In re Jartran, Inc. - 732 F.2d 584 (7th Cir. 1984)

Rule:

The courts have established a two-part test for determining whether a debt should be afforded administrative priority. Under these criteria, a claim will be afforded priority under 11 U.S.C.S. § 503 of the Bankruptcy Code if the debt both (1) arises from a transaction with the debtor-in-possession and (2) is beneficial to the debtor-in-possession in the operation of the business. This test is, of course, essentially an effort to determine whether the underlying statutory purpose will be furthered by granting priority to the claim in question, and the court will apply it in that spirit.

Facts:

Appellee Jartran, Inc. placed advertising in the telephone book through appellants Reuben H. Donnelley Corporation ("Donnelley") and Sandra C. Tinsley, Inc. ("Tinsley"). The parties committed irrevocably to pay for the advertising before the ads appeared, but appellee was not billed until after the ads were published. Before many of the ads were published, appellee filed for reorganization under Chapter 11 of the Bankruptcy Code. Appellants claimed the amount owed for appellee's pre-petition advertising was an administrative expense and should be afforded priority ahead of certain pre-petition creditors. The bankruptcy judge denied the claim, and on appeal, the district court affirmed. Appellants challenged the decision.

Issue:

Was the amount owed for appellee’s pre-petition advertising an administrative expense?

Answer:

No.

Conclusion:

The Court affirmed the lower court’s decision, holding that the claim did not arise from a transaction with the debtor-in-possession. Appellants' claim arose out of commitments made before the debtor-in-possession came into existence, which was when appellee filed its Chapter 11 petition. Inducement of the creditor's performance by the debtor-in-possession was crucial to a claim for administrative priority for furnishing goods or services. Therefore, the language and policies of 11 U.S.C.S. § 503 of the Bankruptcy Code would not be served by priority. The underlying purposes of § 503 compelled the conclusion that the bankruptcy court and district court reached the correct result.