Administrative Expense Priority Is Not Guaranteed for Post-Petition Breaches by Debtors

Parties to contracts with a company that files for Chapter 11 bankruptcy are often urged to continue doing business with the debtor after its case is filed to avoid disruption of business for all parties. In doing so, contract counterparties often assume that they will be entitled to an administrative expense claim for any post-petition breach of the agreement by the debtor. However, the decision by Judge James Garrity in In re Ditech Holding Corp., No. 19-10412 (JLG) (Bankr. S.D.N.Y. Oct. 21, 2021) provides a cautionary tale that well-informed companies should bear in mind when engaging in business with debtors in bankruptcy.

In this Reuters article authored by Loeb & Loeb Restructuring & Bankruptcy partners Schuyler Carroll and Bethany Simmons and associate Noah Weingarten, the writers examine the Ditech case and decision, including how Ditech seems to reverse what was accepted as black letter law and suggests that a debtor’s post-petition breach of a contract may never create an administrative claim if the terms of the contract contemplated a potential breach.