rutiny. See, e.g., In re Diocese of Buffalo, N.Y., 637 B.R. 701, 704 (Bankr. W.D.N.Y. 2022);In re JW Res., Inc., 536 B.R. 193, 197 (Bankr. E.D. Ky. 2015); In re Genco Shipping & Trading Ltd., 509 B.R. 455, 465 (Bankr. S.D.N.Y. 2014). Other courts apply stricter scrutiny, requiring evidence that proposed bid protections are in the "best interests of the estate." Collier at ¶ 363.02[7] (citing cases).Finally, some courts, and in particular the U.S. Court of Appeals for the Third Circuit, have generally allowed or disallowed bid protections, including break-up fees, according to the standards governing the allowance of administrative expenses under section 503(b). See In re Reliant Energy Channelview LP, 594 F.3d 200 (3d Cir. 2010); Calpine Corp. v. O'Brien Envtl. Energy, Inc. (In re O'Brien Envtl. Energy, Inc.), 181 F.3d 527, 535 (3d Cir. 1999); accord In re Acis Cap. Mgmt., L.P., 604 B.R. 484, 517 (N.D. Tex. 2019); In re President Casinos, Inc., 314 B.R. 786, 788 (Bankr. E.D. Mo. 2004).Section 503(b) of the Bankruptcy Code provides in pertinent 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." 11 U.S.C. § 503(b). According to the Third Circuit, for a claim to be entitled to administrative expense status under this provision, it must "arise from a [postpetition] transaction with the debtor-in-possession," and "be beneficial to the debtor-in-possession in the operation of the business." O'Brien, 181 F.3d at 532–33; accord In re Philadelphia Newspapers, LLC, 690 F.3d 161, 172–73 (3d Cir. 2012).In O'Brien, the debtor sought court approval of a stalking-horse agreement prior to a planned auction of its assets. The bankruptcy court refused to approve the break-up fee and expense reimbursement provisions, expressing concern that allowing such fees and expenses would chill or unnecessarily complicate the bidding process. After the auction, the losing stalking-horse bidder filed an appl

An Eleventh Circuit Court of Appeals’ decision permits a creditor both to be paid in full under Bankruptcy Code section 503(b)(9) for goods delivered within 20 days before commencement of a bankruptcy case, and to use the delivery of those goods on credit as “subsequent new value” in defense to a trustee’s preference lawsuit.TAKEAWAYSA creditor who receives payment from a debtor in the 90-day period before bankruptcy can be subject to a preference lawsuit to recover the payment.

704 (Bankr. W.D.N.Y. 2022); In re JW Res., Inc., 536 B.R. 193, 197 (Bankr. E.D. Ky. 2015); In re Genco Shipping & Trading Ltd., 509 B.R. 455, 465 (Bankr. S.D.N.Y. 2014). Other courts apply stricter scrutiny, requiring evidence that proposed bid protections are in the "best interests of the estate." Collier at ¶ 363.02[7] (citing cases).Finally, some courts, and in particular the U.S. Court of Appeals for the Third Circuit, have generally allowed or disallowed bid protections, including break-up fees, according to the standard governing the allowance of administrative expenses under section 503(b). See In re Reliant Energy Channelview LP,594 F.3d 200 (3d Cir. 2010); Calpine Corp. v. O'Brien Envtl. Energy, Inc. (In re O'Brien Envtl. Energy, Inc.), 181 F.3d 527, 535 (3d Cir. 1999); accord In re Acis Cap. Mgmt., L.P.,604 B.R. 484, 517 (N.D. Tex. 2019); In re President Casinos, Inc., 314 B.R. 786, 788 (Bankr. E.D. Mo. 2004).This standard for allowed administrative expenses is set forth in section 503(b)(1)(A) of the Bankruptcy Code, which provides in pertinent 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." 11 U.S.C. § 503(b). According to the Third Circuit, for a claim to be entitled to administrative expense status under this provision, it must "arise from a [postpetition] transaction with the debtor-in-possession," and "be beneficial to the debtor-in-possession in the operation of the business." O'Brien, 181 F.3d at 532–33; accord In re Philadelphia Newspapers, LLC, 690 F.3d 161, 172–73 (3d Cir. 2012).In O'Brien, the debtor sought court approval of a stalking-horse agreement prior to a planned auction of its assets. The bankruptcy court refused to approve the break-up fee and expense provisions, expressing concern that allowing such fees and expenses would chill or unnecessarily complicate the bidding process. After the auction, the losing stalking-horse bidder filed an application

Sanchez Energy In Sanchez Energy Corporation, Case No. 19-34508 (Southern District of Texas), Judge Marvin Isgur took a limited view of an indenture trustee’s statutory right to payment. The indenture trustee (the “IT”) sought payment of its fees and expenses in the amount of approximately $930,000 as an administrative priority claim under section 503(b)(1)(A) of the Bankruptcy Code, arguing that such fees and expenses were part of the “actual, necessary costs and expenses of preserving the [bankruptcy] estate[.]” Claims allowed under section 503(b)(1)(A) are entitled to payment ahead of all other unsecured claims and must be paid in full in order for a chapter 11 plan to be confirmed.Under section 503(b)(1)(A), a claim may be considered a “necessary” expense of administration if it confers a benefit to the debtor and its bankruptcy estate.

In affirming the bankruptcy court’s order, the district court agreed that electricity is not a “good” for purposes of the administrative priority provisions of the Bankruptcy Code and, alternatively, that the principle that administrative priority claims should be narrowly construed dictated that Hudson’s claim was properly denied.Background In April 2012, Hudson filed a motion in the GAPTC bankruptcy proceeding pursuant to 11 U.S.C. § 503(b)(9 seeking allowance and administrative priority for $875,943.90 in electricity it sold to GAPTC and its affiliates within the 20 days before the petition date. Section 503(b)(9) provides for “administrative expenses…[for] the value of any goods received by the debtor within 20 days before the date of commencement of a case under this title in which the goods have been sold to the debtor in the ordinary course of business.”

Section 503(b)(9) OverviewEver since its addition to the Bankruptcy Code in 2005, there has been an ongoing debate as to whether electricity is a “good” or a “service” for purposes of section 503(b)(9). If electricity is determined to be a “good,” it is entitled to section 503(b)(9) priority claim status. By contrast, if electricity is determined to be a “service,” it is not entitled to such priority status and instead treated as a general unsecured claim.Split between the Courts To date, six bankruptcy court decisions have found electricity to be a good, qualifying for priority claim status under section 503(b)(9). See, e.g., In re Wometco de P.R. Inc., 2016 WL 155393, at *2 (Bankr. D.P.R. Jan. 12, 2016) (court “concludes that because electricity is movable at the time of identification to the contract, the purchased electricity constitutes a good under 11 U.S.C. § 503(b)(9)”); In re S. Mont. Elec. Generation and Transmission Coop., Inc., 2013 WL 85162, at *5 (Bankr. D. Mont., Jan. 8, 2013) (“electricity is movable, tangible and consumable” and is “goods” under Section 503(b)(9)); In re Escalera Res. Co., 563 B.R. 336, 353 (Bankr. D. Colo. 2017); In re Erving Indus., Inc., 432 B.R. 354, 365 (Bankr. D. Mass. 2010) (“Electricity easily meets the movability requirement .... After it is generated, the electric current moves through a huge network of transmission and distribution systems before ultimately reaching the customer's location. Like movability, the identifiability of electricity is subject to little debate .... Courts have generally held that electricity is identifiable because it can be measured at the point it passes through the meter.”); In re Grede Foundries, Inc., 435 B.R. 593 (Bankr. W.D. Wis. 2010) (allowing a section 503(b)(9) administrative expense priority claim and holding that “[n]either the Bankruptcy Code nor the UCC require that parti

Thus, an allowed administrative claim is one of the best outcomes for an unsecured creditor in a Chapter 9 or Title III case. Necessary Costs of Preserving the Estate Under 11 U.S.C. § 503(b)(1)(A) Section 503(b)(1) of the Bankruptcy Code provides a nonexclusive list of administrative claims. Among others, “the actual, necessary costs and expenses of preserving the estate” are administrative claims.

WE WON. WE MADE NEW LAW.In the Chapter 11 case of Beaulieu Group, LLC (carpet industry in Dalton, Georgia) in the U.S. Bankruptcy Court for the Northern District of Georgia, we defended Auriga Polymers Inc. (a subsidiary of Indorama Ventures) in a preference claim filed by the Beaulieu Liquidating Trustee.We successfully asserted Auriga’s “subsequent new value” defense, that after preference payments were received, Auriga shipped more goods. A substantial portion of the goods were shipped within 20 days prior to the Chapter 11 filing, which provided Auriga a Bankruptcy Code Section 503(b)(9) administrative priority claim for the value of the goods shipped. The pivotal issue in this case, as in virtually every preference case, was whether Auriga could both be paid on its Section 503(b)(9) administrative expense priority claim (for goods shipped within 20 days prior to the Chapter 11 filing) and also reduce its preference liability based on the value of shipments that comprised such claim.In the vast majority of Chapter 11 cases, after the “main event” (a Section 363 sale of all assets or a reorganization), the “residual” assets are transferred to a “creditor” trust to realize upon such assets.

As a result, the claims of vendors who supply product to the debtor within this time period (and who have not received payment) are placed above, and paid before, those of the general unsecured creditors.The relevant part of Section 503(b)(9) reads:"After notice and a hearing, there shall be allowed administrative expenses, . . . including—….(9) the value of any goods received by the debtor within 20 days before the date of commencement of a case under this title in which the goods have been sold to the debtor in the ordinary course of such debtor’s business." 11 U.S.C. § 503(b)(9). At first blush, the section appears simple enough, in that it requires: (a) a vendor to sell goods to a debtor in the ordinary course of business (and not receive payment for the goods); and (b) such goods to be "received" by the debtor within 20 days prior to filing bankruptcy.

Preference defense received an important boost this week when the Eleventh Circuit decided that invoices paid under 11 U.S.C. § 503(b)(9) can count as "new value" in defending against preference claims. It is the first circuit court to consider the question, making its decision in favor of creditors' rights that much more significant.