Section 502, Title 11 of the U.S. Bankruptcy Code generally governs the allowance and disallowance of claims or interests asserted against a debtor’s bankruptcy estate. In particular, Subsection 502(d) expressly requires the disallowance of any claim asserted by an entity that has failed to return to the bankruptcy estate property recoverable pursuant to Chapter 5 of the Bankruptcy Code: If an entity improperly holds or fails to tender back to the debtor any property that is rightfully part of the debtor’s bankruptcy estate, any claim asserted against the estate by such entity must be disallowed.
On the other hand, Section 503(b) of the Bankruptcy Code allows a creditor to seek allowance of, and to recover, certain debts on administrative priority basis. Specifically, Subsection 503(b)(9) allows an entity to recover, as an administrative expense, “the value of any goods received by the debtor within 20 days before the date [of the debtor's bankruptcy] in which the goods have been sold to the debtor in the ordinary course of such debtor’s business.”
The language of Section 503(b) provides that upon “notice and a hearing, there shall be” payment of such an administrative expense. However, in instances where an entity claims entitlement to an administrative expense while still in possession of property of the bankruptcy estate, courts have been split as to whether Section 502(d) operates to bar payment of the otherwise-mandatory allowed administrative expense.
In In re Energy Conversion Devices, 486 B.R. 872 (Bankr. E.D. Mich. 2013), the U.S. Bankruptcy Court for the Eastern District of Michigan held that an administrative expense request under Section 503(b)(9) may not be disallowed under the provisions of Section 502(d).
The facts of this case are straightforward: Ameri-Source Specialty Products supplied steel to United Solar Ovonic LLC (USO) in the regular course of USO’s business. After USO and its affiliate, Energy Conversion Devices Inc. (ECD), filed for protection under Chapter 11 of the Bankruptcy Code, Ameri-Source asserted a nonpriority unsecured claim for over $4 million in USO’s bankruptcy case. Ameri-Source also asserted an administrative expense claim in the amount of $185,348 pursuant to Section 503(b)(9) on account of steel it delivered to USO 14 days before the date that USO filed its bankruptcy petition.
Following the effective date of the debtors’ confirmed plan, Ameri-Source filed a motion seeking an order allowing its Section 503(b)(9) administrative expense claim and compelling immediate payment of that claim. The debtors’ liquidation trustee objected to payment of the administrative expense request on the grounds that Ameri-Source had received $84,166 from USO within 90 days before USO’s bankruptcy filing, and that these payments constituted preferential transfers avoidable under Section 547 of the Bankruptcy Code. As such, the trustee argued that because Ameri-Source had yet to return the allegedly preferential transfers, Ameri-Source’s administrative expense request had to be disallowed pursuant to Section 502(d).
In ruling on the motion, the bankruptcy court first recognized a split of authority concerning the legal issue of “whether an administrative expense request under 11 U.S.C. § 503(b)(9) may ever be disallowed based on 11 U.S.C. § 502(d)” and noted an absence of controlling precedent in the U.S. Court of Appeals for the Sixth Circuit. The bankruptcy court then considered conflicting decisions that had been decided before Section 503(b)(9) was added to the Bankruptcy Code by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA).
In some of these pre-BAPCPA cases, administrative expense requests under Section 503(b) were subject to disallowance under Section 502(d). (See, e.g., In re MicroAge, 291 B.R. 503 (9th Cir. BAP 2002); and In re Georgia Steel, 38 B.R. 829 (Bankr. M.D. Ga. 1984).) To reach this conclusion, these courts relied on a broad interpretation of the word “claim,” as defined in the Bankruptc