§ 136.14 — Miscellaneous Administrative Expenses and Priority Claims before BAPCPA
Revised: June 17, 2004
There will be Chapter 13 cases in which the debtor has unusual prepetition or postpetition liabilities that raise priority questions under §§ 507 and 1322(a)(2).
For example, in one Chapter 13 case, the bankruptcy court rejected the argument that homeowners’ association assessments under recorded covenants were deposits entitled to priority treatment under § 507(a)(6).1 Another bankruptcy court held that even if “regime fees” owed by the debtor pursuant to a master deed that accrued during the Chapter 13 case were priority administrative expenses under § 503(a)(1)(A), the fees were not allowable because the creditor waited 28 months after notice of the petition to file its request.2 This court noted in the alternative that even if the creditor explained its tardy request for administrative expenses under § 503(a), allowance would be prohibited by § 1305(a)(2) because the claim holder failed to seek the prior approval of the Chapter 13 trustee.3
Unpaid wage claims to employees of a business debtor have a third priority under § 507(a)(3) and must be paid in full, to the limits stated in the section, to satisfy § 1322(a)(2). When the debtor was engaged in business in corporate or partnership form, the corporation or partnership may have unpaid liability to employees that can be asserted against the debtor personally under state or federal law. For example, it has been held that claims for unpaid wages by a state department of labor on behalf of employees of a Chapter 13 debtor’s corporation are entitled to full payment priority in the debtor’s individual Chapter 13 case.4 Fees owed to an attorney for prepetition legal services are not wages for purposes of the priority in § 507(a)(3).5
It should be noted that the maximum amount of wages entitled to priority under § 507(a)(3) was changed by the Bankruptcy Reform Act of 1994. In cases filed before October 22, 1994, the third priority for unpaid wages, salaries or commissions was limited to $2,000 for each claimant.6 In Chapter 13 cases filed between October 22, 1994, and April 1, 1998, the priority is $4,000 for each claimant. Between April 1, 1998, and April 1, 2001, the wage priority amount was $4,300 per employee. Between April 1, 2002, and April 1, 2004, the priority was $4,650 per employee. After April 1, 2004, the priority increased to $4,925. “Independent sales representatives” were added as priority claim holders.7 Commissions earned within 90 days of the petition for sales or services to the debtor may be priority claims up to the § 507(a)(3) limit.8
Chapter 13 debtors engaged in business incur trade credit9 and are likely to generate postpetition liabilities with priority under § 503(b)(1)(A). For example, suppliers of raw materials or other services to a debtor engaged in business will be owed money for postpetition goods and services. If those goods or services were necessary to the preservation of the Chapter 13 estate, the postpetition debts will be administrative expenses under § 503(b)(1)(A), will be entitled to priority under § 507(a)(1) and under most Chapter 13 plans must be paid in full. Taxes that become payable by a debtor engaged in business after the filing of the petition may fit the definition of administrative expenses under § 503(b)(1)(B) and/or may be postpetition claims under § 1305(a)(1).10 It is not likely that trade debts incurred by a Chapter 13 debtor engaged in business would be characterized as postpetition claims under § 1305(a)(2) because trade credit is unlikely to fit the definition of “consumer debt.”11
The administrative expense entitlement of a trade creditor or supplier may be affected by whether the debt is incurred before or after confirmation and then by whether the vesting effect of confirmation under § 1327(b) ends the estate for purposes of § 503(b). As detailed elsewhere, absent a contrary provision of the plan or of the order of confirmation, confirmation vests all property of the Chapter 13 estate in the debtor.12 Administrative expenses under § 503(b)(1)(A) extend only to actual and necessary costs and expenses of “preserving the estate.”13 Trade debt incurred by the Chapter 13 debtor after confirmation cannot be an administrative expense unless an estate remains to be preserved.
On interesting facts, the U.S. Court of Appeals for the Eighth Circuit concluded that trade credit incurred by a Chapter 13 debtor engaged in business was entitled to administrative status under § 503(b)(1)(A) notwithstanding the vesting effect of confirmation under § 1327(b). In Security Bank of Marshalltown v. Neiman,14 the debtors were hog farmers. After confirmation, the debtors incurred debts for feed and veterinary services. During the Chapter 13 case, the debtors paid some of their postpetition obligations but not all.
The Chapter 13 case converted to Chapter 7. The Chapter 7 trustee recovered as preferential transfers some of the money paid on account of postpetition debts. The Chapter 7 trustee proposed to distribute this money first to Chapter 7 administrative fees and expenses and then in partial payment of Chapter 13 administrative claims. The Chapter 7 trustee included in this second category creditors who supplied postpetition goods and services to the debtors during the superseded Chapter 13 case.
A general unsecured creditor in the Chapter 7 case objected, arguing that the postpetition liabilities incurred by the debtors during the failed Chapter 13 case could not be administrative expenses under § 503(b)(1)(A) because those expenses were not necessary to preserve the Chapter 13 estate. The creditor reasoned that the Chapter 13 estate ceased to exist upon confirmation of the Chapter 13 plan by operation of § 1327(b).15
The Eighth Circuit recognized a tension between the vesting effect of confirmation under § 1327(b) and the broadened definition of property of the Chapter 13 estate under § 1306.16 The court acknowledged a split of authority whether the bankruptcy estate continues to exist after confirmation of a Chapter 13 plan.17 Citing the dissenting opinion in an earlier Eighth Circuit case,18 the panel “join[ed] the line of cases holding the estate continues to exist after confirmation of the Chapter 13 plan.”19 Because the estate continued to exist, postpetition and postconfirmation providers of services to that estate were entitled to administrative expenses under § 503(b)(1)(A):
The post-petition debts in the present case were incurred for feed and veterinary services for debtors’ hog herd and should be considered administrative expenses necessary to preserve the estate pursuant to § 503(b)(1)(A). These post-petition debts were not unauthorized borrowing by debtors; rather, these transactions were in the ordinary course of business and were necessary to preserve debtors’ principal asset, their hog herd. Therefore, . . . the post-petition debts [are] administrative expenses entitled to priority under § 507(a)(1).20
Neiman has many messages for debtors and those who might do business with a Chapter 13 debtor after the petition. Debts incurred in the ordinary course of business after the petition are likely to be administrative expenses under § 503(b)(1)(A) that are entitled to first priority under § 507(a)(1). Prepetition creditors are best advised to pay attention to the operation of the Chapter 13 debtor’s business after the petition because unpaid expenses of operation can achieve a higher priority of distribution both during the Chapter 13 case and in the event of conversion to Chapter 7. It is in the interests of the general unsecureds that a Chapter 13 debtor engaged in business remain current with respect to postpetition trade creditors. Those who might do business with a Chapter 13 debtor after the petition should be careful that the debtor stays current in postpetition payment of all trade debt.
A postpetition trade creditor that is not paid by the debtor may be entitled to an administrative expense in the Chapter 13 case and in the Chapter 7 case in the event of conversion. That status may not be worth much if the administrative expense claim holders are sharing the same small pot. A postpetition trade creditor that gets paid during a Chapter 13 case can face a preference action if the case converts to Chapter 7. The postpetition trade creditor’s best strategy is to insist on full payment from the debtor in the ordinary course of business during the Chapter 13 case.21
The Chapter 13 debtor self-employed as a contractor, carpenter, carpet layer, plumber or tile installer sometimes uses the advances or draws from current jobs to pay the bills remaining from completed jobs. When the debtor gets into Chapter 13, the advances may be claims entitled to a sixth priority under § 507(a)(6). To avoid having to return the deposits in full through the plan, the debtor may have to assume the new contracts and fully perform during the plan. If the debtor is no longer in business, each deposit will have to be scheduled and repaid in full under § 1322(a)(2), to the extent provided in § 507(a)(6).22 One reported decision holds that a former tenant is entitled to the § 507(a)(6) priority for a security deposit given to the Chapter 13 debtor before the petition.23
Priority status can favor or disadvantage the debtor or creditor, depending on the circumstances. When the plan does not pay unsecured debt in full, the holder of an unsecured claim that successfully argues for priority must be paid in full to satisfy § 1322(a)(2).24 This is incentive for unsecured claim holders in composition plans to stretch for an administrative expense or any other priority that might fit. In In re Ozcelik,25 a produce seller had PACA26 claims against the debtor’s business and against the debtor personally. The claim holder argued that the debtor’s personal liability was a “superpriority” claim payable ahead of all other creditors in the debtor’s Chapter 13 case. The bankruptcy court recognized that the PACA claim holder had a priority lien on produce-related assets and that the debtor was personally liable for failing to preserve the PACA trust, but “[t]his Court is not aware of any case law that supports priority treatment for a PACA creditor in the bankruptcy case of a debtor simply because the Debtor is secondarily liable under PACA.”27
Chapter 13 debtors occasionally argue in favor of administrative expense status for a creditor in an effort to defeat allowance of the creditor’s claim. For example, in In re Guevara,28 the confirmed plan cured mortgage arrearages and paid regular monthly payments but made no provision for increases in taxes and insurance. Taxes and insurance increased, and the mortgage holder paid the increased amounts. After the completion of payments, the mortgage holder sought reimbursement. The debtor argued that postconfirmation taxes and insurance were administrative expenses under § 503 that were not recoverable after discharge because the mortgage holder did not request payment of an administrative expense during the Chapter 13 case.29 The bankruptcy court rejected the debtor’s characterization of the advances as administrative expenses:
[T]he Debtors have relied on In re Rathe, 114 B.R. 253 (Bankr. D. Idaho 1990) to support the position that HSBC not be repaid for its payment of the increased amount of taxes and insurance. In Rathe, the debtors’ real property taxes or insurance premiums increased during the term of the Chapter 13 plan and the reserve account was insufficient to make the payments. . . . The Rathe court held that impound or reserve charges would properly fall into the category of administrative expenses under 11 U.S.C. § 503 and, because the creditor made no attempt to collect those charges during the bankruptcy case, the creditor could not recoup such payments after completion of the plan. . . . This Court does not agree with Rathe. If that is the law, then banks and mortgage companies would be discouraged from helping debtors save their homes by advancing tax and insurance increases and instead would be causing debtors additional legal expense for plan modifications or for seeking stay relief for nonpayment of increases. All debtors benefit from a more benevolent approach by home mortgage lenders.30
Filing a priority claim without a factual basis invites all manner of trouble. In In re Dansereau,31 the bankruptcy court found that Cash In Advance routinely filed proofs of claim asserting priority status “without apparent factual or legal basis.”32 The court reduced all claims filed by Cash In Advance to $1, reclassified all of its claims as ordinary general unsecured claims and enjoined Cash In Advance from filing priority claims in the future.
1 In re Smith, 206 B.R. 113 (Bankr. D. Md. 1997).
2 In re Wilder, 225 B.R. 600 (Bankr. D.S.C. 1997).
4 In re Halperin, 87 B.R. 399 (Bankr. W.D.N.C. 1987). But see In re Allen, 241 B.R. 710 (Bankr. D. Mont. 1999) (Claim for priority wages under § 507(a)(3) is rejected because ex-spouse worked for the debtor’s professional corporation, not for the debtor.).
5 In re Prickett, No. 00-00353, 2000 WL 33712200 (Bankr. D. Idaho Aug. 28, 2000) (unpublished) (Prepetition legal services pursuant to an attorney-client relationship, not an employer-employee relationship, are a general unsecured claim, not a priority claim under § 507(a)(3).).
6 11 U.S.C. § 507(a)(3)(B) (prior to amendment in 1994).
7 11 U.S.C. § 507(a)(3), as amended by Bankruptcy Reform Act of 1994, Pub. L. No. 103-394, § 207, 108 Stat. 4106 (1994).
8 See In re Myer, 197 B.R. 875, 877 (Bankr. W.D. Mo. 1996) (Commissions lost by a sales representative because of debtor’s breach of contract are not priority claims under § 507(a)(3)(A) or (B). “Mr. Burks is not the ‘procuring cause’ of and he did not actually ‘perform’ services giving rise to the commissions for which he seeks priority status. . . . Mr. Burks claims priority not for commissions earned and unpaid, but rather for commissions he never had a chance to earn due to Debtors’ alleged breach of the sale representative agreement. Such ‘lost commissions’ awarded pursuant to a state court judgment are not ‘earned’ commissions entitled to priority under the Bankruptcy Code.”).
9 11 U.S.C. § 1304(a) defines a Chapter 13 debtor engaged in business as “a debtor that is self-employed and incurs trade credit in the production of income from such employment.” Not every self-employed Chapter 13 debtor will incur trade credit. See § 12.1 Self-Employment, § 33.1 Special Information Needs In Business Cases, § 52.1 Operating a Chapter 13 Debtor Engaged in Business and § 52.3 Debtors Engaged in Business after BAPCPA.
11 “Consumer debt” in § 1305(a)(2) is defined by 11 U.S.C. § 101(8) to mean “debt incurred by an individual primarily for a personal, family, or household purpose.” See § 65.2 Consumer Debts Only, § 137.1 Postpetition Claims before BAPCPA and § 137.2 Postpetition Claims after BAPCPA.
12 11 U.S.C. § 1327(b). See § 230.1 [ 11 U.S.C. § 1327(b): Vesting Effect on Property of Estate ] § 120.3 11 U.S.C. § 1327(b): Vesting Effect on Property of Estate. See also § 207.1 [ Retention of Property of the Estate: Overcoming 11 U.S.C. § 1327(b) ] § 113.11 Retention of Property of the Estate: Overcoming 11 U.S.C. § 1327(b).
13 11 U.S.C. § 503(b)(1)(A).
14 1 F.3d 687 (8th Cir. 1993).
15 See § 230.1 [ 11 U.S.C. § 1327(b): Vesting Effect on Property of Estate ] § 120.3 11 U.S.C. § 1327(b): Vesting Effect on Property of Estate.
16 See discussion beginning at § 46.1 What Is Property of the Chapter 13 Estate?. See also § 58.3 Additional Protection for Postpetition Property and Income.
17 See §§ 230.1 [ 11 U.S.C. § 1327(b): Vesting Effect on Property of Estate ] § 120.3 11 U.S.C. § 1327(b): Vesting Effect on Property of Estate and 238.2 [ Effects of Confirmation on Postpetition Claims ] § 122.4 Effects of Confirmation on Postpetition Claims.
18 See Laughlin v. United States, 912 F.2d 197 (8th Cir. 1990), cert. denied, 498 U.S. 1120, 111 S. Ct. 1073, 112 L. Ed. 2d 1179 (1991).
19 1 F.3d at 690.
20 1 F.3d at 691.
21 See 11 U.S.C. § 547(c)(2). See also Security Bank of Marshalltown v. Neiman, 1 F.3d 687 (8th Cir. 1993).
22 See 11 U.S.C. § 507(a)(6) ($1,950 in cases filed after April 1, 1998).
23 Guarrancino v. Hoffman, 246 B.R. 130, 134 (D. Mass. 2000) (“Given that non-commercial tenant security deposits are within the scope of [§ 507(a)(6)] and legislative history evidences Congress’ intent to protect a consumer’s money held in trust, it follows that the $1300 security deposit should be given administrative [sic] priority.”).
25 267 B.R. 485 (Bankr. D. Mass. 2001).
26 Perishable Agricultural Commodities Act, 1930, 7 U.S.C.A. 499a-499t (2001 & Supp. 2002).
27 267 B.R. at 491.
28 258 B.R. 59 (Bankr. S.D. Fla. 2001).
30 258 B.R. at 61.
31 274 B.R. 686 (Bankr. W.D. Tex. 2002).
32 274 B.R. at 688.