Sixth Circuit: Administrative Expense Claims Standard

By requesting payment of an administrative expense claim, the movant has the burden of proof and must demonstrate that the expenses were “reasonable, necessary and benefited the estate.” In re Cook & Sons Mining, Inc., 2005 U.S. Dist. LEXIS 21615 (E.D. Ky. Sept. 28, 2005). The Sixth Circuit normally utilizes what has become known as the ‘benefit to the estate test’ in order to determine what qualifies as an ‘actual, necessary’ administrative expense.” In re Economy Lodging Systems, Inc., 234 B.R. at 696. Under this test, the claimant must prove the debt (1) was an “actual” expense of the bankruptcy estate by showing that the debt arose from a transaction with the bankruptcy estate and (2) that the debt was a “necessary” expense of the bankruptcy estate by showing the debt directly and substantially benefitted the estate. Id.  In determining whether there was a “transaction with the bankruptcy estate,” “the proper focus [is] on the inducement involved in causing the creditor to part with its goods or services.” United Trucking Serv., Inc. v. Trailer Rental Co. (In re United Trucking Serv., Inc.), 851 F.2d 159, 162 (6th Cir. 1988). As the Sixth Circuit explained in White Motor: “A creditor provides consideration to the bankrupt estate only when the debtor-in-possession induces the creditor’s performance and performance is then rendered to the estate. If the inducement came from a pre-petition debtor, then consideration was given to that entity rather than to the debtor-in-possession. However, if the inducement came from the debtor-in-possession, then the claims of the creditor are given priority.” In re White Motor Corp., 831 F.2d 106, 110 (6th Cir.1987) (footnote omitted).

“Bankruptcy courts should strictly scrutinize claims and narrowly construe the terms ‘actual’ and ‘necessary.”  In re Moore, 109 B.R. 777,780 (Bankr. E.D. Tenn. 1989). “Administrative expenses are disfavored and are subject to close examination by the Court.” In re Cardinal Industries, Inc., 151 B.R. 833, 837 (Bankr.S.D.Ohio 1992).  It would be contrary to the purpose of the statute to saddle debtors with burdensome postpetition obligations or give preferential treatment to select creditors by creating a broad category of administrative expenses. In re Grant Broadcasting of Philadelphia, 71 B.R. 891, 897 (Bankr. E.D.Pa. 1987). See also H.R.Rep.No. 595, 95th Cong., 1st Sess. 221 (1977), reprinted in 1978 U.S.Code Cong.& Ad.News 5787, 5963, 6181 (under Chapter 11 it is essential to free the debtor of pre-petition debts so that additional cash flow is provided to meet current operating expenses).

By: Jamie L. Harris, Esq.



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