POST-PETITION CLAIMS IN CHAPTER 11 CASES

What do you do when your client calls and tells you the following?:

"We've been shipping to Allway for awhile now and my bookkeeper tells me they're 90 days behind. When we called Allway, the accounts payable department said that Allway filed bankruptcy six months ago. Is there anything we can do? We didn't even know about the bankruptcy?"

The attorney's first question should be, "Under what Chapter of the Bankruptcy Code has the debtor sought relief?" Although post petition business debts under Chapter 7 or chapter 13 are more rare than under Chapter 11, if one of these types of debts arises, a bankruptcy practitioner should be contacted because the issues are more complex. Such a discussion is beyond the scope of this article.

If your client tells you that Allway is operating under a Chapter 11, make sure that the monies became due after the order for relief was entered in the Chapter 11 case (usually the date the bankruptcy was filed; but if the case started as an involuntary petition, a later date). If the debt to your client was incurred during the debtor-in-possession period, it is afforded an administrative priority status over pre-petition creditors [11 U.S.C. Section 507(a)(1); In re Kent Plastics Corp., 183 B.R. 841 (Bkrtcy.S.D.Ind. 1995)].

Also, a debtor-in-possession is required to pay its debtor-in-possession debts, known as administrative expenses, on a current basis in order to protect the bankruptcy estate from being diminished by the accruing of past-due post-petition claims [11 U.S.C. Section 1112(b)(1)].

Some creditors feel that if they just wait until the plan confirmation date, their administrative expense will have to be paid by the debtor, pursuant to 11 U.S.C. Section 1129, before the Plan can be confirmed. They wonder why they should pay you to take action in the bankruptcy court. The reason is simple. If the case is converted to a Chapter 7 or is dismissed, the debtor-in-possession never gets to the Plan stage, and the creditor will be in a weaker position. If the case is converted to a Chapter 7, the creditor will now come behind the Chapter 7 administrative claims, i.e. the trustee's fees, the fees for her attorneys, the fees for her accountants, fees to any auctioneers retained, etc. If the case is dismissed, your client will have to chase the debtor in state court, and now your client will be in a race not only with post-petition creditors, but with all creditors.

The better route is for your client to proceed in bankruptcy court in order to compel payment of its administrative expense. Gone are the days when a creditor would file an "administrative" proof of claim form and just get paid. The request must now be made by motion [11 U.S.C. Section 503(a)]. Once the administrative expense has been approved, the debtor-in-possession is required to pay it [11 U.S.C. Section 1112(b)(1)].

Unfortunately, if the debtor-in-possession still refuses to pay the debt, even after the administrative expense has been approved, some bankruptcy judges refuse to grant a creditor's subsequent motion to compel the payment and refuse to order the debtor-in-possession to actually pay the administrative expense. These judges hold that the approval of the administrative expense creates an obligation upon the debtor-in-possession to pay the expense, and further court for the debtor-in-possession to do what is already required to do would be redundant.

For this reason, the most effective remedy for an administrative creditor is to make a motion combining the request for approval of the expense with a motion that the expense be paid or, alternatively, that the bankruptcy case be converted to a chapter 7 case [pursuant to 11 U.S.C. Sections 503(a) and 1112(b)(2)]. This remedy is appropriate for two reasons: First, a debtor-in-possession which does not perform its duties, in general, is subject to having its case converted [11 U.S.C. Section 1112]. Second, a debtor-in-possession which allows the estate to be diminished and which is not likely to be reorganized, is subject to having its case converted. In re Schriock Construction, Inc., 1967 B.R. 569 [Bkrtcy.D.N.D. 1994].

Although your client really does not want to have the case converted, it is the rare instance where a motion to convert a case will not get the debtor-in-possession's, and its attorney's, attention. Usually, your client's claim will be paid. So that you do not press the issue too quickly, do not send notice of your request for conversion to all creditors for the first motion date. Pursuant to Bankruptcy Rule 2002, you will be required to do so at some point, but let the court continue the matter once before you send notice. This way, you begin to get your leverage over the debtor-in-possession without alerting other creditors to a problem. After all, the other creditors may just be sitting and waiting their claims to be paid, and they might panic and join in the motion if they think the debtor-in-possession might not succeed.

The material contained herein is not to be relied upon as a substitute for consultation with your attorney.