To establish an administrative claim, the creditor isn’t required to show that the goods or services led to an increase in the debtor’s value or profits.
Rather, Bankruptcy Judge Craig T. Goldblatt of Delaware said that it’s enough if the debtor believed that the goods or services provided during chapter 11 would enhance revenue or the value of the business.
Judge Goldblatt was sworn in on April 26. He had been an advocate arguing in the Supreme Court and was a partner with Wilmer Cutler Pickering Hale & Dorr LLP. He was on the winning side in City of Chicago v. Fulton, 141 S. Ct. 585, 208 L. Ed. 2d 384 (Sup. Ct. Jan. 14, 2021), and had clerked on the Supreme Court for Justice David H. Souter.
The Abandoned Project
The debtor was an oil and gas exploration and production company operating in the Permian Basin in west Texas and southeastern New Mexico. The debtor built a facility for the disposal of toxic wastewater generated while drilling. Before and during the chapter 11 case, the debtor was working on a project to commercialize wastewater disposal and offer the service to other drillers.
The creditor provided consulting services for the wastewater commercialization project, generating invoices for more than $200,000. Having control of the debtor’s use of cash collateral, the secured lenders told the debtor to abandon the project and refused allow the use of cash collateral to pay the consultant’s bills connected to the project.
The creditor responded with a motion asking Judge Goldblatt to allow and direct immediate payment of an administrative expense claim under Section 503(b)(1)(A) for the “actual, necessary costs and expenses of preserving the estate.”
In his June 2 opinion, Judge Goldblatt explained how the Third Circuit has said that administrative expenses must “yield a benefit to the estate.” In re Energy Future Holdings Corp., 990 F.3d 728, 741 (3d Cir. 2021). Earlier, however, the Third Circuit recognized that courts must allow administrative claims so that creditors will be encouraged to continue doing business with debtors. Pennsylvania Department of Environmental Resources v. Tristate Clinical Laboratories, 178 F.3d 685, 690 (3d Cir. 1999).
Everyone agreed that the creditor provided the services. The debtor did not contest the amount but argued that the value of the services was “too speculative” to warrant administrative status. The debtor and the lender also contended that the creditor could only shoulder the burden of proof by showing that the services increased profit or revenue or enhanced the debtor’s competitive position.
Judge Goldblatt disagreed. The caselaw, he said, “does not support the proposition that a non-insider third party that provides goods or services to a debtor-in-possession on ordinary commercial terms must prove that receipt of those goods or services led directly to increased profits. None of the cases cited by the parties so holds.”
The record demonstrated the debtor’s belief that the project would generate greater revenue or enhance the value of the business. “That is all that is required,” Judge Goldblatt said.
When a commercial vendor provides goods or services at standard rates and under standard terms, the creditor “does not become a guarantor of the success of the venture,” Judge Goldblatt said.
The debtor had pledged to file a chapter 11 plan “promptly” and to emerge from bankruptcy in three months. Judge Goldblatt allowed the administrative claim but did not order immediate payment. Nonetheless, he was “sensitive” to the fact that delayed payment “may adversely affect” the creditor and that other administrative claims had already been paid.
So, Judge Goldblatt allowed the claim and permitted the creditor to renew the motion for immediate payment if the claim is not paid within 60 days.
To establish an administrative claim, the creditor isn’t required to show that the goods or services led to an increase in the debtor’s value or profits.
Rather, Bankruptcy Judge Craig T. Goldblatt of Delaware said that it’s enough if the debtor believed that the goods or services provided during chapter 11 would enhance revenue or the value of the business.
Judge Goldblatt was sworn in on April 26. He had been an advocate arguing in the Supreme Court and was a partner with Wilmer Cutler Pickering Hale & Dorr LLP. He was on the winning side in City of Chicago v. Fulton, 141 S. Ct. 585, 208 L. Ed. 2d 384 (Sup. Ct. Jan. 14, 2021), and had clerked on the Supreme Court for Justice David H. Souter.
The Abandoned Project
The debtor was an oil and gas exploration and production company operating in the Permian Basin in west Texas and southeastern New Mexico. The debtor built a facility for the disposal of toxic wastewater generated while drilling. Before and during the chapter 11 case, the debtor was working on a project to commercialize wastewater disposal and offer the service to other drillers.
The creditor provided consulting services for the wastewater commercialization project, generating invoices for more than $200,000. Having control of the debtor’s use of cash collateral, the secured lenders told the debtor to abandon the project and refused allow the use of cash collateral to pay the consultant’s bills connected to the project.
The creditor responded with a motion asking Judge Goldblatt to allow and direct immediate payment of an administrative expense claim under Section 503(b)(1)(A) for the “actual, necessary costs and expenses of preserving the estate.”