The New Administrative Claim For Suppliers
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The Bankruptcy Abuse Prevention and Consumer Protection Act (“BAPCPA”) offers some protection for suppliers that provide goods to a debtor on credit immediately prior to a bankruptcy filing. Section 503(b)(9) of the Bankruptcy Code, a provision that became effective in cases filed after October 17, 2006, provides suppliers with an administrative claim equal to the value of any goods received by the debtor in the ordinary course of its business within 20 days prior to the petition date.
In bankruptcy liquidation, administrative claims are paid after secured claims but prior to the payment of pre-petition unsecured debt. If the debtor liquidates and there is little or no equity after payment of secured claims, the new administrative claim will not be very meaningful. However, if a debtor wants to confirm a chapter 11 plan, it must pay all administrative claims in full or get the consent of each administrative claimant to a lesser amount.
When debtor’s counsel prepares for a chapter 11 filing, most will now advise the debtor not to incur debt for goods immediately prior to filing. The Debtor should pay cash on delivery if possible. There are several reasons for this, not the least of which is counsel’s desire to minimize administrative claims that will compete with debtor’s counsel for payment or impede confirmation. Professional fees of debtor’s counsel and other professionals employed by the debtor or committees are given administrative expense status. Unless the professionals obtain a “carve out” whereby they are paid from the collateral securing a creditor, they are on the same level of payment as the new supplier administrative clam. It is not unusual for cases to be administratively insolvent, meaning there is not enough money to pay all administrative claims in full. In that situation, a pro rata distribution is made to the holders of allowed administrative claims.
Interestingly, the new supplier administrative claim will become an issue with regard to conversion of cases from chapter 11 to chapter 7. In cases converted from chapter 11 to chapter 7, the expenses incurred in the chapter 7 case have priority over the chapter 11 administrative expenses. The administrative claimants have an incentive to keep a case in chapter 11, rather than convert to chapter 7.
The approach of chapter 7 trustees will likewise be affected by the administrative claims of suppliers. Whereas the trustees in converted cases will be paid ahead of all chapter 11 administrative expenses, in cases originally filed under chapter 7, chapter 7 trustees will have to share their administrative expense priority with prepetition suppliers. Before embarking upon liquidation and incurring significant administrative expenses, trustees in such cases will have to take a hard look at the potential for administrative expense claims which would share pro-rata with the trustee's expenses. In rare cases, abandonment of assets may become an option because the trustee will not have the resources to ensure that the administrative costs of liquidation can be paid in full.
Many courts still allow critical vendors motions filed by chapter 11 debtors, but the debtor must be selective and justify the importance of paying certain pre-petition creditors. Even conservative courts often allow payment of pre-petition wages if the debtor shows the court that it would be able to pay the wages in a liquidation of its assets. Now, chapter 11 debtors have begun to seize upon section 503(b) (9) as a way to justify critical-vendor treatment for creditors that would hold the new administrative claim. See, e.g., In re Pliant Corp., Case No. 06-10001 (Bankr. D. Del. Jan. 4, 2006) (interim order); In re J.L. French Automotive Castings Inc., Case No. 06-10119 (Bankr. D. Del. March 6, 2006) (interim order). In such cases, the debtor has cash or financing and wants to pay the administrative claimants to keep them as suppliers to the debtor.
Certainly the new administrative claim is a benefit to suppliers and will provide leverage for payment in a myriad of ways, whether immediately after a case is filed, at confirmation, or in a complete chapter 11 or chapter 7 liquidation.
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