Legal Notes

Secured Lender, The, May/Jun 2007 by Helfat, Jonathan N, Kohn, Richard M

In re Bookbinder's Restaurant, Inc., 2006 Bankr. LEXIS 3749 (Bankr. E.D. Pa. Dec. 28, 2006) (Bankruptcy court denied creditor's request for immediate payment of administrative expense under section 503(b)(9) of the Bankruptcy Code for the value goods received by the debtor within 20 days of the debtor's Chapter 11 case.)

Bookbinder's Restaurant ("Bookbinder's") filed for relief pursuant to Chapter 11 of the Bankruptcy Code in June 2006. Shortly after the reorganization case was filed, Blue Crab Plus ("Blue Crab") filed a request for allowance of an administrative expense under section 503(b)(9) of the Bankruptcy Code. Pursuant to Section 503(b)(9), which was enacted as part of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("BAPCPA"), creditors are entitled to an administrative priority claim for the value of any goods received by the debtor within 20 days before the date the bankruptcy petition was filed.

While Bookbinder's acknowledged that Blue Crab was entitled to an allowed administrative expense claim under Section 503(b)(9), the parties disagreed as to when the claim had to be paid (and the statute does not address timing of the payment). Not surprisingly, Blue Crab argued that Section 503(b)(9) provides creditors with an absolute right to immediate payment of theirclaim. Bookbinder's, by contrast, argued that the bankruptcy court has discretion to determine when the claim should be paid and that, in this instance, payment of Blue Crab's claim should be deferred until a later date so as not to impair Bookbinders' available working capital in the Chapter 11.

As a starting point, the United States Bankruptcy Court for the Eastern District of Pennsylvania noted that, prior to the enactment of the BAPCPA, it was common practice for bankruptcy courts to exercise discretion when determining the time at which an administrative expense should be paid. As such, the bankruptcy court phrased the question as whether the enactment of Section 503(b)(9) was intended to alter this practice.

To answer the question, the bankruptcy court focused its attention on the language of Section 503(b)(9). The bankruptcy court noted that nothing in the statute expressly or implicitly requires immediate payment of the claim. As such, and because Blue Crab offered no evidence to suggest the statute was intended to alter the existing practice of bankruptcy courts to exercise discretion over the timing of payment, the bankruptcy court held that Blue Crab was not entitled to immediate payment of its claim. The bankruptcy court then scheduled a further hearing to determine the appropriate time at which the payment should be made (Blue Crab, however, subsequently withdrew its motion).

Interestingly, Blue Crab also argued that it should be paid immediately because vendors who delivered goods to Bookbinder's during the bankruptcy case were being paid in the ordinary course of business. Rejecting what it characterized as an "equal protection" argument, the bankruptcy court drew a distinction between the two types of claims, since creditors who deliver goods during the bankruptcy case are paid not under section 503(b), but instead under section 363(c)(l) (which permits a debtor to pay creditors for goods and services they provide during the bankruptcy case).

Bookbinder's was decided just one week after the United States Bankruptcy Court for the District of Delaware issued a similar opinion regarding the timing of payment of a claim allowable under section 503(b)(9). See In re Global Home Products, LLC, 2006 Bankr. Lexis 3608 (Bankr. D. Del. Dec. 21, 2006). In Global Home Products, the court was required to decide the identical issue of whether it should exercise its discretion and grant immediate payment of the claim.

In Global Home Products, Wachovia Bank, the debtor-inpossession lender and holder of a first-priority lien on all of the debtors' assets, objected to a trade creditor's motion for immediate payment on the basis that payment of the claim would constitute a breach of the debtors' financing agreement with Wachovia and therefore result in prejudice to the debtors and the other creditors. Balancing what it characterized as "little prejudice or hardship" to the trade creditor against the "substantial harm" to the debtors and their other creditors, the bankruptcy court denied the motion for immediate payment.

As a practical matter, if claims allowable under section 503(b)(9) of the Bankruptcy Code must be funded prior to plan confirmation, debtor-inpossession lenders will most likely be required to fund the claims. However, as illustrated by Bookbinder's and Global Home Products, holders of these claims are not necessarily entitled to immediate payment of their claims. Indeed, a debtor will often request that the court defer payment of such claims to avoid impairing its working capital. If the court approves such a request, it is possible that these claims might not be funded until confirmation of a plan of reorganization.