5
INTELLECTUAL PROPERTY ASPECTS
OF DOING BUSINESS IN CHINA
Elizabeth Chien-Hale
Institute for Intellectual Property in Asia
© Copyright 2007
Chapter 8
Claims and Interests
§ 8:1 Types of Claims and Interests § 8:1.1 Claims
[A] Secured Claims
[B] Priority and Nonpriority Unsecured Claims § 8:1.2 Interests
§ 8:2 Filing Proofs of Claim or Interest § 8:3 Disallowance of Claims or Interests
§ 8:4 Allowance of Administrative Expense Claims § 8:5 Estimation of Claims
§ 8:6 Determination of Tax Liability
§ 8:7 Subordination and Recharacterization § 8:8 Interest on Tax Claims
§ 8:1
Types of Claims and Interests
§ 8:1.1
Claims
Claims are broadly defined as rights to payment or rights to equitable remedies for breach of performance if such breach gives rise to a right to payment.1
Determinations of when claims arise and whether certain credi-tors hold claims under section 101(5) have generated considerable controversy. Courts use three tests to determine whether parties hold prepetition claims: the accrued state law claim test, the con-duct test, and the prepetition relationship test.2
1. 11 U.S.C. § 101(5). A debt is defined as “liability on a claim.” 11 U.S.C. § 101(12). See Ohio v. Kovacs, 469 U.S. 274 (1985) (holding that breach of a statutory obligation in the form of a state court injunction to close up a hazardous waste disposal site, rather than breach of a contractual obliga-tion, was a debt or liability on a claim).
The accrued state law claim theory, which posits that there is no claim until one has accrued under state law, has been largely dis-credited as being too narrow an interpretation of the term “claim.”3
The conduct test provides that a right to payment arises when the conduct giving rise to the alleged liability occurs,4 while the
prepetition relationship test requires some type of conduct, expo-sure, impact, or privity between the debtor ’s prepetition conduct and the claimant.5 Citing philosopher Martin Heidegger, one court
has stated that “a contingent right to payment ‘might be said to ex-ist somewhere on a continuum between being and not being. At some point on the continuum, a right to payment becomes so con-tingent that it cannot fairly be deemed a right to payment at all.”6
In Chapter 11 cases, only holders of allowed claims can vote;7
and, in Chapter 7, Chapter 11, Chapter 12, and Chapter 13 cases, subject to the applicable provisions of those chapters and Bankrupt-cy Code sections 727 and 523, only claims are discharged.8
Claims can be classified several ways, such as prepetition and postpetition, secured and unsecured, or priority and nonpriority. The status of the claim determines whether the claimant will be en-titled to a distribution, as well as, in some cases, the amount of the distribution. For the purposes of this discussion, the initial division shall be between secured and unsecured claims.
[A]
Secured Claims
The Act amends section 506 of the Code, which is captioned “Determination of Secured Status.”9 The provisions of former
sec-tion 506(a) remain unchanged but are renumbered as secsec-tion 506(a)(1). The Act adds section 506(a)(2), which pertains only to in-dividuals in Chapter 7 or Chapter 13 cases with personal property secured by an allowed secured claim. Section 506(a)(2) will be dis-cussed at the end of this section.
3. See Piper Aircraft Corp., 58 F.3d at 1576 n.10; Grady v. A.H. Robins Co.,
839 F.2d 198, 201 (4th Cir.), cert. denied, 487 U.S. 1260 (1988). Contra
In re M. Frenville Co., Inc., 744 F.2d 332 (3d Cir. 1984), cert. denied, 469
U.S. 1160 (1985).
4. See Watson v. Parker (In re Parker), 313 F.3d 1267, 1269 (10th Cir. 2002), cert. denied, 540 U.S. 956 (2003); see also A.H. Robins Co., 839 F.2d at
199.
5. Piper Aircraft Corp., 58 F.3d at 1577.
6. In re CD Realty Partners, 205 B.R. 651, 656 (Bankr. D. Mass. 1997).
7. 11 U.S.C. § 1126(a).
A creditor is secured under the Bankruptcy Code only to the ex-tent of the value of the property securing the creditor ’s claim.10 The
property must be property in which the estate has an interest in or-der to be affected by the Bankruptcy Code. Thus, if a landlord holds only a $3,000 security deposit and the unpaid rent is $10,000, the landlord is secured to the extent of $3,000 and unsecured for $7,000. Similarly, if a bank holds a perfected security interest in in-ventory and equipment worth $80,000, and the bank’s claim is $100,000, the bank is unsecured for $20,000.
It should be noted that a trustee or debtor in possession (but not a creditor)11 may recover from the collateral the reasonable and
nec-essary costs and expenses of preserving or disposing of the collater-al, including, as a result of an Act amendment applicable to cases filed on or after October 17, 2005, the payment of all ad valorem property taxes with respect to the property, to the extent the costs and expenses benefit the secured creditor.12 Thus, if a trustee sells
real estate at public auction on which the secured creditor holds a mortgage, the secured creditor may be responsible for an equitable portion of the expenses associated with the sale, including the auc-tioneer ’s commission and expenses, so long as the secured creditor benefited from the sale by receiving payment on its mortgage.
10. 11 U.S.C. § 506(a)(1) (2005). The creditor ’s secured claim is not extin-guished if it fails to file a proof of claim. Hamlett v. Amsouth Bank (In re Hamlett), 322 F.3d 342, 350 (4th Cir. 2003) (Amsouth’s liens were not extinguished by its failure to file a timely claim against the bankrupt estate). Creditors also hold secured claims in property subject to setoff under 11 U.S.C. § 553, to the extent of the amount subject to setoff. The United States Supreme Court has ruled that lien stripping is not permit-ted in Chapter 7. See Dewsnup v. Timm, 502 U.S. 410 (1992). In Boring v. Promistar Bank (In re Boring), 312 B.R. 789 (W.D. Pa. 2004), the court, citing Dewsnup, held that a Chapter 7 debtor could not “strip off” or void two nonconsensual liens which encumbered real property in which he had no equity.
11. See Hartford Underwriters Ins. Co. v. Union Planters Bank, 530 U.S. 1
Creditors often ask what “extras” may be included as part of the secured claim. To the extent the value of the collateral, after any re-covery by the trustee or debtor in possession as described in the pre-ceding paragraph, is greater than the amount of the claim, the secured creditor is allowed interest, and any reasonable fees, costs, or charges provided for under the agreement on which the claim is based.13
The key to determination of secured status is value, but what does value mean? Forced sale value? Going concern value? What if the estate’s interest in the property is unusual, such as a right of survivorship? Prior to the effective date of the Act, the Code provid-ed only the following guideline: “Such value shall be determinprovid-ed in light of the purpose of the valuation and of the proposed disposition or use of such property, and in conjunction with any hearing on such disposition or use or on a plan affecting such creditor ’s inter-est.”14 While some commentators have thought that the statutory
language means that value is to be determined on a case by case ba-sis, others believe that the nature of the proceeding will determine the value to be used. For example, the Supreme Court has held that, in a Chapter 13 cramdown, replacement value is used to determine the amount of a creditor ’s secured claim.15 The Act adopts that
val-uation standard for the personal property of individual debtors in Chapter 7 and Chapter 13 cases. With respect to personal property securing an allowed claim, value “shall be determined based on the replacement value of such property on the date of the filing of the petition without deduction for costs of sale or marketing.”16 With
respect to property acquired for personal, family, or household pur-poses, “replacement value shall mean the price a retail merchant would charge for property of that kind considering the age and con-dition of the property at the time value is determined.”17 As a
re-sult, expert testimony in particular circumstances may be crucial in establishing the value of a secured claim.
The procedure for obtaining a court determination of the value of a claim secured by a lien on property in which the estate has an interest is by a hearing on a motion.18 Any party in interest may file
13. 11 U.S.C. § 506(b) (2005). See United States v. Ron Pair Enters., Inc., 489 U.S. 235 (1989).
14. 11 U.S.C. § 506(a).
15. Assocs. Commercial Corp. v. Rash, 520 U.S. 953 (1997) (“under § 506(a), the value of property retained because the debtor has exercised the § 1325(a)(5)(B) ‘cram down’ option is the cost the debtor would incur to obtain a like asset for the same ‘proposed . . . use.’”).
16. 11 U.S.C. § 506(a)(2) (2005). 17. Id. See 11 U.S.C. § 1325(a)(5) (2005).
such a motion, and the holder of the claim is entitled to notice of the hearing. It should be noted that this procedure governs only val-uation. If the validity, priority, or extent of a lien is at issue, an ad-versary proceeding must be commenced by filing a complaint.19
Creditors who are partially secured and partially unsecured are called “undersecured” creditors. There are certain ramifications of a creditor ’s being undersecured. First, an undersecured creditor may face action by a trustee or debtor in possession to avoid any prefer-ential payments received within ninety days. Second, in a Chapter 11 case, an undersecured creditor might consider making an elec-tion to be treated under secelec-tion 1111(b). Briefly, that secelec-tion allows a creditor secured by a lien on property, including an undersecured creditor, to elect to have the entire claim secured by the property,20 a
potential benefit when property is likely to appreciate in value.
[B]
Priority and Nonpriority Unsecured Claims
Unsecured claims can be divided into two categories, priority and nonpriority. Any unsecured claims not entitled to priority can be paid only after full payment of all priority claims. As often happens in bankruptcy cases, unsecured claims without any priority may re-ceive only a nominal distribution or no distribution at all.
Priority simply refers to the order in which these unsecured claims are paid under section 507 of the Bankruptcy Code. It is es-sential to remember that priority claims are entitled to special treat-ment only because the Code provides for such treattreat-ment, not because the claimant has a lien or other security. The priority provi-sions of the Code do not apply to a claimant who is secured. For ex-ample, as is more fully discussed below, certain tax claims are entitled to priority in payment. If, for example, the Internal Reve-nue Service has a tax lien, the Internal ReveReve-nue Service is treated as a secured creditor, not as a priority claimant.21
Claims that qualify as priority claims are to be paid in the order set forth in section 507(a). Each category of claim must be paid in full before the succeeding category can receive payment.21.1 Within a
19. FED. R. BANKR. P. 7001(2). 20. See chapter 11 in this Deskbook.
21. If a notice of federal tax lien is properly recorded, the IRS is a secured cred-itor and the priority rules of § 507(a)(8) are inapplicable to that secured claim. See Suarez v. United States (In re Suarez), 182 B.R. 916, 919 n.4 (Bankr. S.D. Fla. 1995).
category, claims are paid pro rata if there are insufficient funds to pay the claims in full, with the exception of superpriority claims discussed below. However, entities that are subrogated to the rights of a priority claimant, other than for administrative expenses or gap claims (discussed below), cannot assert the priority. For example, an officer of a debtor corporation who pays certain prepetition taxes owed by the debtor, cannot step into the shoes of the Internal Reve-nue Service to assert a eighth priority claim.22
The Act makes significant changes to the priority and amounts payable to unsecured claims. Priority claims fall into the following categories, and are to be paid in the order discussed.
FIRST PRIORITY: What were first priority claims, namely adminis-trative expenses allowed under section 503(b), have been supplanted by three categories of claims. For cases filed after the effective date of the Act, October 17, 2005, allowed unsecured claims for domes-tic support obligations23 are entitled to be paid first, if, on the
peti-tion date, they are owed to or recoverable by a spouse, former spouse, or child of the debtor, or such child’s parent, legal guardian, or responsible relative, without regard to whether the claim is filed by such person or is filed by a governmental unit on behalf of such person.24 The priority is conditional: if funds are received by a
gov-ernmental unit after the date of the filing of the petition they must be applied and distributed in accordance with applicable nonbank-ruptcy law.25
The second category of first priority claims are subject to section 507(a)(1)(A) discussed above.26 They are allowed unsecured claims
for domestic support obligations that were assigned as of the date of the filing of the petition by a spouse, former spouse, child of the debtor, or such child’s parent, legal guardian, or responsible relative to a governmental unit (unless such obligation is assigned voluntar-ily by the spouse, former spouse, child, parent, legal guardian, or re-sponsible relative of the child for the purpose of collecting the debt).27 Alternatively, these claims may be owed directly to or
recov-erable by a governmental unit under applicable nonbankruptcy law, on the condition the funds received postpetition by the governmen-tal unit are applied and distributed in accordance with applicable nonbankruptcy law.28
22. 11 U.S.C. § 507(d). Cf. Bevan v. Socal Commc’ns Sites, LLC (In re Bevan), 327 F.3d 994 (9th Cir. 2003).
23. 11 U.S.C. § 507(a)(1) (2005). The term domestic support obligation is defined at 11 U.S.C. § 101(14A) (2005).
24. 11 U.S.C. § 507(a)(1)(A) (2005). 25. Id.
26. 11 U.S.C. § 507(a)(1)(B) (2005). 27. Id.
Certain administrative expenses are included in the third catego-ry of first priority claims.29 To be entitled to this priority, a trustee
must have been appointed under section 701, 702, 703, 1104, 1202, or 1302, and the claims must be of the type set forth in sec-tion 503(b)(1)(A), (2), and (6).30 These administrative expenses may
be paid before the claims pertaining to domestic support obligations set forth in section 507(a)(1)(A) and (B) if the trustee administers assets that are otherwise available for the payment of such claims.31
SECOND PRIORITY: Administrative expenses allowed under sec-tion 503(b) are entitled to second priority, as well as fees and charg-es against the charg-estate under chapter 123 of title 28.32 Administrative
expenses include the actual, necessary costs and expenses of pre-serving the estate, such as wages, salaries, or commissions for ser-vices rendered after the commencement of the case.33 They also
include rent due postpetition, and payments to trade creditors for goods and services purchased postpetition.
29. 11 U.S.C. § 507(a)(1)(C) (2005).
30. These expenses are the actual, necessary costs and expenses of preserving the estate and include wages, salaries and commissions for services ren-dered after the commencement of the case and wages and benefits awarded pursuant to a judicial proceeding or a proceeding of the National Labor Relations Board, 11 U.S.C. § 503(b)(1)(A)(i) and (ii) (2005); com-pensation and reimbursement award under section 330(a) to bankruptcy professionals, 11 U.S.C. § 503(b)(2) (2005); and fees and mileage payable under chapter 119 of title 28. 11 U.S.C. § 503(b)(6) (2005).
31. 11 U.S.C. § 507(a)(1)(C) (2005). This language is ambiguous. Are the trustee’s administrative expenses limited to property that the support creditor could reach if the bankruptcy had never been filed? See Catherine E. Vance & Corinne Cooper, Nine Traps and One Slap: Attorney Liability
under the New Bankruptcy Law, 79 AM. BANKR. L.J. 283, 325–27 (2005). 32. 11 U.S.C. § 507(a)(2) (2005).
Taxes incurred by the estate are also considered an administra-tive expense, so long as the tax is not of a kind specified in the eighth category (described below).3 4 The Act amends section
503(b)(1)(B) to clarify that these taxes incurred by the estate, which are entitled to administrative priority, may be secured or unsecured, including property taxes for which liability is in rem, in personam, or both so long as the tax is not described in section 507(a)(8).35
Taxes entitled to administrative priority include taxes attributable to an excessive allowance of a tentative carryback adjustment that the estate received, whether the taxable year to which the adjust-ment related ended before or after the commenceadjust-ment of the case.36
Any fines, penalties, or reductions in credit relating to taxes entitled to administrative priority receive the same priority.37
The administrative priority awarded to trustees, examiners, and any professional persons properly employed by the estate, for rea-sonable compensation and reimbursement of necessary expenses approved by the court is significant to those working in the often risky area of bankruptcy.38 Persons rendering professional services
to the estate without court approval run the risk of not being per-mitted to be paid from the estate at all.39
Second priority is also awarded for the payment of actual and necessary expenses of:
(1) Creditors filing an involuntary petition;
(2) Creditors that recover for the benefit of the estate, after the court’s approval, any property transferred or concealed by the debtor;
34. 11 U.S.C. § 503(b)(1)(B) (2005). 35. 11 U.S.C. § 503(b)(1)(B)(i) (2005). 36. 11 U.S.C. § 503(b)(1)(B)(ii).
37. 11 U.S.C. § 503(b)(1)(C). Contrary to some prior cases, the Supreme Court has held that tax penalties cannot be categorically subordinated. United States v. Reorganized CF&I Fabricators of Utah, Inc., 518 U.S. 213, 116 S. Ct. 2106 (1996). The Act amends section 503(b)(1) by adding a new section, 11 U.S.C. § 503(b)(1)(D), which provides that notwith-standing the requirement of section 503(a), namely making a timely request for payment of an administrative expense, “a governmental unit shall not be required to file a request for the payment of an expense described in subparagraph (B) and (C), as a condition of its being an allowed administrative expense.”[sic].
38. 11 U.S.C. § 330(a). There was a split of authority as to whether debtor ’s attorneys’ fees may be paid from the estate. The Supreme Court has held that the present text of § 330 does not allow Chapter 7 debtor ’s attorneys to be compensated from the estate unless the attorney was employed by the trustee with court approval. Lamie v. United States Tr., 540 U.S. 526, 124 S. Ct. 1023 (2004).
39. See 11 U.S.C. §§ 327, 1103(a), and In re Jarvis, 53 F.3d 416 (1st Cir.
(3) Creditors that prosecute a criminal offense relating to the case or to the business or property of the debtor;
(4) Custodians superseded under section 543, together with compensation for their services; and
(5) Parties, other than creditors’ committees appointed under section 1102, who make a substantial contribution in a case under Chapter 9 or 11.40
In addition, an attorney or an accountant for an entity whose ex-penses are allowable under the preceding paragraphs (1) to (5) is en-titled to administrative priority for the reasonable compensation for professional services based on the time, nature, extent, and value of such services, together with reimbursement for actual and neces-sary expenses.41 An indenture trustee who makes a substantial
con-tribution in a Chapter 9 or 11 case is also entitled to reasonable compensation for services as an administrative expense.42
THIRD PRIORITY: Third priority is awarded to “gap” claims,43 so
called because they are claims arising in the ordinary course of the debtor ’s business or financial affairs during the gap after the filing of an involuntary petition, but before the earlier of the appointment of a trustee and the order for relief.44
FOURTH PRIORITY: Allowed unsecured claims for wages, salaries, or commissions, including vacation, severance, and sick leave pay earned by an individual, and certain compensation of commis-sioned independent contractors, or corporations with a single em-ployee, are entitled to payment as a fourth priority expense. The Act expands the period of time within which the claim can be earned from ninety days to 180 days before the filing of the petition or the date of the cessation of the debtor ’s business, whichever occurs first, and increases the amount entitled to priority from $4,925 to $10,000.45 If the priority pertains to sales commissions earned by
an individual or by a corporation with only one employee acting as an independent contractor in the sale of goods or services for the debtor in the ordinary course of the debtor ’s business, then during the twelve months preceding the date of the filing of the petition, the individual or corporation must have earned at least 75% of the amount earned from the debtor.46
FIFTH PRIORITY: Fifth priority is awarded to allowed unsecured claims for contributions to an employee benefit plan that arise from services rendered within 180 days before the earlier of (1) the date of the filing of the petition, or (2) the date of the cessation of the debtor ’s business.47 As with wage claims, there is a cap on the
amount payable for such claims. For each benefit plan, claims may not exceed the number of employees covered by the plan multiplied by $10,000, an increase from $4,925, resulting from the Act, for cases filed on or after October 17, 2005, less the aggregate amount paid to employees as a fourth priority, and the aggregate amount paid by the estate on behalf of the employees to any other employee benefit plan.48
SIXTH PRIORITY: Sixth priority is granted to allowed unsecured claims of persons (1) engaged in the production or raising of grain against certain debtors who own or operate grain storage facilities, or (2) engaged as U.S. fishermen against debtors who have acquired fish or fish produce and who are engaged in operating fish produce storage or processing facilities. Again, these claims were capped at $4,925 for each individual, and are now capped at $10,000.49
SEVENTH PRIORITY: Certain consumer deposits are entitled to sixth priority status, to the extent of $2,225 per claimant.50 These
deposits must have been made prior to the commencement of the case in connection with the purchase, lease, or rental of property, or the purchase of services, for the personal, family, or household use of the individual, that were not delivered or provided.51
EIGHTH PRIORITY: Certain allowed unsecured tax claims of gov-ernmental units are entitled to payment as eighth priority claims.52
Section 507(a)(8), which governs eighth priority claims, should be reviewed carefully to determine whether a particular claim is, in fact, a priority claim.53 Moreover, practitioners should be aware that
under section 507 (a)(8)(A)(i), which describes tax claims measured by income or gross receipts for taxes for the taxable year ending on
47. 11 U.S.C. § 507(a)(5) (2005). Howard Delivery Serv., Inc. v. Zurich Am. Ins. Co. (In re Howard Delivery Serv., Inc.), ___ U.S. ___, 126 S. Ct. 2105 (2006) (insurance company not entitled to priority status because worker ’s compensation was not a wage substitute).
48. 11 U.S.C. § 507(a)(5) (2005). 49. 11 U.S.C. § 507(a)(6) (2005). 50. 11 U.S.C. § 507(a)(7) (2005). 51. Id.
52. 11 U.S.C. § 507(a)(8) (2005).
53. See In re United Healthcare Sys., Inc., 396 F.3d 247 (3d Cir.), cert denied,
or before the date of the filing of the petition for which the return, if required, was last due three years or less, including extensions, be-fore the filing of the bankruptcy petition, certain tolling periods may apply to extend the lookback period.54 In addition to taxes for which
a return was due as stated above, eighth priority is granted to taxes measured by income or gross receipts assessed within 240 days be-fore the date of the filing of the petition, exclusive of any time in which an offer in compromise with respect to the tax was pending during the 240-day period plus thirty days, and any time during which a stay of proceedings against collection was in effect in a pri-or case during the 240-day period plus ninety days.55
Broadly, the types of taxes entitled to priority are income taxes, property taxes, withholding taxes, employment taxes, excise taxes, and customs duties.56 Specifically, the Act amends section 507(a)(8)
to provided that property taxes incurred, whether or not assessed, before the filing of the petition, and last payable without penalty within one year of the filing, are entitled to priority.57
Moreover, any penalties related to claims entitled to eighth prior-ity that represent compensation for actual pecuniary loss are enti-tled to the same priority.58 It is important to distinguish between
compensation for actual pecuniary loss, and penalties that are puni-tive, because the latter are not eighth priority claims. If, for exam-ple, a penalty is assessed against an officer liable for the taxes of a corporation, and the penalty represents the amount of the unpaid taxes, the penalty may represent an actual pecuniary loss. On the other hand, if the penalty is merely a late payment fee in addition to interest on unpaid taxes, the penalty is punitive and should not be entitled to payment as an eighth priority claim.
Additionally, section 507 grants a priority to a claim of a govern-mental unit arising from an erroneous refund or credit of a tax. The priority is the same as the claim for the tax to which the refund or credit relates.59
NINTH PRIORITY: Unsecured claims with respect to commit-ments to depository institutions have priority at this level.60
TENTH PRIORITY: The Act adds a tenth priority for allowed claims for death or personal injuries resulting from the operation of a motor vehicle or vessel, if such operation was unlawful because
54. See Young v. United States, 535 U.S. 43 (2002).
55. 11 U.S.C. § 508(a)(8)(ii)(I) and (II) (2005). 56. 11 U.S.C. § 507(a)(8)(A)–(F).
the debtor was intoxicated from using alcohol, a drug, or another substance.61
SUPERPRIORITY: There is an important exception to the general rule that priority claims are paid pro rata within the particular pri-ority. If a claimant is awarded adequate protection of its secured claim under sections 362, 363, or 364, and if, notwithstanding such protection, the creditor has a claim allowable as an administrative expense, then the creditor ’s claim is entitled to priority over every other claim allowable as an administrative expense.62 These claims
are called “superpriority” claims and are subject only to section 364(c).63
§ 8:1.2
Interests
The term “interest” is not defined in the Bankruptcy Code. Gen-erally speaking, an interest, as opposed to a claim, refers to the property right of a holder of an equity security of the debtor, includ-ing a share in a corporation, or an interest of a limited partner in a limited partnership—the type of ownership interest defined as an “equity security” in 11 U.S.C. § 101(16). As in general corporate or partnership law, equity security holders are at the bottom of the dis-tribution line. Unless special provisions are made in a confirmed Chapter 11 plan of reorganization, an equity security holder cannot expect to receive any distribution unless all creditors are paid in full.64
§ 8:2
Filing Proofs of Claim or Interest
In order for a distribution to be made on a claim, the claim must be “allowed.”65 Special rules apply for the allowance of
administra-tive expenses, which will be discussed below. Subject to certain ex-ceptions, a form known as a “Proof of Claim” ordinarily must be filed in order for a creditor to receive a distribution. It must con-form substantially to the Official Form.66 The advantage of filing a
proof of claim is that a claim properly filed in accordance with the Bankruptcy Rules is deemed allowed unless a party in interest ob-jects.67
61. 11 U.S.C. § 507(a)(10) (2005). 62. 11 U.S.C. § 507(b).
63. 11 U.S.C. § 364(c). See chapter 11 of this Deskbook. 64. 11 U.S.C. § 1129(b).
65. 11 U.S.C. § 502(a).
66. See Official Form 10; FED. R. BANKR. P. 3001(a).
Except as provided in cases under Chapters 9 and 11, most credi-tors must file a proof of claim in order to receive a distribution. These include all unsecured creditors, except those holding a claim entitled to priority as an administrative expense,68 and all equity
se-curity holders. A secured creditor intending to rely solely on its col-lateral in satisfaction of its claim need not file a proof of claim, unless a party in interest has requested a determination of the value of the secured claim, and whether it should be allowed.69
In cases under Chapters 9 and 11, the schedule of liabilities filed by the debtor constitutes prima facie evidence of the validity and amount of the claims of creditors, unless the claims are scheduled as disputed, contingent, or unliquidated.70 Similarly, the list of
equi-ty securiequi-ty holders filed by a debtor constitutes prima facie evidence of the validity and amount of the equity security interest, and it is not necessary for the holders of these interests to file a proof of in-terest.71 Of course, if the creditor or equity security holder disagrees
with the amount listed, the creditor or equity security holder should file a proof of claim or interest. Moreover, if the claim or interest is not scheduled, or is scheduled as disputed, contingent, or unliqui-dated, the creditor or equity security holder must file a proof of claim or interest.72 A properly filed proof of claim or interest
super-sedes any scheduling of that claim or interest.73
68. See FED. R. BANKR. P. 1019(6), and INTERIM FED. R. BANKR. P. 1019(6). Both provide with respect to cases converted or reconverted to Chapter 7:
A request for payment of an administrative expense incurred before conversion of the case is timely filed under § 503(a) of the Code if it is filed before conversion or a time fixed by the court. If the request is filed by a governmental unit, it is timely if it is filed before conversion or within the later of a time fixed by the court or 180 days after the date of the conversion. A claim of a kind speci-fied in § 348(d) may be filed in accordance with Rules 3001(a)–(d) and 3002. Upon the filing of the schedule of unpaid debts incurred after commencement of the case and before conversion, the clerk, or some other person as the court may direct, shall give notice to those entities listed on the schedule of the time for filing a request for payment of an administrative expense and, unless a notice of insufficient assets to pay a dividend is mailed in accordance with Rule 2002(e), the time for filing a claim of a kind specified in § 348(d).
69. FED. R. BANKR. P. 3012.
70. 11 U.S.C. §§ 925, 1111(a). See FED. R. BANKR. P. 3003(b)(1), INTERIM FED. R. BANKR. P. 3003(b)(1).
71. FED. R. BANKR. P. 3003(b)(2), and INTERIM FED. R. BANKR. P. 3003(b)(2). 72. FED. R. BANKR. P. 3003(c)(2), and INTERIM FED. R. BANKR. P. 3003(c)(2). 73. FED. R. BANKR. P. 3003(c)(4), and INTERIM FED. R. BANKR. P. 3003(c)(4).
The creditor or equity security holder may not necessarily be the party who files the proof of claim. If a creditor fails to file a proof of claim on or before the first date set for the meeting of creditors, the debtor or the trustee may do so in the name of the creditor.74 If the
creditor thereafter files a proof of claim, the creditor ’s filing will su-persede the proof of claim filed by the debtor or trustee. In addition, if a creditor has not filed a proof of claim, any codebtor, or one who has secured the creditor, may, within thirty days after the expiration of the time for filing claims, execute and file a proof of claim in the name of the creditor, if known, or if unknown, in his own name.75
Again, if the creditor thereafter files a proof of claim, the creditor ’s claim shall supersede the proof of claim filed by the codebtor or one who has secured the creditor. A situation may also arise where a claim has been transferred. Rule 3001(e) governs the filing of claims by the transferee.
A proof of claim is not difficult to complete and file properly. It must conform to the applicable official form. The proof of claim must also be executed by the creditor or the creditor ’s authorized agent,76 except when the claims are deemed filed, as discussed above
in connection with Chapters 9 and 11. If a claim is based on a writ-ing, the original or a duplicate must be filed with the proof of claim. If the writing has been lost or destroyed, a statement of the circum-stances of the loss must be filed. In addition, if a secured creditor chooses to file a proof of claim, the proof of claim must be accompa-nied by evidence that the security interest has been perfected.77
Claims are to be filed with the clerk of the court in which the case is pending.78 In Chapter 7, 12, or 13 cases, the time for filing
claims generally is set at ninety days after the first date set for the
74. FED. R. BANKR. P. 3004. Effective December 1, 2005, this rule was amended to conform to section 501(c) of the Code. It now requires a debtor and a trustee to wait until the creditor ’s opportunity to file a proof of claim has expired. The advisory committee note contains the observa-tion that permitting the filing of a claim on behalf of a creditor by the debtor or the trustee permits the creditor to participate in any distribu-tions, an important factor if the claim is nondischargeable.
75. FED. R. BANKR. P. 3005(a).
76. An agent specifically authorized to protect the interests of a creditor in bankruptcy has standing to file a proof of claim and respond to an objec-tion to the claim. Becket & Lee LLC v. O’Dell (In re Greer), 305 F.3d 1297 (11th Cir. 2002).
77. FED. R. BANKR. P. 3001(d).
meeting of creditors.79 Governmental entities have until 180 days
after the order for relief to file.80 In a Chapter 7 case, however, the
court will not set a time for filing claims if it appears that there will be insufficient assets to pay any dividend (a “no asset” case).81 If it
subsequently appears that the estate will be able to pay a dividend, the court will issue a separate notice setting a time to file claims.82
In cases under Chapters 9 and 11, the court fixes the time with-in which proofs of claim or with-interest may be filed.83 It is not unusual
in reorganization cases for the debtor to request the court to set a “bar date” for filing claims so that the debtor knows well in advance of the confirmation hearing the amount and nature of claims.
Unless the court also bars creditors from amending claims after a fixed date, claims may be amended after any bar date so long as the proof of claim is timely filed (or deemed filed in Chapters 9 and 11).84 Furthermore, if a claim arises from the rejection of an
execu-tory contract of the debtor, the claim may be filed within such time as the court directs.85
79. FED. R. BANKR. P. 3002(c), and INTERIM FED. R. BANKR. P. 3002(c). The date appears in the official notice issued by the court setting the date for the first meeting of creditors, except in no asset cases as discussed below. In a Chapter 13 case, an unsecured creditor who fails to file a timely claim will not share in distributions under the plan; extensions are available only for infants and incompetents. FED. R. BANKR. P. 3002(c). The same principle has been applied to secured creditors. See In re Hogan, 346 B.R. 715 (Bankr. N.D. Tex. 2006).
80. FED. R. BANKR. P. 3002(c)(1), and INTERIM FED. R. BANKR. P. 3002(c)(1). Interim Bankruptcy Rule 3002 has a special provision for a proof of claim filed by a governmental unit for a claim resulting from a tax return filed under section 1308. Effective October 17, 2005, “a tax return filed under § 1308 is timely filed if it is filed not later than 180 days after the date of the order for relief or 60 days after the date of the filing of the tax return, whichever is later.”
81. FED. R. BANKR. P. 2002(e), and INTERIM FED. R. BANKR. P. 2002(e). 82. FED. R. BANKR. P. 3002(c)(5), and INTERIM FED. R. BANKR. P. 3002(c)(5). 83. FED. R. BANKR P. 3003(c)(3), and INTERIM FED. R. BANKR. P. 3003(c)(3).
See Pioneer Inv. Servs. Co. v. Brunswick Assocs. Ltd. P’ship, 507 U.S. 380
(1993) (holding that a creditor must establish excusable neglect for the fil-ing of a late proof of claim. See also In re Banco Latino Int’l, 404 F.3d 1295 (11th Cir. 2005); In re Kmart Corp., 381 F.3d 709 (7th Cir. 2004),
cert. denied, 543 U.S. 1056, 125 S. Ct. 933 (2005).
84. “Amendments to timely filed creditor proofs of claim have been liberally permitted to cure a defect in the claim as originally filed, to describe the claim with greater particularity or to plead a new theory of recovery on the facts set forth in the original claim.” In re Kolstad, 928 F.2d 171, 175 (5th Cir.) (citation omitted), cert. denied, 502 U.S. 958 (1991). See also Woburn Assoc. v. Kahn (In re Hemingway Transp., Inc.), 954 F.2d 1, 10 (1st Cir. 1992).
In some instances, a creditor may wish to withdraw a claim. A creditor may withdraw a claim as of right by filing a notice of with-drawal. If, however, an objection has been filed to the creditor ’s claim, a complaint has been filed against the creditor in an adver-sary proceeding, or the creditor has participated significantly in the case, the creditor may not withdraw the claim except on order of the court after a hearing upon notice to the trustee or debtor in posses-sion and any creditors’ committee.86
As a general proposition, in all cases, except a Chapter 7 no asset case, creditors should establish procedures to insure that proofs of claim are timely filed. This will avoid the necessity of determining if one is required and will protect and preserve the rights of the creditor. The only caveat to this rule is the possibility of vesting the bankruptcy court with jurisdiction by implied consent when juris-diction might not otherwise be present, which may bring the creditor into a court where it does not wish to appear.87
§ 8:3
Disallowance of Claims or Interests
A claim or interest, proof of which is properly filed, is deemed al-lowed unless a party in interest objects.88 Such parties in interest
include a trustee, a debtor in possession, a creditors’ committee, or a creditor of a general partner in a partnership that is a debtor under Chapter 7.
The grounds for objection are many and varied. An objecting party could contest the amount of the claim, the validity of a securi-ty agreement, the validisecuri-ty of an asserted securisecuri-ty interest, the desig-nation of the type of claim, and assert any other grounds that may void or change the claim. Section 502(b) of the Bankruptcy Code in-dicates certain types of claims that are specifically not allowable. Af-ter notice and a hearing, the court shall not allow the claim to the extent that:
(1) such claim is unenforceable against the debtor and property of the debtor, under any agreement or applicable law for a reason other than because such claim is contingent or unmatured;89
86. FED. R. BANKR. P. 3006.
87. See chapter 2 of this Deskbook. Revised venue provisions added by the
Act may ameliorate the potential harm. See 28 U.S.C. § 1409 (2005). 88. 11 U.S.C. § 502(a). In an important tax case, the Supreme Court has
ruled that the burden of proof with respect to a corporate officer ’s liability for a “responsible officer” penalty for the corporation’s failure to pay state use tax was not altered from what it would have been outside bankruptcy simply because the corporate officer filed bankruptcy. See Raleigh v. Ill. Dep’t of Revenue, 530 U.S. 15 (2000).
(2) such claim is for unmatured interest;90
(3) if such claim is for a tax assessed against property of the estate, such claim exceeds the value of the interest of the estate in such property;91
(4) if such claim is for services of an insider or attorney of the debtor, such claim exceeds the reasonable value of such ser-vices;92
(5) such claim is for a debt that is unmatured on the date of the filing of the petition and that is excepted from discharge under section 523(a)(5) of this title;93
(6) if such claim is the claim of a lessor for damages resulting from the termination of a lease of real property, such claim exceeds—
(A) the rent reserved by such lease, without acceleration, for the greater of one year, or 15%, not to exceed three years, of the remaining term of such lease, following the earlier of—
(i) the date of filing of the petition, and
(ii) the date on which such lessor repossessed, or the lessee surrendered, the leased property; plus (B) any unpaid rent due under such lease, without
accelera-tion, on the earlier of such dates;94
(7) if such claim is the claim of an employee for damages result-ing from the termination of an employment contract, such claim exceeds—
(A) the compensation provided by such contract, without acceleration, for one year following the earlier of— (i) the date of the filing of the petition, or
(ii) the date on which the employer directed the employee to terminate, or such employee termi-nated, performance under the contract; plus (B) any unpaid compensation due under such contract,
without acceleration, on the earlier of such dates;95
(8) such claim results from a reduction, due to late payment, in the amount of an otherwise applicable credit available to the debtor in connection with an employment tax on wages, sal-aries, or commissions earned from the debtor;96 or
(9) proof of such claim is not timely filed, except to the extent tardily filed as permitted under paragraph (1), (2), or (3) of section 726(a) or under the Federal Rules of Bankruptcy Pro-cedure, except that a claim of a governmental unit shall be timely filed if it is filed before 180 days after the date of the order for relief or such later time as the Federal Rules of Bankruptcy Procedure may provide.97 The Act adds a
pro-viso. In a Chapter 13 case, a claim of a governmental unit for a tax with respect to a return filed under section 1308 shall be timely if the claim is filed on or before the date that is sixty days after the date on which the return was filed as required.98
An objection must be in writing and filed with the court, with a copy of the objection with notice of the hearing mailed or otherwise delivered to the claimant, the debtor or debtor in possession, and the trustee at least thirty days prior to the hearing.99
Certain types of claims are disallowed, even if no objection is filed. The court is required to disallow any claim of any entity from which property is recoverable under the turnover or avoidance of transfer provisions, unless the entity has paid the amount, or turned over any such property, for which the entity is liable.100 In
addition, the court is required to disallow any claim for reimburse-ment or contribution made by a co-debtor, surety, or guarantor of an obligation of the debtor, unless:
96. 11 U.S.C. § 502(b)(8).
97. 11 U.S.C. § 502(b)(9). See In re Outboard Marine Corp., 386 F.3d 824 (7th Cir. 2004) (permitting subordination of late filed claim in Chapter 7 case). See also In re Wright, 300 B.R. 453 (Bankr. N.D. Ill. 2003) (holding that the bankruptcy court had no authority under the Code or the Rules to permit a late filed claim in a Chapter 13 case because § 726(a) is only applicable to Chapter 7 cases pursuant to 11 U.S.C. § 103(b)). But see United States v. Waindel (In re Waindel), 65 F.3d 1307, 1310 (5th Cir. 1995) (holding that § 1325(a)(4) incorporates § 726(a)(3) because it con-tains the “best interests of creditors test”); and In re Collier, 307 B.R. 20 (Bankr. D. Mass. 2004) (in Chapter 13 case, only after a showing of rea-sonable notice may a creditor ’s claim be barred).
(1) the entity has paid the obligation; (2) the claim is not contingent; or
(3) the entity paying the obligation asserts a right of subroga-tion to the rights of such creditor.101
§ 8:4
Allowance of Administrative Expense Claims
As the court noted in Midway Airlines Corp.,102 “[t]he term
‘ad-ministrative expense’ is not defined in the Code, but courts agree that an administrative expense has two defining characteristics: (1) the expense and right to payment arise after the filing of bank-ruptcy, and (2) the consideration supporting the right to payment provides some benefit to the estate.
It is important to distinguish between the procedure for
allow-ance of claims for administrative expenses and payment of them. It
is also important to consider the type of administrative expense. Administrative expenses can be allowed only after notice and a hearing,103 and, pursuant to section 348(d),104 administrative
ex-pense claims retain their priority status upon conversion from Chapter 11 to Chapter 7 and from conversion from Chapter 11 to Chapter 13.105
As a practical matter, many expenses of the estate that would fall in the category of administrative expenses are paid in the ordinary course if the business of the debtor is authorized to be operated un-der the provisions of the Code.106 Thus, postpetition rent or trade
debt may not require any specific court approval because of the gen-eral authorization to incur such expenses in the normal conduct of business.
101. 11 U.S.C. § 502(e)(1). See Capital Indus., Inc. v. Regal Cinemas, Inc. (In
re Regal Cinemas, Inc.), 393 F.3d 647 (6th Cir. 2004).
102. CIT Commc’ns Fin. Corp. v. Midway Airlines Corp. (In re Midway Air-lines Corp.), 406 F.3d 229, 237 (4th Cir. 2005) (citing, inter alia, Hicks, Muse & Co. v. Brandt, 272 B.R. 510, 512 (B.A.P. 1st Cir. 2002)).
103. 11 U.S.C. § 503(b).
104. 11 U.S.C. § 348(d) (“A claim against the estate or the debtor that arises after the order for relief but before conversion in a case that is converted under section 1112, 1208, or 1307 of this title, other than a claim speci-fied in section 503(b) of this title, shall be treated for all purposes as if such claim had arisen immediately before the date of the filing of the peti-tion.”).
105. See United States v. Fowler (In re Fowler), 394 F.3d 1208 (9th Cir. 2005)
(specifically holding that § 348(d) requires that a debt for a postpetition employment tax incurred as an administrative expense of a Chapter 11 bankruptcy estate retains its first priority administrative expense status upon conversion to Chapter 13). See also United States v. Nolan, 517 U.S. 535 (1996).
If the administrative expense is “ordinary course” debt that has not been paid by the Chapter 7 trustee, a Chapter 11 or 12 debtor in possession, or a Chapter 13 business debtor, the holder of the claim should file a request for payment.107 Because notice and a hearing
are required,108 either the party requesting payment of the
adminis-trative expense or the clerk of the court must provide notice to all parties in interest pursuant to Rule 2002.109
An objection to the application for allowance of an administra-tive expense may be filed within the time prescribed in the no-tice.110 Regardless of whether an objection is filed, the court may
hold a hearing on the application. Even though the court may ap-prove the application for allowance, the estate may not have suffi-cient funds to pay the claim. Thus, the court may permit only a portion of the allowed claim to be paid at a particular time, or allow the claim to be paid in the future or pro rata with other administra-tive claimants if the estate is administraadministra-tively insolvent.111
In many cases, the claimant does not request payment prior to the close of the case. In a Chapter 7 case, the trustee will simply file a proposed order of distribution with the court, listing the adminis-trative expenses the trustee intends to pay. Notice of these expenses is issued by the court, and creditors and other parties in interest are given an opportunity to object.112 Similarly, in Chapter 11 cases, the
disclosure statement may provide creditors and parties in interest with notice of the proposed administrative expenses. Other chapters of this treatise provide more specific information regarding the han-dling of administrative expenses in Chapter 7, 11, 12, and 13 cases. Section 503(b) lists nine examples of administrative expenses. The “actual necessary costs and expenses of preserving the estate” are listed first. These include three categories of expense: wages, salaries, and commissions for services rendered after the
com-107. 11 U.S.C. § 503(a). See Form 8.2 (Request for Payment of Administrative Expense Claim).
108. 11 U.S.C. § 503(b).
109. FED. R. BANKR. P. 2002(a)(6).
110. See Form 8.3 (Trustee’s Objection to Request for Payment of
Administra-tive Expense Claim).
111. For example, see Specker Motor Sales Co. v. Eisen, 393 F.3d 659 (6th Cir. 2004), citing 11 U.S.C. § 726(b) and requiring disgorgement of a prepeti-tion retainer to achieve pro rata distribuprepeti-tion among administrative claim-ants.
112. See Tarbox v. United States Tr., (In re Reed), 405 F.3d 338 (5th Cir. 2005),
mencement of the case,113 as well as wages and benefits awarded
pursuant to a judicial proceeding or a proceeding of the National La-bor Relations Board as back pay attributable to any period of time occurring after the commencement of the case.114 The latter type of
expense was added by the Act. It is also qualified. The back pay award must be as a result of a violation of state or federal law by the debtor, but the award is entitled to administrative expense status without regard to the time of occurrence of the unlawful conduct or whether any services were rendered. The court must determine that payment of the wages and benefits will not substantially increase the probability of layoff or termination of current employees or of nonpayment of domestic support obligations.115
The next category of actual and necessary costs and expenses re-lates to any tax, except those entitled to eighth priority under sec-tion 507(a)(8), incurred by the estate whether secured or unsecured, including property taxes for which liability is in rem, in personam, or both, or any tax attributable to an excessive allowance of a tenta-tive carryback adjustment that the estate received, whether the tax-able year to which the adjustment relates ended before or after the commencement of the case.116 The third category of actual and
nec-essary costs and expenses relates to any fine, penalty, or reduction i n c r e d i t w i t h r e s p e c t t o t h e t a x e s d e s c r i b e d i n s e c t i o n 503(b)(1)(B).117
An amendment to section 503(b) added by the Act provides that notwithstanding the requirement that an administrative expense claimant file a request for payment, a governmental unit is not required to file such a request for expenses described in section 503(b)(1)(B) and (C) as a condition of its being an allowed adminis-trative expense.118
The second type of administrative expense listed in section 503(b) is compensation and reimbursement of expenses awarded under section 330(a).119 Claims for administrative expenses are
gen-erated by the professionals in a bankruptcy estate. Payment of rea-sonable compensation to these professionals is permitted only
113. 11 U.S.C. § 503(b)(1)(A)(i) (2005). The Act renumbered this category of expenses.
114. 11 U.S.C. § 503(b)(1)(A)(ii) (2005). 115. Id.
116. 11 U.S.C. § 503(b)(1)(B)(i) and (ii) (2005). 117. 11 U.S.C. § 503(b)(1)(C).
118. 11 U.S.C. § 503(b)(1)(D) (2005).
“after notice and a hearing.”120 Courts vary widely on whether a
hearing is actually held on an application for fees and expenses. Many courts will not hold a hearing unless an objection is filed. Interim compensation may be awarded prior to the close of the case.121 Local practices vary widely as to the conditions under which
interim compensation will be paid. Section 331 gives the court con-siderable latitude in that regard.
A person seeking compensation for actual necessary services ren-dered and reimbursement of expenses must file an application for allowance with the court and a notice of the application. The appli-cation should set forth the number of hours worked and the fee per hour, and a detailed description of the services performed, with the amount of detail required by local rules and the U.S. trustee’s guide-lines.122 Accurate time sheets, particularly for attorneys and
accoun-tants, are vital backup for these applications. If an objection is filed to the application, the court may hold a hearing, at which time the professional will be required to defend the requested fee. If the court considers the hours invested or the fees charged to be excessive, it will reduce the fee to an amount that it considers reasonable. The important lesson to be learned is that no fee is earned until it is ap-proved by the court.
The third category of administrative expenses listed in section 503(b) is for the actual, necessary expenses incurred by certain cred-itors or custodians.123 These parties are identified above in section
8:1.1[B]. The Code also provides an administrative expense for rea-sonable compensation for services rendered by an attorney or an ac-countant to the entities listed in section 503(b)(3), based on the time, the nature, the extent, and the value of such services, and the cost of comparable services other than in a case under this title, as well as reimbursement of their actual and necessary expenses.124
The Code further provides administrative expenses status for the reasonable compensation for services rendered by an indenture trustee in making a substantial contribution in a case under
Chap-120. 11 U.S.C. § 330. See Iannochino v. Rodolakis (In re Iannochino), 242 F.3d 36 (1st Cir. 2001), in which the court held that the bankruptcy court’s implicit findings as to the quality and value of services rendered by debtor ’s counsel when it allowed counsel’s administrative claim for fees precluded the debtors, under principles of res judicata, from suing their attorney for malpractice.
121. 11 U.S.C. § 331.
122. See Guidelines for Reviewing Applications for Compensation and
Reim-bursement of Expenses Filed Under 11 U.S.C. § 330, effective January 30, 1996.
ter 9 or Chapter 11, as well as the fees and mileage payable under chapter 119 of title 28.125
The Act adds three new categories of administrative claims. The first relates to nonresidential real property leases. If the lease has been assumed under section 365 and subsequently rejected, the Act provides an administrative expense claim in
a sum equal to all monetary obligations due, excluding those arising from or relating to a failure to operate or a penalty provi-sion, for the period of two years following the later of the rejec-tion date or the date of actual turnover of the premises, without reduction or setoff for any reason whatsoever except for sums actually received or to be received from an entity other than the debtor, and the claim for remaining sums due for the balance of the term of the lease shall be a claim under section 502(b)(6).126
The Act permits an administrative expense claim for the actual, necessary costs and expenses of closing a health care business.127
More significantly, it permits an administrative expense claim for entities that fail to assert timely reclamation rights.128 Thus, those
parties may assert an administrative expense claim 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 such debtor ’s busi-ness.”129
The Act also limits retention bonuses, frequently referred to as key employment retention plans or KERPs, and severance pay-ments. These restrictions are set forth in section 503(c), which is reproduced below because of its complexity:
Notwithstanding subsection (b), there shall neither be allowed, nor paid—
(1) a transfer made to, or an obligation incurred for the benefit of, an insider of the debtor for the purpose of inducing such person to remain with the debtor ’s business, absent a find-ing by the court based on evidence in the record that— (A) the transfer or obligation is essential to retention of the
person because the individual has a bona fide job offer from another business at the same or greater rate of compensation;
125. 11 U.S.C. § 503(b)(5) and (6).
126. 11 U.S.C. § 503(b)(7) (2005). Section 502(b)(6) places a cap on lease rejec-tion damages claims. 11 U.S.C. § 502(b)(6). See secrejec-tion 8:3, supra. 127. 11 U.S.C. § 503(b)(8) (2005).
(B) the services provided by the person are essential to the survival of the business; and
(C) either—
(i) the amount of the transfer made to, or obligation incurred for the benefit of, the person is not greater than an amount equal to ten times the amount of the mean transfer or obligation of a similar kind given to nonmanagement employees for any pur-pose during the calendar year in which the transfer is made or the obligation is incurred, or
(ii) if no such similar transfers were made to, or obli-gations were incurred for the benefit of, such non-management employees during such calendar year, the amount of the transfer or obligation is not greater than an amount equal to 25% of the amount of any similar transfer or obligation made to or incurred for the benefit of such insider for any purpose during the calendar year before the year in which such transfer is made or obligation is incurred;
(2) a severance payment to an insider of the debtor, unless— (A) the payment is part of a program that is generally
appli-cable to all full-time employees; and
(B) the amount of the payment is not greater than ten times the amount of the mean severance pay given to nonmanagement employees during the calendar year in which the payment is made; or
(3) other transfers or obligations that are outside the ordinary course of business and not justified by the facts and circum-stances of the case, including transfers made to, or obliga-tions incurred for the benefit of, officers, managers, or consultants hired after the date of the filing of the peti-tion.130
Section 503(c) limits the payment and allowance of retention claims by preventing the payment of retention bonuses to insiders to induce them to remain in the debtor ’s employment unless the payment is essential to actually retain the insiders and the insiders have bona fide job offers from other businesses in the same or a greater amount of compensation.
§ 8:5
Estimation of Claims
There may be claims that are contingent or unliquidated, mak-ing it impossible to distribute funds of the estate based on a fixed dollar amount. An example of such a claim is when the debtor is a defendant in a nonpersonal injury tort action and no liability or damages has yet been established, nor will any trial be held until some distant date. Accordingly, the Code requires the court to esti-mate a dollar value for any contingent or unliquidated claim for purposes of allowance, if the fixing or liquidation thereof would un-duly delay the administration of the case, and for any right to pay-ment arising from a right to an equitable remedy for breach of performance.131
§ 8:6
Determination of Tax Liability
The court may determine certain tax liabilities.132 It may not,
however, determine the amount or legality of a tax, fine, penalty, or addition to tax, if the amount or legality was previously contested and adjudicated prior to the commencement of the case.133 In
addi-tion, the court may not determine any right of the estate to a tax re-fund before the earlier of
(1) 120 days after the trustee properly requests such a refund from the governmental unit from which such refund is claimed;
(2) a determination by such governmental unit of such request;134 or
(3) the amount or legality of any amount arising in connection with an ad valorem tax on real or personal property of the estate, if the applicable period for contesting or redetermin-ing that amount under any law (other than bankruptcy law) has expired.135
This third criteria was added by the Act.
The Act also requires the clerk to maintain a list under which a federal, state or local governmental unit responsible for the collec-tion taxes within the district may designate an address for service of
131. 11 U.S.C. § 502(c). See, e.g., In re G-I Holdings, Inc., 323 B.R. 583 (Bankr. D.N.J. 2005), discussing claims estimation in the context of asbestos personal injury claims.
132. 11 U.S.C. § 505. 133. 11 U.S.C. § 505(a)(2)(A).
requests under this subsection and describe where further informa-tion concerning addiinforma-tional requirements for filing such requests may be found.136 If a taxing authority does not utilize the list by
providing the information to the clerk, the request for determina-tion of tax liability may be served at the address for the filing of a tax return or protest in connection with the tax.137
A trustee or debtor in possession may request a determination of any unpaid liability of the estate for any tax incurred during the ad-ministration of the case. By following the procedures prescribed in section 505(b)(2), the trustee may be assured that he or she has no lingering tax liability after the case is closed.138 Thus, by submitting
a tax return and requesting a determination of any unpaid liability of the estate to a governmental unit, the estate, the trustee, the debtor, and any successor to the debtor will be discharged from any liability for such tax upon payment of the tax shown on the return if (1) the government unit does not notify the trustee, within sixty days after such request, that such return has been selected for amination, or (2) the governmental unit does not complete an ex-amination and notify the trustee of any tax due within 180 days after the request or within such additional time as the court, for cause, may permit.139 The broad discharge also applies if the tax is
paid after determination by the court, after notice and a hearing, af-ter completion by the governmental unit of an examination, or upon payment of the tax determined by such governmental unit as being due.140
Finally, section 505 provides that, notwithstanding the automat-ic stay, after determination by the court of a tax under its provi-sions, the governmental unit charged with responsibility for collection of such tax may assess such tax against the estate, the debtor, or a successor to the debtors, subject to any otherwise appli-cable law.141
§ 8:7
Subordination and Recharacterization
In certain instances, pursuant to the doctrine of subordination, a creditor or class of creditors may be dropped lower down in the dis-tribution line. Subordination agreements that are enforceable under applicable nonbankruptcy law are enforceable under the Code.142
The court is required to subordinate the claim of a surety or codebt-or of an obligation to a creditcodebt-or of the estate until the creditcodebt-or has been paid in full.143
The Code also recognizes the principles of equitable subordina-tion.144 These principles, defined by case law, generally hold that a
claim or interest may be subordinated only if its holder is guilty of inequitable conduct.145 The concept of equitable subordination may
be a mighty weapon for unsecured creditors facing little or no distri-bution to use against secured creditors with substantial collateral if the unsecured creditors can show that the secured creditors have acted inequitably. Bankruptcy courts have the power to recharacter-ize loans as capital in the appropriate case.145.1
§ 8:8
Interest on Tax Claims
The Act adds a new section providing for interest on tax claims. It provides that, if any provision of the Code requires the payment of interest on a tax claim or on an administrative expense tax, or the payment of interest to enable a creditor to receive the present value of the allowed amount of its claim, the rate of interest shall be the rate determined under applicable nonbankruptcy law.146 It
fur-ther provides that if taxes are paid under a confirmed plan, the rate of interest shall be determined as of the calendar month in which the plan is confirmed.147
143. 11 U.S.C. § 509(c). 144. 11 U.S.C. § 510(c).
145. In Benjamin v. Diamond (In re Mobile Steel Co.), 563 F.2d 692 (5th Cir. 1977), the court formulated a three part test requiring a showing that the claimant engaged in “inequitable conduct”; that the conduct injured other creditors or gave the claimant an unfair advantage; and that equitable sub-ordination of the claim is not inconsistent with the provisions and poli-cies of the Bankruptcy Code. The Supreme Court has held that categorical equitable subordination is not permitted if it would change the distribu-tion scheme of § 707. See United States v. Reorganized CF&I Fabricators of Utah, Inc., 518 U.S. 213 (1996); United States v. Nolan, 517 U.S. 116 535 (1966).
145.1. See Fairchild Dornier GMBH v. Official Comm. of Unsecured Creditors (In re Official Comm. of Unsecured Creditors), 453 F.3d 225, 231–33 (4th Cir. 2006), and cases cited. See also In re Insilco Techs., Inc., 480 F.3d 212 (3d Cir. 2007).
