In Chapter 11 Bankruptcies How Administrative Expenses Aid Reorganization

Generally speaking creditors, whether classified as secured or unsecured creditors, in a Chapter 11 bankruptcy case, expect to be paid only a fraction of what they are owed by the debtor’s estate. But some creditors who provide the company in bankruptcy those services which enable the company to maintain its operations during the course of the bankruptcy case have the opportunity to get paid all or much of the costs it charges for some services provided after – actually 60 days after – the filing of the bankruptcy petition. The incurring of these costs, deemed as administrative expenses, may ironically be essential for the successful reorganization of some bankrupt companies although the estate pays, in many instances, the charges in full to these creditors.

The logic underlying this part of the Chapter 11 bankruptcy process derives from the notion that bankrupt companies intending to reorganize need to be able to continue some of its revenue-generating operations in order to have a chance to be profitable after the bankruptcy. Accordingly, the federal bankruptcy code permits the trustee for the estate to pay, under 11 U.S.C. § 503(b)(1)(A), “the actual, necessary costs and expenses of preserving the estate”. This means companies which have unexpired leases with the debtor have the opportunity, after the bankruptcy petition is filed to recover the payments due under the lease including any incidental damages. However, this applies only to work done or services or equipment provided after the bankruptcy case has commenced and up to the point at which such lease is rejected. Once the rejection occurs, the debtor no longer must comply with the terms of such a lease.

A Chapter 11 bankruptcy case decided last year by the Bankruptcy Court in New Mexico illustrates how this procedure works. In the bankruptcy action of In re Pettingill Enterprises, 486 B.R. 524 (2013), a creditor, Bane Machinery, Inc., which was leasing certain construction equipment to the debtor beginning a couple years before the bankruptcy filing, asked the bankruptcy court to grant it as “administrative expenses” a litany of charges during the post-bankruptcy period. (Unpaid expenses accruing before the filing of the bankruptcy petition get treated like other debts owed creditors.) The bankruptcy court decided that the estate did have to remit certain lease payments, overtime charges and hauling costs to the company. It also declined some of the requested expenses finding either that the dates the expenses were incurred were not established or that the nature of the expenses did not qualify to be “administrative expense” under the terms of the law which assesses whether the services were beneficial to the debtor’s operations.

The bankruptcy court notes that  the “purpose of [this] Section of the Bankruptcy Code is to facilitate the rehabilitation of insolvent businesses by encouraging third parties to provide those businesses with necessary goods and services.” As businesses will likely balk at the idea that they continue to provide such services to bankrupt companies absent adequate remuneration, the law incentivizes those businesses to do so by giving them the chance to recover such costs as administrative expenses.

In Albuquerque, Giddens & Gatton Law, PC has attorneys who offer expert handling of Chapter 7, Chapter 11, Chapter 12 and Chapter 13 bankruptcy cases. The firm represents many debtors and creditors in Albuquerque, Santa Fe, Taos, Raton, Farmington, Gallup, Grants, Roswell, Los Lunas, Placitas, Belen and the rest of New Mexico. Contact Giddens & Gatton Law, PC at (505) 633-6298 to set up an appointment or visit the firm’s website at giddenslaw.com. Giddens & Gatton Law, PC is located at 10400 Academy Road N.E., Suite 350 in Albuquerque, New Mexico.