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Bankruptcy Court Holds 11 U.S.C. § 502(d) Does Not Bar Allowance of an Administrative Claim

The Bankruptcy Court for the Eastern District of Michigan recently issued an opinion restricting the use of 11 U.S.C. 502(d) to object to and delay payment of administrative expense claims. In re Energy Conversion Devices, Inc., 2013 Bankr. LEXIS 536 (Bankr. E.D. Mich. Feb. 11, 2013). After confirmation of a liquidating plan, Ameri-Source Specialty Products filed a motion requesting allowance and immediate payment of an administrative expense under 11 U.S.C. 503(b)(9) for steel delivered to the debtor within 20 days before the bankruptcy filing. The Liquidation Trustee objected, arguing that Ameri-Source had received pre-petition preferential payments avoidable under 11 U.S.C. 547 and, therefore, the expense must be disallowed by application of 11 U.S.C. 502(d) until resolution of the preference avoidance action and payment by Ameri-Source of any resulting judgment. The Trustee further argued that, even if section 502(d) did not strictly apply to bar Ameri-Source’s administrative claim, the Bankruptcy Court should still exercise its discretion to delay payment of the administrative expense until resolution of the preference action for the purpose of protecting the liquidating bankruptcy estate from any failure or inability by Ameri-Source to pay a future judgment. Noting a split among courts, the Bankruptcy Court determined that Congress did not intend to limit allowance and payment of administrative expenses. Accordingly, the Bankruptcy Court held that section 502(d) does not bar any administrative expense, including pre-petition expenses arising under section 503(b)(9). The Bankruptcy Court also held that it had no discretion to delay payment of the administrative expense because payment was required both by the terms of the confirmed plan and by section 1129(a)(9)(A). The opinion leaves open the question whether a bankruptcy court would have discretion to delay payment of an administrative expense if there had been no confirmed plan.

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