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Determining Whether a Claim Is Entitled to Administrative Expense Priority in Bankruptcy

In Finance of America LLC v. Mortgage Winddown LLC (In re Ditech Holding Corp.), No. 21-cv-10038 (LAK) (S.D.N.Y. Sept. 23, 2022), District Court Judge Lewis Kaplan answered the following question: "[I]n what circumstances, if any, will a post-petition breach of an executory contract give rise to an administrative expense priority claim under section 503(b) of the Bankruptcy Court?"

In answering the question, Judge Kaplan reversed, in part, the decision of Bankruptcy Judge James Garrity in In re Ditech Holding Corp., No. 19-10412 (JLG) (Bankr. S.D.N.Y. Oct. 21, 2021), which we wrote about in March 2022. Judge Kaplan held that non-debtor contract counterparties may receive administrative expense claim priority for a post-petition breach on a pre-petition contract when the post-petition breach was not within the parties' "fair contemplation" at the time they entered the contract. However, if the breach was within the parties' fair contemplation, the post-petition breach yields a contingent pre-petition claim not entitled to administrative expense priority.
In this Reuters article authored by Loeb & Loeb Restructuring & Bankruptcy partners Schuyler Carroll and Bethany Simmons and associate Noah Weingarten, the writers discuss various arguments and instances in which creditors may be entitled to an administrative expense claim for a post-petition breach of the agreement by the debtor.