Chapter 11 Super Priority Claims Retain Exalted Status After Conversion to Chapter 7

In a case converted from chapter 11 to chapter 7, do administrative expenses incurred in the chapter 7 case take priority over so-called super priority administrative claims granted during a chapter 11 case under Section 364(c)(1)?

The answer is “no,” according to Chief Bankruptcy Judge Thomas L. Saladino of Omaha, Neb. The priority afforded chapter 7 administrative expenses under Section 726(b) “does not trump the super priority granted to Section 364(c)(1) claims,” he said.

A primary supplier refused to extend unsecured credit to the chapter 11 debtor in possession. Although the debtor declined to grant the supplier a lien to secure payment for goods sold during the chapter 11 case, the bankruptcy court did enter an order giving the supplier an administrative claim with “priority over any or all administrative expenses of the kind specified in section 503(b) or 507(b) . . . ,” as Section 364(c)(1) provides.

After the case converted to chapter 7, the supplier sought payment of its unsecured, super priority claim. The chapter 7 trustee and several creditors objected, contending that the super priority claim should take a back seat to chapter 7 administrative expenses. Judge Saladino disagreed in his Nov. 7 opinion.

Judge Saladino said that Section 364(c)(1) is clear, standing alone. In chapter 11, a super priority claim “will have priority over every other kind of administrative claim allowed under Section 503(b).” However, the case had been converted to chapter 7, where Section 726(b) “creates another priority scheme for administrative expenses,” he said.

The proviso in Section 726(b) creates an exception to the ordinary rules of priority by providing that administrative expenses incurred after conversion will have “priority over a claim allowed under section 503(b) of this title incurred under any other chapter of this title.” [Emphasis added.]

Judge Saladino said that super priority claims “are a special category of claims with priority over Section 503(b) administrative claims.” Because super priority claims are granted under Section 364(c)(1), he said they are not administrative claims under Section 503(b). Therefore, he said, “Section 726(b) does not trump the super priority granted to Section 364(c)(1) claims.”

Judge Saladino cited the Eighth Circuit Bankruptcy Appellate Panel for reaching the same conclusion and holding that chapter 11 super priority claims come ahead of chapter 7 administrative claims.