19: Administrative expenses© Charles Tabb 2010
Administrative expenses are the 2ndpriority, under 507(a)(2)Really, though, in business cases, where admin. expenses matter the most, they effectively are 1st, b/c a business does not have DSO
507(a)(2) refers to 503(b) for the listing of admin expensesThere are 9 types of administrative expenses listed in 503(b)No ordinal preference – all of equal rank
Not an exclusive list“including”So court can recognize an unlisted admin expense but ONLY if it fulfills the statutory purposesAs a practical matter almost everything ct might consider falls within 503(b)(1) – “actual, necessary costs and expenses of preserving the estate”
Ctsnarrowly construe admin expensesWhy?They depart from the fundamental principle of equality of distribution
So what is the justification for an admin expense, given that allowing it puts one claimant ahead of others – the residual unsecuredcrs?1) Is there a benefit to the residual claimants?2) if so, do we HAVE to give this particular claimant priority in order to realize that benefit?i.e. if it makes sense to have a bankruptcy case in the 1stplace, do we have to afford admin priority to fully capture the benefits of thebkcase?
1. Benefit to estate2. postpetition transaction with estate
1st– actual, necessary expenses either to operate thedr’sbusiness (e.g. inch11) or preserve & liquidate the estate assets (eginch7)Examples operating expenses:wages of ongoing employeescurrent taxesrentExamples of liquidation expenses:Storage costsCosts of sale (advertising, auctioneer fees)
Pay people who work on the caseE.g., their fees and expensesExamples:Bankruptcy trusteeAttorneys for the estate
What do you mean by “benefit”??Facts:Receivership under Ch XIDr’s workmen negligent, cause catastrophic firetort damages exceed value of entire estateSo if tort claimants paid admin expense, general unsecuredcrsof Dr get nothingIssue: are the tort claimants entitled to admin expense?
1st– timing – POST-petition, during pendency of the caseNOT a problem hereNo question that the fire occurred during thebkcase, and was caused by the Dr’s employees2nd– benefit to estateThis is the issue
What is the argument that the fire damages did NOT “benefit” the estate?
Supreme Court held for the tort victims and granted them admin expense status for their tort damagesThus came ahead of prepetition general unsecuredcrs
One basis forReadingholding:fairnessto the tort victimsJ. Harlan for Ct said they “had an insolvent business thrust upon them by operation of law”
NO – but why not?Ifreorghad succeeded, the generalunsec.crswould have enjoyed the upsideView asresidual ownerssince Dr likely insolvent: Tom Jackson’sTransfer of Ownershipmetaphor.
Admin status for all costs of doing business: “’actual and necessary’ costs should include costs ordinarily incident to the operation of a business, and not be limited to costs without which rehabilitation would not be possible.”
As a matter of economic incentives, can we make sense of the Supreme Court’s dictate inReadingthat must count as admin expenses ALL costs of doing business?If rule were otherwise, what would the incentive structure look like?
1st: employee wages & benefitsWhat policy?
2ndpriority:post-petition (503(b)(1)(A)(i))4thpriority:180 days pre-petition, up to max of $10,950 per employee, forwages(507(a)(4))5thpriority:benefitsfor the 180-day period, to extent the $10,950/person amount not already paid under 4thpriority (507(a)(5))No priority: prepetition wages & benefits, either > 180 days old or in excess of $10,950 capFor purposes of applying timing rules, ask when servicesperformed, not when vested
Facts:Vacation pay claim = $2000, for one year’s service, calendar year basisEmployer filesch11 at start 4thquarter (October 1)Vacation pay vests Jan 1 of following year
How might the employee argue that the entire $2,000 is entitled to administrative priority?Would say that entitled to nothing unless and until kept working for the Dr during the pendency of thech11 case, and became entitled to the entire $2,000 only when it vested on Jan. 1, during the pendency of the caseBut most courts say no. What would be an alternative treatment?
Prevailing view in thectsis to ascribe anaccrualbasis for things like vacation or severance pay claims, even if the employee has no enforceable entitlement until claim vestsHere, on accrual basis (rounding off):¼ 2ndpriority (Oct 1-Jan1)= $500½ 4thpriority (180 days before filed Oct 1) = $1,000¼ = no priority (1stquarter of last year) = $500
Policy?Yeah, right, as if you have to askTimingPost-petition – 2ndpriority admin expense (503(b)(1)(B)-(C))Pre-petition – 8thpriority, IF meet requirements of 507(a)(8)Most important is income taxes for past 3 years
2005 amended law to elevate “domestic support obligations” to 1stpriorityAlimony, child supportTalking aboutpre-petition claims, see 1322(a)(2)Dr’s obligation to pay ongoingpost-petition DSOs is paramount – must pay in full in reorg cases to confirm plan—, see 1325(a)(8)Indeed failure to pay currently can lead to dismissal of case
Facts:Dr owes income taxes $14k for 2005 tax yearDr divorced 2006, state ct awarded Ex $20k supportDr filesch7 on March 1, 2009Estate = $22k
Support claim = 1stpriority DSO (507(a)(1)(A)) for entire $20KTax claim = 8thpriority (507(a)(8)(A)(i))For taxable year for which return last due within 3 years of bankruptcy: 3 year pre-petition would be March 1, 2006For 2005 tax year, return last due April 15, 2006Petition filed March 1, 2009Of course, since only $22K total in estate, there’s only $2k left to pay the priority tax claim after pay the 1stpriority DSO
Facts:Creditor joined Debtor Health Club on Jan 1prepaid $2,000Entitled to one year of personal training sessions for the $2kDr closed Feb 1 – just 1 month into the year
7thpriority for that portion of the $2k for which the Cr did not receive the services paid forE.g., 11/12 of the $2k (got services in January, while club still open,we assume)Purchase of services by an individual for personal useBelow cap of $2,425