Administrative Expenses

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§507(a)(1) of the Bankruptcy Code states that claims that are given first priority distribution are those claims allowed as administrative expenses under §503(b). Administrative expenses have the highest priority among creditor claims in bankruptcy.

In determining whether a claim is entitled to administrative expense status, courts generally apply a two-part test: (1) the expense must have arisen from a post-petition transaction between the creditor and the debtor, and (2) the expense must have been “actual and necessary” to preserve the estate. Generally, courts would allow the following administrative expenses:

-       Administrative expenses found to be actual, necessary costs and expenses of preserving the estate pursuant to §503 (b)(1)(A) i.e., “wages, salaries, or commissions for services rendered after the commencement of a bankruptcy case”. Some courts would allow utilities expenses under this provision;

-       Under §546(c)(2)(A), the court may treat a claim based on a seller’s unfulfilled demand for reclamation of goods as an administrative expense priority under §503(b) or the court may secure such claim by lien on the asset of the bankruptcy estate §546(c)(2)(B);

-       Some courts have concluded that either a public or private entity may be accorded an administrative expense priority for cost of environmental cleanup incurred due to the post-petition conduct of the trust or debtor-in-possession;

-       Pursuant to §364 (a), a trust authorized to operate the business of the debtor may obtain unsecured credit and incur unsecured debt in the ordinary course of business, unless the court orders otherwise. Such unsecured credit or debt obtained or incurred in the ordinary course of business is allowable under §503(b)(1) as an administrative expense;

-       Under §503(b)(1)(B) claims for taxes incurred by the estate, except taxes of a kind specifies in §507(a)(8), are allowable as administrative expenses. §503(b)(1)(B)(ii) allows, as an administrative expense, those claims attributable to an excessive allowance of a tentative carryback adjustment received by the estate, whether the taxable year to which such adjustment relates ended before or after the commencement of the case;

-       §503(b)(1)(C) provides the allowance of fines, penalties, and reductions in credit relating to tax;

-       §503(b)(2) provides for the allowance as an administrative expense of claims under §330(a) for compensation and reimbursement awarded officers of the bankruptcy case: trustees, examiners, and professionals, employed with the court’s approval, tp represent or assist the trustee or debtor-in-possession in its duties under §330(a)(1) and §330(a)(2), or the creditor’s committee under §1103;

-       §503(b)(3)(A) allows, as an administrative expense, the actual, necessary expenses incurred by a creditor in filing an involuntary petition under §303. §503(b)(3)(B) allows actual, necessary expenses incurred by a creditor that recovers, after the court’s approval, for the benefit of the estate any property transferred or concealed by the debtor under §503(b)(3)(B). Under §503 (b)(3)(C), an administrative expense priority is allowable for actual, necessary expenses incurred by a creditor in connection with the prosecution of a criminal offense relating to the bankruptcy case or to the business or property of the debtor;

-       An administrative expense is allowable for the actual, necessary expenses incurred by a creditor, an indenture trustee, an equity security holder, or an unofficial committee of equity security holders or creditors in making a substantial contribution in a Chapter 9 or 11 case under §503(b)(3)(D). It is important to distinguish between §503(b)(5), which accords administrative expenses status to compensation of an indenture trustee’s professional services and §503(b)(3)(D), which allows, as an administrative expense, reimbursement of expenses of an indenture trustee.

-       Under §503(b)(6), witness fees and mileage payable under 28 U.S.C.A. §§1821 are allowable as an administrative expense.

[Last updated in May of 2020 by the Wex Definitions Team]