Class 15 Bankruptcy, Spring, 2009 Administrative Expenses 11/11/2018 Class 15 Bankruptcy, Spring, 2009 Administrative Expenses Randal C. Picker Leffmann Professor of Commercial Law The Law School The University of Chicago 773.702.0864/r-picker@uchicago.edu Copyright © 2005-09 Randal C. Picker. All Rights Reserved.

Copyright © 2005-09 Randal C. Picker 11/11/2018 503 Allowance of administrative expenses (a) An entity may timely file a request for payment of an administrative expense, or may tardily file such request if permitted by the court for cause. November 11, 2018 Copyright © 2005-09 Randal C. Picker

Copyright © 2005-09 Randal C. Picker 11/11/2018 503 (Cont.) Allowance of administrative expenses (b) After notice and a hearing, there shall be allowed administrative expenses, other than claims allowed under section 502(f) of this title, including - (1)(A) the actual, necessary costs and expenses of preserving the estate, including (i) wages, salaries, or commissions for services rendered after the commencement of the case; (ii) … November 11, 2018 Copyright © 2005-09 Randal C. Picker

Copyright © 2005-09 Randal C. Picker 11/11/2018 1129 Confirmation of plan (cont.) (a) (cont.) (9) Except to the extent that the holder of a particular claim has agreed to a different treatment of such claim, the plan provides that - (A) with respect to a claim of a kind specified in section 507(a)(1) or 507(a)(2) of this title, on the effective date of the plan, the holder of such claim will receive on account of such claim cash equal to the allowed amount of such claim; November 11, 2018 Copyright © 2005-09 Randal C. Picker

Copyright © 2005-09 Randal C. Picker 11/11/2018 Reading v. Brown Core Facts Receiver operating business in old Chapter XI Business burns and causes $3.5 million in damages to third parties Claims filed in case, disallowed as adminstrative expenses and also not “provable” November 11, 2018 Copyright © 2005-09 Randal C. Picker

Copyright © 2005-09 Randal C. Picker 11/11/2018 Reading v. Brown Affirmed by district court and court of appeals Key Questions Are these postpetition damages allowable as an administrative expense? November 11, 2018 Copyright © 2005-09 Randal C. Picker

Copyright © 2005-09 Randal C. Picker 11/11/2018 Relevant Language Then “costs and expenses of administration, including the actual and necessary costs of preserving the estate subsequent to filing the petition” Now “administrative expenses … including … the actual, necessary costs and expenses of preserving the estate” November 11, 2018 Copyright © 2005-09 Randal C. Picker

Understanding the Language 11/11/2018 Understanding the Language Says the Receiver “Only those expenditures without which the insolvent business could not be carried on” This would include voluntary creditors This would exclude the postpetition tort victims Why isn’t that right? November 11, 2018 Copyright © 2005-09 Randal C. Picker

Competing Considerations 11/11/2018 Competing Considerations Fairness to existing unsecured creditors? to prepetition tort victims? Efficiency What should we worry about here? November 11, 2018 Copyright © 2005-09 Randal C. Picker

Precaution Incentives for Debtors 11/11/2018 Precaution Incentives for Debtors Hypo Firm owes USC $1000 Has two assets Cash: $110 Project Returns $100 With $10 precautions, expected harm is $50 With $40 precautions, expected harm is $5 November 11, 2018 Copyright © 2005-09 Randal C. Picker

Debtor’s Choice: Payoff to Existing Creditors 11/11/2018 Debtor’s Choice: Payoff to Existing Creditors Pro Rata Rule Admin Expense Rule Low-Cost Precaution High-Cost Precaution November 11, 2018 Copyright © 2005-09 Randal C. Picker

Debtor’s Choice: Payoff to Existing Creditors 11/11/2018 Debtor’s Choice: Payoff to Existing Creditors Pro Rata Rule Admin Expense Rule Low-Cost Precaution 1000/(1000 + EHL) x (210 – CL) = 190.47 210 – CL – EHL = 210 – 10 – 50 = 150 High-Cost Precaution 1000/(1000 + EHH) x (210 – CH) = 166.15 210 – CH – EHH = 210 – 40 – 5 = 165 November 11, 2018 Copyright © 2005-09 Randal C. Picker

Copyright © 2005-09 Randal C. Picker 11/11/2018 Meaning? Externalization of Harm Under pro rata rule, debtor internalizes full cost of precaution but not of harms inflicted on third parties Goes cheap on precautions Administrative expense treatment of tort harms causes debtor to internalize appropriately November 11, 2018 Copyright © 2005-09 Randal C. Picker

Copyright © 2005-09 Randal C. Picker 11/11/2018 Wall Tube Core Facts Wall Tube creates bad environmental stuff Oct 83: WT ceases operations Dec 83: Tenn DHE investigates and finds violation of Tenn law Feb 84: WT files Ch 7 case June 84: Tenn hires waste contractor to look at facility November 11, 2018 Copyright © 2005-09 Randal C. Picker

Copyright © 2005-09 Randal C. Picker 11/11/2018 Wall Tube July 84: Ch 7 trustee gives notice to convey property to original lessors Nov-Dec 84: More expenditures by Tenn contractor Dec 84: B Ct approves conveyance of property May 85: Tenn seeks admin expense status for expenses November 11, 2018 Copyright © 2005-09 Randal C. Picker

Copyright © 2005-09 Randal C. Picker 11/11/2018 28 USC § 959 Trustees and receivers suable; management; State laws (a) Trustees, receivers or managers of any property, including debtors in possession, may be sued, without leave of the court appointing them, with respect to any of their acts or transactions in carrying on business connected with such property. Such actions shall be subject to the general equity power of such court so far as the same may be necessary to the ends of justice, but this shall not deprive a litigant of his right to trial by jury. November 11, 2018 Copyright © 2005-09 Randal C. Picker

Copyright © 2005-09 Randal C. Picker 11/11/2018 28 USC § 959 (cont.) Trustees and receivers suable; management; State laws (cont.) (b) Except as provided in section 1166 of title 11, a trustee, receiver or manager appointed in any cause pending in any court of the United States, including a debtor in possession, shall manage and operate the property in his possession as such trustee, receiver or manager according to the requirements of the valid laws of the State in which such property is situated, in the same manner that the owner or possessor thereof would be bound to do if in possession thereof. November 11, 2018 Copyright © 2005-09 Randal C. Picker

Copyright © 2005-09 Randal C. Picker 11/11/2018 554 Abandonment of property of the estate (a) After notice and a hearing, the trustee may abandon any property of the estate that is burdensome to the estate or that is of inconsequential value and benefit to the estate. (b) On request of a party in interest and after notice and a hearing, the court may order the trustee to abandon any property of the estate that is burdensome to the estate or that is of inconsequential value and benefit to the estate. November 11, 2018 Copyright © 2005-09 Randal C. Picker

Copyright © 2005-09 Randal C. Picker 11/11/2018 554 (cont.) Abandonment of property of the estate (cont.) (c) Unless the court orders otherwise, any property scheduled under section 521(1) of this title not otherwise administered at the time of the closing of a case is abandoned to the debtor and administered for purposes of section 350 of this title. (d) Unless the court orders otherwise, property of the estate that is not abandoned under this section and that is not administered in the case remains property of the estate. November 11, 2018 Copyright © 2005-09 Randal C. Picker

Copyright © 2005-09 Randal C. Picker 11/11/2018 Midlantic (US, 1986) Holding “… [W]e conclude that Congress did not intend for section 554(a) to preempt all state and local laws. The Bankruptcy Court does not have the power to authorize an abandonment without formulating conditions that will adequately protect the public’s health and safety.” November 11, 2018 Copyright © 2005-09 Randal C. Picker

Copyright © 2005-09 Randal C. Picker 11/11/2018 Cont. “Accordingly, without reaching the question whether certain state laws imposing conditions on abandonment may be so onerous as to interfere with the bankruptcy adjudication itself, we hold that a trustee may not abandon property in contravention of a state statute or regulation reasonably designed to protect the public health or safety from identified hazards.” November 11, 2018 Copyright © 2005-09 Randal C. Picker

Copyright © 2005-09 Randal C. Picker 11/11/2018 Back to Wall Tube So is Wall Tube Like Midlantic? Like Reading v. Brown? Something else? November 11, 2018 Copyright © 2005-09 Randal C. Picker

Copyright © 2005-09 Randal C. Picker 11/11/2018 Microsoft v. Dak Try Three Approaches 1. Sale of Goods with Installment Payments 2. 1 plus a security interest 3. Per-Use Copies November 11, 2018 Copyright © 2005-09 Randal C. Picker

Copyright © 2005-09 Randal C. Picker 11/11/2018 Installment Sale Structure Corp sells 50,000 widgets to Debtor Debtor agrees to pay over time Debtor makes some payments, owes others, files for bankruptcy Debtor still has some of the widgets on hand What is status of Corp? November 11, 2018 Copyright © 2005-09 Randal C. Picker

Secured Installment Sale 11/11/2018 Secured Installment Sale Structure 1, but give Corp a security interest in the remaining widgets What is status of Corp? November 11, 2018 Copyright © 2005-09 Randal C. Picker

Copyright © 2005-09 Randal C. Picker 11/11/2018 Per-Use Copies Structure Corp gives Debtor master disk Each time Debtor makes copy it owes Corp $45 Debtor makes copies prepetition and owes money for those to Corp. Debtor makes copies postpetition as well What is status of Corp? November 11, 2018 Copyright © 2005-09 Randal C. Picker

Copyright © 2005-09 Randal C. Picker 11/11/2018 The Case Itself Core Facts License Agreement between DAK and Microsoft DAK has to pay minimum amount over time regardless of whether it makes copies After 50,000 copies—later upped—DAK has to pay $50 (reduced to $45) for each copy made November 11, 2018 Copyright © 2005-09 Randal C. Picker

Copyright © 2005-09 Randal C. Picker 11/11/2018 The Case Itself Question Is DAK 1, 2, 3 or something else? November 11, 2018 Copyright © 2005-09 Randal C. Picker