In ASM Capital LP v. Ames Dept. Stores Inc. (In re Ames Dept. Stores Inc.), No. 07-1362, 2009 WL 2972510 (2d Cir. Sept. 18, 2009), the Second Circuit considered “whether section 502(d) of the Bankruptcy Code, which bars allowance of certain claims filed against the debtor’s estate by alleged recipients of preferential transfers, also bars allowance to such a claimant of postpetition administrative expenses pursuant to section 503(b) of the Bankruptcy Code.” Ames Dept., 2009 WL 2972510 at *1. In ruling that no such bar exists, the Second Circuit vacated the lower courts’ decisions.
Section 502(d) of the Bankruptcy Code provides:
Notwithstanding subsections (a) and (b) of this section, the court shall disallow any claim of any entity from which property is recoverable under section 542, 543, 550, or 553 of this title or that is a transferee of a transfer avoidable under section 522(f), 522(h), 544, 545, 547, 548, 549, or 724(a) of this title, unless such entity or transferee has paid the amount, or turned over any such property, for which such entity or transferee is liable under section 522(i), 542, 543, 550, or 553 of this title.
11 U.S.C. §502(d). Section 503(b) states, in relevant part, that “[a]fter notice and a hearing, there shall be allowed administrative expenses, including -- . . . (1)(A) the actual, necessary costs and expenses of preserving the estate. . . .” Further, §546(c) provides:
(c)(1) Except as provided in subsection (d) of this section and in section 507(c), and subject to the prior rights of a holder of a security interest in such goods or the proceeds thereof, the rights and powers of the trustee under sections 544(a), 545, 547, and 549 are subject to the right of a seller of goods that has sold goods to the debtor, in the ordinary course of such seller’s business, to reclaim such goods if the debtor has received such goods while insolvent, within 45 days before the date of the commencement of a case under this title, but such a seller may not reclaim such goods unless such seller demands in writing reclamation of such goods – (A) not later than 45 days after the date of receipt of such goods by the debtor; or (B) not later than 20 days after the date of commencement of the case, if the 45-day period expires after the commencement of the case.
11 U.S.C. §546(c)(1).
In this case, following the commencement of Ames Department Stores Inc.’s bankruptcy filing on Aug. 20, 2001, the debtor suspended payment of administrative expense claims in 2002 and thereafter initiated preference actions against several creditors, including G&A Sales Inc. In 2002 and 2003, ASM Capital LP acquired G&A’s administrative expense claim of $360,117.65 and G&A’s reclamation claim of $33,292.50. In 2004, the debtor began making interim distributions to administrative expense claimants, but refused to do so with ASM on the ground that G&A, from whom ASM purchased the claims, was a defendant in a pending preference action. Both the bankruptcy court and the district court held that §502(d) applied to administrative expense payments and barred the payment to ASM until (a) the preference action against G&A had been finally resolved (which did occur) and (b) G&A had repaid the amount owing thereunder (which likely could not occur as G&A itself had filed a chapter 11 petition). The Second Circuit disagreed.
In considering the language of the statute, the court noted that “[t]he structure and context of section 502(d) suggests that Congress intended it to differentiate between claims and administrative expenses, and not to apply to the latter.” Ames Dept., 2009 WL 2972510 at *6. In addition, the court engaged in a comprehensive analysis of §§502 and 503 as well as the definition of a claim as applied therein, and found that they are “separate and independent.” Id. Further, the Second Circuit recognized that administrative expenses are postpetition claims, which are given a higher priority than prepetition claims. Id. at *7-8. As such, due to this distinction and the clear language of the statutes, the Second Circuit held that §502(d) did not apply to §503(b) administrative expenses. Id. at *8.