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The Bankruptcy StrategistFeaturesBankruptcyLitigation

Obtaining Administrative Claim Status When Doing Business With a Debtor

By By Andrew C. Kassner and Joseph N. Argentina Jr.
August 01, 2021

The Bankruptcy Code encourages service and good suppliers to continue to do business with a company in Chapter 11 by providing that amounts owed for post-petition services and deliveries are eligible to receive administrative claim status if they provide a benefit to the estate, meaning that their claims are paid in full before pre-petition unsecured claims. But how is administrative claim status obtained in a bankruptcy case, and what risks does a service or goods supplier take by continuing to do business with the debtor after commencement of the bankruptcy case?

Judge Craig Goldblatt of the U.S. Bankruptcy Court for the District of Delaware recently considered the contours of the "benefit to the estate" rule in In re MTE Holdings, (Case No. 19-12269 (CTG)). In an opinion dated June 2, 2021, Goldblatt granted administrative claim status to a consulting service provider and ruled a noninsider third party that provides goods or services to a debtor-in-possession on ordinary commercial terms does not have to prove that receipt of those goods or services led to success of the venture or increased profits for the debtor.

According to the opinion, the debtors were in the oil and gas drilling business. The drilling process required a significant amount of water. The debtors had storage facilities for the wastewater, which must be disposed in accordance with applicable environmental laws. Prior to the bankruptcy case, the debtors decided to expand the capacity of their wastewater disposal facility beyond the level required by the debtors' operations. The debtors planned to charge other oil and gas exploration companies for disposal of their own wastewater at the debtors' facilities.

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