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In a decision issued on September 16, 2008, the Honorable Phillip J. Shefferly, a Bankruptcy Judge for the United States Bankruptcy Court for the Eastern District of Michigan, Southern Division, issued an opinion in the Plastech Engineered Products, Inc. et al., bankruptcy cases holding that 502(d) of the Bankruptcy Code was not an impediment to the payment of administrative claims under 503(b)(9).
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Earlier in the case, the Court had set a bar date for filing 503(b)(9) claims – claims for goods delivered to the debtor within the 20 day period immediately preceding the bankruptcy filing. The debtor objected to various 503(b)(9) claims, arguing as a threshold matter that 502(d) prevented the allowance of such claims. The parties agreed to brief that threshold matter and, on August 21, 2008, the Court heard oral argument.
In the decision, the Court noted that while there were a number of decisions that addressed the application of 502(d) generally to administrative claims, the Court also observed that there were no decisions interpreting the interplay between 502(d) and administrative claims under 503(b)(9). The Court expressed the view that the interplay could be more complicated because of the “hybrid nature of this new § 503(b) expense: it is a pre-petition obligation of the debtor that is now elevated to an expense of administration of a bankruptcy estate by 503(b)(9). Because of this wrinkle, the question also arises whether 502(d) should apply to 503(b)(9) administrative expenses even if it does not otherwise apply to 503(b) administrative expenses.”
In rendering its decision, the Court first reviewed the disallowance provision of 502(d), and noted that its purpose was “’designed to assure an equality of distribution of the assets of the bankruptcy estate . . . .’” (citations omitted). Likewise, the Debtor pointed to the language of 502(d) that requires a court to “disallow any claim of any entity.” The debtor argued that 502(d) can be used to disallow any entity’s claim, regardless of whether the claim arose pre-petition or post-petition.
In contrast, the 503(b)(9) claimants argued that 502(d) applied only to those pre-petition and post-petition claims that are filed under Section 501 of the code, and allowed under Section 502. Thus, 502(d) did not apply to the allowance and payment of administrative claims under Section 503. The 503(b)(9) claimants argued that when Congress created 503(b)(9) status, it removed those claims from the allowance/disallowance procedures of 502.
The Court examined the case history interpreting 502(d) and observed that cases from the 9th Circuit had determined that 502(d) could be used to disallow administrative claims under 503. The Court also examined cases from other jurisdictions holding that 502(d) did not apply to 503(b) claims. In particular, the Court noted several decisions from the Delaware Bankruptcy Court: Camelot Music, Inc. v. MHW Advertising and Public Relations, Inc. (In re CM Holdings, Inc.), 264 B.R. 141 (Bankr. D. Del. 2000) (Court held 502(d) was inapplicable to a 503(b) administrative expense); In re Lids Corp., 260 B.R. 680 (Bankr. D. Del. 2001) (agreeing with the Court’s statutory analysis in CM Holdings). The Court also noted other cases that had relied on the “compelling” statutory analysis of those cases.
Finally, the Court determined that 502(d) does not apply to 503(b) administrative expenses, including 503(b)(9). “502(d) does apply to post-petition claims, but only to those post-petition claims that are governed by § 501 and § 502 . . . Section 502(d) does not contain any reference to administrative expenses allowed under § 503.” “Section 503 provides the sole method for filing a request for payment of an administrative expense and the sole method for allowance of any administrative expense. The provisions governing filing, payment and allowance of administrative expenses are self-contained within § 503 and do not depend upon nor are they limited by the filing an allowance provisions for pre-petition claims and those specifically identified post-petition claims under § 501 and § 502.”
As an aside, in observing that “The developing case law is just beginning to scratch the surface of the issues that § 503(b)(9) raises,” the Court cited an article written by Morris James partner, Carl N. Kunz, III recently published on the topic of 503(b)(9) claims: Section 503(b)(9) Claims and Bar Dates: Creditors Must Be Vigilant, Am. Bankr. Inst. J. at 20 (July-Aug. 2008).
