The Heavy Burden of Supporting an Administrative Claim Just Got Easier in Delaware Bankruptcy Court | Obermayer Rebmann Maxwell & Hippel LLP

Recently appointed Delaware Bankruptcy Judge Craig T. Goldblatt in the case of oil and gas driller MTE Holdings LLC ruled that to establish an administrative claim for priority payment, a creditor need not to demonstrate that the goods or services have resulted in a real increase in the debtor’s profits or value; rather, it suffices that the debtor reasonably believed that it would increase the revenue or overall value of the business¹.

The underlying facts.

The debtor’s business included oil and gas drilling which generates, as a by-product, significant quantities of toxic wastewater which must be disposed of in accordance with applicable environmental regulations. Prior to its bankruptcy, the debtor had initiated a pipeline project to bring sewage from its various field wells to a central disposal facility. The capacity of this pipeline exceeded the debtor’s wastewater production and the debtor planned to generate additional revenue by billing other oil and gas exploration and production companies for the disposal of the wastewater. The debtor has retained the services of Gray Surface to provide consultation and advisory services on rights of way, easements and service use agreements for the pipeline project.

Following the bankruptcy filing, the debtor’s pre-petition secured lenders announced that they did not support the proposed sewage disposal expansion and would not allow their cash collateral be used there ². Notwithstanding the lenders’ decision, the debtor wanted to proceed with the project and assured Gray Surface that its invoices would be paid through a non-debtor affiliate controlled by the debtor’s principal. However, when the Affiliate failed to pay as promised, Gray Surface filed a claim seeking indemnity and immediate payment of an administrative expense for the unpaid invoices.

Allocation of claims for administrative costs in the event of bankruptcy.

Requests for reimbursement of administrative costs, which benefit from a priority of payment, are authorized for “the costs and expenses real and necessary for the preservation of the estate”. ³ Authorized administrative expense claims must be paid in full before payment is made to lower classifications such as general unsecured claims. In addition, a Chapter 11 debtor cannot emerge from bankruptcy without paying authorized administrative debt holders in full as of the effective date of the plan or obtaining their consent to different treatment.

In the Third Circuit, a successful administrative plaintiff must demonstrate that “(1) there was a post-petition transaction between the plaintiff and the estate and (2) those expenses provided a benefit to the estate.” .4

In the MTE Holdings case, there was no dispute regarding the amounts of the invoices or whether Gray Surface performed the services related to its administrative claim. Rather, the main dispute before the Court was whether the “benefit to the estate” of the services provided under the sewage disposal project was too speculative to warrant administrative expense status.

How is the estate benefit measured?

The Delaware Bankruptcy Court observed that Third Circuit case law dealing with the requirement of a “mass benefit” for the award of an administrative expense claim reflects two competing themes. On the one hand, a creditor must “bear the heavy burden” of proving that the claim is entitled to priority treatment of administrative costs. On the other hand, however, courts also recognize the need to extend administrative debt status to post-petition creditors to encourage them to continue doing business with the debtor. Absent such priority, it would be unlikely that the debtor would be able to retain its workforce or procure goods and services essential to the continuation of its business or an orderly winding-up and winding-up.

In opposing Gray Surface’s motion for an administrative claim, the debtor argued that in order to “bear its heavy burden” in order to be eligible for treatment of the administrative costs, Gray Surface had to prove that the bankruptcy estate had obtained “demonstrable increases in profits, revenue or competitive position” as a result. of the services provided.

Notwithstanding the language of a “heavy burden” to demonstrate a “benefit to the estate”, the bankruptcy court rejected this argument, concluding that the applicable case law does not impose a requirement on an uninitiated third party who provides goods or services to a debtor in possession on normal trade terms to prove that the receipt of such goods or services directly resulted in an increase in profits or valuation. The court filing established that the debtor retained Gray Surface to provide services related to the sewage disposal project because he “believed the project would generate additional revenue or increase the value of his business.” and that, the Court found, is all that is required.

An ordinary commercial seller who provides goods or services after the petition at standard commercial rates and terms “does not become a guarantor of business success”. If it were otherwise, ordinary commercial sellers would be forced to charge debtors in possession higher rates to offset the risk of their goods or services being used in businesses that ultimately failed, thereby hindering rather than advancing legislative purpose of facilitating reorganization. companies in difficulty.

This notice provides an arm’s length vendor dealing post-petition with a debtor on standard commercial terms with a strong argument that the “benefit to the estate” requirement establishing an administrative priority claim is satisfied simply by showing that the debtor reasonably believed that the goods or services provided would increase revenue or increase the value of the business rather than the more onerous standard that the transaction actually increased profits or value.

[1] In re MTE Holdings LLC, et al. Case No. 19-12269 (CTG) (Bankr. D.Del.)

[2] Secured lenders are entitled to adequate protection against the decrease in value of their collateral, including their cash collateral, and lenders often enter into a series of court-approved stipulations that allow debtors to use that cash collateral in accordance with agreed budgets.

[3] 11 USC § 503(b)(1)(A).

[4] In re Energy Future Holdings Corp., 990 F.3d 728, 741 (3d Cir. 2021)

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