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05.13.2020 | Legal Advisory

Creditors risk losing important rights in bankruptcy cases if deadlines are not met. Unfortunately, sometimes the existence or relevance of a deadline is not obvious to a creditor. Indeed, bankruptcy notices can be indecipherable and tempting to ignore, but failing to abide by deadlines comes at a high price. A recent opinion from the U.S. Bankruptcy Court for the District of Massachusetts underscores the need for creditors to take timely action to preserve rights, which is especially noteworthy given the current coronavirus pandemic and the expected increase in bankruptcy filings.

Act Immediately to Assert Administrative Expense Claims

The deadline at issue arose under Section 503(b)(9) of the Bankruptcy Code. That section provides a supplier of goods the ability to assert an “administrative expense claim” for the value of goods sold to a customer in the ordinary course of business during the 20-day period prior to the customer’s bankruptcy filing. This statutory provision provides suppliers with a meaningful bankruptcy right – an opportunity to convert some portion of a pre-petition general unsecured claim into an administrative expense claim. Pre-petition general unsecured claims are typically paid only cents on the dollar, if anything, while administrative expense claims must be paid in full before any payment to general unsecured creditors. A copy of the Bankruptcy Court decision, which was entered in the chapter 11 proceedings of In re Interra Innovation, Inc., is available here.

Four Key Factors for Warranting Time Extensions

Federal Rule of Bankruptcy Procedure 9006(b)(1) gives bankruptcy judges discretion to extend a filing deadline in Chapter 11 cases where a party filed late because of “excusable neglect.” In Pioneer Investment Services Company v. Brunswick Associates Limited Partnership, the Supreme Court established that a bankruptcy judge’s determination of excusable neglect is inherently an equitable one and adopted the following guiding factors that impact whether such a time extension is warranted: (1) the danger of prejudice to the debtor; (2) the length of the delay and its potential impact on judicial proceedings; (3) the reason for the delay, including whether it was within the reasonable control of the movant; and (4) whether the movant acted in good faith.

In the Interra case, all creditors received a notice of the case commencement that included the deadline for filing requests for administrative expense claims under Section 503(b)(9). A creditor failed to timely file a request and instead requested that the court accept its late filing citing its unfamiliarity with bankruptcy law and procedure. The creditor argued that its failure to meet the deadline constituted excusable neglect under the Pioneer Investment Services standard. The Bankruptcy Court disagreed, stating that the deadline on the notice was conspicuous, and that if the significance of the deadline was unclear then the creditor should have requested assistance from outside counsel. As a result of the decision, a substantial portion of the creditor’s claim will be treated as a general unsecured claim as opposed to the more favorable status of an administrative expense.

What’s Next?

With an expected rise in bankruptcy cases on the horizon, the Court’s decision is a reminder to all those dealing with distressed counterparties. If you receive a bankruptcy notice of any type and are not sure of the exact implications, seek assistance from experienced counsel familiar with creditors’ rights and bankruptcy law. Time is money – especially in bankruptcy.

This advisory was prepared by Maya Ginga and John Loughnane in Nutter’s Bankruptcy, Restructuring and Workout practice group. For more information, please contact Maya, John, or your Nutter attorney at 617.439.2000.

This update is for information purposes only and should not be construed as legal advice on any specific facts or circumstances. Under the rules of the Supreme Judicial Court of Massachusetts, this material may be considered as advertising.