typical cases, a large discount may
not sound too bad to a vendor.
It is—somewhat understandably—
rare for attorneys to be willing to
jeopardize a structured dismissal or
reduce their fees to get more for
503(b)( 9) claim holders. In addition,
there is quite often an inherent
conflict within creditors’ committees.
Although the appointment of an
unsecured creditors’ committee is
intended to protect the interests of
all unsecured creditors, those who
do not have Section 503(b)( 9)
claims might not hesitate at the idea
of compromising a portion of others'
503(b)( 9) claims to obtain a larger
recovery for the greater good of
the larger unsecured creditor body.
Indeed, some committee attorneys
do raise Section 503(b)( 9) issues in
their initial debtor-in-possession (DIP)
financing objection, but the price of
doing so may be that dollars carved
out for 20-day claims reduce those
available to pay professional fees.
Thus, the custom and practice in
many jurisdictions is that 13-week
budgets rarely provide for payment of
20-day claims. Debtors don’t press for
funding them in a 13-week budget,
and their treatment is often ignored.
Experience has taught bankruptcy
professionals that they can get away
with it. Simply put, they believe
other things are more important to
fund—especially when DIP financing
already is an uphill battle with the
lenders. Plus, and most significantly,
lenders cannot see the value (benefit
to their collateral position) of
providing funding post-petition to
pay for goods received prepetition.
Achieving Congressional Intent
To achieve the intent of Congress,
all that judges would have to say is
that no plan will be confirmed, no
dismissal will be authorized, and no
professional fees will be finally allowed
unless 20-day claims are treated
the same as other administrative
claims. In fact, at least one judge has
stressed the importance of providing
for Section 503(b)( 9) claims. In NEC
Holdings Corp., Case No. 10-11890
(PJW) (CSS) (Bankr. D. Del. Jul 13,
2010), Bankruptcy Judge Peter J. Walsh
questioned whether a Section 506(c)
surcharge waiver should be allowed
when it was unclear that all Section
503(b)( 9) claims would be paid.
Kenneth A. Rosen is a partner and chair of
Lowenstein Sandler’s Bankruptcy, Financial
Reorganization & Creditors’ Rights Department.
He advises on the full spectrum of restructuring
solutions, including Chapter 11 reorganizations,
out-of-court workouts, financial restructurings,
and litigation. Rosen works closely with debtors,
creditors’ committees, lenders, landlords, and others
in such diverse industries as paper and printing,
food, furniture, pharmaceuticals, healthcare, and
real estate. He serves on several philanthropic and
nonprofit boards primarily devoted to healthcare
Michael Papandrea is an associate in Lowenstein
Sandler’s Bankruptcy, Financial Reorganization &
Creditors’ Rights Department. Before joining the
firm, he served as a judicial law clerk to Bankruptcy
Judges Jerrold N. Poslusny Jr. of the District of New
Jersey, Ashely M. Chan of the Eastern District of
Pennsylvania, and Gloria M. Burns of the District
of New Jersey. Papandrea is also a recipient of the
American Bankruptcy Institute’s Medal of Excellence.
The bottom line is that the
Bankruptcy Code does not provide
for subordinate or disparate treatment
of 503(b)( 9) claims relative to other
administrative claims. If someone
does not like that fact, they should
write to their congressman.
Failure to include 20-day claims in a
budget (or to demonstrate that they
are highly likely to be paid) effectively
provides a subsidy to the debtor and
its lender at the expense of prepetition
sellers of goods. And, with debtors
able to commence cases far from their
principal place of business, many
vendors often can ill afford to protect
themselves in these situations. If it
was not the goal of Congress to protect
these vendors when it enacted Section
503(b)( 9), then what was their intent?
It’s a fundamental principle of
reorganization in Chapter 11 that
a debtor must be administratively
solvent. Ignoring 503(b)( 9) claims
when asked to approve a 13-week
budget makes passing the test easier.
But it also distorts the picture. It’s like
putting a finger on the scale. Further,
one of the tenets of Chapter 11
is that like-positioned creditors
are to be treated equally. When
professional fees are being allowed,
it is timely for courts to ask the
question (again and again) whether
all 503(b)( 9) claims will be paid. J
The views expressed in this
article are those only of the
authors and are not necessarily
shared by Lowenstein Sandler
LLP or any attorney at the firm.
1 11 U. S.C. § 503(b)( 9).
2 Brendan M. Gage, “Should Congress Repeal
Bankruptcy Code Section 503(b)( 9)?”, 19
Am. Bankr. Inst. L. Rev. 215, 229-38 (2011).
4 See 4 Collier on Bankruptcy ¶ 503.16,
at 503-79 (Alan N. Resnick & Henry
J. Sommer eds., 16th ed.).
5 See In re Garden Ridge Corp., 323
B. R. 136, 143 (Bankr. D. Del. 2005).
6 See 11 U. S.C. 503(b)( 4).
7 In re Global Home Prods., 2006 WL
3791955, at 3 (Bankr. D. Del. Dec. 21,
2006) (citing In re HQ Global Holdings,
Inc., 282 B.R. 169 (Bankr. D. Del. 2002)).
8 See 11 U. S.C. 507(a)( 2). Bankruptcy Code
Section 507(a)( 2) affords priority status to
Section 503(b) claims. Professional fees and
20-day claims both fall under Section 503(b).