Administrative Expense Claims

Section 507 of the Code grants a higher priority of payment to “administrative expenses” than it does to any unsecured claims (leaving aside certain domestic support obligations). Thus, administrative expenses must be paid in full before any unsecured claims get paid at all. A chapter 11 plan may not be confirmed unless it proposes to pay administrative expenses in full upon the effective date of the plan.

How qualify for such a claim? Section 503(b) defines “administrative expenses” to include “actual, necessary costs and expenses” of various kinds that preserve the estate.  The provider of goods and services who seeks administrative claims status must move for allowance of its claim as administrative expenses, unless other procedures have been established by the court in the case, and must establish that its claim is “actual” and “necessary” upon the standard set by section 503(b). 

The high payment priority for administrative expenses in intended to support debtor reorganization or orderly liquidation by encouraging claimants to do business with or work for the debtor or trustee.  Examples of administrative expenses: (i) compensation and reimbursement given to the officers of the estate; (ii) fees for professional services for the bankruptcy estate, such as accounting or legal services; (iii) reasonable compensation for trustees; (iv) witness fees and mileage; (v) certain nonresidential real property lease expenses; (vi) the value of goods received by the debtor within 20 days before the case was filed (called “Section 503(B)(9) Claims”); and (vii) wages, salaries, or commissions for services rendered to the Debtor or (perhaps) a statutory Committee.    

There is no guarantee, however, of full payment.  Many a bankruptcy estate has become administratively insolvent (lacking sufficient funds to pay administrative expense claims in full).  That risk should be weighed by potential administrative expense claimant.