Contributions

The Applicability of the Absolute Priority Rule in the Context of Pre-Plan Settlement Agreements

by Nathan Gen­car­el­la 1

Inher­ent in the con­cept of bank­rupt­cy is the pre­sump­tion that no process could make every par­ty with a claim to a debtor’s prop­er­ty whole.2 As such, a fun­da­men­tal pur­pose of the Bank­rupt­cy Code is to estab­lish pri­or­i­ties among cred­i­tors to ensure that the debtor’s assets are dis­trib­uted in a man­ner that equi­tably bal­ances the com­pet­ing inter­ests of affect­ed par­ties based on ex ante pol­i­cy deter­mi­na­tions, rather than the inside influ­ence or eco­nom­ic lever­age of a par­tic­u­lar equi­ty hold­er or cred­i­tor ex post.3 These con­gres­sion­al pri­or­i­ties are reflect­ed in sec­tion 507 of the Bank­rupt­cy Code, which out­lines a detailed hier­ar­chy of claims that guides the dis­tri­b­u­tion of prop­er­ty in bank­rupt­cy pro­ceed­ings, and in the absolute pri­or­i­ty rule set forth in sec­tion 1129, which ensures that no plan will be con­firmed in a Chap­ter 11 reor­ga­ni­za­tion pro­ceed­ing that devi­ates from the pri­or­i­ty scheme with­out the con­sent of a dis­ad­van­taged class.5

How­ev­er, notwith­stand­ing the seem­ing uni­ver­sal­i­ty of the Code’s pri­or­i­ty scheme, par­ties to Chap­ter 11 pro­ceed­ings that stand to gain from pri­or­i­ty-skip­ping dis­tri­b­u­tions have sought to evade its stric­tures by cre­ative­ly struc­tur­ing agree­ments to avoid for­mal­ly dis­trib­ut­ing prop­er­ty pur­suant to a final plan.6 Pro­po­nents of this approach argue that because the absolute pri­or­i­ty rule only express­ly gov­erns the dis­tri­b­u­tion of estate prop­er­ty under a Chap­ter 11 plan, the rule does not impli­cate pri­or­i­ty-skip­ping dis­tri­b­u­tions that occur out­side of a final plan or that involve prop­er­ty that is right­ful­ly owned by the cred­i­tor dis­trib­ut­ing the assets. 7 More­over, some courts argue that these pur­port­ed excep­tions to the absolute pri­or­i­ty rule are ground­ed in sound pol­i­cy, as they allow par­ties to accel­er­ate the Chap­ter 11 pro­ceed­ings, max­i­mize the val­ue of the estate where a pri­or­i­ty-skip­ping dis­tri­b­u­tion is the only way to avoid liq­ui­da­tion, and over­come poten­tial hold-out prob­lems that arise if a class of cred­i­tors could in effect veto any pri­or­i­ty-skip­ping com­pro­mise. By hold­ing that all prop­er­ty dis­tri­b­u­tions must strict­ly abide by the Code’s pri­or­i­ty scheme when tied to a struc­tured dis­missal, how­ev­er, the Supreme Court’s recent deci­sion in Czyzews­ki v. Jevic casts sub­stan­tial doubt on the con­tin­ued valid­i­ty of pur­port­ed excep­tions to the absolute pri­or­i­ty rule.8

Ulti­mate­ly, this Con­tri­bu­tion will argue that to pre­serve the integri­ty of the Bank­rupt­cy Code’s pri­or­i­ty scheme and to pro­tect the statute’s care­ful­ly drawn bal­ance between com­pet­ing inter­ests in Chap­ter 11 pro­ceed­ings, courts should refuse to read into the Bank­rupt­cy Code a pre-plan gift set­tle­ment excep­tion to the absolute pri­or­i­ty rule.

* * * * *

The Bank­rupt­cy Code estab­lish­es a com­pre­hen­sive sys­tem of pri­or­i­ty gov­ern­ing the dis­tri­b­u­tion of prop­er­ty in Chap­ter 11 pro­ceed­ings that express­ly pro­hibits par­ties with sub­or­di­nate claims from receiv­ing any prop­er­ty on account of a claim or inter­est in the debtor’s estate over the objec­tion of a more senior class until that class’s claims are sat­is­fied. 9 Specif­i­cal­ly, under sec­tion 1129(b), Chap­ter 11 plans that attempt to cir­cum­vent the Code’s pri­or­i­ty scheme with­out the con­sent of a dis­ad­van­tage class must be reject­ed by the bank­rupt­cy court because such plans fail to meet the “fair and equi­table” thresh­old required for con­fir­ma­tion as a mat­ter of law.10 How­ev­er, while the Supreme Court has extend­ed this bright-line pro­hi­bi­tion on the approval of pri­or­i­ty-skip­ping plans to set­tle­ment dis­tri­b­u­tions made pur­suant to a dis­missal of a Chap­ter 11 pro­ceed­ing, it has yet to pro­vide guid­ance on whether pre-plan gift set­tle­ments like­wise fall with­in the scope of the absolute pri­or­i­ty rule. Sim­i­lar­ly, no cir­cuit has yet been pre­sent­ed with a case involv­ing a gift dis­tri­b­u­tion made in the con­text of a pre-plan set­tle­ment.

Pro­po­nents of a gen­er­al gift­ing excep­tion to the absolute pri­or­i­ty rule argue that an under­se­cured senior cred­i­tor is allowed to “gift” the pro­ceeds of its col­lat­er­al to class­es with infe­ri­or claims with­out regard to the Code’s pri­or­i­ty scheme because such cred­i­tors have an undis­put­ed claim to the estate’s prop­er­ty and should have the right to dis­pose of it as they wish.12 How­ev­er, while the Third Cir­cuit in In re ICL Hold­ing Co. held that secured cred­i­tors may gift non-estate prop­er­ty with­out trig­ger­ing the absolute pri­or­i­ty rule, no cir­cuit has upheld a gift­ing arrange­ment that dis­trib­utes estate prop­er­ty in vio­la­tion of the Code’s pri­or­i­ty scheme.14 Indeed, the Sec­ond Cir­cuit, the only cir­cuit to direct­ly address the issue of gift­ing estate prop­er­ty in the con­text of Chap­ter 11 pro­ceed­ings, found that nei­ther the plain lan­guage nor leg­isla­tive his­to­ry of sec­tion 1129 sup­ports the cre­ation of a gift excep­tion to the absolute pri­or­i­ty rule.15

Where the Courts of Appeals have diverged, how­ev­er, is whether dis­tri­b­u­tions made pur­suant to a pre-plan set­tle­ment are sub­ject to the full force of the absolute pri­or­i­ty rule. Although the Supreme Court in TMT Trail­er Fer­ry, Inc. v. Ander­son16 held that set­tle­ments that are incor­po­rat­ed into a reor­ga­ni­za­tion plan must be “fair and equi­table” – a stan­dard that the Court observes “incor­po­rates the absolute pri­or­i­ty doc­trine”17 – the Court has not yet resolved whether this rule applies to pre-plan set­tle­ment agree­ments. There­fore, though every cir­cuit to have addressed this issue agrees that pre-plan set­tle­ments must be fair and equi­table to be approved by the bank­rupt­cy court under Rule 9019 of the Fed­er­al Rules of Bank­rupt­cy Pro­ce­dure, a split has arisen over whether the “fair and equi­table” stan­dard applic­a­ble to pre-plan set­tle­ments ful­ly incor­po­rates the absolute pri­or­i­ty rule. While the Sec­ond Cir­cuit would grant bank­rupt­cy courts the dis­cre­tion to approve pri­or­i­ty-skip­ping pre-plan set­tle­ments if the set­tle­ment “was a step towards pos­si­ble con­fir­ma­tion of a plan of reor­ga­ni­za­tion and not an eva­sion of the plan con­fir­ma­tion process,”18 the Fifth Cir­cuit in In re AWECO19 embraced a bright-line rule that bank­rupt­cy courts must reject a pre-plan set­tle­ment that entails a pri­or­i­ty-skip­ping dis­tri­b­u­tion “unless the court con­cludes that pri­or­i­ty of pay­ment will be respect­ed as to object­ing senior cred­i­tors.”20 At the heart of this split is the ques­tion of whether the text of the statute and the sig­nif­i­cant risk that par­ties will exploit any loop­hole that is cre­at­ed in the Code’s absolute pri­or­i­ty scheme com­pel the court to strict­ly enforce its require­ments in eval­u­at­ing pre-plan set­tle­ment agree­ments or whether a per se rule is too rigid to effec­tive­ly accom­mo­date the often dynam­ic and amor­phous nature of the ear­ly stages of Chap­ter 11 pro­ceed­ings.

* * * * *

Because the absolute pri­or­i­ty rule is essen­tial to the fair and equi­table dis­tri­b­u­tion of prop­er­ty in Chap­ter 11 pro­ceed­ings, the Supreme Court has declared that one should “expect more than sim­ple statu­to­ry silence if, and when, Con­gress were to intend a major depar­ture.”22 Par­ties to a Chap­ter 11 pro­ceed­ing can­not evade its stric­tures by doing via a pre-plan gift set­tle­ment what Con­gress has express­ly pro­hib­it­ed them from doing pur­suant to a final plan for four rea­sons.

First, the text of sec­tion 1129 is incon­sis­tent with read­ing a gift­ing excep­tion into the absolute pri­or­i­ty rule. As the Sec­ond Cir­cuit explained in In re DBSD, “the Code extends the absolute pri­or­i­ty rule to any prop­er­ty, … not any prop­er­ty not cov­ered by a senior creditor’s lien. The Code focus­es entire­ly on who receives or retains the prop­er­ty under the plan, not on who would receive it under a liq­ui­da­tion plan.”23 There­fore, the fact that a secured cred­i­tor would have the right to receive the prop­er­ty at issue under the Code’s pri­or­i­ty scheme is sim­ply imma­te­r­i­al to a deter­mi­na­tion of whether it com­plies with Chap­ter 11’s absolute pri­or­i­ty rule. Rather, the plain lan­guage of sec­tion 1129 pre­cludes par­ties with a junior inter­est from receiv­ing any prop­er­ty on account of that inter­est that vio­lates the statute’s care­ful­ly bal­anced pri­or­i­ty scheme.24

Sec­ond, even if the text were ambigu­ous, the his­tor­i­cal devel­op­ment of the absolute pri­or­i­ty rule belies the notion that a “gift set­tle­ment” excep­tion to absolute pri­or­i­ty rule could be con­sis­tent with the statute. The absolute pri­or­i­ty rule was orig­i­nal­ly devel­oped by the Supreme Court in the con­text of rail­road reor­ga­ni­za­tions to pre­vent senior cred­i­tors from squeez­ing out inter­me­di­ate cred­i­tors by giv­ing up val­ue or an equi­ty stake in the new­ly reor­ga­nized enti­ty to buy the coop­er­a­tion of old equi­ty.25 In oth­er words, the absolute pri­or­i­ty rule was designed to pre­vent the very sort of gift­ing excep­tion being advo­cat­ed for today. While the rail­road cas­es are no longer bind­ing prece­dent giv­en that the com­mon law rule has now been cod­i­fied by Con­gress, it strains creduli­ty to con­clude that Con­gress would abro­gate “the more-than-a-cen­tu­ry old core of the absolute pri­or­i­ty rule by pass­ing a statute whose lan­guage explic­it­ly adopts it.” 26

Third, the mere fact that a gift­ing arrange­ment is made pur­suant to a pre-plan set­tle­ment, rather than as part of a reor­ga­ni­za­tion plan, does not cure the vio­la­tion of the Code’s pri­or­i­ty scheme. As the Fifth Cir­cuit right­ly rec­og­nized in the mat­ter of AWECO, fail­ing to apply the absolute pri­or­i­ty rule to pre-plan set­tle­ments would grant bank­rupt­cy courts the dis­cre­tion “to favor junior class­es of cred­i­tors so long as the approval of the set­tle­ment came before the plan.” 27 Cre­at­ing such an arbi­trary dis­tinc­tion would allow par­ties to evade fun­da­men­tal pro­ce­dur­al pro­tec­tions writ­ten into the Bank­rupt­cy Code by the mere for­mal­i­ty of struc­tur­ing pri­or­i­ty-vio­lat­ing dis­tri­b­u­tions as pre-plan set­tle­ments as opposed to tying them to final dis­tri­b­u­tions under a plan or struc­tured dis­missal.

Final­ly, pre­serv­ing the integri­ty of the absolute pri­or­i­ty rule is essen­tial as a mat­ter of pub­lic pol­i­cy. The hier­ar­chy of claims detailed in sec­tion 507 reflects care­ful­ly bal­anced val­ue and pol­i­cy judg­ments made by Con­gress with respect to what class­es of inter­ests deserve pri­or­i­ty when dis­trib­ut­ing the debtor’s prop­er­ty.28 Ensur­ing that the pri­or­i­ty scheme is respect­ed in pre-plan set­tle­ment agree­ments pro­tects the reliance inter­ests of par­ties who rea­son­ably believe that the Code’s pri­or­i­ty sys­tem will gov­ern dis­tri­b­u­tions in the event of bank­rupt­cy, incen­tivizes the infu­sion of new cap­i­tal in a reor­ga­ni­za­tion enti­ty by ensur­ing that admin­is­tra­tive pri­or­i­ty claims will be pro­tect­ed, min­i­mizes the risk that employ­ees will aban­don a fail­ing busi­ness out of fear of not being paid, and is the most equi­table result as it reflects the pri­or­i­ty of claims that par­ties bar­gained for ex ante.31 More­over, main­tain­ing a clear, bright-line rule min­i­mizes lit­i­ga­tion costs by facil­i­tat­ing set­tle­ments.32

* * * * *

Because bank­rupt­cy pro­ceed­ings are pre­sump­tive­ly unable to ful­ly com­pen­sate every par­ty with a claim or inter­est in the prop­er­ty of the estate, it is imper­a­tive that dis­tri­b­u­tions of estate prop­er­ty be dis­trib­uted in a fair and equi­table man­ner. Although apply­ing the absolute pri­or­i­ty rule to pre-plan gift set­tle­ments may appear to impede the effi­cient res­o­lu­tion of dis­putes, enforc­ing a robust ver­sion of absolute pri­or­i­ty advances the inter­ests of all cred­i­tors by encour­ag­ing invest­ment in reor­ga­niz­ing enti­ties, pro­tect­ing reliance inter­ests that par­ties bar­gained for ex ante, and facil­i­tat­ing set­tle­ments by main­tain­ing a clear, pre­dictable rule. More­over, strict adher­ence to the absolute pri­or­i­ty rule in pre-plan set­tle­ment agree­ments is essen­tial to ensure that par­ties to a Chap­ter 11 pro­ceed­ing can­not evade the require­ments of sec­tion 1129(b) sim­ply by alter­ing the tim­ing of a pri­or­i­ty-skip­ping dis­tri­b­u­tion. There­fore, in order to pro­tect the Code’s care­ful­ly cal­i­brat­ed hier­ar­chy of com­pet­ing inter­ests and ensure the vital­i­ty of the absolute pri­or­i­ty rule in reor­ga­ni­za­tion pro­ceed­ings, courts should reject any pre-plan gift set­tle­ment that seeks to dis­trib­ute prop­er­ty in vio­la­tion of the Code’s pri­or­i­ty scheme.

Notes:

1 Nathan Gen­car­el­la is a 3L at New York Uni­ver­si­ty School of Law.This piece is a com­men­tary on the 2018 prob­lem at the Duber­stein Moot Court Com­pe­ti­tion in Queens, NY, host­ed by St. John’s Uni­ver­si­ty School of Law. The issue in the prob­lem dealt with whether a bank­rupt­cy court may approve a con­test­ed “gift” set­tle­ment involv­ing a pay­ment by a sec­tion 363 pur­chas­er in con­nec­tion with the acqui­si­tion of the debtor’s assets when the set­tle­ment pro­ceeds are not dis­trib­uted in accor­dance with the Bank­rupt­cy Code’s pri­or­i­ty scheme. The views expressed in this arti­cle do not nec­es­sar­i­ly rep­re­sent the views of the author on this point of law. Rather, this arti­cle is a dis­til­la­tion of one side of the argu­ments made by the team at the Duber­stein Moot Court Com­pe­ti­tion.

2 See Eliz­a­beth C. War­ren, Bank­rupt­cy Pol­i­cy, 54 U. Chi. L. Rev. 775, 785 (1987).

3 Id.; see also Czyzews­ki v. Jevic Hold­ing Corp., 137 S. Ct. 973, 986 (2017) (observ­ing that the bank­rupt­cy code’s scheme has “long been con­sid­ered fun­da­men­tal to [its] oper­a­tion” as it ensures that the debtor’s assets are dis­trib­uted “in an order­ly man­ner …  in accor­dance with estab­lished prin­ci­ples rather than on the basis of the inside influ­ence or eco­nom­ic lever­age of a par­tic­u­lar cred­i­tor”) (inter­nal cita­tions omit­ted); Roe & Tung, Break­ing Bank­rupt­cy Pri­or­i­ty: How Rent-Seek­ing Upends The Cred­i­tors’ Bar­gain, 99 Va. L. Rev. 1235, 1243, 1236 (argu­ing that “the first prin­ci­ple of bank­rupt­cy is that ‘dis­tri­b­u­tion con­forms to pre­de­ter­mined statu­to­ry and con­trac­tu­al pri­or­i­ties”).

A busi­ness may file for bank­rupt­cy direct­ly under either Chap­ter 7, for liq­ui­da­tion, or Chap­ter 11, which gov­erns busi­ness reor­ga­ni­za­tions. See William L. Nor­ton Jr., Nor­ton Bank­rupt­cy Law. & Prac­tice § 11:1 (rev. 3d ed. Supp. 2018). At the point that a busi­ness files for bank­rupt­cy, an estate is cre­at­ed that “includes all of the debtor’s legal or equi­table inter­est in prop­er­ty at the time of the fil­ing of the peti­tion wher­ev­er locat­ed and by whomev­er held.” Id. § 3:11. In a Chap­ter 7 pro­ceed­ing, a trustee is appoint­ed to col­lect and liq­uidize the prop­er­ty of the estate and then to dis­trib­ute the pro­ceeds to the cred­i­tors. See Nor­ton, supra, § 3:12. The debtor retains no con­trol over the enti­ty once the pro­ceed­ing com­mences and the process will end with the enti­ty being dis­solved. See id. In a Chap­ter 11 pro­ceed­ing, by con­trast, a debtor gen­er­al­ly retains con­trol to oper­ate the busi­ness as the “debtor-in-pos­ses­sion” through­out the process. See id. § 3:14.

4 See 11 U.S.C. § 507 (West 2012).

5 See 11 U.S.C. § 1129 (West 2012); see also Nor­ton, supra note 3, § 3:14 (“Absolute pri­or­i­ty … ‘requires that the plan pay any dis­sent­ing class in full before any class junior to the dis­senter may be paid at all.’” (quot­ing H.R. Rep. No. 95–595., 1st Sess. 224 (1977))).

6 See Sal­ly Hen­ry, Chap­ter 11 Zom­bies, 50 Ind. L. Rev. 579, 593–606 (2017) (describ­ing the meth­ods employed to evade the stan­dard pri­or­i­ty and equal­i­ty rules).

7 See, e.g., Motoro­la, Inc. v. Offi­cial Comm. of Unse­cured Cred­i­tors (In re Irid­i­um Oper­at­ing LLC), 478 F.3d 452, 467 (2d Cir. 2007) (hold­ing that “the bank­rupt­cy court, in its dis­cre­tion, could endorse a set­tle­ment that does not com­ply in some minor respects with the pri­or­i­ty rule if the par­ties to the set­tle­ment jus­ti­fy, and the review­ing court clear­ly artic­u­lates the rea­sons for approv­ing, a set­tle­ment that devi­ates from the pri­or­i­ty rule”). This argu­ment forms the basis of so-called “gift” set­tle­ments made by secured cred­i­tors, which tra­di­tion­al­ly are com­prised of pri­or­i­ty-skip­ping dis­tri­b­u­tions tak­en from the pro­ceeds of their col­lat­er­al to buy peace through a pre-plan set­tle­ment agree­ment. See Hen­ry, supra note 6, at 600–02.

8 See Czyzews­ki, 137 S. Ct. at 987.

9 See §§ 507, 1129(b).

10 See § 1129(b)(2)(B).

11 See Czyzews­ki, 137 S. Ct. at 987.

12 See, e.g., In re Gen­e­sis Health Ven­tures, Inc., 266 B.R. 591, 602 (Bankr. D. Del. 2001) (approv­ing pri­or­i­ty-skip­ping dis­tri­b­u­tions made by senior cred­i­tors under a reor­ga­ni­za­tion plan because those cred­i­tors were enti­tled to receive the entire val­ue of the debtor’s estate under the ordi­nary pri­or­i­ty rules); In re MCorp Finan­cial, Inc., 160 B.R. 941 (S.D.Tex. 1993) (hold­ing that senior cred­i­tors “may share their pro­ceeds with cred­i­tors junior to [an inter­me­di­ate class], as long as [the inter­me­di­ate class] continue[s] to receive as [sic] least as much as what they would with­out the shar­ing”).

13 See In re ICL Hold­ing Co., 802 F.3d 547, 555–56 (3d Cir. 2015) (rea­son­ing that the gift­ing arrange­ment at issue did not impli­cate that absolute pri­or­i­ty rule because it did entail a dis­tri­b­u­tion of estate prop­er­ty).

14 The First Circuit’s deci­sion in Offi­cial Unse­cured Cred­i­tors’ Com­mit­tee v. Stern (In re SPM Man­u­fac­tur­ing Corp.), 984 F.2d 1305, 1313 (1st Cir. 1993) is not to the con­trary. As a thresh­old mat­ter, In re SPM could nev­er be used to jus­ti­fy a gift­ing excep­tion to Chap­ter 11’s absolute pri­or­i­ty rule because that case arose under a Chap­ter 7 liq­ui­da­tion. This is fatal to any attempt to apply its hold­ing to the Chap­ter 11 con­text because Chap­ter 7 is not gov­erned by the absolute pri­or­i­ty rule. See In re DBSD North Amer­i­ca, Inc., 634 F.3d 79, 98 (2d Cir. 2011). More­over, even if the ratio­nale of In re SPM were applic­a­ble to a Chap­ter 11 gift set­tle­ment, the gift­ing arrange­ment at issue only dis­trib­uted non-estate prop­er­ty. See also In re ICL Hold­ing Co., 802 F.3d 547, 558 (3d Cir. 2015) (hold­ing that where gifts do not dis­trib­ute estate prop­er­ty, secured cred­i­tors need not com­ply with the Code’s pri­or­i­ty scheme).

15 See In re DBSD North Amer­i­ca, Inc., 634 F.3d 79, 95–99 (2d Cir. 2011) (hold­ing that while under­se­cured senior cred­i­tors may “demand[] a plan in which they receive[] all of the reor­ga­nized cor­po­ra­tion, … hav­ing cho­sen not to, they may not sur­ren­der part of the val­ue of the estate for dis­tri­b­u­tion [to a sub­or­di­nate class] as a gift) (inter­nal cita­tions omit­ted).

16 390 U.S. 414 (1968).

17 Id. at 441.

18 In re Irid­i­um, 478 F.3d at 467.

19 725 F.2d 293 (1984).

20 Id. at 298 (not­ing that “fair and equi­table” are terms of art that “mean that ‘senior inter­ests are enti­tled to full pri­or­i­ty over junior ones’” (quot­ing SEC v. Amer­i­can Trail­er Rentals Co., 379 U.S. 594 (1965))).

21 Id.

22 Czyzews­ki v. Jevic Hold­ing Corp., 137 S. Ct. 973, 986 (2017).

23 In re DBSD, 634 F.3d at 97 (first empha­sis added; sec­ond empha­sis in orig­i­nal) (inter­nal cita­tions omit­ted).

24 See § 1129(b).

25 See In re Irid­i­um Oper­at­ing, LLC, 478 F.3d 452, 463 n.17 (2d Cir. 2007); see also, e.g., Chi., Rock Island & Pac. R.R. v. Howard, 74 U.S. 392, 409–10 (1868); N. Pac. Ry. Co. v. Boyd, 228 U.S. 482, 507–08 (1913); Hen­ry, supra note 6, at 602.

26 In re DBSD, 634 F.3d at 99.

27 Id.

28 For exam­ple, “Con­gress estab­lished employ­ee wage pri­or­i­ty to alle­vi­ate in some degree the hard­ship that unem­ploy­ment usu­al­ly brings to work­ers and their fam­i­lies when an employ­er files for bank­rupt­cy.” Czyzews­ki, 137 S. Ct. at 986 (inter­nal quo­ta­tions omit­ted).

29 See, e.g., Trustees of Amal­ga­mat­ed Ins. Fund v. McFarlin’s, Inc., 789 F.2d 98, 101 (2d Cir. 1986) (“Con­gress grant­ed pri­or­i­ty to admin­is­tra­tive expens­es in order to facil­i­tate the efforts of the trustee or debtor in pos­ses­sion to reha­bil­i­tate the busi­ness for the ben­e­fit of all the estate’s cred­i­tors.… Con­gress rea­soned that unless the debts incurred by the debtor in pos­ses­sion could be giv­en pri­or­i­ty over the debts which forced the estate into bank­rupt­cy in the first place, per­sons would not do busi­ness with the debtor in pos­ses­sion, which would inhib­it reha­bil­i­ta­tion of the busi­ness and thus harm the cred­i­tors.”); In re Espinosa, 542 B.R. 403, 410 (Bankr. S.D. Tex. 2015) (“The pur­pose of admin­is­tra­tive expens­es is clear: sec­tions 503 and 507 .… work in tan­dem to encour­age enti­ties to do busi­ness with a debtor post-peti­tion and thus ensure the sur­vival of the estate above all oth­er finan­cial goals.”).

30 See Czyzews­ki v. Jevic Hold­ing Corp., 137 S. Ct. 973, 987 (2017) (inter­nal cita­tions omit­ted).

31 See In re THC Fin. Corp., 679 F.2d 784, 785 (9th Cir. 1982) (the absolute pri­or­i­ty rule “vindicate[s] the rea­son­able expec­ta­tions formed by claimants when their invest­ments or loans were made”).

32 See Czyzews­ki, 197 S. Ct. at 987 (“[T]he ratio of law­suits to set­tle­ments is main­ly a func­tion of the amount of uncer­tain­ty, which leads to diver­gent esti­mates by the par­ties of the prob­a­ble out­come.” (quot­ing Lan­des & Pos­ner, Legal Prece­dent: A The­o­ret­i­cal and Empir­i­cal Analy­sis, 19 J. Law & Econ. 249, 271 (1976))); see also Rad­LAX Gate­way Hotel, LLC v. Amal­ga­mat­ed Bank, 566 U.S. 639, 649 (2012) (empha­siz­ing the impor­tance of clar­i­ty and pre­dictabil­i­ty giv­en that the “Bank­rupt­cy Code stan­dard­izes an expan­sive (and some­times unruly) area of law”).