In In re Happy Jack’s Petroleum, Inc., LEXIS 3424, (Bankr. Neb. 2018), the bankruptcy court held that a claim for super-priority administrative expense status granted during a Chapter 11 case has priority over post-conversion Chapter 7 expenses with administrative priority.
11 U.S.C. § 365(c)(1) provides that
If the trustee is unable to obtain unsecured credit allowable under section 503(b)(1) of this title as an administrative expense, the court, after notice and a hearing, may authorize the obtaining of credit or the incurring of debt-
(1) With priority over any or all administrative expenses of the kind specified in section 503(b) or 507(b) of this title;
11 U.S.C. §§ 503(b) and 507(b) provide priority for administrative expense claims – that is, necessary expenses of the bankruptcy estate incurred after the bankruptcy petition is filed.
But 11 U.S.C. § 726(b) provides in part that
… in a case that has been converted to this chapter under section 1112, 1208, or 1307 of this title, a claim allowed under section 503(b) of this title incurred under this chapter after such conversion has priority over a claim allowed under section 503(b) of this title incurred under any other chapter of this title or under this chapter before such conversion and over any expenses of a custodian superseded under section 543 of this title.
So, do post-conversion chapter 7 administrative claims have priority over pre‑conversion chapter 11 expenses with priority under 11 U.S.C. § 364(c)(1)? In Happy Jack’s, Judge Saladino held that a chapter 11 pre-conversion claim under section 364(c)(1) has priority over post‑conversion chapter 7 administrative claims. Judge Saladino ruled that priority under section 364(c)(1) is outside of section 503(b), so that section 364(c)(1) claims have priority over section 503(b) claims, whether the claim arose pre-conversion or post-conversion.
Creditors and chapter 7 trustees (and their professionals!) should keep in mind the significance of an unsecured priority claim allowed under 11 U.S.C. § 364(c)(1).