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Second Circuit: 502(d) Does Not Apply to Administrative Claims

By Marion M. Quirk

In ASM Capital, LP v. Ames Department Stores, Inc. (Ames Department Stores, Inc.), 582 F.3d 422 (2nd Cir. 2009), the Second Circuit Court of Appeals (the “Second Circuit”) held that ' 502(d) of the Bankruptcy Code, which disallows claims until the claimant has returned all voidable preferential payments and other voidable transfers from the debtor's estate, does not apply to disallow administrative claims under 503(b). As the first circuit court to consider the issue, the Second Circuit agreed with the majority of lower courts that had addressed the issue. The practical result is that a claimant who has a general administrative claim under 503(b) will not have this claim disallowed or reduced on the basis that the claimant must first return voidable preferential payments or other voidable transfers from the debtor's estate under 502(d).

The ruling provides a significant benefit to creditors because payment of their 503(b) administrative claims will not be delayed pending determination of a preference or other voidable transfer. In contrast, the ruling eliminates the debtor's ability to reduce 503(b) administrative claims by asserting 502(d) defensively or affirmatively through the pursuit of a judgment recovering preferential or other transfers. Finally, it is important that the Second Circuit specifically noted that it was not addressing the interaction between '  503(b)(9) and ' 502(d) since neither party to the appeal suggested that 503(b)(9) applied.

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