Ellis v. Westinghouse Electric Co. LLC: Third Circuit Allows Discharge of Post-Confirmation Administrative Expense Claim | Practical Law

Ellis v. Westinghouse Electric Co. LLC: Third Circuit Allows Discharge of Post-Confirmation Administrative Expense Claim | Practical Law

In Ellis v. Westinghouse Electric Co., LLC, the Third Circuit reversed a district court ruling that an employee's bias claims against debtor, Westinghouse Electric Co., survived the company's bankruptcy and that the employee did not need to submit an administrative claim in the bankruptcy. On appeal, the Third Circuit said that the employee could not bypass the bankruptcy court's bar date for administrative expense claims by suing Westinghouse directly, but must file a claim before the court-ordered bar date to avoid discharge of the claim.

Ellis v. Westinghouse Electric Co. LLC: Third Circuit Allows Discharge of Post-Confirmation Administrative Expense Claim

by Practical Law Bankruptcy & Restructuring
Law stated as of 21 Sep 2021 • USA (National/Federal)
In Ellis v. Westinghouse Electric Co., LLC, the Third Circuit reversed a district court ruling that an employee's bias claims against debtor, Westinghouse Electric Co., survived the company's bankruptcy and that the employee did not need to submit an administrative claim in the bankruptcy. On appeal, the Third Circuit said that the employee could not bypass the bankruptcy court's bar date for administrative expense claims by suing Westinghouse directly, but must file a claim before the court-ordered bar date to avoid discharge of the claim.
The US District Court for the Western District of Pennsylvania's ruled that:
  • Employee Timothy Ellis' bias claims against Westinghouse Electric Co. were not discharged and survived the company's bankruptcy.
  • The employee did not need to submit an administrative claim in the bankruptcy case.
On August 30, 2021, the US Court of Appeals for the Third Circuit reversed the district court and held that Ellis could not bypass the bankruptcy court's bar date for administrative expense claims by suing Westinghouse directly and that failure to file an administrative claim before the bar date resulted in discharge of the claim.
Addressing a case of first impression for a federal appellate court, the Third Circuit took up the issue of whether a creditor with an administrative expense claim arising between the date of confirmation of a plan of reorganization and the plan's effective date must comply with a bar date for such claims or face discharge of its claim ( (3d Cir. Aug. 30, 2021)).
Westinghouse filed for Chapter 11 reorganization in the Southern District of New York in 2017. The bankruptcy court set a September 1, 2017 deadline for creditors to file general claims for most prepetition debts. The court confirmed a Chapter 11 reorganization plan in March 2018, but the plan did not take effect until August 1, 2018, owing to delays associated with closing a related investment transaction.

The Age Discrimination Claim

In May 2018, after its plan of reorganization was confirmed, Westinghouse terminated then-67-year-old Ellis, citing a restructuring of his department. Ellis filed a charge with the Equal Employment Opportunity Commission (EEOC) alleging age discrimination. Ellis did not file an administrative expense proof of claim in the bankruptcy case by the August 31, 2018 court-ordered deadline. Instead, he filed a lawsuit against Westinghouse in the US District Court for the Western District of Pennsylvania.
Westinghouse moved for summary judgment based on the theory that Ellis' post-confirmation employment discrimination suit qualified as an administrative claim under Bankruptcy Code section 503 and was subject to the bar date for such claims. The company also argued that Ellis' claim was discharged under section 1141(d)(1), providing that confirmation of a plan discharges all of a debtor's debts "that arose before the date of such confirmation."
The district court rejected Westinghouse's argument and granted summary judgment to Ellis on the claim discharge issue. Due to the complex legal questions involved, the district court certified questions of law to the Third Circuit, which agreed to hear the interlocutory appeal.

The Bar Date

The Third Circuit reversed the District Court and concluded that:
  • An employment-related claim against a Chapter 11 debtor that arises after the bankruptcy petition qualifies as an administrative expense claim.
  • Under section 503, a bankruptcy court may set and enforce a bar date for postpetition administrative expense claims.
  • Section 503 further permits the discharge of administrative expense claims arising after confirmation of a plan but before the effective date of the plan.
  • Section 1141(d)(1) does not prohibit a Chapter 11 plan from discharging post-confirmation administrative expense claims.
Because Ellis did not timely submit an administrative expense claim, his age discrimination claim is subject to discharge. Ellis' only recourse is to ask the bankruptcy court to allow him to submit a late-filed claim "for cause" under section 503(a).

Practical Implications

The Third Circuit's ruling resolves this novel issue that the holder of a postpetition claim, including a post-confirmation pre-plan effective date claim, must comply with the Bankruptcy Code by filing a proof of claim before a court-ordered bar date to avoid discharge, just like prepetition claims. Plaintiffs with claims against bankrupt defendants – even claims arising postpetition – cannot ignore the bankruptcy process and pursue debtors in other venues. As the Third Circuit noted, creditors are not without recourse to challenge the plan and the treatment of the underlying claim or the sufficiency of notice of the bar date.