Cases Involving had approved a 363 sale or a liqui- sale or - PDF document

J OURNAL A M E R I C A N B A N K R U P T C Y I N S T I T U T E The Essential Resource for Today’s Busy Insolvency Professional Who Pays the Freight? Interplay Between Priority Claims and a Debtor’s Secured Lender Contributing Editor: T h e T o w n s e n d s About the Authors Bruce S. Nathan c o u r t i n i t i a l l y Lowenstein Sandler PC; New York refused to approve Bruce Nathan and Bruce Buechler are bnathan@lowenstein.com the financing, even members of Lowenstein Sandler’s if that meant derail- Bankruptcy, Financial Reorganization Also Written by: ing the sale process. Bruce D. Buechler and Creditors’ Rights Group. Mr. Nathan The court stated is also co-author of ABI’s Trade Creditor Lowenstein Sandler PC; Roseland, N.J. that the debtors’ bbuechler@lowenstein.com Remedies Manual , now available in pre-petition secured the ABI Bookstore at bookstore.abi. M ore debtors filing chapter 11 lenders could not Bruce D. Buechler org, and a member of ABI’s Executive cases are utilizing § 363 of utilize chapter 11 to Committee. the Bankruptcy Code to obtain sell the debtors’ business assets, com- court approval of an expedited sale pro- prising the lender’s collateral, without cess and ultimately the sale of their busi- assuring payment of all administrative while other administrative claims are nesses and/or assets. All too often, the expenses, including § 503(b) (9) claims. either paid in full or receive more favor- chapter 11 debtor runs a sale process The court was particularly concerned able treatment. that is effectively for the benefit of its about the prospect of administratively This trend may be starting to secured lender. The lender typically has insolvent debtors preferring post-peti- change. In the Townsends 1 chapter 11 insuffjcient collateral to assure the full tion trade payables and other operating case, pending in Delaware before Hon. payment of its secured claim and usually expenses, critical vendors’ pre-petition Christopher S. Sontchi , the bankruptcy agrees to provide chapter 11 fjnancing or claims and estate professional fees that court initially refused to approve the allow the debtor to use the cash proceeds the lenders had approved for payment at debtors’ proposed chapter 11 financ- of its collateral pursuant to a budget that includes payment of some or all of the debtor’s chapter 11 trade payables and Last in Line I other expenses incurred during the chap- ter 11 case, and the debtor’s and credi- tors’ committee professional fees. C o n s p i c u o u s l y the expense of the debtors’ § 503(b)(9) ing arrangement with its pre-petition absent from the bud- administrative claims whose prospects secured lenders because the debtors had get are § 503(b)(9) for payment were slim or nonexistent. failed to provide reasonable certainty claims, entitled to The court determined that Congress, that § 503(b)(9) administrative-priority administrative pri- in granting § 503(b)(9) claims admin- claims would be paid through the sales ority, for the goods istrative-priority status, did not intend process. The lenders were offering to that trade creditors for these claims to be treated differ- fund an expedited sale process that was sold to the debtor in ently than other administrative claims. not expected to realize sufficient pro- the ordinary course In order to obtain court approval of the ceeds to fully pay their secured claims. of the debtor’s busi- Bruce S. Nathan proposed financing and sales process, The budget included the payment of ness that the debtor the lender reached an agreement with trade payables and other operating had received within 20 days of the bank- the creditors’ committee that ultimately expenses incurred during the case, cer- ruptcy filing. The result is an adminis- resulted in full payment of § 503(b)(9) tain pre-petition critical vendor claims, tratively insolvent bankruptcy estate claims from the sales proceeds. and the debtors’ and committee’s pro- with insufficient funds to fully pay all However, in the Allen Family Foods fessional fees up to specified caps. administrative-priority claims. Section Inc. 2 chapter 11 case, also pending in However, the lenders made no provision 503(b)(9) claimants end up at the short Delaware before Hon. Kevin J. Carey , for the payment of § 503(b)(9) adminis- end with little or no prospect for payment trative-priority claims. 2 In re Allen Family Foods Inc. , Case No. 11-11764 (KJC) (Bankr. D. Del.). of their administrative-priority claims, 1 In re Townsends Inc. , Case No. 10-14092 (CSS) (Bankr. D. Del.). 44 Canal Center Plaza, Suite 400 • Alexandria, VA 22314 • (703) 739-0800 • Fax (703) 739-1060 • www.abiworld.org