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The Absence of Legislative History Obscures the Plain Meaning of Bankruptcy Code Section 503(b)(1)(A)

By Teddy M. Kapur
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Without the guiding light of legislative history, courts may well veer off in unintended directions and subvert the intent of a statute.

Many jurists and scholars have ridiculed the reliance on legislative history in judicial opinions. These textualists abide by the "plain meaning" rule and admonish references to external sources if a statute has a plain meaning. Despite the textualist view that legislative history should rarely play a role in statutory interpretation, the absence of statutory history can perplex courts and obscure a statute's intended purpose.

Efforts to interpret the relatively recent amendment to section 503(b)(1)(A) of the Bankruptcy Code are a telling example. When section 503(b)(1)(A) was amended in 2005, Congress provided no explanation for the purpose of the amendment. Without guidance from Congress, the three courts that have interpreted the amendment have given it three different meanings. The diverging interpretations of the "plain" and "unambiguous" meaning of this section of the Bankruptcy Code demonstrate that, without legislative history, courts are left to labor in the dark. Although legislative history cannot—and should not— supplant the text, it can shine a light on the legislature's purpose, thereby illuminating the statute's intended meaning.

Section 503(b)(1)(A) of the Bankruptcy Code

Section 503 of the Bankruptcy Code governs administrative expense claims. Administrative expenses are actual and necessary costs and expenses involved in preserving the value of a bankrupt entity's estate. Section 503(b)(1)(A), in particular, pertains to administrative expense claims consisting of wages, salaries, and commissions for services rendered to the bankrupt entity. Section 503 authorizes payment of administrative expenses ahead of other kinds of obligations owed by an entity operating in bankruptcy because administrative expenses are critical to preserving the value of the debtor's estate and therefore benefit the creditor body at-large. As a result, creditors seek administrative priority status for their claims because often such claims are paid in full while lower priority claims are only partially paid.

Section 503(b)(1)(A) has become the subject of much dispute because former employees of bankrupt companies have relied on this provision to demand administrative priority status for WARN Act claims and other wage-related claims so that they can receive distributions before other creditors.

Courts have struggled to uniformly apply section 503(b)(1)(A) since it was amended by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA). Before BAPCPA, section 503(b)(1)(A) stated, in its entirety:
(b) After notice and a hearing, there shall be allowed administrative expenses, other than claims allowed under section 502(f) of this title, including—

(1)(A) the actual, necessary costs and expenses of preserving the estate, including wages, salaries, or commissions for services rendered after the commencement of the case.
BAPCPA divided (1)(A) of section 503(b) into two subsections, whereby subsection (i) retained the text of the former provision (1)(A) and subsection (ii) added a new category of administrative expense claims. Section 503(b)(1)(A) of the Bankruptcy Code now provides:
(b) After notice and a hearing, there shall be allowed administrative expenses, other than the claims allowed under section 502(f) of this title, including—

(1)(A) the actual, necessary costs and expenses of preserving the estate including—

(i) wages, salaries, and commissions for services rendered after the commencement of the case; and

(ii) wages and benefits awarded pursuant to a judicial proceeding or a proceeding of the National Labor Relations Board as back pay attributable to any period of time occurring after commencement of the case under this title, as a result of a violation of Federal or State law by the debtor, without regard to the time of the occurrence of unlawful conduct on which such award is based or to whether any services were rendered, if the court determines that payment of wages and benefits by reason of the operation of this clause will not substantially increase the probability of layoff or termination of current employees, or of nonpayment of domestic support obligations, during the case under this title.

Absence of Legislative History

Only three decisions have discussed amended section 503(b)(1)(A)(ii) (the Amendment), and each observed that the legislative history on the Amendment is "sparse," "nearly silent," and consists of "only one comment, which, for the most part, simply paraphrases the statutory language."

Without guidance from legislative history, the three courts discerned the "plain," "straightforward" and "unambiguous" meaning of the Amendment and reached different interpretations.

In re First Magnus Financial Corporation

The first decision to interpret the Amendment was First Magnus Financial Corp., 390 B.R. 667 (Bankr. D. Ariz. 2008). There, former employees of First Magnus who were fired five days before the company filed for bankruptcy sought allowance of an administrative expense claim under the Amendment as a result of damages caused by the debtor's alleged violation of the Worker Adjustment and Retraining Notification (WARN) Act. The WARN Act requires certain employers to give affected workers 60 days' notice of plant closures and mass layoffs to provide them time to look for new jobs.

The bankruptcy court focused on the plain language of the Amendment and interpreted the connector "and" between subsections (i) and (ii) of 503(b)(1)(A) to "require that both parts of the subsections must exist in order for a claimant to be entitled to an administrative expense." Accordingly, since the employees were terminated before First Magnus filed for bankruptcy and did not render any services after that point, their WARN Act claims failed to satisfy subsection (i) of section 503(b)(1)(A) and thus were ineligible for administrative treatment under the Amendment.

This ruling was affirmed on appeal, and the district court praised the bankruptcy court for its "thorough and well-reasoned opinion."

In re Powermate Holding Corporation

A few months after First Magnus in a case with a substantially similar facts, the Delaware bankruptcy court ascribed a different plain meaning to the Amendment. In In re Powermate Holding Corporation, 394 B.R. 765 (Bankr. D. Del. 2008), former employees of Powermate Holding Corporation who were terminated before Powermate went into bankruptcy alleged that their WARN Act damages were entitled to administrative expense priority under the Amendment.

Powermate rejected the First Magnus interpretation that the connector "and" between subsections (i) and (ii) of the Amendment means that the two provisions must be read together. Instead, the court emphasized the role of the word "including" that appears before subsection (i) and reasoned that the use of "and" means that subsections (i) and (ii) are "categories within a particular subset of allowable administrative expenses," namely the "'actual necessary costs and expenses of preserving the estate.'"

The court thereafter reasoned that the primary consideration for determining whether a claim fits within the Amendment is the timing of when the claim vests or accrues. According to the court, "[i]f a claim vests [before the company files for bankruptcy], then the back pay is attributable to the time occurring prior to the commencement of the case and therefore it is not an administrative expense claim." In contrast, if a claim vests after the bankruptcy filing, then it would satisfy the Amendment and receive administrative expense priority treatment. The court reviewed the connection between WARN Act damages and severance pay, and ruled that the employees' claims were priority wage claims rather than administrative expenses because they vested prior to the petition date at the time the employees were terminated. Furthermore, having concluded that the vesting date was the pivotal issue, the court concluded it was irrelevant to consider whether the back pay was due for the time prior to or following the date the claims accrued.

In re Philadelphia Newspapers, LLC

Most recently, a Pennsylvania bankruptcy court attempted to resolve the conflict between First Magnus and Powermate, supplying a third interpretation of "the plain and straightforward language of the [Amendment]."

In In re Philadelphia Newspapers, LLC, 433 B.R. 164 (Bankr. E.D. Pa. 2010), a union representing a former Philadelphia Newspapers employee sought to have the portion of an arbitration award comprised of wages and healthcare premiums that accrued after Philadelphia Newspapers filed for bankruptcy treated as an administrative expense. The union initiated the grievance because it alleged that the employee's termination violated the terms of its collective bargaining agreement with Philadelphia Newspapers. Although the employee was fired before Philadelphia Newspapers filed for bankruptcy, the arbitrator entered the award after the bankruptcy case commenced.

The court reviewed the First Magnus and Powermate decisions and sided with Powermate's ruling that the use of "and" between subsections (i) and (ii) means that the subsections are subsets of the category of allowable administrative expenses under section 503(b)(1)(A). Philadelphia Newspapers, however, disagreed with Powermate's conclusion that the claim's vesting date is critical to determining if it qualifies as an administrative expense under the Amendment. Based on its reading of the plain meaning of the Amendment, the court observed: "Had Congress intended to condition subsection (ii) on when a right or claim for back pay 'vested' or 'accrued,' it could have said so. It did not and, for that reason, this Court will not impose that requirement on this new subsection to § 503(b)(1)(A)."

Moreover, the court criticized the decisions in both First Magnus and Powermate for ignoring the clause in the Amendment that allows certain administrative expense claims "without regard to the time of the occurrence of unlawful conduct on which such award is based or to whether any services were rendered." Contrary to those decisions, Philadelphia Newspapers concluded that back pay could constitute an administrative expense under the Amendment without regard to whether services have been rendered, as long as it is awarded for any period of time "attributable to any time occurring after commencement of a case" and meets the other requirements listed in subsection (ii).

The court observed that the Amendment "could not be more plain in its language" and reduced it to a four-part test. According to Philadelphia Newspapers, wages and benefits qualify as administrative expenses under the Amendment if they meet the following four requirements:
  1. they were awarded pursuant to a judicial proceeding or a proceeding of the National Labor Relations Board;
  2. they were awarded as back pay attributable to a period of time occurring after commencement of the debtor's bankruptcy case;
  3. they were awarded as a result of a violation of federal or state law by the debtor; and
  4. the court determines that payment of the wages and benefits will "not substantially increase the probability of layoff or termination of current employees, or of nonpayment of domestic support obligations, during the" debtor's bankruptcy case.
Applying these criteria, the court concluded that the union's claim failed to satisfy the Amendment's third requirement because the arbitration award resulted from a breach of the collective bargaining agreement rather than a violation of federal or state law.

Conclusion

First Magnus, Powermate, and Philadelphia Newspapers each followed their own interpretation of the plain meaning of the Amendment and were led in different directions. Whereas First Magnus interpreted the Amendment to limit the scope of section 503(b)(1)(A) by adding new statutory requirements, Powermate and Philadelphia Newspapers read the same provision to broaden the applicability of that section by recognizing a new type of allowable administrative expense. Similarly, whereas Powermate believed that a claim's vesting date was pivotal to the applicability of the Amendment, Philadelphia Newspapers concluded that such date was inconsequential as long as the claim was attributed to any time occurring after the company filed for bankruptcy protection.

When a statute is unclear, Congress bears responsibility for clarifying its meaning. In this instance, however, Congress has proven an unreliable partner for the judiciary. The Protecting Employees and Retirees in Business Bankruptcies Act of 2010 (the Act) was introduced in the 111th Congress in February 2010, presumably to clarify the purpose of the Amendment, but the Act failed to make it out of the House Committee on the Judiciary and did not become law. The Act would have revised amended section 503(b)(1)(A)(ii) to specifically include awards of WARN Act damages as administrative expenses if any time period attributed to such damage award occurs after the commencement of a bankruptcy case and the other requirements of the Amendment have been met. The Act supported the Philadelphia Newspapers view that a claim's "vesting date" is immaterial and that a back pay claim can constitute an administrative expense even if it is awarded for services rendered before the commencement of a bankruptcy case. The Act has not been reintroduced in the current Congress and faces uncertain prospects. Until it is signed into law, the Act does not represent the will of Congress and provides no assistance to judges struggling to interpret the Amendment.

The divergent judicial interpretations of the plain meaning of the Amendment demonstrate that without the guiding light of legislative history, courts may well veer off in unintended directions and subvert the intent of a statute. Legislative history should not, of course, be the solebasis of interpretation because the congressional record is not the law and legislative intent often can be difficult to discern. But it can be particularly useful in situations where, as here, a statute is ambiguous and courts cannot easily agree on its meaning. Clear legislative history can undoubtedly shed light on the purpose of a new law. Here, such direction likely would have prevented the confusion that ensued and guided courts to a uniform interpretation of the Amendment.
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