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Sixth Circuit Clarifies Requirements to Preserve Claims in Bankruptcy

Sixth Circuit Clarifies Requirements to Preserve Claims in Bankruptcy

The United States Bankruptcy Court for the Northern District of Illinois recently allowed an administrative expense for a creditor’s claim against an assignee for the benefit of creditors. In In re Stainless Sales Corp., No. 17-bk-03148, 2017 Bankr. LEXIS 4384 (Bankr. N.D. Ill. Dec. 22, 2017), Stainless Sales Corporation assigned all of its property to an assignee under an assignment for the benefit of creditors before its bankruptcy. The assignment included a forklift that Atlas Toyota Material Handling, LLC leased to Stainless Sales. After assigning the property, the assignee sold the forklift at an auction for $15,500 over the protests of Atlas. Before the assignee could turnover the money to Atlas, however, Stainless Sales’ creditors filed an involuntary chapter 11 petition against the company and the case later converted to chapter 7.

After converting, Atlas filed an application for an administrative expense seeking $15,500. While Atlas initially argued that it was entitled to such an expense under 11 U.S.C. § 503(b)(3)(E), or that the court should impose a constructive trust over the funds, at the hearing the discussion shifted to whether Atlas was entitled to protection under 11 U.S.C. § 543(c)(1) when it became clear that Atlas’ initial arguments were unlikely to succeed. Section 543(c)(1) states that the court, after notice and a hearing, shall protect all entities to which a custodian has become obligated with respect to property of the estate. Here, the court held, Atlas was entitled to protection because the assignee (a custodian) was obligated to Atlas (an entity) for the amount of the forklift, which amount constituted property of the bankruptcy estate. To provide protection, the court found a compelling justification to fashion a new type of administrative expense under § 503(b) for Atlas’ claim, noting that the list of expenses included in the statute is nonexhaustive and demonstrative. Accordingly, the court expanded § 503(b) to include claims arising under § 543(c)(1) and allowed Atlas’ claim as an administrative expense.

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