Summary:
In three separate Orders in the same case, which began as a Chapter 11 and later converted to Chapter 7, the Court looks at the allowance of administrative expenses.
First, the Court held that pursuant to § 365(g)(2)(B)(I), a the rejection of an executory contract must be treated as if it occurred immediately prior to the conversion of the case from Chapter 11. Any claims arising from the rejection of a lease, which had previously been assumed, must be classified as a Chapter 11 administrative expense.
In the second order, the Court held that a payments to the Debtor’s suppliers were made in the ordinary course of business pursuant to 11 U.S.C. § 364(a) and were for the actual and necessary expenses of preserving the estate. As "[p]ayroll taxes are an essential cost of conducting business ... it should never be ordinary or customary for an agent of a debtor to personally provide for their payment." Accordingly, a $15,000 loan to the Debtor for payment of payroll taxes was not allowed as an administrative expense.
Lastly, the Court allowed a claim by the General Manager for wages as an administrative expense, finding that compensation for his services was an actual and necessary expense for preserving the bankruptcy estate. That notwithstanding, the Court reduced his claim by 50%, finding that the General Manager has provided no evidence of wages received or hours worked. The failure of the re-organization also weighed against him.
Commentary:
It would seem that it would be prudent for salaried employees of corporations in Chapter 11 to maintain hourly billing records, similar to attorneys, if they hope to be compensated if the business later fails to re-organize.
For a copy of the opinion, please see:
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