class 15 bankruptcy, spring, 2009 administrative expenses randal c. picker leffmann professor of...

Class 15Bankruptcy, Spring, 2009

Administrative Expenses

Randal C. PickerLeffmann Professor of Commercial Law

The Law School

The University of Chicago

773.702.0864/[email protected] © 2005-09 Randal C. Picker. All Rights Reserved.

April 19, 2023 Copyright © 2005-09 Randal C. Picker 2

503

Allowance of administrative expenses (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.


503 (Cont.)

Allowance of administrative expenses (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, including

• (i) wages, salaries, or commissions for services rendered after the commencement of the case;

• (ii) …


1129

Confirmation of plan (cont.) (a) (cont.)

(9) Except to the extent that the holder of a particular claim has agreed to a different treatment of such claim, the plan provides that -

• (A) with respect to a claim of a kind specified in section 507(a)(1) or 507(a)(2) of this title, on the effective date of the plan, the holder of such claim will receive on account of such claim cash equal to the allowed amount of such claim;


Reading v. Brown

Core Facts Receiver operating business in old Chapter

XI Business burns and causes $3.5 million in

damages to third parties Claims filed in case, disallowed as

adminstrative expenses and also not “provable”


Reading v. Brown

Affirmed by district court and court of appeals

Key Questions Are these postpetition damages allowable

as an administrative expense?


Relevant Language Then

“costs and expenses of administration, including the actual and necessary costs of preserving the estate subsequent to filing the petition”

Now “administrative expenses … including … the

actual, necessary costs and expenses of preserving the estate”


Understanding the Language

Says the Receiver “Only those expenditures without which the

insolvent business could not be carried on” This would include voluntary creditors This would exclude the postpetition tort

victims Why isn’t that right?


Competing Considerations

Fairness to existing unsecured creditors? to prepetition tort victims?

Efficiency What should we worry about here?


Precaution Incentives for Debtors

Hypo Firm owes USC $1000 Has two assets

Cash: $110 Project

• Returns $100• With $10 precautions, expected harm is $50• With $40 precautions, expected harm is $5


Debtor’s Choice: Payoff to Existing Creditors

Pro Rata Rule Admin Expense Rule

Low-Cost Precaution

High-Cost Precaution


Debtor’s Choice: Payoff to Existing Creditors

Pro Rata Rule Admin Expense Rule

Low-Cost Precaution

1000/(1000 + EHL) x (210 – CL) = 190.47

210 – CL – EHL = 210 – 10 – 50 = 150

High-Cost Precaution

1000/(1000 + EHH) x (210 – CH) = 166.15

210 – CH – EHH = 210 – 40 – 5 = 165


Meaning?

Externalization of Harm Under pro rata rule, debtor internalizes full

cost of precaution but not of harms inflicted on third parties

Goes cheap on precautions Administrative expense treatment of tort

harms causes debtor to internalize appropriately


Wall Tube

Core Facts Wall Tube creates bad environmental stuff Oct 83: WT ceases operations Dec 83: Tenn DHE investigates and finds

violation of Tenn law Feb 84: WT files Ch 7 case June 84: Tenn hires waste contractor to

look at facility


Wall Tube

July 84: Ch 7 trustee gives notice to convey property to original lessors

Nov-Dec 84: More expenditures by Tenn contractor

Dec 84: B Ct approves conveyance of property

May 85: Tenn seeks admin expense status for expenses


28 USC § 959 Trustees and receivers suable; management;

State laws (a) Trustees, receivers or managers of any

property, including debtors in possession, may be sued, without leave of the court appointing them, with respect to any of their acts or transactions in carrying on business connected with such property. Such actions shall be subject to the general equity power of such court so far as the same may be necessary to the ends of justice, but this shall not deprive a litigant of his right to trial by jury.


28 USC § 959 (cont.) Trustees and receivers suable; management;

State laws (cont.) (b) Except as provided in section 1166 of title 11, a

trustee, receiver or manager appointed in any cause pending in any court of the United States, including a debtor in possession, shall manage and operate the property in his possession as such trustee, receiver or manager according to the requirements of the valid laws of the State in which such property is situated, in the same manner that the owner or possessor thereof would be bound to do if in possession thereof.


554 Abandonment of property of the estate

(a) After notice and a hearing, the trustee may abandon any property of the estate that is burdensome to the estate or that is of inconsequential value and benefit to the estate.

(b) On request of a party in interest and after notice and a hearing, the court may order the trustee to abandon any property of the estate that is burdensome to the estate or that is of inconsequential value and benefit to the estate.


554 (cont.) Abandonment of property of the estate (cont.)

(c) Unless the court orders otherwise, any property scheduled under section 521(1) of this title not otherwise administered at the time of the closing of a case is abandoned to the debtor and administered for purposes of section 350 of this title.

(d) Unless the court orders otherwise, property of the estate that is not abandoned under this section and that is not administered in the case remains property of the estate.


Midlantic (US, 1986)

Holding “… [W]e conclude that Congress did not

intend for section 554(a) to preempt all state and local laws. The Bankruptcy Court does not have the power to authorize an abandonment without formulating conditions that will adequately protect the public’s health and safety.”


Cont.

“Accordingly, without reaching the question whether certain state laws imposing conditions on abandonment may be so onerous as to interfere with the bankruptcy adjudication itself, we hold that a trustee may not abandon property in contravention of a state statute or regulation reasonably designed to protect the public health or safety from identified hazards.”


Back to Wall Tube

So is Wall Tube Like Midlantic? Like Reading v. Brown? Something else?


Microsoft v. Dak

Try Three Approaches 1. Sale of Goods with Installment Payments 2. 1 plus a security interest 3. Per-Use Copies


Installment Sale

Structure Corp sells 50,000 widgets to Debtor Debtor agrees to pay over time Debtor makes some payments, owes

others, files for bankruptcy Debtor still has some of the widgets on

hand What is status of Corp?


Secured Installment Sale

Structure 1, but give Corp a security interest in the

remaining widgets What is status of Corp?


Per-Use Copies

Structure Corp gives Debtor master disk Each time Debtor makes copy it owes Corp

$45 Debtor makes copies prepetition and owes

money for those to Corp. Debtor makes copies postpetition as well

What is status of Corp?


The Case Itself

Core Facts License Agreement between DAK and

Microsoft DAK has to pay minimum amount over time

regardless of whether it makes copies After 50,000 copies—later upped—DAK has

to pay $50 (reduced to $45) for each copy made


The Case Itself

Question Is DAK 1, 2, 3 or something else?

class 15 bankruptcy, spring, 2009 administrative expenses randal c. picker leffmann professor of...

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