The Gold Standard for Chapter 11 Bankruptcy
The Fifth Circuit recently issued an opinion that provides some guidance for seeking an allowed administrative claim (commonly called an “Admin Claim”) during a chapter 11 case. It should be required reading: while the facts arise from an oil and gas case dealing with post-rejection “demobilization” costs for a rejected well site, it contains overall policy discussion which may be helpful to claimants.
As noted in the opinion in In the Matter of Whistler Energy II, LLC , it is not cheap or easy to seek an admin claim when it is contested. The Louisiana Bankruptcy Court held a four day evidentiary hearing, and the lengthy (and costly) appeal followed, only to have the Circuit Court vacate the ruling and remand back to the bankruptcy court for further findings. The costs to the estate for this battle could not have been cheap.
The issue of admin claims is of key importance for a number of reasons. First, it is most common that plain vanilla unsecured claims from the pre-filing time period will recover anywhere from nothing to a few pennies on the dollar. All the assets are encumbered by liens, and there are no “free” funds to pay admin claims but for what the lien holder usually permits in a short-time budget to get through a “going concern” 363 sale process. Arguing about what the buzzwords “for the benefit of the estate” and “maximizing the value of the estate for the benefit of stakeholders” really mean in this day and age is for another day. It mostly means the benefits for the admin creditors, which includes all the estate professionals, and any going concern buyer who gets a “free and clear” sale order for an ongoing business. The dollars will rarely if ever trickle down to anyone else.
Second, holding an admin claim and the total amount of collective admin claims is crucial to figuring out whether a chapter 11 plan is able to be confirmed. 11 U.S.C. Section 1129(a)(9) is one of the numerous requirements that a plan proponent must prove to have a plan confirmed. 1129(a)(9) requires that all allowed admin claims must be paid in full at confirmation, unless they agree otherwise. It is often unlikely that there will be enough cash on hand to pay all admin claims at the confirmation date, especially when certain unexpected claims are filed. A single admin creditor has the ability to torpedo confirmation.
Third, unless there is a special “carve-out” order (which there often is), then all allowed admin claims are supposed to share pari passu under the law, i.e., share on a pro rata basis dollar for dollar. One claimant who attempts to be efficient on its claim amount will only be harmed by the others in the “pool” who run up their own claims. Experienced debtor professionals will want their own stand-alone carve out to avoid being diluted by other estate professionals. Further, this common process really permits the DIP lender/proposed asset buyers much control over which admins are and are not being paid with limited funds.
Whistler is a good reminder of the complexity of the chapter 11 process, and how critical it is to those dealing with a debtor in possession to obtain administrative status for ongoing post-filing goods and services. In cases with environmental obligations, this complexity can lead to unexpected outcomes for those not experienced in the types of admin claims which may arise.
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