Checkmate: Trumping A Supplier's Administrative Claim

Creditors that have experienced a customer filing for bankruptcy have learned that claims are paid in the order stated in the Bankruptcy Code. Generally, secured claims are paid first, followed by administrative expenses, then unsecured claims and equity. Additionally, in chapter 11, administrative expense claims must be paid in full by the confirmed plan of reorganization (unless the creditor agrees otherwise) while general unsecured claims often only receive pennies on the dollar.

In the ADI Liquidation, Inc. chapter 11 cases, the Delaware Bankruptcy Court held that the debtors could apply certain credits to reduce or eliminate a supplier's administrative claim as opposed to first applying them to the supplier's general unsecured claim.