In Official Committee of Unsecured Creditors v. Baldwin (In re Lemington Home for the Aged), 659 F.3d 282 (3d Cir. 2011), the Third Circuit Court of Appeals held, among other things, that the “deepening insolvency” cause of action, which the Third Circuit previously recognized in Official Committee of Unsecured Creditors v. R.F. Lafferty & Co., 267 F.3d 340 (3d Cir. 2001), remains an independent cause of action under Pennsylvania law.

Background

Section 503(b) of the Bankruptcy Code delineates categories of claims that are entitled to elevated priority as “administrative expenses.” Under section 503(b)(3)(D), administrative expenses include “actual, necessary expenses” incurred by a creditor, indenture trustee, equity holder, or unofficial committee “in making a substantial contribution” in a chapter 11 case.

On March 22, the United States Court of Appeals for the Third Circuit issued a decision that could significantly impact the rights of secured creditors to credit bid in connection with Chapter 11 asset sales under a plan of reorganization.

Lehman Brothers Holdings Inc. (LBHI) and its affiliated U.S. chapter 11 debtors (the “Debtors”) filed a joint plan with the Bankruptcy Court on March 15, the last day on which the Debtors who filed petitions on September 15, 2008, had the exclusive right to file a plan. As a result of the filing, the Debtors have an additional 60 days during which no other party may file a plan.