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Should Administrative Expense Claims Be Valued by the Contract Rate or the Actual Use of the Service?

In re Highway Techs., Inc., No. 13-11326 (KJC) (Bankr. D. Del. Jan. 30, 2015)

In this Memorandum, the Honorable Kevin Carey determined whether to value an administrative expense claim at the full contract rate or the actual use of the goods and services provided to the debtor.  The Court held that the creditor, Wynne Systems (“Wynne”), is entitled to an administrative claim for only the debtor’s actual use.  In doing so, the Court also denied Wynne’s request for attorney’s fees as an administrative claim, holding that those fees are not an actual and necessary cost of preserving the estate as required by Bankruptcy Code section 503(b).

Wynne entered into a pre-petition contract with the debtor Highway Technologies, Inc. (together with HTS Acquisition, Inc., the “Debtors”) to provide traffic systems software (the “Contract”).  The Contract provided that the Debtors could use certain software for up to 100 geographic locations in exchange for a fee.  Debtors rejected the Contract post-petition, but continued to use Wynne’s software post-petition, albeit in a much smaller capacity.  Wynne filed an administrative claim for software services provided to the Debtors post-petition, pre-rejection, in the amount of $321,532 (the full contract rate after applying a credit of $160,766 for post-petition payment received by the Debtors).  Wynne also sought an administrative claim for attorney’s fees incurred in obtaining payment for the post-petition services, which was provided for by the Contract’s indemnification provision.  Debtors asserted that the administrative expense claim should be limited to the actual post-petition use of Wynne’s software, which was far fewer than 100 locations.

Administrative expense claims under Bankruptcy Code section 503(b)(1)(A) must be “actual and necessary costs and expenses of preserving the estate.”  Not only must such an expense arise from a post-petition transaction with a debtor, but it must provide some benefit to the estate.  It is the latter requirement that was at issue in this proceeding, namely the value of the benefit provided to the Debtors and their estates.  Under existing case law, there is a presumption that a previously agreed upon contract rate reflects fair value of post-petition service.  However, while some courts stick to the contract rate to value benefit, other courts look beyond the contract terms to determine the amount of an administrative expense claim based on actual use during the post-petition period.

In Highway, Wynne urged the Court to value its administrative claim at the full contract rate because the Debtors obtained a benefit from having Wynne’s services available to them if needed.    Judge Carey, however, distinguished the cases Wynne relied upon in support, noting that Wynne and the Debtors did not specifically bargain for the availability of Wynne’s services in the Contract.  Rather, the Contract provided the Debtors with a product, i.e. certain software, to use at its disposal.  The facts here, according to the Court, more closely resembled the situation faced by the court in In re Enron Corp., 279 B.R. 695 (Bankr. S.D.N.Y. 2002).  In Enron, a creditor leased a pipeline to the debtor who in turn subleased it.  The court determined that the pipeline company’s administrative expense claim should be based on the debtors’ actual use, and not the capacity of the pipeline available to be subleased post-petition.  Id. at 707.  The Enron court wrote that “the mere potential for benefit is not enough to warrant an administrative claim priority.”  Id. at 706.  Like in Enron, the Court found that Wynne was entitled to administrative priority for only the Debtors’ actual use—use of the software at 43 locations—equal to $69,129.38 plus some additional amount attributed to an annual subscription fee in the Contract.  Therefore, the Court concluded that the Debtors’ payment of $160,766 sufficiently and fairly compensated Wynne.