The first among the courts of appeals to rule on the issue, the Third Circuit held that an administrative claim arising between confirmation and the effective date of a chapter 11 plan must be filed before the administrative bar date to avoid being discharged.
In his August 30 opinion, Circuit Judge Thomas L. Ambro said that “holders of post-confirmation, pre-effective date administrative expense claims are bound by a bar date like other holders of claims against the estate, and thus they cannot choose to bypass the bankruptcy process altogether.”
The result, Judge Ambro said, is “supported by [the] principal purpose of granting the debtor a fresh start.” A debtor “still needs comfort [that] administrative expense claims will not come out of the woods later to assert them against the reorganized debtor.”
The Plan and the ‘Admin’ Claim
The corporate debtor confirmed a chapter 11 plan. The plan said that administrative expense claims must be filed before a specified date, which we shall refer to as the “admin bar date.” Naturally, the plan also said that all claims would be discharged on the effective date of the plan.
One of the debtor’s executives was fired two months after confirmation. The firing took place two months before the plan became effective and about three months before the admin bar date.
The effective date of the plan had been delayed given the need for governmental regulatory approvals. The debtor said it had given the executive notice of the admin bar date. The executive had also received notices about the general bar date and the deadlines for voting and objecting to confirmation.
After being fired, the 67-year-old executive immediately hired a lawyer, believing that his firing was the result of age discrimination. He filed a complaint with the Equal Employment Opportunity Commission before the admin bar date. He filed suit in federal district court about two months after the admin bar date. The plan’s effective date occurred about two months after the executive was fired. He did not file an administrative claim before or after the admin bar date.
The debtor filed a motion for summary judgment in district court, contending that the claim was discharged because the executive had not filed a claim in bankruptcy court before the admin bar date. The district court denied the debtor’s motion but granted the executive’s motion for summary judgment, holding that Section 503 does not authorize a bar date to discharge post-confirmation administrative claims.
The district court also held that Section 1141(d) prohibits the discharge of post-confirmation claims.
The district court authorized an interlocutory appeal, which the Third Circuit accepted.
Plans May Alter the Default Rule in Section 1141(d)(1)
Methodically, Judge Ambro dissected the issues leading to his conclusion that the plan discharged post-confirmation-but-pre-effective-date administrative claims. First, he addressed the question of whether a post-confirmation claim is an administrative expense of the chapter 11 case.
The district court had held that the claim was an administrative expense but was not discharged. Judge Ambro found no textual support for the holding. He said that a “claim is either an administrative expense claim or it is not; it cannot be a chameleon.”
Judge Ambro went on to say:
[T]he District Court’s position that the claim is entitled to administrative priority, but not subject to discharge, is untenable, as that would allow creditors to cherry-pick whether they want to recover from the estate or the reorganized debtor.
Recognizing that the chapter 11 estate was still in existence when the claim arose, Judge Ambro held that the “claim is thus an administrative expense claim under § 503 and subject to the Administrative Claims Bar Date.”
Citing the Collier treatise, Judge Ambro next held that Section 503 authorizes bankruptcy courts to set and enforce bar dates for administrative expense claims. He said that bar dates for administrative claims “help the debtors know their liabilities and implement a viable plan to obtain a fresh start.”
Judge Ambro turned to the question of whether Section 503 permits courts to discharge post-confirmation administrative claims. In that regard, the district court had held that a bankruptcy court cannot set a bar date for post-confirmation administrative claims.
Judge Ambro said that “Section 503 recognizes no such limitation, and we generally refrain from adding words to a statute.” He said that Section 503 works in tandem with Section 1141(d) by allowing bankruptcy courts “to set and enforce bar dates,” while Section 1141(d) allows the plan and a confirmation order “to govern the discharge of claims (with a few exceptions).”
Last, Judge Ambro held that Section 1141(d) does not prohibit the discharge of post-confirmation claims.” Rather, it sets a default rule “that can be overridden by the plan and confirmation order.”
The district court had held that Section 1141(d)(1) precludes the discharge of post-confirmation claims. The section says:
Except as otherwise provided in this subsection, in the plan, or in the order confirming the plan, the confirmation of a plan —
(A) discharges the debtor from any debt that arose before the date of such confirmation, and any debt of a kind specified in section 502(g),502(h), or 502(i) of this title . . . ; and
(B) terminates all rights and interests of equity security holders and general partners provided for by the plan.
Disagreeing with the district court, Judge Ambro read the section as creating
a default rule for discharging pre-confirmation debts, meaning it applies only when the plan and confirmation order are silent on the issue. Here the Plan provided for the discharge of postconfirmation claims not timely filed by the Administrative Claims Bar Date. This overrides the default rule in § 1141(d)(1).
Judge Ambro reversed the district court but said that the decision would not prevent the executive from asking the bankruptcy court to accept a late-filed claim for cause under Section 503(a).
The first among the courts of appeals to rule on the issue, the Third Circuit held that an administrative claim arising between confirmation and the effective date of a chapter 11 plan must be filed before the administrative bar date to avoid being discharged.
In his August 30 opinion, Circuit Judge Thomas L. Ambro said that “holders of post-confirmation, pre-effective date administrative expense claims are bound by a bar date like other holders of claims against the estate, and thus they cannot choose to bypass the bankruptcy process altogether.”
The result, Judge Ambro said, is “supported by [the] principal purpose of granting the debtor a fresh start.” A debtor “still needs comfort [that] administrative expense claims will not come out of the woods later to assert them against the reorganized debtor.”