Restructuring

Contributed by Andrea Saavedra
In a typical chapter 11 case, a debtor’s administrative expenses do not raise much controversy because the debtor has paid them in the “ordinary course of its business” during the pendency of the case or, to the extent that it has not, its plan will provide for payment in full of valid administrative expenses at emergence from bankruptcy.  Thus, a debtor can reasonably predict the extent or scope of administrative expenses that it will likely have to pay as a consequence of its chapter 11 case.

The additional requirement that administrative expense holders file requests for payment of administrative expenses by a specified bar date, imposed in some cases, adds another layer of certainty for the debtor, enabling the debtor to conclude that there should be little, if any, unknown administrative expenses that could somehow “ride through” (i.e., be excepted from discharge) the bankruptcy and remain ongoing obligations of the reorganized debtor.   Can administrative expense bar dates provide absolute certainty that an unanticipated administrative expense claim will not ride through? The answer is no – particularly when the order establishing the administrative expense bar date excepts from its ambit specific types of claims.  This was the case in Sanchez v. Northwest Airlines, Inc., where the debtor, Northwest Airlines, Inc., believed that its administrative bar date order had narrowly limited the types of administrative claims that could ride through.  It discovered, however, that the scope of administrative expenses that would remain “alive and well” post-bankruptcy was broader than it had intended.
In Sanchez, the court examined whether an employee’s action seeking damages for Northwest’s alleged violation of the Americans with Disabilities Act in connection with its postpetition, pre-confirmation rescission of an offer of a management position to the employee was discharged under the terms of Northwest’s chapter 11 plan.  Northwest argued that the employee’s claim had been discharged because it accrued in the postpetition period, and despite records showing that he was provided notice of Northwest’s administrative bar date, the employee failed to file a timely administrative expense request seeking his payment.  The employee countered that he had not received notice of the administrative bar date, but that, in any event, his claim was not subject to the terms of the administrative bar date order as the administrative bar date notice specifically excepted “liabilities incurred in the ordinary course of the debtor’s business” from the types of claims subject to the bar date. The court focused on the employee’s second argument.
The Eighth Circuit’s analysis was twofold: it examined (i) whether the employee’s claim constituted an administrative expense in the first instance and (ii) if the claim qualified as an administrative expense claim, whether the bar date notice required it to be asserted by a specific deadline.  Noting that the employee’s claim for discrimination was a postpetition tort claim and that such claims, as a matter of law under the Supreme Court’s Reading Co. v. Brown and its related progeny, including Eagle-Picher Industries, are considered “costs ordinarily incident to [the] operation of a business” (representing the “limited exception” to the general rule that an administrative expense request must confer an actual benefit to the debtor’s estate and arise from a transaction with the estate), the court held that the employee’s claim was a valid administrative expense request and, therefore, theoretically subject to the discharge provisions of Northwest’s confirmed plan of reorganization.
Whether the employee’s claim was barred by the terms of the particular bar date provided in Northwest’s chapter 11 cases, however, was another question. The court found that, under the terms of the bar date notice, the employee’s claim had not been barred by the passage of the administrative expense bar date.  Although the bar date notice had established deadlines for filing most types of administrative claims, it specifically provided that administrative expense claims for “liabilities incurred in the ordinary course” of Northwest’s business were not required to be asserted by the administrative bar date.
Thus, the court examined whether the employee’s discrimination claim was incurred in the ordinary course of Northwest’s business.  The Eighth Circuit concluded that the employee’s claim fit squarely within the definition for “liabilities incurred in the ordinary course of business” incurred by the debtor.  Even though the claim ostensibly arose from the debtor’s alleged breach of a duty not to discriminate against the employee, because the employee’s activity was necessary to carry out Northwest’s day-to-day operations, the court agreed (and Northwest conceded, for reasons unknown) that the liability should be “properly viewed” as an ordinary course liability.  Consequently, the court concluded that the employee’s claim was not properly discharged under the terms of Northwest’s chapter 11 plan and, rather, rode through the restructuring.  Accordingly, the court reversed the decision of the lower court in favor of Northwest and remanded for further proceedings.
Although many debtors tend not to view such litigation-type claims as being incurred in the “ordinary course of business,” this decision is consistent with previous decisions of other circuit courts of appeals.  As a result, the Sanchez decision reminds us that caution should be taken prior excepting administrative expenses “incurred in the ordinary course of business” from those that need to be asserted by an administrative bar date.  Otherwise, the nature and extent of administrative claims that “ride through” will be anything besides certain.