Creditors Must React Quickly When Debtors Default on Post-Petition Obligations


The Business Advisor

April 11, 2003

It is increasingly important for post-petition creditors, and landlords specifically, to closely monitor Chapter 11 proceedings and react quickly once a debtor in possession fails to make timely post-petition administrative payments. A creditor’s failure to act quickly to protect its right to timely payment of post-petition expenses exposes the creditor to the risk of not getting paid or competing with other administrative claimants, including the retained professionals in the case, for the remaining administrative dollars.

This dilemma is driven by the fact that there is no ‘priority’ in bankruptcy among post-petition or administrative creditors under the Bankruptcy Code. Many creditors, and landlords in particular, are inclined to rely on the long-standing practice of seeking an administrative expense priority.1 Having an allowed administrative expense priority once the estate becomes administratively insolvent can be an empty victory indeed. When a bankruptcy estate becomes administratively insolvent, all of the post-petition creditors will be fighting over the same pot of money. The problem is that a part of the contents of the pot may have been eaten up by those administrative claimants who were smart and aggressive enough to get their portion first. Therefore, it is critical that creditors closely monitor their extensions of post-petition credit to debtors-in-possession. Upon a post-petition default, creditors should quickly file a motion to compel the debtor to immediately pay their post-petition obligations. Consideration should be given to not extending credit unless provision for payment is reasonably available. If a case becomes administratively insolvent, your credit department may be questioning its judgment twice in the same case.

As an example, during a recent chapter 11 proceeding in a large real estate case, the debtors failed to make their first post-petition administrative rent payment to a landlord client. As soon as the rent became late under the terms of the landlord creditor’s leases, we at Gibbons promptly filed a motion to compel the immediate payment of: (i) administrative rent; and (ii) “Stub Rent,” representing the remainder of the post-petition rent due for the month in which the debtors filed their petitions for relief. Gibbons was the only law firm that did so. Shortly thereafter, the debtors began paying administrative rent to every landlord in the case, although they continued to ignore the Stub Rent issue. The judge ordered the debtors to serve a copy of Gibbons’ pleadings on every landlord in the case so that he could address the Stub Rent issue for all landlords in a single hearing.

The Bankruptcy Court is a court of equity, and “equity rewards the vigilant.”

1 Landlords of debtor-tenants qualify as administrative claimants for post-petition payments of what is commonly referred to as “administrative rent.”