Del.). This time, the court approved
a settlement concerning a proposed
debtor-in-possession (DIP) financing
and contemplated asset sale that
provided for a segregated escrow
account to pay allowed Section
503(b)( 9) claims. The court rejected
the claimants’ contention that the
settlement had to guarantee full
payment of all Section 503(b)( 9) claims.
See id., Tr. of July 19, 2013 Hr’g (Dkt.
184), at p. 98: 11-23. Rather, the court
held that evidence of a “reasonable
likelihood, or more likelihood than
not, that 503(b)( 9) claims will be paid
in full” sufficed. Id., at p. 99: 20-22.
While acknowledging the concern
that some administrative priority
claimants might be paid more than
others, the court indicated that this
was sometimes a business reality, and
its mere possibility was not sufficient
to decline approval of the settlement.
Id., at pp. 103: 11-25 – 104: 1-9.
Against this conflicting case law
backdrop, Gregg was called upon to
evaluate the Family Christian asset
auction, which resulted in three
disparate bids: the first bid guaranteed
payment of all administrative
priority claims in full; the second bid
made no payment guarantee as to
administrative priority claims; and
the third bid guaranteed payment of
only certain administrative priority
claims (explicitly excluding Section
503(b)( 9) claims). See In re Family
Christian, LLC, Case No. GG 15-00643-
jtg (Bankr. W.D. Mich. June 18, 2015),
Memorandum Decision Regarding
Motion to Sell Substantially All Assets
of Debtors (Dkt. No. 931), at pp. 19-20.
Gregg declined to approve the sale
to any of the bidders for reasons
unrelated to the payment of
administrative priority claims, but
explicitly disqualified the third bid
for failure to guarantee payment of
all administrative priority claims. See
id., at p. 47. Taking the Townsends
and NEC holdings one step further,
Gregg also entered an order specifying
that if the auction were reopened,
any qualifying bid must provide for
payment in full of all administrative
priority claims. See Order Denying
Motion to Sell Substantially All Assets
of Debtors (Dkt. No. 932), at p. 2, ¶ 5(ii).
In the end, the winning bid was
embodied in a plan of reorganization,
providing (as also required by Section
1129(a)( 9)(A)) for full payment of
all administrative priority claims,
including all Section 503(b)( 9)
claims. The Family Christian plan
was confirmed on August 11, 2015.
Framing a Response
What lessons can Section 503(b)( 9)
claimants take away to frame their
response to a Section 363 sale driven
by an undersecured lender? Certainly,
the Blitz, Townsends, NEC, and Family
Christian decisions all suggest that
claimants, committees, and other
parties in interest should begin
discussing payment of Section
503(b)( 9) claims as soon as they see
that a Section 363 asset sale is in the
offing. This can be as early as the
first day motions for DIP financing
or the use of cash collateral where
an asset sale is a stated strategy.
By no means are the issues settled
because, as noted, other decisions
have treated Section 503(b)( 9)
claims as administrative priority
“lite.” 5 Nevertheless, by putting
payment of Section 503(b)( 9) claims
on the table earlier—even if only
to suggest an escrow to protect
against administrative insolvency—
the court and other parties will
be sensitized to the issues. This
awareness may well prevent debtors
and their undersecured lenders from
steamrolling over Section 503(b)( 9)
claimants on the eve of a sale by
arguing that the sale, though it leaves
these claims unpaid, is the best
possible outcome for all creditors. J
1 See, e.g., In re Allen Family Foods, Inc., Case
No. 11-11764 (KJC) (Bankr. D. Del.) (Carey,
J.), Tr. of June 30, 2011 Hr’g (Dkt. No. 122),
at p. 8: 8-9 (stating principle that “he who
benefits [from conducting business in a
Chapter 11] has to pay the freight for that”).
2 Although pre-BAPCPA creditors were
afforded their reclamation rights,
these rights provided precious little
protection. In the overwhelming
majority of cases, the prior-in-time
secured lender had a floating lien.
3 In re Townsends, Inc., Case No. 10-14092
(CSS), Tr. of Jan. 21, 2011 Hr’g (Dkt. No.
338), at p. 24: 3-5, 7-9 (initially refusing to
approve DIP financing that contemplated
asset sale, based on finding of virtually
no prospects for full payment of Section
503(b)( 9) claims: court was unwilling
to oversee Chapter 11 case “that is both
administratively insolvent and prefers one set
of administrative creditors over another”).
4 In re NEC Holdings Corp., Case No. 10-
11890 (CSS), Tr. of July 13, 2010 Hr’g (Dkt.
No. 224), at p. 100: 17-20 (approving DIP
financing that contemplated asset sale
only after lender and creditors’ committee
reached agreement to pay Section
503(b)( 9) claims from sale proceeds).
5 Moreover, the 3rd U. S. Circuit Court of
Appeals’ decision in In re ICL Holding
Co., 802 F.3d 547 (3d Cir. 2015), suggests
that by characterizing their credit bids as
comprising one payment for the assets and
a separate payment directly to creditors,
undersecured lenders may be able to
pick and choose which administrative
claims get paid in a Section 363 sale.
Paul Labov is a partner with Fox Rothschild and an
experienced financial restructuring and bankruptcy
attorney focusing his practice on creditor-side
representation in both national and international
bankruptcy proceedings. He frequently counsels
hedge funds, insurance companies, and
commercial banking institutions with respect to the
purchase of assets out of bankruptcy, debtor-in-possession financing, claims trading, intellectual
property, real estate, derivatives, and the treatment
of other financial instruments in bankruptcy.
Additionally, Labov represents Chapter 11 trustees
in all aspects of corporate debtors’ estates.
Audrey Noll is counsel with Fox Rothschild and
devotes her practice to bankruptcy, corporate
reorganization, and debtor/creditor matters. Her
clients include Chapter 11 debtors, secured and
unsecured creditors, shareholders, committees, and
licensors. She handles cases involving a broad range
of businesses and industries, including hospitality,
manufacturing, energy, and entertainment.
Noll is resident in the firm’s Las Vegas office but
spends a majority of her time in Tel Aviv, Israel.