In a 5 page opinion released January 21, 2016 in the Trump Entertainment Resorts case (Bank. D. Del. 14-12103), Judge Kevin Gross of the Delaware Bankruptcy Court denied the motion of Unite Here Health (“UHH”), the health care provider to employees who were members of union, Unite Here Local 54 (the “Union”).  Judge Gross’s opinion is available here (the “Opinion”).  Judge Gross has issued a number of opinions in this bankruptcy, and we have published several posts about the issues which have been decided.  Please review our prior posts for the background of the dispute between the Union and the Debtors:

Trump Entertainment Resorts Files for Chapter 11 Bankruptcy Protection in Delaware

Trump Entertainment – A Debtor’s Rejection of a Bargaining Agreement

Third Circuit Affirms Bankruptcy Opinion – Trump Entertainment

UHH claimed that because it was not served the Debtors’ motion to reject the CBA, it should be entitled to an administrative claim for health care benefits it provided through October 31, 2014.  The Debtors objected, arguing that because the Court granted its prior motion to reject the CBA nunc pro tunc to September 26, 2014, UHH is not entitled to an administrative claim for benefits it provided.

The Debtors conceded that it did not serve the motion to reject the CBA on UHH, but that UHH had actual notice of the Debtors’ motion to reject the CBA.  Opinion at *3.  The Court agreed that UHH had actual notice and thus was subject to the relief granted in the Court’s order allowing the rejection of the CBA.  The Court then cited Calpine Corp. v. O’Brien Envtl. Energy, Inc. (In re O’Brien Envtl. Energy, Inc.), for the proposition that “The burden of establishing an entitlement to an administrative claim is on the claimant to prove that the expense (1) arises from a post-petition transaction and (2) is beneficial to the debtor in operating its business.”  Opinion at *4 (citing 181 F.3d 527, 532-33 (3d Cir. 1999)).

Judge Gross held that UHH failed to meet the “heavy burden of demonstrating that the costs and fees for which it seeks payment provided an actual benefit to the estate and that such costs and expenses were necessary to preserve the value of the estate assets.”  Opinion at *4-5.  Judge Gross thus held that UHH was subject to the order allowing rejection of the CBA and was not entitled to an admin claim for the purported value of any health benefits it provided.

My primary takeaway from this Opinion is that actual notice “trumps” arguments of inadequate service.

In an 11 page opinion (the “Opinion”) released March 9, 2015, in the Trump Entertainment Resorts, Inc. bankruptcy (Case No. 14-12103), Judge Gross interpreted Bankruptcy Code 503(b)(1)(A) in approving the reclassification of a claim from a priority claim to a general unsecured claim.  The Opinion is available here.  Administrative claims are an integral part of the bankruptcy process and have been written about in prior blog postings:

Decision in Qimonda Bankruptcy Looks at Whether a Conversion Claim is Entitled to Administrative Priority

Decision in Goody’s Holds That Administrative Claims Under 503(b)(9) Apply to Goods, Not Services

Background

Prior to the Debtors’ Petition Date (9/9/2014), a jury awarded Mr. Tapal Sarker damages of $47,500 for the Debtors’ violations of the FMLA in his firing.  On June 13, 2014, Mr. Sarker filed motions with the New Jersey District Court to amend the FMLA Judgment to include pre-and post-judgment interest as well as attorneys’ fees and costs.  Opinion at *2.  Mr. Sarker sought and obtained relief from the automatic stay to proceed with his District Court action, and on December 1, 2014, the District Court amended the FMLA Judgment as requested by Mr. Sarker and ordered the Debtors’ bank to wire the jury award ($47,500) to Mr. Sarker.  The fees, costs and interest totaled an additional $105,561.73 (the “Costs”).  Opinion at *3.

Mr. Sarker filed a motion to have the Costs treated as an administrative claim pursuant to 503(b)(1)(A)(ii).  The Debtors objected seeking to have the Costs reclassified as a general unsecured claim.

The Opinion

Judge Gross began his analysis by reciting 11 U.S.C. 503(b)(1)(A)(ii), which provides:

(ii) wages and benefits awarded pursuant to a judicial proceeding or a proceeding of the National Labor Relations Board as back pay attributable to any period of time occurring after commencement of the case under this title, as a result of a violation of Federal or State law by the debtor, without regard to the time of the occurrence of unlawful conduct on which such award is based or to whether any services were rendered

Opinion at *5 (italics in original).

Judge Gross summarizes the reasons for his ruling in two parts:  (1) the Costs do not constitute “wages and benefits” and are thus outside the scope of 503(b)(1)(A)(ii), and (2) the Costs do not constitute “back pay attributable to any period of time after commencement of the case.” Opinion at *5-6.  While he fleshes out each of his reasons, he cites to the Third Circuit for the principle that “the Court must give ‘the words used [in a statute] their ordinary meaning.'”  Opinion at *6 (citing United States v. Diallo, 575 F.3d 252, 257 (3d Cir. 2009)).

Judge Gross also addressed the Sarker claims attempted to have the Costs considered as “wages, salaries or commissions” pursuant to Section 507(a)(4).  Opinion at *10.  However, the Court again looked to the ordinary meaning of the statute, finding that the Costs did not qualify as “Section 507(a)(4) is clearly meant to encompass employment-based compensation”.  Opinion at *10.

My $.02

When seeking relief from the Bankruptcy Court, you always want to consider the plain meaning of the statutes upon which you rely.  If the statutes’ plain language doesn’t get you where you want to be, you need to provide case law supporting your position.  It is possible that with persuasive case law to rely upon, Judge Gross would have gone the other way in his analysis.  As he stated, “Mr. Sarker has cited no cases extending Section 507(a)(4) priority status to attorneys’ fees, costs, or interest and the Court has found none.”  Opinion at *10.  The Delaware Bankruptcy Court has shown, in this case and in others, that it strongly prefers to maintain predictability by following precedent when it exists.

There are generally three types of claims in a bankruptcy proceeding: unsecured claims, secured claims and administrative expense claims. Section 503 of the Bankruptcy Code governs the allowance of administrative expense claims. Section 503 provides that “after notice and a hearing, there shall be allowed administrative expenses…, including the actual and necessary costs and expenses of preserving the estate.” 11 U.S.C. § 503(b)(1)(A). A creditor who seeks to have its claim paid has an administrative claim, and therefore ahead of the general unsecured creditors, bears the burden of establishing that its claims qualifies for priority status. In re New Century TRS Holdings, Inc., et al, 446 B.R. 656, 661 (Bankr. D. Del. 2011). Courts generally apply a two-part test in deciding whether a claim qualifies as an administrative expense: (1) whether the expense arose from a post-petition transaction between the creditor and debtor; and, (2) whether the expense was “actual and necessary” to preserve the estate. Id., citing In re Unidigital, Inc., 262 B.R. 283, 288 (Bankr. D. Del. 2001). Claims which do not constitute an administrative expense are often treated as general unsecured claims which are payable in the ordinary course with other unsecured creditors of the estate. In re Arrow Carrier Corp., 154 B.R. 642, 646 (Bankr. D. N.J. 1993).

Aside from the allowance of an administrative claim, a common issue concerning creditors is the timing of payment of the administrative claim. Although Section 503 of the bankruptcy code provides that an entity can request payment of an administrative expense claim, the section does not address the question of when a claim for administrative expense is to be paid. In re HQ Global Holdings, Inc., 282 B.R. 169 (Bankr. D. Del. 2002) (further citations omitted). The determination of the timing of payment of an administrative expense claim is within the discretion of the bankruptcy court. Id., citing In re Colortex Industries, Inc. 19 3d 1371, 1384 (11th Cir. 1994). In deciding the timing of payment for an administrative expense claim, one of the central factors courts consider is the goal of the bankruptcy court to have an orderly and equal distribution among creditors and a need to prevent a “race to a debtor’s assets.” Id. Distributions to administrative claimants are generally not allowed when the estate may not be able to pay all administrative expenses in full. Id., citing In re Standard Furniture, 3 B.R. 527, 532 (Bankr. S.D. Cal. 1980). Even though courts generally wait until after confirmation before allowing payment on administrative expenses, courts nevertheless have discretion to consider other factors in deciding whether to grant immediate payment. These factors include the particular needs of the administrative claimants, as well as the length and expense of the administration of the bankruptcy proceeding. Id., at 173, citing In re Reams Broadcasting Corp., 153 B.R. 520, 522 (Bankr. N.D. Ohio 1993).

In HQ Global Holdings, the Delaware Bankruptcy Court considered whether commercial landlords of the debtor are entitled to the immediate payment of their administrative rent claims. The court in HQ Global agreed with the debtor “that any decision on the amount and payment of the [administrative rent] must await the debtor’s decision whether to assume or reject leases.” Id. at 175. The court reasoned that if the debtor assumed the landlord’s lease, such assumption would resolve the issue of the landlord’s administrative rent claims. By that, if the debtors assumed the leases, then the debtor would be required to cure any defaults and make all past due rent payments under the lease. Id.

On May 8, 2012, the U.S. Bankruptcy Court for the District of Delaware (the “Court”) entered its Order (the “Order”) Establishing Procedures to Assert Claims Arising under Section 503(b)(9) of the Bankruptcy Code (“503(b)(9) Claims”) in the chapter 11 cases of AFA Investment, Inc. and its affiliated debtors (collectively, the “Debtors”) (Bankr. D. Del. 12-11127 (MFW)). While unusual, it is not an extraordinary step taken by the Court; however, the claims procedures and timing established by the Order could seriously affect certain creditors’ rights in the Debtors’ cases.  A copy of the Order is available here .

Bankruptcy Code section 503(b)(9) provides creditors who delivered goods received by a debtor within 20 days from the bankruptcy petition date an administrative claim for those goods. This is significant because it allows for some pre-petition claims to move to the top of the bankruptcy priority list. Pursuant to Bankruptcy Code section 503 a creditor asserting an administrative claim must “file a request for payment of an administrative expense” then “after notice and a hearing, there shall be allowed administrative expenses . . .” 11 U.S.C. § 503(a) and (b). Generally, creditors file a motion requesting allowance of a 503(b)(9) Claim and after settling with the debtor or having a hearing on the motion are afforded the comfort and security of having a Bankruptcy Court order allowing the claim. In the Debtors’ case, the Court has allowed to Debtors to establish 503(b)(9) Claim procedures which require all 503(b)(9) creditors to file a modified proof of claim form and submit it, with all supporting documents, to the Debtors’ claims agent no later than 4:00 p.m. (EDT) on June 11, 2012. These procedures give all 503(b)(9) claimants only one month to review their records and submit their 503(b)(9) Claims.

In addition to the relatively short time to file a 503(b)(9) Claim, the Order does not provide a timeline for the Debtors to reconcile the 503(b)(9) Claims. Absent extraordinary circumstances 503(b)(9) Claims are not actually paid until a confirmed chapter 11 plan goes “effective”; however, having the order allowing a 503(b)(9) Claim affords a creditor comfort and certainty of amount and priority of their claim. In this case, creditors with administrative claims may very well be left with the uncertainty of creditors lower in the priority scheme and their claims may be subject to the uncertainty of objections/litigation. By entering the Order, the Court took away a 503(b)(9) Claims holder’s ability to control the process for the allowance of their claim and the comfort of having an order allowing that claim.

Based on the Court’s entry of the Order, any creditor that provided goods that were received or may have been received by the Debtors from March 13, 2012 through April 1, 2012 should carefully review the Order and the notice of the 503(b)(9) Claim bar date approved by the Court, and consult an experienced bankruptcy attorney. Please note that Fox Rothschild LLP has already filed papers on behalf of a 503(b)(9) creditor in the Debtors’ cases.

Introduction

On August 3, 2010, Judge Mary F. Walrath of the United States Bankruptcy Court for the District of Delaware issued an opinion in the Qimonda bankruptcy addressing whether Google was entitled to an administrative claim against the Qimonda bankruptcy estate.  This post will look briefly at the facts underlying Google’s claim, the holding of the Court and the basis for the Court’s decision.  Click here to review the Court’s Opinion in Qimonda.

Background

Qimonda manufactured memory modules which it sold to various customers including Google.  Since the company’s formation in 2006, it had sold hundreds of thousands of its memory modules to Google.  Pursuant to the terms and conditions of Google’s purchase orders, defective modules were either returned, repaired or replaced at Qimonda’s option.  Opinion, at pp. 1-2.

Basis for Claim

After Qimonda filed for bankruptcy, Google sought allowance of an administrative claim for approximately $1.2 million.  According to Google, its claim arose from Qimonda’s conversion of memory modules which Google had returned to Qimonda pre-bankruptcy for repair.  Instead of repairing and returning the modules, Google claimed Qimonda kept approximately 21,000 modules.  Google argued that it owned the returned modules and that Qimonda wrongfully sold the returned modules to other parties subsequent to filing for bankruptcy.

Holding of the Court

The Court conducted an evidentiary hearing where it heard testimony for and against Google’s claim.  After considering the evidence and the parties’ legal arguments, the Court found that under California law (which governed the parties’ agreement), the parties’ course of dealings and the terms of the the agreement, title to the modules passed back to Qimonda when Google returned the modules.  Based on this finding, the Court held that Google had not proven its conversion claim and was not entitled to administrative priority.

Basis for the Court’s Decision

In its opinion the Court cited several cases that granted administrative priority status to conversion claims.  In Hayes Lemmerz, for example, the Delaware Bankruptcy Court held that Hayes had converted a lessor’s property postpetition by stripping parts from its equipment for use in Hayes’ equipment.  See In re Hayes Lemmerz Int’l, Inc., 340 B.R. 461, 480 (Bankr. D. Del. 2006).  Under Hayes the lessor was entitled to an administrative claim for Hayes’ conversion of the equipment postpetition.

Unlike the debtor in Hayes,  the Court in Qimonda found that pursuant to the California Commercial Code and Google’s “terms and conditions,” when Google returned the modules to Qimonda, Google relinquished title to those goods and title reverted back to the Debtor by operation of law.  Opinion, at p. 8.  In support of its decision, the Court also noted that the course of dealings between the parties supported this conclusion.  Throughout their business history, neither Google nor Qimonda ever tracked the modules that were returned by Google.  Often, Qimonda took the modules returned by Google and resold them to other customers.  The Court found it significant that the modules were never manufactured specifically for Google, but were instead a “mass produced standardized product that the Debtor sold to many customers.  Id. at p. 9.

Conclusion

Google cited several cases for the proposition that Google’s installation of the modules constituted acts inconsistent with the Debtor’s ownership of the products.  In the Qimonda decision, however, the Court distinguishes the cases cited by Google based on the nature of the goods in dispute.  Google sought conversion claims for modules which the Court found were “not customized but were highly standardized, mass-produced units …”  Opinion, at p. 2.  In contrast, the cases cited by Google involved “heavy equipment or kitchen cabinets,”  a fact the Court found significant.

Introduction

The Honorable Christopher S. Sontchi, presiding over the Goody’s bankruptcy in the United States Bankruptcy Court for the District of Delaware, issued a decision recently regarding the scope of administrative claims under 11 U.S.C. 503(b)(9).  Section 503(b)(9) provides that after notice and a hearing, there shall be an allowed administrative expense claim for “the value of any goods received by the debtor within 20 days before the date of commencement of a case under this title in which the goods have been sold to the debtor in the ordinary course of such debtor’s business.”  The issue presented to the Court in Goody’s was whether 503(b)(9)’s grant of administrative claim status extended to services provided to a debtor.  (Read the Goody’s decision here).

Background

Goody’s is a clothing retailer with 350 stores throughout the United States.  One of Goody’s vendors, AVS, provided various services to Goody’s, including inspecting, ticketing and repackaging apparel Goody’s purchased from other vendors.  During the twenty days prior to the commencement of Goody’s bankruptcy, AVS submitted invoices showing that it provided over $60,000 in services to Goody’s.  After Goody’s filed its bankruptcy petition, AVS sought allowance of an administrative claim for its services and Goody’s objected, arguing that 503(b)(9) claims apply to goods, not services.

Analysis

Citing In re Brown & Cole, LLC, 375 B.R. 873, 878 n.7 (9th Cir. B.A.P. 2007), the Court in Goody’s held that in order to be an allowed administrative claim under 503(b)(9), the creditor must have sold “goods” to the debtor, the goods must be received by the debtor prior to the petition date, and the creditor must have sold the goods to the debtor in the ordinary course of business.  The Bankruptcy Code does not define “goods,” however, the Court noted that bankruptcy courts commonly defer to the U.C.C.’s definition of goods under section 2-105(1)(defining goods as “all things … moveable at the time of identification to the contract for sale …”)

The Court in Goody’s found that the services provided by AVS were just that – services, and therefore not goods as required under section 503(b)(9).  The Court declined to find that AVS’s services fell within “goods”, reasoning that “the construction of the Bankruptcy Code itself excludes services from the meaning of the term ‘goods'”.  The Court noted several examples of the Code’s disjunctive application of “goods” and “services”, such as 11 U.S.C. sec. 101(4A)(defining “bankruptcy assistance” as “any goods or services sold or otherwise provided”), and 101(49)(B)(vii)(providing that the term “‘security’ does not include – debt or evidence of indebtedness for goods sold and delivered or services rendered.”)(Emphasis added).

The last part of the Court’s decision addressed AVS’s argument that 503(b)(9) allows administrative claims for the “value of any goods received.”  AVS argued that the services it provided (repackaging merchandise) contributed to the value of goods received by Goody’s.  Citing to In re Plastech Engineered Prods, Inc., the Court rejected AVS’s argument, finding instead that it “is the goods and not the value that must be received by the debtor to trigger section 503(b)(9).”  2008 WL 5233014, at *2 (Bankr. E.D. Mich. 2008).

Conclusion

In the end, AVS failed to show show that it satisfied the requirements under 503(b)(9).  Having not met its burden, the Court sustained Goody’s objection to the classification of the AVS claim.

Introduction

In a decision that the Court deemed “one of first impression for this Circuit,” the Honorable Kevin Gross of the United States Bankruptcy Court for the District of Delaware, declined to grant administrative claim status to employee WARN Act claims, instead finding that the employees’ claims vested prior to the commencement of the bankruptcy proceeding. See Henderson v. Powermate Holding Corp. (In re Powermate Holding Corp.), Case No. 08-10498(KG)(Bankr. D. Del. Oct. 10, 2008)(read opinion here). The opinion provides a useful analysis of the application of the WARN Act following the 2005 amendments to § 503 of the Bankruptcy Code governing administrative claims.

Background

Powermate Holding Corp (“Powermate”), and its related entities, filed for chapter 11 bankruptcy protection on March 17, 2008. Powermate also terminated all of its remaining employees on March 17, however, it did so prior to the filing its bankruptcy petition. Powermate’s employees brought claims against the Debtors alleging the Debtors violated their rights under the Worker Adjustment and Retraining Notification Act (the “WARN Act”). The employees further alleged that they were entitled to sixty days of wages and benefits under the WARN Act, and that these expenses were entitled to administrative claim status pursuant to 11 U.S.C. § 503(b)(1)(A)(ii). In response to the employees’ adversary complaint for damages, Powermate argued that the employees’ WARN Act claims, to the extent proven, were entitled to fourth or fifth priority status under §§ 507(a)(4) and (5), not administrative status.

Analysis

The WARN Act provides qualified employees up to sixty (60) days of back pay and benefits due to an employer’s failure to provide proper notice of a potential termination. As the Court observed, Congress passed the WARN Act in 1988 “following two decades which many workers were terminated without notice as a result of mergers, acquisition and closings.” Id. at *7. Exceptions to the WARN Act include terminations due to shut downs that were not reasonably foreseeable, natural disasters or situations where notice to employees might interfere with an employer’s efforts to secure outside investments.

After looking at the intent behind the WARN Act, the Court next looked at administrative expense claims in the context of wages. Administrative expense claims are those which either “preserve the estate in a reorganization or facilitate the winding-down in a liquidation.” Id. at *9. Congress amended § 503(b)(1)(A) in 2005, extending administrative claim status to “(ii.) wages and benefits awarded pursuant to a judicial proceeding or a proceeding of the National Labor Relations Board as back pay attributable to any period of time occurring after commencement of the case under this title.”

Looking at the plain meaning of the statute, the court found that the amended § 503 grants administrative status to wages that “vest post-petition, [so that] the back pay is attributable to the time occurring after the commencement of the case and therefore it is an administrative expense claim.” Id. at *16. The question remaining for the Court, then, was to determine when the employees’ rights under the WARN Act vest.

The Court found that rights of employees discharged in violation of the WARN Act accrued upon their termination. In reaching this conclusion, the Court relied upon other opinions that “consistently hold that WARN damages are specifically like payment at termination in lieu of notice.” Id. at *18. Citing In re First Magnus Fin. Corp., 390 B.R. 667, 673 (Bankr. D. Ariz. 2008). The Powermate employees were terminated prior to the filing of the bankruptcy petition. Because the employees’ claims vested pre-petition, they were not entitled to administrative expense status. Instead, the employees’ damage claims were governed under § 507(a)(4)-(5) granting unsecured claim status to wages.

Conclusion

The Powermate decision is helpful, in part, for the clarity it provides to a portion of the 2005 Bankruptcy Code amendments. Like with many other decisions before it, the Court in Powermate applied a “plain meaning” analysis to the 2005 amendments. The Powermate employees who commenced the WARN Act claim might not agree that this decision is “helpful.” On October 20, 2008, the employees filed a Notice of Appeal of the Court’s Order dismissing their adversary action.