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September 14, 2021 – In the first decision of a federal appeals court dealing with the matter, the 3rd U.S. Court of Appeals recently ruled that administrative claims arising after a debtor’s plan is confirmed, but before the effective date of the plan, can be discharged in the same way as claims. that occur before the plan confirmation date. See Ellisv. WestinghouseElectricCo., No. 20-2867, 2021 WL 3852612 (3d Cir. August 30, 2021).
Westinghouse Electric Company LLC and its affiliates (âWestinghouseâ) filed for Chapter 11 bankruptcy in March 2017. The bankruptcy court set a general limitation date of September 2017 for claims that arose before the date of filing for bankruptcy, but as is customary in Chapter 11 bankruptcy cases, the deadline for administrative claims has been set at a later date because the estate continues to incur expenses throughout the bankruptcy.
The Westinghouse plan provided for an administrative claims deadline of 30 days after the effective date of the plan. As is common in Chapter 11 plans, the Westinghouse Plan provided that holders of administrative expense claims would be enjoined and prevented from asserting their claims if they did not file the claims by the statute of limitations and also that such claims would be discharged from the date of entry into force of the scheme.
Westinghouse’s plan was confirmed in March 2018. While plans typically go into effect shortly after confirmation, significant delays can occur in certain circumstances. For example, entry into force may be delayed if regulatory approval is required or if the debtor needs time to finalize post-confirmation funding. The entry into force of the Westinghouse plan was delayed for these reasons and the plan did not come into effect until August 1, 2018. Westinghouse notified the effective date of its plan and informed its creditors that the deadline required that all administrative fee reimbursement claims be filed. no later than August 31, 2018.
A Westinghouse executive was fired in May 2018 after Westinghouse’s plan was confirmed, but before the plan took effect. The executive, who was 67 at the time of his dismissal, believed his dismissal was the result of unlawful age discrimination. He hired a lawyer and filed a complaint with the Equal Employment Opportunity Commission in July 2018. He then filed a complaint against Westinghouse in October 2018.
The executive admitted receiving notice of the general deadline for filing claims against Westinghouse as well as notice of opposition to the plan and voting deadlines, but denied receiving notice of the date entry into force of the plan and the deadline for administrative complaints. The parties agreed, however, that the claim âaroseâ when he was terminated, so it was a claim that arose after Westinghouse’s plan was confirmed but before its effective date.
Westinghouse filed a motion for summary judgment against the executive, arguing that his claim was met by the plan and the order upholding it since he failed to file a claim for administrative costs in a timely manner. The district court denied summary judgment to Westinghouse and instead granted it to the executive.
Although the district court found that the executive had received notice of the statute of limitations for the administrative claim and the notice was appropriate, it nonetheless ruled that 11 USC Â§ 503 does not allow a date of limitation. limitation period for discharging post-confirmation claims and that 11 USC Â§1141 (d) also prohibits the acquittal of post-confirmation claims. The district court certified an interlocutory appeal to the Third Circuit.
The third circuit overturned the district court. He ruled that “[t]The holder of a post-confirmation administrative claim cannot choose to bypass the bankruptcy process, so if the claim is not filed within the time limit set on the deadline, it is discharged as a claim prior to confirmation. “
The Third Circuit began by concluding that the executive’s claim was a “real and necessary expense” of preserving the Westinghouse estate as that term is defined in 11 USC Â§ 503 (b).
The Third Circuit went on to assert that 11 USC Â§ 503 (a) allows bankruptcy courts to set and enforce deadlines for filing administrative expense claims, with timely filed claims receiving priority treatment and full payment, but late claims are discharged. The Third Circuit held that this harsh result is justified because, like deadlines for general complaints, deadlines for administrative expense claims help debtors know their obligations and implement a workable plan. Conversely, unforeseen administrative complaints can “jeopardize the entire restructuring[.]”
The Third Circuit then ruled that while the executive’s claim arose after Westinghouse’s plan was confirmed, it was still an administrative expense claim that could be discharged. In reaching its conclusion, the Third Circuit considered the text of 11 USC Â§ 503 (b) (1) (A), which provides that a claim is administrative if it accumulates before the bankruptcy estate ceases. to exist.
Although a bankruptcy estate usually ceases to exist when the plan is confirmed, the plan may extend the life of the plan to a later date, such as the effective date of the plan. This allows the bankruptcy court to handle all claims against a debtor’s assets and allows the bankruptcy court to use deadlines as a tool for reorganization. The Third Circuit ruled that this flexibility is important when the gap between the confirmation date and the effective date is significant, as concerns about undisclosed liabilities are heightened during this time.
While the district court questioned whether 11 USC Â§ 503 provided for authorization to discharge administrative claims, since it did not include the word “discharge,” the Third Circuit dismissed this concern. She ruled that Sections 503 and 1141 work in tandem, with Section 503 giving bankruptcy courts the power to set and enforce deadlines and Section 1141 (d) allowing the plan and order of confirmation to govern the payment of debts.
Finally, the Third Circuit held that 11 USC Â§ 1141 (d) (1) creates only a default rule for the settlement of pre-confirmation debts and only applies when the plan and order of confirmation are silent on the issue. Section 1141 (d) (1) Provides that “[e]Unless otherwise provided in this paragraph, the plan or the order confirming the plan, confirmation of a plan – (A) releases the debtor from any debt that arose before the date of such confirmation. . . “11 USC Â§ 1141 (d) (1) (emphasis added).
Westinghouse’s plan provided for the discharge of all post-confirmation claims not filed by the administrative claims deadline, and therefore changed the default rule in Â§ 1141 (d). The executive’s request was prescribed by Â§ 503 and discharged by Â§ 1141 (d).
The Westinghouse decision makes it clear that parties dealing with bankrupt debtors at any time before the effective date of the debtor’s plan must take into account the deadlines set out in the debtor’s plan. The consequence of not respecting the administrative complaint deadline may lead to the discharge of a complaint which should have been paid in full and the holder of the complaint not receiving any recovery. The text of the debtor’s plan and the order of confirmation are essential because they can modify the default provisions set out in 11 USC Â§Â§ 503 and 1141.
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