be adversely affected where liability for Twenty-Day Claims would far exceed the debtors’ ability to borrow. Second, the debtors’ current financing availability was needed to continue the debtors’ day-to-day business operations and, thus, the debtors’ did not have the funds available for immediate payment of Twenty-Day Claims. With regard to the second factor, IMASA only submitted that its hardship was “self-evident.” IMASA argued that the debtors were discriminating between administrative claimants by refusing IMASA’s request for immediate payment but continuing to pay other prepetition vendor claims pursuant to a critical vendor order.
In balancing these two factors, the Court ultimately found that IMASA suffered little prejudice or hardship if payment of its claim was deferred until after confirmation. Conversely, the debtors4 were in a “tenuous financial position” and restricted by the terms of their postpetition financing. Thus, the Court denied the Motion to the extent that it sought immediate payment of IMASA’s Twenty-Day Claim.
In re Bookbinders’ Restaurant Inc.
In another bankruptcy case within the Third Circuit, In re Bookbinders’ Restaurant, Inc.,5 creditors with Twenty-Day Claims differed in their positions with respect to the timing of payment. One creditor agreed that its Twenty-Day Claim should be paid when other administrative expense claims are paid. Other creditors agreed to defer payment but reserved the right to request immediate payment. Meanwhile, creditor Blue Crab Plus Sfd (“Blue Crab”) insisted on immediate payment of its Twenty-Day Claim.
Blue Crab made a discrimination argument similar to IMASA’s argument in Global Home Products. However, instead of arguing that the debtor should treat its claim as a critical vendor claim,
Blue Crab argued that its claim should be treated as a postpetition creditor claim. Blue Crab argued that if the debtor was obliged to pay postpetition creditors in the ordinary course and had the funds to do so, then the debtor was equally obliged to immediately pay Twenty-Day Claims.
The Court disagreed with Blue Crab’s “equal protection” argument, stating that payments authorized under section 363(c)(1) of the Bankruptcy Code are not the same as payments allowed under section 503(b)(9) of the Bankruptcy Code. Namely, administrative expense claims explicitly require formalities that ordinary course payments do not. Furthermore, the Court noted that neither the express language of section 503(b)(9) nor its legislative history indicate that Twenty-Day Claims should be treated differently from any other administrative expense claims.
Finally, the Court supported its rejection of Blue Crab’s “equal protection” argument by comparing section 503(b)(9) to section 365(d)(3) of the Bankruptcy Code. The Court stated that the text and legislative history of section 365(d)(3) could be easily read to require immediate payment of claims arising under that section. However, in applying section 365(d)(3), which requires performance of postpetition obligations arising under an unexpired lease of nonresidential real property, some courts have refused to allow immediate payment of such claims. In contrast, the Court noted that neither the language nor the sparse legislative history of section 503(b)(9) suggested that Twenty-Day Claims were intended to be paid immediately. The Court was convinced that given the division of case law under section 365(d)(3), Congress would have expressly provided for immediate payment of Twenty-Day Claims if it had so intended. Thus, the Court denied immediate payment of Blue Crab’s Twenty-Day Claim.
While it remains to be seen how a majority of courts will address the timing issue under section 503(b)(9), Global Home Products and Bookbinders’ Restaurant signal a trend towards refusing Twenty-Day Claims any special treatment with regard to the timing of payment. Rather, it appears that courts are reluctant to deviate from the general principles that have guided their discretion in determining when administrative claims are paid, especially in the absence of any express statutory language or legislative history to suggest otherwise.