In practice, Chapter 11 plans and confirmation orders systematically pay administrative expense claims, including those that arise after a plan is confirmed but before its effective date. The Third Circuit Court of Appeal (the “Third circuitâ) Recently confirmed the statutory power on how to file bankruptcy on court to do so by Ellis v. Westinghouse Electric Co., LLC, 2021 WL 3852612 (3d Cir. 30 Aug 2021). Addressing an apparent first impression issue at the circuit court of appeal level, the Third Circuit ruled that a request for reimbursement of post-confirmation administrative costs is canceled like any other request if it is not filed within the time limits on the applicable prescription date.
Bankruptcy courts have the power to set deadlines for prior claims. A creditor who does not file a claim by the cut-off date usually sees their claim released (i.e. the claimant cannot collect from the debtor or reorganized debtor). The bankruptcy court also has the power to set and enforce deadlines for post-petition administrative expense claims (that is, liabilities that arise after the date of the petition but before the debtor exits. bankruptcy). Like preliminary complaints, administrative expenses are subject to discharge if they are not submitted on time.
In Westinghouse, the question arose as to whether the Bankruptcy Code also authorizes the setting of deadlines for claims of administrative costs which arise after the confirmation of the plan but before its effective date. A Chapter 11 debtor business typically comes out of bankruptcy and begins its fresh start on the effective date of the plan, not the date its Chapter 11 plan is confirmed. In many cases, the distinction does not matter; a Chapter 11 plan usually goes into effect shortly after it is confirmed. But it is not uncommon for a delay of several weeks or more to occur. In practice, therefore, Chapter 11 plans and confirming orders routinely establish limitation dates after a plan’s effective date and provide that claims for administrative expenses incurred up to the date entry into force, but not filed on the applicable limitation date, are canceled. Involved in Westinghouse was whether the Bankruptcy Code allows this practice.
Westinghouse Electric Company LLC (“Westinghouse“) operated a global nuclear energy business and filed for Chapter 11 bankruptcy in the Southern District of New York (the”Bankruptcy court“) on March 29, 2017 (the”Date of petition“). Bankruptcy court set September 1, 2017 as the general statute of limitations whereby creditors were required to file proof of claim for most prior claims. As is generally the case, Westinghouse’s Chapter 11 plan set a deadline for post-petition administrative expenses for 30 days after the effective date of the plan (the “Administrative ban date“). The Plan has paid administrative expense claims for which claims for payment had not been filed by the administrative blackout date, including all claims that arose after confirmation and on the effective date of the Plan. The bankruptcy court upheld the plan on March 28, 2018, the plan came into effect on August 1, 2018, and the deadline for administrative claims was set for August 31, 2018.
A former Westinghouse employee was terminated two months after the plan was confirmed but before the plan’s effective date. The employee believed he had been unlawfully dismissed because of his age and filed a complaint of employment discrimination with the Commission for Equal Employment Opportunities. He had received notices on Westinghouse bar dates and other deadlines, but made no claims in the Westinghouse bankruptcy. Instead, in October 2018, the employee sued Westinghouse in District Court for the Western District of Pennsylvania (the “District court“). After the case was initially put on hold pending the employee’s exhausting administrative remedies, Westinghouse filed for summary judgment in July 2019 in the district court action, arguing that employee no. ‘had not filed a proof of administrative expense claim in a timely manner and that any claim was therefore paid by the Plan. In response, the employee argued that the Bankruptcy Code does not authorize a bankruptcy court to set and enforce deadlines for post-confirmation administrative claims.
The district court ruled in favor of the employee and issued summary judgment in his favor. He concluded that the Bankruptcy Code does not allow the use of a limitation date to meet post-confirmation administrative expenses and that such liabilities could not be discharged.
On appeal, the Third Circuit ruled that Articles 503 and 1141 of the Bankruptcy Code “work in tandem” to allow bankruptcy courts to set and enforce deadlines for administrative expense claims, including claims arising after the bankruptcy. confirmation of a plan but before its effective date. The Third Circuit held that Section 503 of the Bankruptcy Code allows bankruptcy courts to set and enforce deadlines, and Section 1141 (d) allows the plan and the confirming order to generally govern the discharge of complaints.
The third circuit first dealt with article 503 of the Bankruptcy Code. In the relevant part, this provision provides that â[a]An entity may file a request for payment of an administrative expense in a timely manner, or may file such a request late if the court allows it for good cause. The court found the statutory authority required to set and enforce deadlines for administrative claims in that language. Among other things, the Third Circuit held that because the Bankruptcy Code requires a debtor to pay its administrative expense claims in full (unless a claimant agrees otherwise), deadlines for administrative claims are necessary for debtors propose a viable plan from Chapter 11. Indeed, unforeseen administrative expenses could jeopardize the entire restructuring of a debtor, or become a significant burden for the reorganized debtor. Article 503 of the Bankruptcy Code therefore provides “both a carrot and a stick” so that creditors quickly demand payment of these debts.
The Third Circuit then looked at Section 1141 (d) (1) (A) and addressed the critical issue in dispute: Can a bankruptcy court set and enforce a deadline for post-administrative expenses? confirmation before the effective date? Section 1141 (d) (1) (A) of the Bankruptcy Code provides that â[e]Unless otherwise provided … in the plan, or in the order confirming the plan, the confirmation of a plan … releases the debtor from any debt that arises before the date of this confirmationâ¦ â The employee argued, and the district court accepted, that the plain language of Section 1141 (d) of the Bankruptcy Code only allows for the release of pre-confirmation debts. Emphasizing the preamble to the law – “unless otherwise provided in the plan or the order confirming the plan” – the Third Circuit held that Article 1141 (d) (1) of the Bankruptcy Code does not create such a “categorical rule “. Instead, the Bankruptcy Code Section 1141 (d) (1) reference to pre-confirmation claims establishes a default rule, which could be overruled through the plan and the confirmation order, as evidenced by the preamble to the provision. The third circuit also noted that nothing in article 503 of the Bankruptcy Code prevents its application to requests for reimbursement of post-confirmation administrative costs. In addition, the Bankruptcy Code links the viability of administrative expense claims to the existence of the debtor’s assets, and not to confirmation of the Plan. Accordingly, claims that arise after the plan is confirmed but before its effective date are always claims against the bankruptcy estate which are suitably subject to limitation periods and discharge.
Interpreted together, the Third Circuit held that (a) Section 503 of the Bankruptcy Code gives bankruptcy courts discretion to set and enforce deadlines for administrative expense claims, which include claims that arise after confirmation of a plan and before its effective date; and (b) Section 1141 (d) of the Bankruptcy Code sets out a default rule that confirmation of a plan releases debts prior to confirmation, but preserves the flexibility of a plan and a confirmation order. to dispose of it otherwise. As a result, the employee’s post-confirmation employment discrimination claim and prior to the employee’s effective date was an administrative expense claim subject to the administrative blackout date set out in Westinghouse’s plan. and the confirmation order, and therefore, this claim was subject to return under the Westinghouse plan.
In the third circuit’s own words, “[d]es matter in bankruptcy â, and for creditors,â nothing is more important than the âdeadlineâ. In an in-depth opinion, the Third Circuit unequivocally asserted the power of the bankruptcy court to set and enforce deadlines for post-petition administrative expenses that arise after a plan is confirmed, but before the due date. entry into force of the plan. The opinion affirms a long-standing practice. It applies the critical nature of administrative expense deadlines for the successful reorganization of a debtor, recognizing that failure to pay these expenses in full usually results in the Chapter 11 case being converted into liquidation under Chapter 7 of the Bankruptcy Code. At the same time, the Westinghouse The decision provides caution to debtors by noting the importance of protecting a creditor’s due process rights. Noting that a key element of due process and adequate notice includes information about the types of claims subject to a limitation date, the Third Circuit admonished that limitation date notices for administrative expense claims should clearly state that tort claims and other litigation may be submitted on the date bar and discharge.