If an assignee for the benefit of creditors converts the property belonging to a creditor, what status does the Bankruptcy Code give to the creditor’s conversion claim?
Is the creditor entitled to immediate cash payment in full from the bankruptcy trustee? Is the creditor merely a general unsecured creditor, or does the creditor have an administrative claim? If the creditor has an administrative claim, must the trustee pay the claim immediately? And what provision in the Bankruptcy Code bestows administrative status, if it does?
Bankruptcy Judge Timothy A. Barnes of Chicago answered these questions and others in his Dec. 22 opinion.
A manufacturing company had appointed an assignee for the benefit of creditors to auction the assets. Before the auction, the assignee agreed to return a forklift to the lessor. However, the forklift and the other assets were auctioned before the assignee could return the forklift. The auction brought $15,000 for the forklift.
Before the assignee could turn the $15,000 over to the forklift’s owner, creditors filed an involuntary chapter 11 petition that was converted to chapter 7. The forklift’s owner filed an administrative claim for the $15,000. The chapter 7 trustee opposed.
Judge Barnes decided that the forklift’s owner did not have an administrative claim under Section 503(b)(3)(E). That section confers administrative status on the “actual and necessary expenses . . . incurred by a custodian superseded under Section 543.”
Allowing the creditor to assert an administrative claim under that section, Judge Barnes said, “is a slippery slope, and leads to results inconsistent with the Bankruptcy Code’s overall scheme.”
“The better reading,” he said, “is that such expenses are for the named parties alone — in this case, the custodian — to assert.” Consequently, Judge Barnes said that the creditor did not have “a direct right to assert an administrative expense under Section 503(b)(3)(E).”
On the other hand, Judge Barnes concluded that the forklift’s owner was entitled to an administrative expense claim under Section 543(c)(1). That section provides that a trustee “shall . . . protect all entities to which a custodian has become obligated” with respect to property of the estate and proceeds.
Judge Barnes ruled that the sale of the forklift amounted to conversion under Illinois law, thus satisfying one of the conditions for liability under Section 543(c)(1).
Although there may have been conversion, the trustee argued that money is fungible and the proceeds were not traceable. While the inability to trace “might be fatal to the constructive trust argument, . . . that doesn’t appear necessary here,” Judge Barnes said. Rather, he said, “the facts establish that all of the debtor’s property in the assignee’s custody become property of the bankruptcy estate.”
The creditor, Judge Barnes said, therefore “lays claim to an obligation from the assignee. The assignee is obligated to [the forklift’s owner] with respect to the property of the bankruptcy estate, and this element of Section 543(c)(1) is therefore satisfied.”
However, the nature of the protection afforded to the forklift’s owner “is not so simple,” in part because “protection” is not defined, Judge Barnes said.
Under similar circumstances, Judge Barnes cited two bankruptcy court decisions that, he said, were “problematic” because they held that “protection” requires immediate payment. “Immediate payment,” he said, would create a “sort of superpriority status that is not clearly called for.”
“Protection,” Judge Barnes said, might mean the allowance of a general unsecured claim. But that claim “might be worthless and constitute no protection at all.”
Preceded by the word “including,” the description of administrative claims in Section 503(b) is “nonexclusive and demonstrative,” Judge Barnes said. He therefore found “compelling justification to afford these parties administrative expense reimbursement” because Section 543 “requires the court to protect innocent parties . . . to whom a custodian has become obligated.”
“Allowing the court to fashion a remedy appears to be precisely what Congress intended,” Judge Barnes said. Use of the word “protection” appears to be intended to “allow the court the maximum amount of flexibility in so doing.”
Conferring administrative status, the judge said, “appears appropriate and statutorily supported here.” Allowing an administrative claim would be a “lesser remedy than requiring direct payment” and would treat the forklift’s owner “ratably with other administrative obligations of the estate.”
Judge Barnes found no reason for entering an order laying out “any special payment mechanism or new timing.” Those issues, he said, are provided for in the Bankruptcy Code. He therefore entered an order granting an administrative claim for $15,000.