The Effect of Conversion on a Post-Petition Lender’s Superpriority Claim over a Chapter 7 Trustee’s Post-Conversion Administrative Expense Claim
The Bankruptcy Code provides a priority scheme that dictates the order in which claims are to be paid. Generally, secured claims get paid out first. Secured claims are followed by administrative expense claims, which include expenses incurred for administration of the estate, such as professional fees of the trustee, attorney, or accountant employed by the estate, and certain taxes. These claims are then followed by other priority unsecured claims, and finally general unsecured claims. The amount of the distribution that a creditor will receive in a bankruptcy case depends on numerous factors, including the total number of other creditors in the case, the nature and relative priority of the creditor’s claim, and the total value of bankruptcy estate.
Notwithstanding that general priority scheme, the Bankruptcy Code permits a debtor to grant certain creditors a superpriority claim. As a general rule, a superpriority claim will have priority over all other unsecured claims, including administrative expenses, unless there is a carve-out for certain claims. For example, in a chapter 11 case, in certain circumstances, a debtor in possession (“DIP”) can grant a lender providing post-petition in financing a superpriority claim under section 364(c) and/or section 507(b), which will have priority over all administrative expense claims.
Converting a case from a chapter 11 to a chapter 7 can give rise to an especially complex issue regarding the relative priority of a superpriority claim granted under section 364(c). Specifically, a court may be required to determine whether a superpriority claim granted in the pre-conversion chapter 11 case retains its relative priority over all other claims, including the administrative expenses claims incurred in the post-conversion chapter 7 case.
Ultimately, the language of the order granting the specific superpriority claim at issue will dictate the relative priorities of the pre- and post-petition claims. This article will examine whether a post-petition lender’s superpriority claim granted under section 364(c)(1) has priority over the administrative expense claims incurred after a bankruptcy case is converted from chapter 11 to chapter 7. Part I will analyze the provisions of the Bankruptcy Code that permit a DIP to grant a post-petition lender a superpriority claim. Part II will analyze the relevant case law and the history of how courts have interpreted the Bankruptcy Code to determine relative priorities of claims in a case that has been converted from chapter 11 to chapter 7. Finally Part III will examine why a DIP lender will likely have superpriority status over the administrative claims when a bankruptcy case is converted from chapter 11 to chapter 7.