By: Michael Ryan Diaz
St. John’s Law Student
American Bankruptcy Institute Law Review Staff
In ASM Capital, LP v. Ames Department Stores, Inc.
(In re Ames Department Stores, Inc.
the Second Circuit held that section 502(d), which disallows claims of a party that has failed to return preferential transfers to the debtor,
does not bar payment for administrative expenses under section 503(b).
The debtor, Ames Department Stores, Inc. (“Ames”), filed a voluntary petition under chapter 11 of the Bankruptcy Code.
While in bankruptcy, Ames received a default judgment, for the recovery of preferential transfers,
against one of its suppliers, G & A Sales, Inc. (“G & A Sales”).
Also facing insolvency, G & A Sales filed a bankruptcy petition and transferred to other entities all of its assets, including two administrative claims against Ames for providing post-petition supplies.
These administrative claims were sold to ASM Capital, a distressed-debt investment firm. Meanwhile, Ames’ board of directors eventually decided that liquidation, rather than reorganization, would maximize value for the debtor’s estate.
In the midst of liquidation, Ames made distributions for administrative expenses to certain claimants, but withheld payment to ASM Capital on the ground that section 502(d) disallows administrative expense claims that were acquired from a party who had failed to return any preferential transfer or its equivalent value. ASM Capital responded by filing a motion in the bankruptcy court to order the debtor to pay ASM Capital its administrative expense claims. ASM Capital argued that section 502(d) does not apply to administrative expense claims, but the bankruptcy court rejected this argument and denied the motion.
Although the district court affirmed the bankruptcy court’s ruling,
the Second Circuit reversed and held that section 502(d) does not apply to administrative expense claims.