In re Zero Energy Systems LLC, 2020 WL 6226100, 69 BCD 123 (Bankr. S.D. Iowa 2020).
In a dispute during a bankruptcy proceeding involving Zero Energy Inc., one of its creditors, Conlon Construction Company (“Conlon”), sought administrative expense status (priority status) in the payment of its claim from the bankruptcy estate. The Court ruled in favor of the bankruptcy trustee and against Conlon.
Zero Energy Inc. (“Debtor”), a manufacturer of insulated concrete wall panels, filed for Chapter 11 protection in March 2018, and subsequently sought to convert its case to Chapter 7. As part of the conversion process, Debtor listed all debts it incurred in the Chapter 11 case that remain unpaid as of the date of the conversion. The bankruptcy court set October 5, 2018, as the deadline for filing claims in the Chapter 7 case. Nearly six weeks after the deadline had passed, Conlon filed a proof of claim requesting administrative expense status for a $150,000 advance payment it made to Debtor as part of an order for insulated wall panels. The bankruptcy trustee objected on the grounds that the claim was not filed in a timely manner and did not qualify for administrative expense priority status because the payment was not in the ordinary course of business and it did not benefit the estate.
Claimants can request payment priority under Bankruptcy Code § 503(b)(1)(a) for expenses constituting “the actual, necessary costs and expenses of preserving the estate.” Similarly, under § 503(b)(3)(D), administrative expense status is given to the “actual, necessary expenses” incurred by a creditor who is “making a substantial contribution” in a Chapter 11 case. The Court stated that the purpose of administrative claim status is to “encourag[e] parties to extend credit and provide funds for a debtor to operate and rehabilitate its business or assist in an orderly liquidation of assets.” In re Comput. Learning Ctrs., Inc., 298 B.R. 569, 577 (Bankr. E.D. Va. 2003). However, administrative priority is subject to a narrow application of the law because granting such priority status “run[s] counter to the central premise of the bankruptcy distributions which is a pro–rata distribution among all creditors.” In re Comput. Learning Ctrs., 298 B.R. at 577.
Conlon argued that email communications between the parties illustrated that Debtor did not have funds to purchase materials and Conlon’s advance payment was intended to allow Debtor to continue functioning. The Court disagreed, holding that Conlon’s prepayment was not a substantial contribution or necessary to the continuation of Debtor’s company. Instead, the email communications demonstrate that Conlon’s prepayment was “solely related to materials for production of Conlon’s order.” There was no evidence that the advance payment was intended to benefit the bankruptcy estate as a whole outside of Conlon’s interest in its own order of panels being completed. Accordingly, the Court held that Conlon was not entitled to administrative expense (priority) status and, given that the claim was untimely, Conlon would only be entitled to receive a distribution from the bankruptcy estate “after all other creditors with timely claims are paid in full.”
By: Michael Robson (Greenberg Traurig LLP)