Unpaid Administrative Expenses May Shield Preference Liability

In a recent decision, In re Quantum Foods, LLC,¹ the bankruptcy court in the District of Delaware confronted the issue of whether a creditor holding an unpaid administrative claim can assert that claim as a defense to the recovery of an avoidable preference. In Quantum, the Unsecured Creditors Committee (the “Committee”) asserted that Tyson Fresh Meats, Inc. and Tyson Foods, Inc. (collectively “Tyson”) received avoidable preferences in excess of $13.7 million. Post petition, Tyson sought and received an order allowing an administrative expense claim of $2.6 million, which remained unpaid.

The Committee filed a complaint seeking to recover the pre petition transfers under sections 547, 548 and 550 of the United States Bankruptcy Code,² and seeking to have Tyson’s administrative claim disallowed unless the preferences were returned pursuant to Code section 502(d). Tyson denied that the transfers were avoidable, asserted that the Committee’s preference claims were post