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Are All Administrative Creditors Equal?

Article

The Business Advisor

April 11, 2003

When a debtor files for bankruptcy, creditors scramble in an effort to obtain payment of debts owed them in as speedy and complete a fashion as possible. The Bankruptcy Code sets forth a general priority scheme setting forth which types of claims get paid first. This scheme provides for priority payment of “administrative” claims of creditors that provide goods and services to the estate during the bankruptcy case, such as landlords of debtors. However, the question remains as to whether an administrative landlord can obtain payment of rent during the bankruptcy case ahead of other administrative creditors, such as the debtor’s lawyers and other professionals, which are on an equal priority. The Bankruptcy Code is silent on this matter.

The Bankruptcy Code sets priorities among general groups of creditors, establishing an order by which different classes of creditors receive payment from the assets of the bankruptcy estate after confirmation of a plan of reorganization or after liquidation of the bankruptcy estate has occurred. Those creditors at the top of the list are administrative creditors.[1] Landlords of debtor-tenants qualify as administrative claimants for post-petition payments of what is commonly referred to as “administrative rent.”[2] However, in cases where insufficient assets exist to satisfy all administrative claims, how can landlords guarantee that the administrative rent owed them will be fully paid by the bankruptcy estate? In other words, how can landlords distinguish themselves from other administrative creditors who have equal priority under the Bankruptcy Code?

Trustees and debtors in possession have a right to accept or reject leases as burdensome to the estate. The problematic period for rental payments is that time after the debtor has filed its petition for bankruptcy, but prior to the moment when it has either accepted or rejected its lease. To ensure payment of rent by debtor-tenants to their landlords, Congress enacted section 365(d)(3) of the Bankruptcy Code.[3] Section 365(d)(3) states as follows:

The trustee shall timely perform all the obligations of the debtor?arising from and after the order for relief under any unexpired lease of nonresidential real property, until such lease is assumed or rejected….[4]

In other words, the estate must continue to timely pay the debtor’s rent to its landlord from the date upon which the debtor filed its bankruptcy petition until the debtor makes the decision to either assume the lease, thereby agreeing to continue to uphold its obligations under the lease, or reject the lease, thereby releasing itself from any further obligations under the lease terms and giving rise to the landlord’s claim for rejection damages, which is treated as a claim in the case. But what precisely does timely mean?

Unfortunately for landlords, an overwhelming majority of courts have held that Congress’s use of the word “timely” does not allow landlords to gain superpriority over and above other administrative creditors for payment of rent during the period between the petition date and the date of lease assumption and rejection.[5] In other words, these courts’ decisions stand for the proposition that all administrative creditors are, and should be, treated equitably and landlords cannot insist upon current rent payments prior to lease assumption and rejection ahead of other administrative creditors. Thus, the inclusion of the word “timely” in section 365(d)(3) does not grant landlords any sort of superpriority within the administrative class, but rather merely permits landlords to be paid administrative rent on equal priority with all other administrative claimants.

However, a minority of courts are not adverse to the idea of interpreting “timely” to mean that landlords should be paid in a more expeditious manner than other administrative creditors. For example, some courts, while not going so far as to hold that landlords have superpriority, have held that section 365(d)(3) demands immediate payment to landlords if they can demonstrate that there is a high probability that the bankruptcy estate will be administratively solvent.[6] However, this immediate payment is subject to disgorgement if the estate cannot adequately cover the claims of the other administrative claimants.

In light of the courts’ overwhelming acceptance of the notion that use of the word “timely” does not equate to a grant of superpriority for landlords over other administrative creditors, landlords must take proactive steps to ensure that they receive the administrative rental payments owed them. Section 503(a) of the Bankruptcy Code states that “[a]n entity may file a request for payment of an administrative expense….”[7] The language of this section is clearly permissive, thus placing the onus of pursuing an administrative claim upon the administrative creditor. As most courts hold that there is no superpriority granted to landlords under section 365(d)(3), and because the burden is on administrative claimants to affirmatively seek payment of their claims, landlords must move before the court for payment of administrative rent claims as soon as their tenants file for bankruptcy.

Thus, as section 365(d)(3) merely provides that landlords must be paid administrative rent and makes no provision for monthly payment ahead of other administrative creditors, landlords must take action and seek court authorization for periodic payments of rent, or risk having administrative rent claims thrown into the pot of all administrative claims and paid, if at all, only when such claims are allowed and paid.



[1]Section 507(a)(1) of the Bankruptcy Code states that administrative expenses are given first priority with regard to disbursement of the debtor’s bankruptcy estate. 11 U.S.C. Section 507(a)(1) (2002).
[2]Section 503(b) of the Bankruptcy Code provides in pertinent part:

    (b) After notice and hearing, there shall be allowed administrative expenses?including- (1) (A) the actual, necessary costs and expenses of preserving the estate?.

11 U.S.C. Section 503(b)(1)(A) (2002).
[3] Temecula v. LPM Corp. (In re LPM Corp.), 300 F.3d 1134, 1138 (9th Cir. 2002).
[4] 11 U.S.C. Section 365(d)(3) (2002).
[5]Omni Partners, L.P. v. Pudgie’s Dev. of NY, Inc. (In re Pudgie’s Dev. of NY, Inc.), 239 B.R. 688, 697 (S.D.N.Y. 1999) (concluding that “the right to ‘timely performance’?is not equivalent to superpriority.”); In re Microvideo Learning Systems, Inc., 232 B.R. 602, 605 (Bankr. S.D.N.Y. 1999); In re J.T. Rapps, Inc., 225 B.R. 257, 264 (Bankr. D. Mass. 1998); In re Tel-Central Communications, Inc., 212 B.R. 342, 349 (Bankr. W.D. Mo. 1997); In re Amber’s Stores, Inc., 193 B.R. 819, 825 (Bankr. N.D. Tex. 1996); In re MS Freight Distrib., Inc., 172 B.R. 976, 979-80 (Bankr. W.D. Wash. 1994); In re Almac’s, Inc., 167 B.R. 4, 7-9 (Bankr. D.R.I. 1994); In re Dawson, 162 B.R. 329, 332-33 (Bankr. D. Kan. 1993); In re The Appliance Store, Inc., 148 B.R. 234, 243 (Bankr. W.D. Pa. 1992); In re Joseph C. Spiess Co., 145 B.R. 597, 608 (Bankr. N.D. Ill. 1992); In re CSVA, Inc., 140 B.R. 116, 121 (Bankr. W.D.N.C. 1992); In re Laurence R. Smith, Inc., 127 B.R. 715, 717 (Bankr. D. Conn. 1991); In re Washington Bancocorporation, 126 B.R. 130, 131 (Bankr. D.D.C. 1991); In re VA Packaging Supply Co., 122 B.R. 491, 494-95 (Bankr. E.D. Va. 1990); In re Buyer’s Club Mkts., Inc., 115 B.R. 700, 702 (Bankr. D. Colo. 1990); In re Cardinal Indus., Inc., 109 B.R. 738, 742 (Bankr. S.D. Ohio 1989); In re Granada, 88 B.R. 369, 373-74 (Bankr. D. Utah 1988); In re United West, Inc., 87 B.R. 138, 141 (Bankr. D. Nev. 1988); In re Homeowner’s Outlet Mall Exch., Inc., 89 B.R. 965, 970 (Bankr. S.D. Fla. 1988); In re Tandem Group, Inc., 61 B.R. 738, 741-42 (Bankr. C.D. Cal. 1986).
[6]In re Tel-Central Communications, Inc., 212 B.R. at 349; In re Buyer’s Club Mkts., Inc., 115 B.R. at 701; In re Cardinal Indus., Inc., 109 B.R. at 742.
[7]11 U.S.C. 503(a).