Vanderbilt Law Review


Stephen D. Hurd

First Page



Who gets the money when there isn't enough to go around? This is the practical question that the bankruptcy system seeks to answer every day.' In answering this question, the Bankruptcy Code draws a particularly bright line at the filing of a bankruptcy petition. The filing of a petition creates the bankruptcy estate, which is a distinct legal entity from the debtor. Creditors with claims against the debtor arising before filing ("prepetition) receive payment of their claim, if at all, through bankruptcy's collective distribution scheme. In contrast, persons whose claims arose after filing ("postpetition"), but before completion of the bankruptcy proceeding, cannot receive payment of their claims through the general bankruptcy distribution because their claims are against the estate, rather than against the debtor.

The ability of a postpetition creditor to recover from the estate depends on whether the postpetition claim qualifies as an administrative expense under 11 U.S.C. ? 503(b). Postpetition claims granted priority will be paid in their entirety-even if this exhausts the estate-prior to payment of any prepetition claims Postpetition claims denied administrative expense priority are either discharged in a Chapter 11 reorganization or individual Chapter 7 liquidation, or they survive against the worthless shell of the debtor remaining after a corporate Chapter 7 liquidation. Thus payment of postpetition claims is generally an all-or-nothing proposition contingent upon the claim being granted administrative expense priority.",

Congress defined administrative expenses to include those expenses necessary to the bankruptcy proceeding, such as compensation for trustees, creditor costs in filing an involuntary bankruptcy petition, and reasonable attorney and accountant fees. Congress also defined administrative expenses to include the "actual, necessary costs and expenses of preserving the estate,""s thus leaving courts with the task of interpreting and defining the outer boundaries of administrative expense priority. While it is clear that postpetition costs that actually benefit the estate-including costs concerned with the continuing operation of the business-fall within this category and should receive administrative expense priority, it is less clear whether postpetition costs that do not benefit the estate should qualify as "actual and necessary" administrative expenses.