# Petition for Writ of Certiorari — Zurich American Insurance v. Lexington Coal Co., 129 S. Ct. 2866 (2009) (No. 08-1254) > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386017_0382%3A1 ## Record - **Collection:** Supreme Court brief - **Document type:** Petition for Writ of Certiorari - **Published:** January 1, 2009 ## Text mt wees 9 thine! | We FILED’ IN THE er FFICE OF THE CLERK pms Gon SE ZURICH AMERICAN INSURANCE COMPANY, Petitioner, Vv. LEXINGTON COAL COMPANY, LLC, Respondent. ON PETITION FOR A WRIT OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE SIXTH CIRCUIT PETITION FOR A WRIT OF CERTIORARI KAREN LEE TURNER SETH P. WAXMAN ECKERT, SEAMANS, Counsel of Record CHERIN & MELLOTT, LLC CRAIG GOLDBLATT Two Liberty Place DANIELLE SPINELLI 50 South 16th Street WILMER CUTLER PICKERING Philadelphia, PA 19102 HALE AND DORR LLP (215) 851-8400 1875 Pennsylvania Ave. NW m Washington, DC 20006 (202) 663-6000 JAMES H. MILLAR JANET R. CARTER WILMER CUTLER PICKERING HALE AND DORR LLP 399 Park Avenue New York, NY 10022 (212) 230-8800 QUESTIONS PRESENTED In order to encourage lenders, vendors, and other creditors tg do business with companies in bankruptcy, facilitating reorganization and the preservation of busi- nesses, the Bankruptcy Code provides that administra- tive expenses—claims to payment that arise during a bankruptcy case, including the “actual, necessary costs and expenses of preserving the [bankruptcy] estate,” 11 U.S.C. §503(b)(1)(A)—are entitled to priority over the claims of other creditors, see id. $507(a). The ques- tions presented are: 1. Whether the Sixth Circuit erred in holding that administrative-expense priority does not extend to all payments due under a contract entered or assumed by the debtor during a bankruptcy case—a holding in di- rect conflict with decisions of the First, Second, and Fourth Circuits. 2. Whether the Sixth Circuit erred in nolding that a creditor’s claim against a bankruptcy estate arises only when the creditor’s right to payment accrues un- der state law, in agreement with the Third Circuit but in conflict with the Second, Fourth, Fifth, Ninth, Tenth, and Eleventh Circuits. (i) PARTIES TO THE PROCEEDINGS Petitioner is Zurich American Insurance Company, the appellant below. Respondent is Lexington Coal Company, LLC, the appellee below. (13) CORPORATE DISCLOSURE STATEMENT Petitioner Zurich American Insurance Company is a wholly-owned subsidiary of Zurich Holding Company of America, Inc., a Delaware corporation. Zurich Hold- ing Company of America, Inc. is a 99.8711% owned sub- sidiary of Zurich Insurance Company, a Swiss corpora- tion. Zurich Insurance Company is directly and indi- rectly owned by Zurich Financial Services, a Swiss cor- poration. Zurich Financial Services is the only publicly traded parent company, with a listing on the Swiss stock exchange, and a further trading of American De- positary Shares. (iii) TABLE OF CONTENTS Page QUESTIONS PRESENTED cicececcossscssscserscenssnssscscsesesssness i PARTIES TO THE PROCEEDINGS ..ccccccccccesscvsccsccccses il CORPORATE DISCLOSURE STATEMENT............ iii TAREE OF BU THORIT IES ...ccccccccccccsoscccsvsssneccescosecees Vil te IY iri ccsccacsioskssisionsssnincunietaeincsoavacseseacenten BE ee aE Oe Sa TE 2 STATUTORY PROVISIONS INVOLVED................... 2 eg ao EERIE Ieee ear a ay Bae eee ae Ie eng me 3 REASONS FOR GRANTING THE WRIT.................. 1} I. THE SIXTH CIRCUITS HOLDING THAT FU- TURE OBLIGATIONS UNDER A CONTRACT ASSUMED DURING BANKRUPTCY ARE NOT ADMINISTRATIVE EXPENSES CONFLICTS WITH DECISIONS OF OTHER CIRCUITS AND Is IN TENSION WITH THIS COURT’S ag 8. RRR In CON nn aM Re Rom ane SOE a 12 A. The Sixth Circuit’s Holding Conflicts With The Decisions Of Other Courts Of BI Si iasiatibicrsr ccnsra accibtolaniensbltaptbidiealaaiecaniinines 12 B. The Sixth Circuit’s Decision Relies On A Premise Rejected By This Court’s a 20 Il. THE SIXTH CIRCUIT’S DECISION EXACER- BATES THE ENTRENCHED SPLIT OF AU- THORITY REGARDING WHEN A CLAIM AGAINST A BANKRUPTCY ESTATE ARISES ............ 21 (Vv) vi TABLE OF CONTENTS—Continued III. THE DECISION BELOW WAS INCORRECT AND ‘THREATENS DEBTORS’ ABILITY TO IE sibs cncvcrsancescssoassnanovierntssnavsceroiavesesesers See T NII OT iii deesiseshoxesvesnnasinenssdsersnnccoriacarsusonesnesens APPENDIX A: Opinion of the United States Court of Appea'‘s for the Sixth Circuit, re- ported at 536 F.3d 683 (Aug. 18, 2008)............ APPENDIX B: Memorandum Opinion and Order of the United States District Court for the Eastern District of Kentucky, re- ported at 371 B.R. 210 (July 2, 2007)................ APPENDIX C: Memorandum Opinion of the United States Bankruptcy Court for the Eastern District of Kentucky, reported at 343 B.R. 839 (May 30, 2006) .......cs.cecccceessseesseee- APPENDIX D: Order of the United States Court of Appeals for the Sixth Circuit, un- DE GP, Ty BIO? cnensscsssssncccssresesenesovecesevesses Pee 59a als 69a vil TABLE OF AUTHORITIES CASES Page(s) Butler v. Nationsbank, N.A., 58 F.8d 1022 I cas 26, 27 CPT Holdings, Inc. v. Industrial & Allied Employees Union Pension Plan, 1GZ F.3d 205 (GER Cir. 19GB) ccccescccoresesrcersceccseesteseoeees 25 Central Virginia Community College v. Katz, Be ri II ciitiicsck ncscconceaiesniarheanmiaiaiondsnspsindaapesscies 3 Grady v. A.H. Robins Co., 8389 F.2d 198 | Ce re ice iaictnnsitn ssndnnetnticaiinsaidslieheinicdsmbaatiansiba 26, 27 In re Chateaugay Corp., 944 F.2d 997 CO Gee NINE fist iceelecacscnivcsinibldininneaticceceabbaeebicnies 27, 28 In re Frontier Properties, Inc., 979 F.2d 1358 SO Is MN iets nas inca cticseditaeeensctdessdiguuminedbisinncineiens 19 In re Hemingway Transport, Inc., 993 F.2d 915 CE ees MIT vistbeciticssstlin eiciniinieiriesacibbsaniies 13, 14, 15, 16 In re Ionosphere Clubs, Inc., 85 F.8d 992 (2d RN I hk eed sicsiceinsiaisscsssseitnitascentbeadisbinnmsibanscasions 31, 32 In re Jensen, 995 F.2d 925 (9th Cir. 1993) ............0. 28, 29 In re Klein Sleep Products, Inc., 78 F.3d 18 CI Gers RE satiichitenisnctsenscacestsiiccsonssancnein 5, 18, 18, 19, 20 In re M. Frenville Co., 744 F.2d 332 i taal a 23, 24 In re Mammoth Mart, Inc., 536 F.2d 950 CN So arias aaicdik asics ealicelsseihiuiciceineicininiaacsaihcecns 15 In re Merry-Go-Round Enterprises, Inc., 180 F.3d 149 (4th Cir. 1999) .....0......0....... 13, 17, 18, 19 Vili TABLE OF AUTHORITIES—Continued Page(s) In re Parker, 313 F.3d 1267 (10th Cir. 2002)........... 26, 27 In re Piper Aircraft Corp., 58 F.3d 1578 Oe I iakdsctientidedindeisarsisabsenicievtisatachenctaveisnedves 28 In re Remington Rand Corp., 8386 F.2d 825 A ME iisisissncicacnscbiasabnionienigiticcuisintomsimiinineneciens 25 In re Sunarhauserman, Inc., 126 F.8d 811 SHORE ERE ERT ew ene a eee 25 Johnson v. Home State Bank, 501 U.S. 78 | FRRDRRTEE ESSER Serine ee ear eet Oe OR 4 Jones v. Chemetron Corp., 212 F.3d 199 ee ee asst ctcrssachitslenhlsccdincinahacicaibseiadaiain 24, 25 Lemelle v. Universal Manufacturing Corp., BE FOG TOG GRR Cie, BIO) vceccinccccncscisccsrsescoorvece 27, 28 N.C.P. Marketing Group, Inc. v. BG Star Prods., Inc., No. 08-463, 2008 WL 4522334 Fak ac Wp ID easthsasiousitnnaiieaddevaiuisianaacidahaarccetwateeesans 7 NLRB vy. Bildisco & Bildisco, 465 U.S. 5138 SOR sisssicthiediiiiensihcdeiy bab ipdiCahibs ibadaakatisk uid eeiebpibanionsuase' 7, 30 Pennsylvania Department of Public Welfare v. Davenport, 496 US. SBF (IGG) ....ccccrecrsocsseoscersresonesees 4 Reading Co. v. Brown, 391 U.S. 471 | __, RPRRRE RENNER arene sees ee. arm Tere 4,11, 20, 21, 23, 24, 32 iX TABLE OF AUTHORITIES—Continued Page(s) STATUTES 11 U.S.C. SUE siisnsssenvecscsisiaceseactscuevceesanpnndid aeideisaeunn een 2,4 I viksscesvcrerecscsecesessersdcnneerintatetseseiiieniommanianmaae 24 BI at initinnstvisenmimcnioniaimaieaadaaane 7 INT iiindsar suriesservininesnessvembenetssiiaunmea 3 I isasusianciscoesssentsiesasesesanuasiasusdsistenithieeaeeeee 3,14 TO cbsnk.crenkssisssvienctnttinisscntcesonenaspeacigidasteae 1,2, 3,4 SIT cicsinsnisisvininsxadesssvesnisinsvigdainleumiiuesaiapaneaeananae i,2,5 BI ss sessadudcnssiteintubsssieaenvedetncdlaaeecensenielauiaaeee 3 Fe i skein nctvinvnsisessacsninetsesienhvepensalenvebesetanatelnaeee 4 BEE intnsevisssinanesutésrascsdevionistecesansatoneionicaa ie 4 Be RI Bs BREIO ses nrescisorssrsiceneastievmnsipeomanainigiamaee 2 42 U.S.C. PESEIES Scsiosuicssioniensendibectnapegumemanel 18, 14, 15, 28 FOOT csccesvisscisunsessisisinedicdicinidedisiesientadeommiacan nn 14 Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub. L. No. 109-8........... 3,19 iy. They. Bibat. Arak: SG ones ciesceosscvcsnsactnneanae 5 Peicn. AMUN. COGS, Fi SOBA vcciicccsssccrtsrcrnecersestin 32 Mich. Comp. Laws Serv. PE vincssisdacisissennssiessibiemecstioncsinaiaamneiaaneee 32 BERG vysecisisstisvibilacgendiidingiandaeonetaed ae 32 LEGISLATIVE MATERIALS H.R. Rep. No. 95-595 (1977), reprinted in 1978 RL) ees PAs EN Mie scessndas vctinnassaaeeesilabiniaienananenaaaanae 4 xX TABLE OF AUTHORITIES—Continued Page(s) OTHER AUTHORITIES Bain & Company, Bankruptcies of Large U.S. Companies To Extend Into 2010 (Dec. 1, Neh ial hal eaaaneiiainabaibnsainenentotesnensaes 33 Collier on Bankruptcy (15th rev. ed. 2008).........5, 22, 30 Siew, Walden, US Company Bankruptcies May Top 100 Next Year, Reuters (July 31, a cada hascehasibennerenbebioieestnnon 33 IN THE Supreme Court of the United States No. 08- ZURICH AMERICAN INSURANCE COMPANY, Petitioner, v. LEXINGTON COAL COMPANY, LLC, Respondent. ON PETITION FOR A WRIT OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE SIXTH CIRCUIT PETITION FOR A WRIT OF CERTIORARI Zurich American Insurance Company respectfully petitions for a writ of certiorari to review the judgment of the United States Court of Appeals for the Sixth Circuit in this case. OPINIONS BELOW The opinion of the United States Court of Appeals for the Sixth Circuit is reported at 536 F.3d 683 (6th Cir. 2008). App. la-2a. Its order denying rehearing is unreported. App. 69a-70a. The opinion of the United States District Court for the Eastern District of Ken- tucky is reported at 371 B.R. 210 (E.D. Ky. 2007). App. 3a-58a. The opinion of the United States Bankruptcy 2 Court for the Eastern District of Kentucky is reported at 343 B.R. 839 (Bankr. E.D. Ky. 2006). App. 59a-68a. JURISDICTION The Court of Appeals entered its judgment on Au- gust 13, 2008, and denied rehearing on January 8, 2009. This Court has jurisdiction under 28 U.S.C. §1254(1). STATUTORY PROVISIONS INVOLVED The version of §101(5) of the Bankruptcy Code, 11 U.S.C. §101(5), applicable to this case provides in rele- vant part: “Claim” means— (A) right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured|.) The version of §503(b) of the Bankruptcy Code, 11 U.S.C. §503(b), applicable to this case provides in rele- vant part: After notice and a hearing, there shall be al- lowed administrative expenses, other than claims allowed under section 502(f) of this title, including— (1)(A) the actual, necessary costs and ex- penses of preserving the estate, including wages, salaries, or commissions for services rendered after the commencement of the case|.] The version of §507(a) of the Bankruptcy Code, 11 U.S.C. §507(a), applicable to this case provides in rele- vant part: 3 (a) The following expenses and claims have pri- ority in the following order: (1) First, administrative expenses allowed under section 503(b) of this title, and any fees and charges assessed against the es- tate under chapter 123 of title 28.' STATEMENT 1. Bankruptcy has dual goals: to grant a debtor a fresh start, including where appropriate the opportu- nity to reorganize and thus preserve its business, and to apportion the debtor’s property equitably among its creditors, in accordance with the statutory priorities established by the Bankruptcy Code. See, e.g., Central Va. Comm. Coll. v. Katz, 546 U.S. 356, 363-364 (2006). To achieve those goals, the Bankruptcy Code provides that when a debtor commences a bankruptcy case, all of its property, with certain narrow exceptions, becomes part of the bankruptcy estate. 11 U.S.C. §541. The debtor’s creditors may then assert claims against the estate. See id. §§501-503. When an eligible debtor sat- ' The Bankruptcy Abuse Prevention and Consumer Protec- tion Act of 2005 (“BAPCPA”) amended each of these provisions. BAPCPA amended $101(5) by inserting the words “The term” be- fore the word “claim.” Pub. L. No. 109-8, $1201(2). It amended §503(b)(1)(A) to clarify that certain back-pay awards are entitled to administrative-expense priority. /d. §329. And it amended §507(a) to provide that certain domestic-support obligations have first priority, above administrative expenses. /d. §212. None of those amendments applies in cases, like this one, commenced prior to the enactment of BAPCPA. /d. §1501. Nor is any of these amendments material to any issue in this case. For clarity, this petition hereafter refers only to the version of the Bankruptcy Code applicable to this case. 4 isfies the requirements of the Code, it may obtain a dis- charge of the existing claims against it. See id. §727 (Chapter 7 cases); 7d..§1141(d) (Chapter 11 cases). The Bankruptcy Code contains an exceedingly broad definition of the “claims” that may be asserted (and potentially discharged) in bankruptcy: a “claim” includes any “nght to payinent, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, un- disputed, legal, equitable, secured, or unsecured.” 11 U.S.C. §101(5). As Congress explained when the Code was enacted, “[bly this broadest possible definition,” the Code “contemplates that all legal obligations of the debtor, no matter how remote or contingent, will be able to be dealt with in the bankruptcy case.” H.R. Rep. No. 95-595, at 309 (1977), reprinted in 1978 US.C.C.A.N. 5963, 6266; see also Pennsylvania Dep't of Public Welfare v. Davenport, 495 U.S. 552, 538 (1990); Johnson v. Home State Bank, 501 U.S. 78, 83 (1991). This case involves a special type of claim against the bankruptcy estate: an administrative-expense claim. Administrative expenses are obligations in- curred by the debtor or bankruptcy trustee during the bankruptcy case. They include, for example: loans, leases, supply agreements, or other contracts enabling the debtor to continue its business while it is attempt- ing to reorganize; wages paid by the business while in bankruptey; and tort or environmental! liabilities in- curred through the debtor’s operations while it is in bankruptey. See generally Reading Co. v. Brown, 391 U.S. 471 (1968). As defined by the Bankruptcy Code, administrative expenses include all “actual, necessary costs and expenses of preserving the estate.” 11 U.S.C. $503(b)(1)(A). 5 The Bankruptey Code provides that administrative expenses receive priority over the claims of other creditors. 11 U.S.C. §507(a). Priority status is impor- tant to a creditor’s recovery because the claims against a bankruptcy estate typically far outstrip the value of the debtor’s assets. Creditors with high-priority claims may be paid in full, whereas those lower in the hierar- chy will likely recover only pennies on the dollar, or nothing at all. Congress chose to grant administrative- expense claims priority to “provide an incentive for creditors and others to continue or commence doing business with an insolvent entity.” 4 Collier on Bank- ruptcy 4503.06[2] (15th rev. ed. 2008). Lenders, suppli- ers, and others considering dealing with a debtor will understandably be wary that credit they extend might not be repaid. This concern is allayed if, in the event “the debtor fails to rehabilitate itself and winds up in liquidation, they can move to the front of the distribu- tive line, ahead of the debtor’s pre-bankruptcy credi- tors.” In re Klein Sleep Prods., Inc., 78 F.3d 18, 20 (2d Cir. 1996). Without that assurance, a debtor would be unlikely to obtain credit except on the most onerous terms, and its prospects of continuing its business and emerging from bankruptcy would be severely limited. 2. Petitioner Zurich American Insurance Com- pany (“Zurich”) provided workers’ compensation, automobile, and general liability insurance to a coal- mining company, Horizon Natural Resources, and its affiliates (collectively, “Horizon’”), beginning in 1998. Workers’ compensation insurance was essential to Ho- rizon’s business. Indeed, it was required by state law. App. lla n.5; Ky. Rev. Stat. Ann. §342.340. There are two principal varieties of workers’ com- pensation insurance policies: “guaranteed-cost” poli- cies, in which the insurer assumes all the risk of the 6 workers’ compensation claims, and “loss-sensitive” policies, including deductible policies, in which the in- sured assumes a portion of the risk associated with each claim. Because the insured bears part of the risk, deductible policies generally have significantly lower premiums than guaranteed-cost policies, and a signifi- cantly lower overall cost even when the deductibles are taken into account. App. 8a-9a. In addition, the de- ductibles structure spreads out the insured’s payments, providing a cash-flow advantage particularly helpful to debtors in bankruptcy. The insurance policies Horizon purchased from Zu- rich were deductible policies, under which Zurich agreed to pay the full amount of the claims against Ho- rizon up front, and then bill Horizon for the deductible. Thus, Horizon had two payment obligations under the policies: first, to pay premiums, and second, to reim- burse Zurich for the deductibles Zurich advanced. Zu- rich, in turn, was obligated to pay workers’ compensa- tion claims asserted against Horizon arising from acci- dents or other occurrences during the period of insur- ance coverage, even if the resulting injuries did not manifest themselves for months or years after coverage ended. Because coal-mining is particularly likely to re- sult in injuries, such as black-lung disease, that become manifest only after a long latency period, such future workers’ compensation claims are a virtual certainty. As the district court recognized, the “practical re- alitly]” is that “these deductible obligations will inevi- tably arise, and in large number,” “reach[{ing] well into the millions of dollars range.” App. 28a n.17. 3. In November 2002, Horizon filed for bank- ruptcy protection under Chapter 11 of the Bankruptcy Code. Zurich continued providing insurance coverage to Horizon while Horizon attempted to reorganize. In 7 September 2008, Horizon assumed the Zurich policies, with bankruptcy-court approval, pursuant to 11 U.S.C. §365. App. 13a-14a.?_ In June 2004, Zurich and Horizon negotiated a series of short-term extensions taking the policies through the end of September 2004. App. 15a. Horizon’s reorganization efforts were unsuccessiul, and it decided to liquidate. In August 2004, it auctioned part of its business as a going concern and sold the rest _of its assets to other buyers, including respondent Lex- ington Coal Company (“Lexington”). The bankruptcy court approved the sale and confirmed Horizon’s plan of liquidation, and on September 30, 2004, Horizon closed the sale of its assets. Under the order confirming Hori- zon’s plan, Horizon was deemed dissolved as of that date. Horizon’s insurance coverage with Zurich had also expired by that date. App. 15a. Zurich then filed an administrative-expense claim against the estate (within the period for doing so estab- lished by the plan). Zurich sought to collect the amount of the deductibles it would have to advance in the fu- ? Section 365 permits a trustee or debtor-in-possession to as- sume or reject an “executory contract ... of the debtor,” subject to the court’s approval. If the debtor chooses to assume a contract, it “continue[s] to receive the benefits of [the contract], while also continuing to perform its obligations under” the contract. N.C.P. Mktg. Group, Inc. v. BG Star Prods., Inc., No. 08-463, 2008 WL 4522334, at *1 (U.S. Oct. 6, 2008) (Kennedy, J., respecting the de- nial of certiorari). In that event, expenses incurred under the as- sumed contract are treated as administrative expenses, just as if the contract were entered into during the bankruptcy. See, ¢.g., NLRB vy. Bildisco & Bildisco, 465 U.S. 513, 531-532 (1984). If the debtor rejects the contract, tt walks away from its obligations un- der the contract, and the counterparty receives a claim for dam- ages against the estate. See id. at 531. 8 ture on claims covered by Horizon’s now-expired insur- ance policies. Because the deductibles would be paid on workers’ compensation claims that had not yet been made, Zurich’s claim required estimation. The evidence Zurich presented as a basis for that estimation was an actuarial calculus called an “ultimate loss projection.” Insurance companies prepare such actuarial reports for “the basic purpose of estimating future obligations in connection with insurance coverage.” App. 18a. Zu- rich’s net administrative-expense claim, based on its ultimate loss projection and subtracting payments and the value of collateral Zurich had received from Hori- zon, was approximately $14.5 million. App. 20a-21a. Lexington objected to Zurich’s claim, and the bank- ruptcy court held that the deductibles were not admin- istrative expenses. It observed that the Sixth Circuit applies a two-part test to determine whether a claim represents the “actual, necessary costs and expenses of preserving the estate” under §503(b)(1)(A): first, the debt must have “arisen from a post-petition transaction with the debtor,” and second, it must have “directly and substantially benefi{t]ed the estate.” App. 68a. The court asserted that “{eJxpenses incurred post- confirmation are not entitled to administrative expense priority treatment,” and that payments Horizon owed under the insurance policies thus “must actually be paid prior to confirmation in order to qualify as an adminis- trative expense.” App. 64a-65a. 4. The district court affirmed. In doing so, the court recognized that “it is undisputed that Zurich will be rightfully ‘owed’ any deductible obligations ad- vanced under the Zurich Policies ... when they ‘arise.’ ” App. 23a-24a. It also recognized that the insurance coverage Zurich provided was essential to Horizon’s reorganization efforts: 9 There can be no question that ... the insurance coverage provided by the Zurich Policies was critical to the Debtors’ operations. Without the insurance provided by Zurich, the Debtors would have been unable to operate their busi- ness as a going concern both prior to and dur- ing the pendency of the bankruptcy. App. 10a-11a. The district court nevertheless held that the de- ductibles Horizon owed under the insurance policies were not administrative expenses and that Zurich was not entitled to receive payment for the deductibles from the bankruptcy estate. Instead, the court con- cluded that Zurich could recover the deductibles only from any dissolved entity that might remain after the bankruptcy. That is, while Zurich would remain liable for future claims against Horizon, it would never be re- paid for the substantial deductib’es that Horizon had promised to pay in return for the insurance it pur- chased. In so holding, the district court examined both the language of §503(b)(1)(A) and the “benefit to the es- tate” test on which the bankruptcy court had relied. The court first held that Zurich’s claim for deductibles was not an “actual” cost of preserving the estate be- cause Horizon’s state-law obligation to reimburse Zu- rich for the deductibles would not accrue until after the bankruptcy—after injured workers had made claims and Zurich had paid those claims. App. 27a-28a (“Zu- rich is only contractually obligated to pay the deducti- bles, and subsequently seek reimbursement, once the {workers’ compensation] claims actually ‘arise.’ ”). The court next concluded that the deductibles were not “necessary” costs of preserving the estate because 10 Horizon would not become obligated to pay them until after it had dissolved. “The moment Zurich is contrac- tually permitted to seek reimbursement from the Debtors for the advanced deductibles, the estate will have already dissolved and the Debtors will cease to exist. Consequently, payment of the claimed expenses will in no way act to preserve an estate when there is no estate to preserve.” App. 29a. For similar reasons, the district court concluded that Zurich’s claim did not meet the “benefit to the es- tate” test. App. 30a-34a. It reasoned that because the insurance contract did not require the reimbursement of deductibles until after Zurich had advanced them, Horizon’s “deductible obligations d{id] not even exist” until after Horizon’s dissolution and thus the payment of the deductibles would not provide a direct and sub- stantial benefit to the estate. App. 33a-34a. The court acknowledged Zurich’s argument that its claim for de- ductibles arose during the bankruptcy because Horizon assumed the insurance policies, and the accidents or other occurrences giving rise to the workers’ compen- sation claims necessarily took place, before the bank- ruptcy ended. But the court dismissed that argument, reasoning that it “does not alter the dispositive adjudi- cation that the payment of the claimed expenses when they truly arise”’—in the court’s view, only after the bankruptcy’s conclusion—“would not act to either pre- serve [or] benefit the estate.” App. 40a. Because Zu- rich’s claim for deductibles would not arise until after the bankruptcy, the court reasoned, it could not be an 11 administrative-expense claim that could be asserted in the bankruptcy.’ 5. The Sixth Circuit affirmed in a published, per curiam opinion that adopted the district court’s reason- ing. App. 2a. REASONS FOR GRANTING THE WRIT The Sixth Circuit’s decision conflicts with two lines of cases from other courts of appeals and with this Court’s decision in Reading Co. v. Brown, 391 U.S. 471 (1968). First, the court’s conclusion that a debtor’s ob- ligation to pay a creditor under a contract assumed dur- ing the bankruptcy does not benefit the estate—and is not an administrative expense—if the payment is not yet due at the time of confirmation conflicts with deci- sions of the First, Second, and Fourth Circuits, and rests on a premise rejected in Reading. Second, the court’s conclusion that Zurich’s claim did not arise until its right to payment accrued as a matter of state con- tract law exacerbated one of the most significant and deeply entrenched splits of authority in bankruptcy law: the well-established three-way division of author- ity regarding how to determine when a bankruptcy claim arises. Both questions are recurring, significant to debtors’ ability to reorganize, and likely to be even > The district court refused to rest its decision on two of the grounds the bankruptcy court relied on. First, it rejected the bankruptcy court’s conclusion that Zurich’s claim was untimely, holding that Zurich had filed its claim before the bar date and nothing more was required. App. 5la-53a. Second, although the district court suggested that estimation might not be appropriate for an administrative-expense claim, it chose not to make that sug- gestion part of its holding. App. 44a-47a (discussing estimation in section entitled “Other (Non-Dispositive) Considerations”). 12 more important in the near future, as the nation’s eco- nomic crisis brings a wave of new bankruptcies. I. THE SIXTH CIRCUIT’S HOLDING THAT FUTURE OBLIGA- TIONS UNDER A CONTRACT ASSUMED DURING BANK- RUPTCY ARE NOT ADMINISTRATIVE EXPENSES CONFLICTS WITH DECISIONS OF OTHER CIRCUITS AND Is IN TENSION WITH THIS COURT’S PRECEDENT A. The Sixth Circuit’s Holding Conflicts With The Decisions Of Other Courts Of Appeals The Sixth Circuit, adopting the district court’s rea- soning, held that Horizon’s obligation to pay deducti- bles under the Zurich policies it assumed during its bankruptcy so that it could continue operating its busi- ness was not an “actual, necessary cost[] and expense[] of preserving the estate” under §503(b)(1)(A). The court reasoned that payment of the deductibles could not “preserve [the] estate” because Horizon would not become obligated to pay them until after the bank- ruptcy case had ended. App. 27a. Similarly, applying the “benefit to the estate” test that various courts have employed to determine whether a claim is entitled to administrative-expense priority, the court reasoned that “the payment of the deductibles, when and if they should arise ... does not provide a direct and substan- tial benefit to, nor act to preserve, a bankruptcy estate where there is no longer an estate to benefit.” App. oda. That reasoning suffers from a fundamental flaw: it asks whether payment of the deductibles would pre- serve or benefit the estate, rather than asking whether the wxswrance Horizon received in return for agreeing to pay premiums and deductibles preserved or bene- fited the estate. The purpose of granting priority to administrative expenses is to induce providers of es- 13 sential funds, goods, and services—such as insurance— to continue doing business with a debtor. The Sixth Circuit accordingly erred by concluding that “the bene- fit [to the estate] should be measured” only when the payment would become due, App. 32a, rather than dur- ing the bankruptcy case, when Horizon was enabled to continue its business by the insurance Zurich provided. Three other federal courts of appeals have ad- dressed this precise question and reached the opposite conclusion. See In re Hemingway Transp., Inc., 993 F.2d 915 (1st Cir. 1993); In re Klein Sleep Prods., Inc., 78 F.3d 18 (2d Cir. 1996); 7x re Merry-Go-Round En- ters., Inc., 180 F.3d 149 (4th Cir. 1999). In concluding that claims arising from contracts and other obligations that entail future payments are entitled to administra- tive priority, those courts have properly focused on the benefit to the estate at the time the debtor entered into or assumed a contract, or incurred a liability, that obli- gated it to make future payments. They hold that if the consideration the estate received in return for its con- tractual obligations benefited the estate or was other- wise necessary to its preservation, then all the obliga- tions the debtor undertook—including future payment obligations—are entitled to administrative-expense priority. Under the rule adopted by these courts of ap- peals, Zurich would have been entitled to payment of its claim for deductibles as an administrative expense. The First Cireuit reached this result in Heming- way, a case concerning liability for future environ- mental clean-up costs under the Comprehensive Envi- ronmental Response, Compensation, and Liability Act, 42 U.S.C. §§9601-9657 (““CERCLA”). The debtor in that case, Hemingway, operated a trucking facility con- taminated by leaking drums of hazardous substances. After Hemingway filed a Chapter 11 bankruptcy peti- 14 tion, a land developer, Juniper, purchased the facility for $1.6 million. See 993 F.2d at 919-920. The EPA or- dered Juniper to remove the drums, and Juniper filed a claim against the Hemingway estate, seeking to re- cover its past and future clean-up costs as administra- tive expenses. See id. at 920. The First Circuit held that Juniper’s claim for future clean-up costs was enti- tled to administrative priority under §503(b)(1)(A), provided that it survived a provision of the Bankruptcy Code—immaterial to this case—that restricts a claim- ant’s ability to recover on debts on which it is jointly liable with the debtor. See id. at 934, 936.” Thus, if Ju- niper was not jointly liable with the debtor for the clean-up costs under CERCLA, the First Circuit held, its “claim for past and future [clean-up] costs should be “Both the current owner of a contaminated facility and the entity that owned the facility at the time of hazardous waste dis- posal are potentially responsible parties under CERCLA. See generally 42 U.S.C. §9607(a). The EPA had designated both Juni- per and Hemingway as potentially responsible parties. See 993 F.2d at 920 & n.2. : Specifically, the Code requires disallowance of “any claim for ... contribution of an entity that is liable with the debtor on ... the claim of a creditor, to the extent that ... such claim for ... con- tribution is contingent as of the time of allowance or disallowance.” 11 U.S.C. §502(e)(1)(B). Because the EPA had not yet ordered clean-up beyond its initial demand, Juniper’s claim for future clean-up costs was “contingent” on such a future order from the EPA. 993 F.2d at 923. Thus, Juniper's claim would be barred by §502(e)(1)(B) if it were a claim for “contribution” on a debt on which Juniper and Hemingway were jointly liable to the EPA. If, on the other hand, Juniper could avoid liability under CERCLA— for example, by establishing that it was an “innocent landowner” who purchased the facility without notice that it was contami- nated—Juniper would not be “liable with the debtor” and its claim for future clean-up costs would not be barred by §502(e)(1\B). 15 estimated and allowed as administrative expenses enti- tled to priority.” Jd. at 984 (emphasis added). In reaching that conclusion, the First Circuit began with the “benefit to the estate” test as first set out in In re Mammoth Mart, Inc., 536 F.2d 950, 954 (1st Cir. 1976). Under that test, a claim is an “actual, necessary cost{j and expense[] of preserving the estate” under §503(b)(1)(A) if (1) the right to payment “arose from a postpetition [as opposed to pre-bankruptcy] transaction with the debtor,” and (2) “the consideration supporting the right to payment was beneficial to the estate of the debtor.” Hemingway, 993 F.2d at 929 (internal quota- tion marks omitted). Like Lexington here, the trustee in Hemingway argued that Juniper’s future clean-up costs under CERCLA were not administrative ex- penses because Juniper’s payment of those costs would not benefit the estate. See id. at 929-930. The First Circuit rejected that argument. In direct contradiction to the Sixth Circuit’s reasoning below, the First Circuit held that, in determining whether Juniper’s claim was an administrative expense, the relevant. inquiry was not whether the payment of clean-up costs would bene- fit the estate, but whether the consideration Juniper had provided, and from which its claim ultimately -arose—there, the $1.6 million purchase price Juniper had paid for the facility—benefited the estate. “Obvi- ously,” the court observed, “this substantial infusion of cash benefited the chapter 11 rehabilitation effort. Thus, the $1.6 million in purchase monies constituted the requisite baseline ‘consideration’ for Juniper’s right to contribution; and {clean-up] costs subsequently in- curred by Juniper a mere maturation of that right, im- material for Mammoth Mart purposes.” /d. at 930. Zurich would have prevailed under this analysis. The workers’ compensation and other insurance cover- 16 age it provided to Horizon during the bankruptcy un- questionably benefited the estate—as the court itself acknowledged. App. 10a-lla (“There can be no ques- tion that ... the insurance coverage provided by the Zu- rich Policies was critical to the Debtors’ operations. Without [it], the Debtors would have been unable to operate their business as a going concern both prior to and during the pendency of the bankruptcy.”). As in Hemingway, the expenses for which Zurich seeks pay- ment in the bankruptcy—reimbursement of the de- ductibles it will have to advance under the insurance agreements—are a “mere maturation of [its] right” to be paid in return for the valuable consideration it pro- vided to the debtor’s estate. 993 F.2d at 930. The deci- sion below squarely conflicts with Hemingway.° The Second and Fourth Circuits have also allowed the recovery of future payment obligations as adminis- trative expenses, likewise reasoning that the proper focus of the “benefit” analysis is the consideration the debtor received in return for entering into the contract giving rise to the future payment obligations. In the Fourth Circuit’s decision in Merry-Go-Round, the debtor entered into a ten-year lease for retail store ° Not only did the First Circuit hold that Juniper's claim for future clean-up costs could be allowed as an administrative ex- pense, it recognized that the forward-looking nature of the claim meant that Juniper's clean-up costs would have to be estimated. See 993 F.2d at 934 & n.25 (“Juniper's claim for ... future [clean-up] costs should be estimated and allowed as administrative expenses entitled to priority.”). Thus, had the Sixth Circuit squarely held, rather than endorsing the district court’s “non-dispositive” sug- gestion, that estimation is unavailable for an administrative ex- pense claim under §503(b)(1)(A), App. 44a-47a, it would have cre- uted a circuit split on that issue too. 17 space during its Chapter 11 bankruptcy case. See 180 F.3d at 152. Merry-Go-Round’s reorganization efforts failed, and the case was converted to Chapter 7. The Chapter 7 trustee subsequently rejected the lease and returned the premises to the landlord, giving rise to a contractual claim for the future rent for the remainder of the lease. See id. at 152-154. The landlord filed a claim seeking administrative-expense treatment for the future rent due under the lease. The trustee opposed allowance of the claim on grounds similar to those ad- vanced by Lexington here, arguing that it did not rep- resent an “actual, necessary cost and expense of pre- serving the estate” under §503(b)(1)(A) because once the leased premises were vacated, the estate no longer made any actual use of them and the lease was no longer necessary to the estate. See id. at 156-157. The Fourth Circuit rejected those arguments and held “as a matter of law” that the landlord’s claim for future rent was an administrative expense. 180 F.3d at 155. It reasoned—in direct contradiction to the Sixth Circuit here—that the future rent was an “actual” ex- pense of preserving the estate because it arose out of a transaction between the debtor and the landlord during the bankruptcy. Jd. at 157. Moreover, the future rent was a “necessary” expense of preserving the estate be- cause, before conversion to Chapter 7, the lease clearly was beneficial to the debtor, permitting it to continue operating its business. Jd. The court explained that because landlords would refuse to enter leases with tenants in bankruptcy without some assurance that the rent obligations would be paid in full, “the future rent .. Was an actual and necessary expense [of] preserving the estate” and thus entitled to administrative priority. Td. at 158. 18 The Second Circuit has similarly held that future rent owed under a lease assumed and then rejected during a bankruptcy case must be treated as an admin- istrative expense. In Klein Sleep, the debtor assumed a long-term retail lease so that it could continue to op- erate its business while it tried to reorganize. After its attempt to reorganize failed, the case was converted to Chapter 7. The newly-appointed Chapter 7 trustee re- jected the lease and returned the premises to the land- lord, triggering the lease’s provision for payment of fu- ture rent as damages. See 78 F.3d at 20-21. The land- lord sought administrative-expense treatment for its claim for future rent. Both the bankruptcy and district eourts reasoned, like the Sixth Circuit here, that the future rent was not an administrative expense because its payment would confer no benefit on the estate. See td. at 22. The Second Circuit reversed, holding that “a trus- tee or debtor-in-possession’s assumption of an unex- pired lease transforms all liability under the lease ... into administrative expenses.” 78 F.3d at 22 (emphasis in original). The court explained that the lower courts’ analysis relied on “an unduly narrow view of the benefit conferred on an estate when a [debtor] assumes an un- expired jease.” Jd. at 24. When the debtor assumed the lease, the court held, it obtained the rights to pre- sent and future possession of the premises, which “had a present value at the time of assumption. Acquisition of those rights clearly constituted a benefit to the es- tate even if, later, the benefit turned to dust.” /d. at 26. A contrary holding, the court noted, “would mean that any post-bankruptcy contract, entered into for the benefit of a bankrupt’s estate, would cease to be enti- tled to priority the moment the deal turned sour.” Jd. Such a result would contravene the purpose of the ad- 19 ry) ministrative-expense provisions: to encourage suppli- ers of essential credit, goods, and services to undertake the risk of dealing with a company in bankruptcy.’ The reasoning and result of the Sixth Circuit in this case squarely contradict the Fourth Circuit’s decision in Merry-Go-Rourd and the Second Circuit’s decision in Klein Sleep. Under the Fourth Circuit’s reasoning in Merry-Go-Round, Zurich’s claim for future deductibles was “actual” within the meaning of $503(b)(1)(A) be- cause it stemmed from a transaction with the bank- ruptcy estate, and it was “necessary” because it was an obligation Horizon undertook in returr. for the provi- sion of insurance it needed to operate its business. See 180 F.3d at 157. And, as the Second Circuit explained in Klein Sleep, asking whether the payment of future obligations under a contract benefits the estate—as the Sixth Cirevit did here—takes “an unduly narrow view of the benefit conferred on an estate” when a debtor enters into or assumes a contract for necessary goods or services during a bankruptcy. 78 F.3d at 24. As in Klein Sleep, “(ajequisition of th{e] rights (to insurance] clearly constituted a benefit to the estate even if, later, ” See also In re Frontier Props., Inc., 979 F.2d 1358, 1367 (9th Cir. 1992) (when a debtor assumes and then rejects an executory contract post-petition, “all of the liabilities flowing from that rejec- tion are entitled to priority as administrative expenses of the es- tate”). Following Klein Sleep and Frontier, BAPCPA amended §503 by adding paragraph (b)(7), which caps the amount of rent entitled to administrative-expense treatment for a nonresidential real-property lease assumed, then rejected, under §365. Pub. L. No. 109-8, §445. The imposition of the cap, however, did not change the holding of those cases relevant here: that such future rent payments are administrative expenses. 20 the benefit turned to dust” because Horizon’s reorgani- zation effort failed. Jd. at 26. The Sixth Circuit’s failure to recognize these prin- ciples, and its clear departure from the governing legal rule in the First, Second, and Fourth Circuits, warrants this Court’s review. B. The Sixth Circuit’s Decision Relies On A Premise Rejected By This Court’s Precedent The Sixth Circuit’s decision also misapprehends ba- sic principles articulated by this Court in the leading case construing the administrative-expense provision. In Reading Co. v. Brown, 391 U.S. 471 (1968), this Court construed the predecessor to §503(b)(1)(A) under the Bankruptcy Act of 1898, which similarly granted administrative priority to “the actual and necessary costs and expenses of preserving the estate.” Jd. at 475. The Court was faced with the question whether a tort claim against the debtor arising during a bank- ruptcy met that definition; the claimants were building owners whose properties had been damaged by a fire caused by the negligence of the bankrupt’s receiver. See id. at 473. The Court held that those claims did meet the definition, reasoning that “ ‘actual and neces- sary costs’ should include costs ordinarily incident to operation of a business, and not be limited to costs without which rehabilitation would be impossible.” Jd. at 483. Accordingly, because the tort claim was the re- sult of the debtor’s operation of its business during the bankruptcy, it was entitled to administrative priority. Reading thus expressly rejected one of the key premises underlying the Sixth Circuit’s decision: the notion that a payment must benefit the estate to be en- titled to administrative priority. Instead, the proper inquiry is whether the debt was incurred through the 21 operation of the debtor’s business, as a result of its ef- forts to continue the business as a going concern (either for reorganization or sale to the highest bidder). That is unquestionably true here: the insurance coverage Zurich provided permitted the debtor to continue oper- ating as it sought to reorganize, to *h« benefit of the estate and its creditors. See, e.g., App. 1Ua-lla (without the Zurich policies, Horizon “would have been unable to operate ... as a going concern ... during the pendency of the bankruptcy”). Indeed, Reading specifically noted that “[i]t is of course obvious that proper insurance premiums must be given priority, else insurance could not be obtained.” 391 U.S. at 483. Had the Sixth Cir- cuit properly applied the legal principles underlying Reading, it would have recognized that the insurance provided by Zurich benefited the estate, and that the obligations owed under the insurance contract thus were “actual, necessary costs and expenses of preserv- ing the estate.” II. THE SIXTH CiRCuIT’sS DECISION EXACERBATES THE En- TRENCHED SPLIT OF AUTHORITY REGARDING WHEN A CLAIM AGAINST A BANKRUPTCY ESTATE ARISES The Sixth Circuit’s decision rested in significant part on the conclusion that Zurich’s claim for reim- bursement for deductibles under its policies would not “arise” until Horizon’s obligation to pay the deductibles accrued as a matter of state contract law. The district court acknowledged that Zurich was entitled to reim- bursement of the deductibles under the insurance poli- cies. App. 23a-24a (“[I]t is undisputed that Zurich will be rightfully ‘owed’ any deductible obj zations ad- vanced under the Zurich Policies (pursuant to the De- ductible Agreements) when they ‘arise[.]’”). It empha- sized, however, that the insurance contract did not re- 22 quire Horizon to pay Zurich for the deductibles until Zurich first paid the claims against Horizon, and con- cluded that such “expenses that arise and are incurred post-confirmation should [not] relate back to the under- lying contractual arrangement during the bankruptcy.” App. 33a. Indeed, the court held that “the deductible obligations do not even exist until [workers’ compensa- tion] claims arise whereby Zurich must advance pay- ment.” App. 33a-34a. Accordingly, the court rejected Zurich’s argument that because its claim stemmed from events during the bankruptcy—Horizon’s decision to assume the insur- ance policies, as well as the occurrences that would later give rise to injuries and workers’ compensation claims—it was entitled to an administrative-expense claim against the estate. App. 33a-34a.° Rather, find- ing that Zurich’s claim did not yet exist and thus could not be asserted as an administrative-expense claim in ‘the bankruptcy, the court relegated Zurich to whatever recovery it might be able to obtain “as a creditor of the dissolved estate”—that is, none. App. 24a. In so holding, the Sixth Circuit took sides in an en- trenched three-way circuit split regarding one of the most important and fundamental questions in bank- ruptcy law: when does a bankruptcy claim arise? The * Even if some of the deductibles related to accidents or oc- currences that took place during the period of insurance coverage prior to bankruptcy, Horizon’s assumption of the insurance policies in bankruptcy rendered all obligations under those policies admin- istrative expenses arising during the bankruptcy case. See 4 Col- lier on Bankruptcy 4503.06[6)[b] (“[A]ssumption of [a] contract ... turn[s] a prepetition liability into a postpetition liability,” “entitied to administrative expense priority.”). 23 answer to that question plays a crucial role in a claim- ant’s recovery. If a claim arises before the filing of the bankruptcy petition, it receives no special priority, unless it falls into one of the narrow categories set out in §507. If such a pre-bankruptcy claim is unsecured, it will likely receive only cents on the dollar, if it is paid at all. If, on the other hand, a claim arises after the filing of the bankruptcy petition and during the bankruptcy, it will generally be an administrative expense entitled to priority over the claims of pre-bankruptcy creditors. Such administrative-expense claimants will typically receive a far higher proportion of the amount they are owed. Finally, if a claim does not arise until after the bankruptcy case is concluded, it is not entitled to pay- ment in the bankruptcy at all (nor is it discharged in bankruptcy). In that case, if the debtor succeeds in re- organizing, the claim may be asserted against the reor- ganized entity. In the common event that the debtor liquidates—as occurred here—the claimant will almost certainly recover nothing: “its right to recover exists in theory but is not enforceable in practice.” Reading, 391 U.S. at 478. The courts of appeals have adopted at least three different approaches to determining when a bank- ruptcy claim arises. The Sixth Circuit’s approach— concluding that a “claim” for bankruptcy purposes arises when the creditor’s right to payment accrues un- der state law—haa previously been adopted by the Third Circuit. See In re M. Frenville Co., 744 F.2d 332 (3d Cir. 1984). But six other circuits have rejected the Frenville approach, instead adopting analyses falling into two broad categories: the Fourth and Tenth Cir- cuits have adopted the so-called “conduct test,” under which a bankruptcy claim arises when the conduct giv- ing rise to the claim occurs, and the Second, Fifth, 24 Ninth, and Eleventh Circuits have adopted either the “relationship” test, under which a claim arises when the debtor’s conduct giving rise to the claim has occurred and the debtor and creditor have formed a relationship, or a variant known as the “fair contemplation” test, which adds the nuance that the claim must be within the “fair contemplation” of the parties before it can be asserted (or discharged) in the bankruptcy. Frenville itself turned on whether the claim at is- sue arose before or after the filing of the bankruptcy petition. See 744 F.2d at 333. An accounting firm that the debtors had engaged as an auditor was sued by 4 group of banks for negligently preparing the debtors’ financial statements. See id. The accounting firm wished to obtain indemnification or contribution from the debtors via a third-party complaint, which was per- missible under the automatic-stay provision, 11 U.S.C. $362(a)(1), only if the firm’s claim arose before the filing of the bankruptcy petition. See 744 F.2d at 334. The court acknowledged that “the debtor[s’] acts which form the basis of [the] suit”—preparation of the finan- cial statements—“occurred pre-petition,” but neverthe- less, looking to New York law, held that the accounting firm’s claim for contribution or indemnification from the debtor arose only post-petition, once it had been sued by the banks. Id. at 334, 337 (“{T]he threshold question of when a right to payment arises ... ‘is to be deter- mined by reference to state law.’” (citation omitted)). The Frenville decision has been widely criticized, but the Third Circuit has repeatedly announced its inten- tion to adhere to it. See, e.g., Jones v. Chemetron Corp., 212 F.3d 199, 206 (3d Cir. 2000) (“We are cognizant of 25 the criticism the Frenville decision has engendered, but it remains the law of this circuit.” (footnote omitted)).” Other than the Sixth Circuit, every court of appeals to consider the issue has rejected Frenville’s focus on the time at which a right to payment accrues under state law, noting the breadth of the definition of “claim” under the Bankruptcy Code and the undesirable conse- quences that may follow from an overly restrictive reading of that definition. The Fourth Circuit and Tenth Circuit have adopted the so-called “conduct” test, under which a claim arises when the conduct giv- . Confirming the entrenched nature of the split, the Sixth Cir- cuit had previously endorsed the Third Circuit’s Frenville line of authority in CPT Holdings, Inc. v. Industrial & Allied Employees Union Pension Plan, 162 F.3d 405 (6th Cir. 1998), CPT7' held that a pension plan’s claim against a debtor employer for withdrawal liability under ERISA arose only when the plan acquired a cause of action under ERISA after the bankruptcy, splitting with other cases that had held that a contingent bankruptcy claim for with- drawal ‘iability existed prior to the accrual of an ERISA cause of action. See id. at 408-409. The Sixth Circuit reasoned that “[i]t is not enough ... to look at the broad definition of ‘claim’ in the Bank- ruptey Code.” /d. at 409. Rather, “[t]he relevant non-bankruptcy law must be examined” to determine when a “right to payment” arises. Id. In so holding, the Sixth Circuit chose to follow the Third Circuit’s decision in In re Remington Rand Corp., 836 F.2d 825 (3d Cir. 1988), which itself relied on Frenville to hold that “the existence of a valid claim” under bankruptcy law depends on whether a right to payment exists under the non-bankruptcy law that governs the claim. See id. at 830. Although, prior to CPT and this case, the Sixth Circuit had stated that “the proper standard for determining [a] claim’s administrative priority looks to when the acts giving nse to a liability took place, not when they ac crued,” Jn re Sunarhauserman, Inc., 126 F.3d 811, 818 (6th Cir. 1997), that case did not discuss the split of authority or the F’ren- ville reasoning later adopted by CP7' and applied by the court in this case. 26 ing rise to the claim occurred. The Fourth Circuit first adopted that analysis in the bankruptcy of A.H. Robins, the manufacturer of the Dalkon Shield intrauterine de- vice. See Grady v. A.H. Robins Co., 839 F.2d 198, 201 (4th Cir. 1988) (expressly rejecting the reasoning of Frenville and concluding that a claimant who had a Dalkon Shield inserted before the bankruptcy petition had a “claim” for purposes of the automatic-stay provi- sions even if injury would not manifest itself until post- petition), affg 63 B.R. 986 (Bankr. E.D. Va. 1986) (hold- ing that a “claim” arises at the “time when the acts giv- ing rise to the alleged liability were performed”). The Fourth Circuit has subsequently applied that analysis in other contexts. See Butler v. Nationsbank, N.A., 58 F.3d 1022 (4th Cir. 1995). Butler concerned a bank’s claim to recover on a fraudulently endorsed check. The debtor had deposited the check before filing his bank- ruptcy petition. The court held that it was that under- lying act—and not the bank’s post-petition awareness of the forgery and efforts to recover the funds—that gave rise to the claim. See id. at 1029 (expressly refus- ing to follow Frenville, and concluding that the bank “had a claim as soon as [the debtor] deposited the fraudulently endorsed check,” even though recovery “was contingent upon the receipt of notice of the for- gery”). The Tenth Circuit has similarly held that a mal- practice claim arises on the date the underlying conduct occurred, not on the date a cause of action accrued un- der state law. See In re Parker, 313 F.8d 1267, 1269 (10th Cir. 2002) (describing “conduct theory” as “more in tune with the plain language and the policy underly- ing the Bankruptcy Code”). The Tenth Circuit likewise expressly rejected the Frenville approach, approvingly citing the Fourth Circuit’s observation that “ ‘the legis- 27 lative history shows that Congress intended that all le- gal obligations of the debtor, no matter how remote or contingent, will be able to be dealt with in bank- ruptcy.’” Parker, 313 F.3d at 1269 (quoting A.H. Rob- ins, 839 F.2d at 202). Four other courts of appeals have likewise rejected Frenville, but have adopted analyses under which a claim arises either when a “relationship” is formed be- tween the debtor and the claimant or when the claim can be said to be within the “fair contemplation” of the parties prior to the bankruptcy. In /n re Chateaugay Corp., 944 F.2d 997 (2d Cir. 1991), the Second Circuit considered the extent to which future clean-up costs that might be expended by the EPA under CERCLA based on the debtor’s release of hazardous waste prior to bankruptcy constituted “claims” dischargeable in the bankruptcy. The court reviewed both the approach un- der which a “claim” exists only once a state-law right to payment has accrued, and the approach under which a “claim” exists as soon as the pre-bankruptcy conduct on which it was based occurred, and adopted a middle ground, holding that at a minimum the debtor and creditor must have a “relationship,” such as the rela- tionship between a regulated entity and regulator, at the time of filing the petition. See id. at 1001-1005. Ap- plying that test, the court found that the EPA had a claim in the bankruptcy for all future clean-up costs arising from the debtor’s pre-bankruptcy discharge of hazardous waste. See zd. at 1005. The Fifth Circuit applied a similar “relationship” test in Lemelle v. Universal Manufacturing Corp., 18 F.3d 1268 (5th Cir. 1994). The plaintiff in that case sought to go forward with a wrongful-death claim against the manufacturer of an allegedly defective mo- bile home that had burned down. The defendant ar- 28 gued that the plaintiffs claim had been discharged in its bankruptcy, which occurred after it manufactured and distributed the mobile home but before the fire. The Fifth Circuit noted the three conflicting lines of author- ity, see id. at 1275-1276, and concluded that the absence of any “pre-petition contact, privity, or other relation- ship” between the manufacturer and the plaintiff pre- cluded a finding that her claim arose prior to discharge, id. at 1277. In In re Piper Aircraft Corp., 58 F.3d 1573 (11th Cir. 1995), the Eleventh Circuit addressed the question whether Piper, an aircraft manufacturer, could dis- charge in its bankruptcy all claims that might be as- serted in the future by any person arising out of air- craft manufactured or distributed by Piper before bankruptcy. The court acknowledged the three-way split on the issue, and declined to adopt either the Frenville “state law claim theory,” id. at 1576 n.2, or the Fourth Circuit’s “conduct” test, id. at 1576-1577, which might have supported the broad relief sought by the debtor. Rather, it held that “[{t]he debtor’s prepeti- tion conduct gives rise to a claim to be administered in a case only if there is a relationship established before confirmation between an identifiable claimant ... and [the debtor’s] prepetition conduct.” Jd. at 1577. Finally, in another environmental clean-up case, the Ninth Circuit adopted a more restrictive variant of the “relationship” test often called the “fair contempla- tion” test, holding that “all future ... cost(s] based on pre-petition conduct that can be fairly contemplated by the parties at the time of [the] bankruptcy” are “claims” under the Bankruptcy Code. Jn re Jensen, 995 I’ 2d 925, 980 (9th Cir. 1993) (internal quotation marks omitted). The court reviewed and rejected both the broad “conduct” test and “Frenville’s ‘right of payment’ 29 theory,” noting that the latter “is widely criticized out- side the Third Circuit, at least in part because it would appear to excise ‘contingent’ and ‘unmatured’ claims from §101(5)(A)’s list.” Jd. at 929-930 (citation omitted). Under any of the conduct, relationship, or fair con- templation tests, Zurich would have had a claim for de- ductibles that arose during Horizon’s bankruptcy, when Horizon assumed the insurance policies that obligated it to pay those deductibles. By the conclusion of the bankruptcy, the contract had been assumed; the period of insurance coverage had expired; and Horizon un- questionably understood that it was liable for the de- ductibles associated with workers’ compensation claims that would be asserted in the future arising out of that period of coverage. That Zurich’s claim was dependent on future workers’ compensation claims being asserted and paid makes no difference. Under the plain lan- guage of §101(5) of the Bankruptcy Code, as inter- preted by a majority of circuits, it was nonetheless a “claim” in the bankruptcy. By holding, to the contrary, that Zurich had no claim that could be asserted in the bankruptcy case be- cause its contractual right to payment had not yet ac- crued, the Sixth Circuit aligned itself with the Third Circuit and against the six courts of appeals that have rejected the Third Circuit’s approach. It thus exacer- bated one of the most significant splits of authority in bankruptcy law, on an issue of central importance to the effective and uniform administration of the bank- ruptcy laws. That issue unquestionably merits this Court’s review. 30 Ill. THE DECISION BELOW WAS INCORRECT AND THREATENS DEBTORS’ ABILITY TO REORGANIZE The decision below marks a radical departure from the settled understanding of §503(b)(1)(A), under which a claimant who entered into a contract with a debtor during the bankruptcy case (or whose pre-bankruptcy contract the debtor assumed) is entitled to administra- tive priority for all payments due to it under that con- tract. See, e.g., Bildisco, 465 U.S, at 531 (“If the debtor- in-possession elects ... to assume [an] executory con- tract ... it assumes the contract cum onere, and the ex- penses and liabilities incurred may be treated as admin- istrative expenses, which are afforded the highest pri- ority on the debtor’s estate” (citations omitted)); 2 Col- lier on Bankruptcy 4365.09[5] (when a pre-bankruptcy contract is assumed and then rejected, “({o}]ne might ar- gue that if the estate gets no benefit from the breach, there is no basis for administrative priority.... The bet- ter approach, however, is to recognize that the estate receives the benefit of the assumed contract ... and takes that contract cwm onere. Therefore, any dam- ages flowing from the breach of a previously assumed contract should be considered first priority administra- tive expenses.”). Horizon unquestionably benefited from the insur- ance coverage Zurich provided it during the bank- ruptcy. App. 10a-lla (“There can be no question that ... the insurance coverage provided by the Zurich Poli- cies was critical to [Horizon’s}] operations. Without the insurance provided by Zurich, [Horizon] would have been unable to operate [its] business as a going concern ... during the pendency of the bankruptcy.”); App. lla n.5 (because state law required Horizon to carry work- ers’ compensation coverage, “the insurance policies themselves necessarily constituted a significant benefit 31 to the estate in that the coverage allowed [Horizon’s]| business to operate”). The insurance contracts it en- tered with Zurich obligated Horizon to reimburse Zu- rich for the advanced deductibles. And a debtor’s obli- gations under a contract necessary to operate its busi- ness are ipso facto actual, necessary costs of preserving the estate. The Sixth Circuit’s contrary decision is an unduly narrow interpretation of the Bankruptcy Code’s admin- istrative-expense provisions. If left uncorrected, it will significantly impair financially distressed companies’ ability to reorganize. Reorganization depends critically on the willingness of lenders, suppliers, landlords, in- surers, and other parties to provide the debtor with needed credit, goods, and services during the bank- ruptey, so that it can preserve and potentially rehabili- tate its business. Such parties will have good reason to be wary of providing credit to an entity in bankruptcy, whose ability to pay is necessarily in doubt. The Bank- ruptcy Code therefore grants administrative-expense claims priority over claims of other creditors, assuring such parties that if they do business with a company in bankruptcy, they will be paid amounts due to them in full. The Sixth Circuit’s decision undermines that as- surance, imposing on parties contracting with debtors the risk that, if the debtor’s reorganization efforts fail, they will be left unpaid. Such uncertainty will seriously threaten debtors’ ability to obtain the goods and ser- vices they need to reorganize. This risk is particularly acute for debtors that re- quire any type of liability insurance. Insurers will be unwilling to offer debtors the type of insurance policies they are most likely to afford—policies requiring the payment of deductibles. Cf In re Ionosphere Clubs, Inc., 85 F.3d 992, 994 (2d Cir. 1996) (noting that no in- 32 surance company was willing to offer guaranteed-cost workers’ compensation coverage to financially dis- tressed airline). As this Court explained in Reading, “(ijt is of course obvious that proper insurance premi- ums must be given priority, else insurance could not be obtained,” 391 U.S. at 483, and insurance is necessary to every debtor’s business. Without affordable insur- ance, many Chapter 11 debtors will have no opportu- nity to attempt reorganization, and will be forced to liquidate. Indeed, even debtors’ ability to liquidate in the fashion most beneficial to their creditors will be im- paired. Deprived of the opportunity to operate their businesses as going concerns while seeking the highest bidder for those businesses, debtors may be forced in- stead to sell their assets at “fire sale” prices, dramati- cally reducing the value of the estate and the distribu- tions to creditors.’° The Sixth Circuit’s narrow construction of the Bankruptcy Code’s expansive definition of “claim” likewise presents an issue of the greatest significance 10 d eo ; ve : Tie Sixth Circuit’s construction of the administrative- expense provisions is also likely to have serious repercussions for states that permit employers to self-insure their workers’ compen- sation obligations. Under these programs, the employer pays benefits directly to employees. See, e.g., Mich. Admin. Code, R. 408.43¢e(1). Many states have established state guaranty funds, from which an injured employee can collect if insolvency prevents the employer from paying the claim. See, e.g., Mich. Comp. Laws Serv. §§418.501(1), 418.537(1). The Sixth Circuit’s decision raises the prospect that state funds that pay the workers’ compensation claims of insolvent employers wil) not be able to recover those payments from the employers’ estates, and that the shortfall will devolve on either the state or the injured employees. 33 to the administration of bankruptcies. The division of authority on that most basic of questions seriously im- pairs the uniformity that bankruptcy law requires. A claimant like Zurich, who in the great majority of cir- cuits would be an administrative claimant entitled to priority over the claims of other creditors, in the Third Circuit or Sixth Circuit has no claim in the bankruptcy case at all. Likewise, a claimant who holds a contingent claim under the relationship test prior to bankruptcy, but whose right to payment accrues under state law only during the bankruptcy, in the majority of circuits would be a pre-bankruptcy creditor entitled only to share pro rata with other like creditors, but in the Third Circuit or Sixth Circuit would be entitled to ad- ministrative priority. That outcome upends the goals of the administrative priority provisions: to encourage dealings with entities during their bankruptcy cases. It also has profound implications for any bankruptey— most obviously, those involving tort and environmental liabilities—in which there are likely to be claimants harmed by the debtor’s pre-bankruptcy conduct, but whose injury becomes manifest only later. The prompt resolution of the questions presented is particularly critical now, when the global economic cri- sis has left many of the nation’s leading industrial com- panies on the verge of bankruptcy. Many economic forecasters predict a substantial surge in corporate bankruptcy filings, extending well into 2010.'' The live- ' See, e.g., Siew, US Company Bankruptcies May Top 100 Next Year, Reuters (July 31, 2008) (bankruptcies of public compa- nies with more than $100 million in assets “may soar to more than 100 in 2009”), available at www.reuters.com; Bain & Company, Bankruptcies of Large U.S. Companies Tu Extend Into 2010 (Dec. 1, 2008) (similar projection for 2010), available at www.bain.com. 34 lihoods of many workers, as well as the success of those who do business with these troubled companies, will turn on whether their attempts to reorganize succeed. The Sixth Circuit’s decision is a substantial impediment to those efforts. It warrants this Court’s review. CONCLUSION The petition for a writ of certiorari should be granted. Respectfully submitted. KAREN LEE TURNER SETH P. WAXMAN ECKERT, SEAMANS, Counsel of Record CHERIN & MELLOTT, LLC CRAIG GOLDBLATT Two Liberty Place DANIELLE SPINELLI 50 South 16th Street ’ WILMER CUTLER PICKERING Philadelphia, PA 19102 HALE AND DORR LLP (215) 851-8400 1875 Pennsylvania Ave. NW Washington, DC 20006 (202) 663-6000 JAMES H. MILLAR JANET R. CARTER WILMER CUTLER PICKERING HALE AND DORR LLP 399 Park Avenue New York, NY 10022 (212) 230-8800 APRIL 2009 APPENDICES la APPENDIX A In re HNRC DISSOLUTION COMPANY, formerly known as Horizon Natural Resources Company, et al., Debtors. Zurich American Insurance Company, Appellant, v. Lexington Coal Co., LLC, Appellee. No. 07-5894. United States Court of Appeals, Sixth Circuit. Argued: July 29, 2008. Decided and Filed: Aug. 13, 2008. Appeal from tie United States District Court for the Eastern District of Kentucky at Ashland. No. 06— 00104—David L. Bunning, District Judge. Before: ROGERS and McKEAGUE, Circuit Judges; ADAMS, District Judge.” OPINION PER CURIAM. Zurich American Insurance Co. (“Zurich’’) provided insurance coverage to Horizon Natural Resources Co., et al., (“the Debtors”) during the pendency of the Debt- ors’ Chapter 11 bankruptcy proceedings. The policies issued to the Debtors were “deductible policies,” mean- ‘ The Honorable John R. Adams, United States District Judge for the Northern Distnct of Ohio, sitting by designation. 2a ing that Zurich would pay the entirety of any claims made and would later seek reimbursement from the Debtors for the deductible portion. After confirmation of the Debtors’ plans, but before the expiration of the date set for the filing of administrative expense claims, Zurich filed an administrative expense claim. Zurich’s administrative expense claim seeks payment of $14,593,567.79, which is an actuarial estimate of the de- ductible portion of the claims that Zurich believes it will pay in the future for injuries that occurred during the coverage period but were not the subject of insur- ance claims until after confirmation of the Debtors’ plans. Both the bankruptcy court and the district court denied Zurich’s administrative expense claim, holding that it does not constitute an “actual, necessary cost[ ] and expense[ ] of preserving the estate” as is required by 11 U.S.C. § 503(b)(1 (A). On appeal to this court, Zurich argues that the bankruptcy court and the district court misinterpreted 11 U.S.C. § 503(b)(1)(A). Furthermore, Zurich argues that the lower courts should have permitted the esti- mation of Zurich’s administrative expense claim under 11 U.S.C. § 502(c). We find no merit in Zurich’s argu- ments. Because it would be difficult for us to add any- thing of substance to the district court’s comprehensive and well-reasoned opinion, we AFFIRM for the rea- sons stated by Judge David L. Bunning in Zurich Am. Ins. Co. v. Lexington Coal Co., LLC (In re HNRC Dis- solution Co.), 371 B.R. 210 (E.D. Ky. 2007). 3a APPENDIX B In re HNRC DISSOLUTION COMPANY f/k/a Horizon Natural Resources Company, et al., Debtors. Zurich American Insurance Company, Appellant, v. Lexington Coal Company, LLC, Appellee. Civil Action No. 06—104—DLB. Bankruptcy No. 02-14261. United States District Court, E.D. Kentucky, Northern Division, at Ashland. July 2, 2007. Order Denying Stay July 26, 2007. MEMORANDUM OPINION & ORDER BUNNING, District Judge. I. INTRODUCTION Pursuant to 28 U.S.C. § 158(a)(1), Appellant, Zurich American Insurance Company (“Zurich”), brings this appeal against Appellee, Lexington Coal Company (“LCC”). Appellant seeks relief from a final order of the United States Bankruptcy Court for the Eastern District of Kentucky, Ashland Division, denying Zu- rich’s application for allowance of an administrative ex- 4a pense claim.' The primary issue on appeal asks whether prospective post-confirmation deductible payments on insurance policies entered into by the former Debtors’ estate with Zurich during the pend- ency of the bankruptcy are entitled to administrative expense priority under 11 U.S.C. § 503. This matter is presently before the Court by way of Appellant’s Notice of Appeal from Bankruptcy Court (Doc. # 1) and Appellant’s Opening Brief (Docs.# 12, 14) seeking reversal of the Bankruptcy Court’s denial of Zurich’s administrative expense claim or, in the alter- native, remand to the Bankruptcy Court for further hearings to allow Zurich to present evidence in support of its claim. LCC subsequently filed a Brief for the Ap- pellee (Doc. # 24) and Zurich respondea with its Reply Brief (Doc. # 26). Oral argument was held on June 15, 2007 with Karen Turner present for Zurich and Greg- ory Schaaf present for LCC. Therefore, this appeal is now ripe for adjudication by the Court. Il. BACKGROUND DISCUSSION A. Summary During the period from June 29, 1998, to Septem- ber 30, 2004, Zurich and its affiliated companies pro- The underlying bankruptcy action is Case No. 02-14261 and is styled In re HNRC Dissolution Co., f/k/a Horizon Natural Re- sources Co., et al., 343 B.R. 8389 (Bankr. E.D. Ky. 2006). The or- ders in question, from which this appeal is taken, are the Memo- randum Opinion (Bankr. Doc. # 7404) (“Opinion”) and related Or- der (Bankr. Doc. # 7406) (“Order”). * This matter is properly before this Court pursuant to Appel- lant’s election under 28 U.S.C. § 158(c)(1)(A), which permits an appellant to have a case heard by a district court in lieu of the Bankruptcy Appellate Panel. 5a vided workers’ compensation, general liability and business automobile insurance coverage (the “Zurich Policies”) to certain of the above-captioned debtors (col- lectively, the “Debtors”) on various policies containing “deductibles.” On a deductible policy, the insured agrees to retain some of the risk of claims and the in- surance company reduces the premium accordingly. Under Zurich’s Insurance Program, the insured was not obligated to pay the deductible in full upon the oc- currence of the claim, but rather Zurich would advance money to pay losses and expenses and the insured would not pay until billed. These advances were inter- est free. Zurich’s administrative expense claim is a claim for the amount of the Ultimate Loss Projection (as defined herein) minus collateral or loss fund held and minus past payments made by the Debtors for deductibles. The present projected amount of the administrative claim is $14,593,567.79, an amount that would have been less but for the insolvency of Frontier Insurance Com- pany, the insurance company that provided certain col- lateral bonds to secure the Debtors’ obligations as prin- cipal obligor. As confirmed during oral argument, these bonds now appear to have de minimis value. B. Procedural History . On November 13 and 14, 2002 (the “petition” dates), the Debtors filed voluntary petitions for relief under chapter 11 of title 11 of the United States Code (the “Bankruptcy Code”) in the United States Bank- ruptecy Court for the Eastern District of Kentucky, Ashland Division (the “Bankruptcy Court”). Following the failure of the Debtors’ efforts to reorganize on a stand-alone basis, the decision was made to pursue the sale of substantially all of Debtors’ assets. 6a On August 17, 2004, the Debtors conducted an auc- tion of substantially all of their remaining assets in ac- cordance with bidding procedures previously approved by the Bankruptcy Court. On September 16, 2004, the Bankruptcy Court entered two orders confirming the Debtors’ Plans (collectively, the “confirmation Or- ders”), which granted authority to LCC to object to, as well as the authority to resolve and settle, all adminis- trative expense claims in the first instance as a primary asset purchaser. The Debtors subsequently closed the sale of their assets to the approved purchasers, and the Debtors’ plans, as modified by the Confirmation Or- ders, became effective on September 30, 2004 (the date of “confirmation” or “liquidation”). Zurich, although aware of the confirmation hearings and the bankruptcy generally, did not participate in the proceedings. According to the confirmed plans, a bar date of De- cember 29, 2004 was established for the filing of admin- istrative expense claims (but not ordinary course ad- ministrative expense claims). On December 29, 2004, Zurich filed its Administrative Expense Request Form, identified as ciaim no. 20675 on the Debtors’ claims reg- ister (the “Administrative Expense Claim”)? Through its Administrative Expense Claim, Zurich seeks pay- ment from the Debtors, now LCC, for deductible obli- gations as an administrative expense based on Zurich’s ultimate loss projection from claims based upon the *The Administrative Expense Claim is made up of: (a) the Administrative Expense Request Form, (b) an Addendum to Ad- ministrative Expense Request Form, (¢c) Exhibit A, titled “The Insurance Contracts”, and (d) Exhibit B, titled “Collateral Charge Summary.” Ta relevant insurance policies during the pendency of the bankruptcy. On February 18, 2005, LCC filed its Objection to Claim of Zurich American Insurance Company (Bankr. Doc. # 5492) (the “Initial Objection”). On July 29, 2005, LCC filed its Supplemental Objection to Claim of Zu- rich American Insurance Company (Bankr. Doc. # 6646) (the “Supplemental Objection,” and, together with the Initial Objection, the “Objection”). On August 31, 2005, Zurich filed its Response to Supplemental Objection of LCC to Claim of Zurich American Insurance Company (Bankr. Doc. # 6853) (the “Response”). On September 15, 2005, LCC filed its Reply to Response to Supple- mental Objection of LCC to Claim of Zurich American Insurance Company (Bankr. Doc. # 6918) (the “Reply”). Thereafter, on November 21, 2005, the Bankruptcy Court entered an order requiring the parties to tender joint stipulations and a list of exhibits (Bankr. Doc. # 7071). On January 24, 2006, Zurich and LCC filed the Agreed Stipulated Facts and List of Exhibits of Zurich American Insurance Company and Lexington Coal Company, LLC (Bankr. Doc. # 7180) (the “Stipulated Facts’). Subsequently, on May 30, 2006, the Bank- ruptcy Court entered its Memorandum Opinion and Order (“Bankruptcy Opinion”) denying Zurich’s Ad- ministrative Expense Claim (Bankr. Doc. # 7406). On June 9, 2006, Zurich timely filed its Notice of Appeal (Bankr. Doc. # 7432). C. Insurance Policies Prior to and after the petition dates, Zurich pro- vided insurance coverage to the Debtors. Zurich and two of its affiliated companies, American Zurich Insur- ance Company (“American Zurich”) and Steadfast In- surance Company (“Steadfast”), issued various insur- 8a ance policies to the Debtors covering both the pre- petition and post-petition periods, including but not limited to workers’ compensation insurance, business automobile insurance, and general liability insurance. The Zurich Policies were deductible policies. On a deductible policy, the insured agrees to retain some of the risk of claims within the deductible layer. In other words, similar to automobile or other personal insur- ance plans, the insured agrees to pay a certain amount for an expense on a claim where the insurer is then re- sponsible for any amount of expense that exceeds the deductible ceiling. In this instance, Zurich would ad- vance the money to pay the losses and expenses and the Debtors would then reimburse Zurich when billed for the deductible costs under the policy.’ For some of the earlier Zurich Policies, the Debtors made payments within the deductible layer to a third-party administra- tor. Under the deductible agreement between the Debtors and Zurich, default occurs when the insured “faills] to pay any amount when it is due under this Agreement....” Many companies purchase insurance policies that contain deductibles agreements so that they pay a smaller premium in exchange for agreeing to bear the risk of claims within the deductible layer, similar to personal automobile insurance. These policies are gen- . Advancing deductible costs is less common where the in- sured is an individual, rather than a business. Where the deducti- ble costs are not advanced, the care provider (in a health insurance context) seeks out the deductible payment or “co-pay” from the individual that is insured, instead of the insurance company paying the entire amount due to the care provider and then billing the insured for the deductible costs (i.e., advancing deductibles). 9a erally less expensive than policies with no deducti- bles—commonly referred to as “guaranteed cost” poli- cies—even after considering the insured’s exposure to deductibles. Here, because the Debtors purchased de- ductible policies, their agreed-upon premiums were re- duced as a result of absorbing some of the risk to the insurer, Zurich, by way of paying costs within the de- ductible layer when claims arise. These deductible costs, as discussed above, would initially be paid in full by Zurich to the relevant care provider (or other payee), and Zurich would subsequently bill the Debtors for the deductible costs that. were advanced under the terms of the policies. In the insurance industry, claims are either consid- ered “open” or “closed.” Claims that are currently ac- tive are termed “open.” However, an inactive or closed claim may be reopened sometime in the future due to - circumstances surrounding the nature of the claim. In other words, although a claim may occur during a policy coverage period and may even be closed before the ex- piration of the coverage period, the claim may be re- opened and costs may be incurred in connection with the prior coverage at some juncture after the coverage has expired; payments on some types of claims may ex- tend over many years. Because costs often arise after the end of a coverage period that the insurer must still pay if the costs stem from a claim filed within the cov- erage period, there is also an ongoing deductible obliga- tion of the insured beyond the mere termination of the coverage period. This is the scenario under which the current action arises. For example, a worker may suffer a compensable injury on December 1, 2002, but receive compensation payments and medical reimbursements over many years. Perhaps the condition abates but flares up in fu- 10a ture years. Or the injury might be latent and manifest itself years later. In the case of workers’ compensation insurance, a claim might remain open for years or may be open, closed, and then reopened. In the insurance industry, therefore, insurance companies need to un- derstand and calculate the total expected exposure, re- ferred to herein as the ultimate loss projection (the “Ultimate Loss Projection”). When an insured’s ongoing deductible obligation is not limited pursuant to a deductible agreement, as in the current context, an insured will need to know (i.e., estimate) these prospective deductible obligations of the insured in order to project its future cash require- ments and issue accurate financial statements. Insur- ance companies also need to know this amount to pre- pare for future payments and negotiate with the in- sured as to how these amount... will be paid or secured, such as through the posting of collateral or loss funds, assuming alternatives are even allowed by the applica- ble deductible agreement or negotiated in a renewal policy. Both parties to major insurance contracts typically utilize the expertise of actuaries to calculate the ulti- mate loss projection within industry standards. The actual deductible obligations of an insured may be less than or greater than the insurance company’s Ultimate Loss Projection. Considering only the amounts that have been paid on claims as of a specific date may not. present a complete picture of the total liability for de- ductibles over time, depending on the language of the deductible agreement. There can be no question that here, as in many con- texts, the insurance coverage provided by the Zurich Policies was critical to the Debtors’ operations. With- lla out the insuranee provided by Zurich, the Debtors would have been unable to operate their business as a going concern both prior to and during the pendency of the bankruptcy.’ Specifically, the workers’ compensa- tion insurance and business automobile insurance were vital to the Debtors’ business. Even so, Zurich contin- ued coverage of the Debtors during bankruptcy with full knowledge that the deductible obligations of the soon-to-be dissolved estate may not survive the liquida- tion. Although Zurich attempted to negotiate varying forms of protection for the prospective deductibles that would inevitably arise in the future and likely post- confirmation, it now appears that some of this protec- tion—namely bond collateral—will not sufficiently cover the entire ultimate loss projection, which consti- tutes mere educated speculation at this stage. D. Policy Renewal In September 2002, which was mid-policy for the year ending June 2003, Zurich raised the issue of collat- eral with the Debtors to offset its potential risk from advancing deductible costs under the terms of the pol- icy. At that vime, the Debtors’ consultant prepared an estimate. The Debtors began negotiating a renewal policy with Zurich in January 2003, two months after Debtors’ filed for bankruptcy reorganization. At the same time, the Debtors also pursued discussions with AIG and Old Republic to obtain competing bids from different insurance carriers. Zurich’s premium request was nearly half of the amount Old Republic sought for > State law actually required the Debtors to carry workers’ compensation coverage, so the insurance policies themselves nec- essarily constituted a significant benefit to the estate in that the coverage allowed the Debtors’ business to operate. 12a similar coverage terms. AIG did not provide Debtors with a quote. In May 2003, in preparation for a June 2003 policy renewal, Zurich again discussed with the Debtors the need for additional collateral to offset the risk to Zu- rich, primarily surrounding the Debtors’ prospective deductible obligations under the policy. In these discus- sions, Zurich explained the “loss pick” with the insured and discussed the appropriate level of collateral. Zu- rich initially sought $15,000,000 in collateral, but by the end of the negotiations, Zurich and the Debtors agreed to collateral in the amount of $10,000,000, which Zurich agreed to receive following the effective date of what was then going to be a stand-alone plan of bankruptcy reorganization.’ The date of the payment was subse- quently changed when the bankruptcy plan shifted from mere reorganization to liquidation of assets and, ultimately, liquidation of the Debtors’ estate. Between collateral—$31 million for workers’ com- pensation and black lung only—and premium costs, the Debtors estimated that the insurance program would cost approximately $50 million to fund for the relevant coverage period. While Zurich and the Debtors contin- ued to negotiate collateral, a short-term extension be- ginning June 2003 was negotiated with only a 22% pre- mium increase, which represented a discounted rate ° The “loss pick” is the estimation of the ultimate loss made at the beginning of the policy period. ‘The reduction in the negotiated collateral amount also in- cluded the replacement of certain bonds that would presumably be of greater risk than the collateral with which they were replaced. These replacement Frontier bonds, which Zurich now values at zero, were undated and the true value unknown. 13a under market conditions and relative to the finalized terms of the policy reached by the Debtors with Zurich. At the end of the final negotiations, Zurich and the Debtors agreed to collateral of $10 million and, by way of the June 2004 Amended Order (discussed infra), the date for paymént of the $10 million was altered due to the shift from reorganization to liquidation. E. Assumption of Policies During the course of their chapter 11] proceedings, the Debtors assumed the Zurich Policies. On Septem- ber 5, 2008, the Debtors filed with the Bankruptcy Court the Motion of Debtors for Orders Authorizing Assumption of Certain Insurance Contracts (Bankr. Doc. # 1785) (the “Motion to Assume”). Pursuant to the Motion to Assume, the Debtors sought to assume the Zurich Policies and Program* pursuant to section 365 of the Bankruptey Code. In the introductory paragraph of the Motion to Assume, the Debtors ~.ated that they sought an order from the Bankruptcy Court authoriz- ing the “assumption by the Debtors of certain insur- ance contracts between the Debtors and Zurich Ameri- can Insurance Company and its affiliates (‘Zurich’) and other insurers (the ‘Contracts’).” On September 23, 2003, the Bankruptcy Court en- tered the Order Granting the Motion of Debtors for an Order Authorizing Assumption of Certain Insurance Contracts (the “Assumption Order”). According to Ap- ‘ “Program” was defined in the Motion to Assume at Section 6 as follows: “Since 1998, Zurich (including its affiliated companies) has provided worker compensation, business automobile, general liability and other coverages as part of an insurance program for Horizon and its predecessors and affiliates and all related deducti ble agreements and specifications thereto (the ‘Program’).” 14a pellant, Zurich repeatedly communicated to the Debt- ors that any assumption would be conditioned upon the Debtors assuming all liabilities for all policies.’ At- tached to the Motion to Assume were various revised binders for the renewals, each of which contains the condition that “The Debtors assume all the Zurich poli- cies for all years (‘the Policies’) and all liabilities under Section 365.” The binders also state that “Zurich re- ceives administrative expense treatment for all monies due under the Policies.” All of the insurance coverage extended by Zurich to the Debtors under the Assumption Order was sub- ject to renewal on June 29, 2004. Zurich chose not to renew the insurance policies, which was valid under the terms of the insurance policies. Subsequent to the non- renewal, however, Zurich and the Debtors negotiated terms for extending the coverage period. These nego- tiations between the Debtors and Zurich resulted in the June 25, 2004 Stipulation and Amendeu Order Author- izing Assumption of Insurance Contracts with Zurich American Insurance Company (Bankr. Doc. # 3381) (the “June 25, 2004 Amended Order’). Section J of the June 25, 2004 Amended Order pro- vides that “the Debtors believe that they will be able to meet all of their ongoing and future obligations under the insurance contracts, as and when they become : Additionally, Paragraph 8 of the Debtors’ Motion to Assume states: “Zurich informed the Debtors that assumption under sec- tion 365 of the Bankruptcy Code of the entire package—all pro- grams, all policies, and all liabilities—would be a condition of any renewal, and that Zurich’s expectation was that the Debtors would continue to mect ali their obligations as they came due.” 15a due....” Additionally, footnote 3 of the June 25, 2004 Amended Order states: The projected total liability by the Debtors that will be due and owing to Zurich over the lifetime of the payments under the Insurance Contracts is in excess of $10,000,000, and Zu- rich retains the rights to assert an administra- tive claim for the balance of any claims under the Insurance Contracts. The Debtors reserve the right to object to any additional administra- tive claim asserted by Zurich. The June 25, 2004 Amended Order required the Debt- ors to pay premiums of almost $900,000 per month; provide additional cash collateral or letters of credit of $1,255,000 per month; and provide $10 million in addi- tional cash collateral at the effective date.'° Although the annual Zurich Policies would have expired on June 28, 2004, the June 25, 2004 Amended Order allowed for the policies to be extended on a month-to-month basis. There were three 30-day exten- sions thereafter and Zurich subsequently granted two one-day extensions for a pro rated premium, which Zu- rich booked on its records as one two-day extension. The final monthly extension expired on September 28, 2004 at 12:00 midnight, two days before the final bank- ruptcy plan was confirmed, and the Debtors’ estate dis- solved. " Further, section 8 of the June 25, 2004 Amended Order provides: “The Debtors acknowledge that Zurich is drawinz on certain surety bonds and letters of credit provided by certain third parties, which funds are being placed in the loss funds under the deductible agreements and specifications between the Debtors and Zurich.” 16a F. Liquidation of the Estate On July 11, 2004, the Debtors filed their liquidating plans (the “Plans”), which contemplated the sale of sub- stantially all of the Debtors’ remaining assets to the successful buyer or buyers at an auction to be con- ducted by the Debtors in acesrdance with bidding pro- cedures previously approved by the Bankruptcy Court. On August 17, 2004, the Debtors conducted their auc- tion of their remaining assets and the successful bid- ders were Newcoal, LLC, now known as International Coal Group (“ICG”), Oldcoal (now known as Lexington Coal Company), and A.T. Massey Coal Company. On August 31, 2004, the Bankruptcy Court held a hearing on the proposed sale of assets and confirmation of the Plans and indicated its intention to approve the sale and confirm the Plans, as modified by the Debtors and by the Bankruptcy Court’s ruling. At the confir- mation hearing, the Debtors were required to prove they could pay allowed administrative expense priority claims. The Debtors’ financial consultant testified at the hearing that there would be a cushion in excess of $20 million for administrative expense claims. Zurich did not enter an appearance at the hearing regarding its forthcoming administrative expense claim that would surpass the entire amount of funds allocated by the Plans for satisfying the priority claims." “ present, however, the parties have informed the Court that there are sufficient funds in the administrative expense pool to cover Zurich’s claim amount as it currently stands ($14.5 mil- lion). However, LCC asserts that this money was set aside to cover other anticipated regulatory liabilities that may reduce, or possibly eliminate, the pool. 17a As indicated in the notices of effective date of the Plans (Bankr. Docs. # 4220 and 4221), on September 30, 2004, the Debtors closed the sale of their assets to the approved purchasers and the Plans became effective. As of the closing, the Debtors were deemed dissolved in accordance with the Confirmation Orders. The Zu- rich Policies were not assumed by asset purchasers ICG, LCC, or Massey as part of the Sale. Zurich never entered an appearance in the Bankruptcy Cases until the filing of its administrative claim now in contro- versy, which was filed post-confirmation but prior to the bar date for priority claims as established by the Plans. G. Zurich’s Administrative Expense Claim The Plans define an “Administrative Expense Claim” as consistent with governing law, stating as fol- lows: Administrative Expense Claim means any right to payment constituting a cost or expense of administration of any of the Chapter 11 Cases under section 503(b), 507(a)(1), 507(b) and 1114(e)(2) of the Bankruptcy Code, and ap- plicable case law including, without limitation, any actual necessary costs or expenses of pre- serving the Estate, all compensation and reim- bursement of expenses to the extent Allowed by the Bankruptcy Court under section 330 or 503 of the Bankruptcy Code, and any fees or charges assessed against the Estates of the Debtors under section 330 or 503 of the Bank- ruptcy Code, and any fees or charges assessed against the Estates of the Debtors under sec- tion 1930 of chapter 123 of title 28 of the United States Code. 18a The bar date for filing administrative expense claims under the Plans was December 29, 2004. The bar dates contained in the Plans do not, by their terms, apply to “Ordinary Course” expenses. In accordance with the applicable bar date, Zurich filed an Administrative Expense Request Form and attachments on or about December 29, 2004, identified as claim no. 20675 on the Claims Register (“Zurich’s claim”). The claim was in the amount of $44,744,067. According to Zurich, its claim was filed as a protective measure to ensure payment of administrative expenses incurred by Zurich in the event that the surety bonds and other collateral provided by the Debtors to Zurich to secure the Debtors’ payment of insurance deducti- bles are ultimately dishonored or otherwise fail to cover the prospective deductible obligations. H. Zurich’s Loss Projections As detailed herein, an ultimate loss projection is essentially a report prepared by actuaries with the ba- sic purpose of estimating future obligations in connec- tion with insurance coverage. In connection with its filing for an administrative expense priority for future deductible obligations of the Debtors, Zurich has pro- jected that the ultimate deductible loss (i.e., obligation) under the Zurich Policies will be $46,858,757, which does not include any legal costs and expenses that are generally reimbursable by the Debtors under the Zu- rich general liability policies. Although Zurich expects to incur additional defense costs on the general liability policies, Zurich has not requested reimbursement of current or future defense costs related to the general liability policies. Ultimate loss projections are actuarial analyses of the projected ultimate cost made on a regular periodic 19a basis, which employ information provided by the in- sured and updated loss information. These projections are used in the insurance industry to forecast total de- ductible liability on policies where the insured has agreed to be responsible for such liabilities and where such liability will inevitably extend into the future. This is especially true for insurance policies providing workers’ compensation coverage, which can extend years past policy expiration. Consequently, and as re- flected in the Ultimate Loss Projection, the workers’ compensation claims are by far the largest of the total claims arising under the Program. | Because ultimate loss projections require actuarial judgment, two actuaries using the same data may ar- rive at different conclusions as to a reasonable expected value of the ultimate losses, although the conclusions should be inside a range of reasonable estimates of the ultimate losses. Notwithstanding any uncertainty that is inevitably present when predicting future obliga- tions, insurance companies, such as Zurich, regularly create, maintain, and rely upon these actuarial reports in their ordinary course of business. In terms of the methodology for calculating the ul- timate loss projection for each separate policy, Zurich’s projection takes into account numerous variables.’ 2 Tn constructing the projections, Zurich identifies, among other things, the policy period, the maximum amount of deductible liability, exposure amount as determined by information provided by the insured and updated as per audits, claims made for the pol- icy period (“Deductibles Incurred”), claims paid, deductibles paid on behalf of the insured (“Deductibles Paid”), the estimated ratio of the ultimate value of known and unknown claims over cur- rent/reported losses (“Incurred LDF’), the estimated ratio of the ultimate value of claims known and unknown over current paid 20a According to Zurich, the methodology and data used in calculating the Ultimate Loss projection is based on widely accepted and employed industry standard actu- arial methods of establishing deductible claims. Based on a review of the relevant factors, Zurich then selects an appropriate loss number depending upon the cir- cumstances of the policy and policy period as they re- late to those factors. Pursuant to the obligations of the Debtors in the June 25, 2004 Amended Order, Zurich holds cash collat- eral received from the Debtors in the amount of $1,255,000. In addition to the cash collateral, Zurich re- ceived a letter of credit equal to $2,510,000. The letter of credit, along with others totaling $7,900,000, were liquidated and placed in loss funds in connection with the Debtors’ prospective deductible obligations. Zurich also received the payment of $10,000,000 required by the June 25, 2004 Amended Order close to the Effective Date. Zurich has asserted that the deductible payments previously received by Zurich and third-party adminis- trators from the Debtors total $9,526,055.24. The initial $44,744,067 listed as Zurich’s administrative expense on the Administrative Expense Claim did not subtract de- ductible payments previously received by Zurich and third-party administrators from the Debtors, which are required deductions to arrive at the amount of Zurich’s losses (“Paid LDF”), estimates of ultimate losses as the product of Deductible Incurred Losses and the Incurred Loss Development Factors (“Developed Incurred”), Developed Paid (product of Paid LDF and Deductible Paid), the Loss Pick, the weighted average between the Developed Incurred and the Loss Pick, and the weighted averaye between Developed Paid and the Loss Pick. 2la asserted Administrative Expense Claim. If the Zurich Administrative Expense Claim shown on the Zurich Claim Form was calculated by deducting the payments previously received by Zurich and third-party adminis- trators, the Zurich Filed Claim Form would have re- quested an Administrative Expense Claim of $35,218,011.76 ($44,744,-067.00 less the $9,526,055.24 in payments).° The amount of Zurich’s administrative expense claim as it now stands, approximately $14.5 million, was calculated by taking the Current Ultimate Loss Projec- tion minus the collateral or loss fund and payments made by the Debtors for deductibles in the past. Zu- rich projects that the current deficiency amount is $14,593,567.79, which would have been substantially reduced if Frontier had paid the surety. The vast ma- jority of the Current Ultimate Loss Projection is for workers’ compensation insurance coverage. Some or all the Deductible Agreements in connection with the poli- cies contain different deductible amounts or aggregates ' Zurich also holds the following bonds issued by Frontier Insurance Company as collateral against the Debtors’ prospective deductible obligation under the Zurich Policies: Bond No. 153883 (effective 4/30/00) $2,600,383 Bond No. 153261 (effective 6/29/98) $2,979,500 Bond No. 153262 (effective 6/29/99) $3,323,700 Bond No. 153882 (effective 4/30/00) $2,500,000 Bond No. 153800 (effective 6/29/99) $3,285,898 Frontier Insurance Company (“Frontier”) contends that Bond No. 153261 and Bond No. 153800 were cancelled or expired and the remaining bonds have nominal value. The ability to collect under the Frontier bonds is in dispute. Frontier is in receivership in the State of New York. Zurich made a claim on all of the bonds in July 2004. 22a for black lung or other types of claims. The Deductible Agreements control these amounts. I. Bankruptcy Opinion The Bankruptcy Opinion (Bankr. Doc. # 7404) and related Order (Bankr. Doc. # 7406), issued on May 30, 2006, denied Zurich’s application for allowance of an administrative expense priority claim in connection with prospective deductibles on the Zurich Policies. Ul- timately, the Bankruptcy Court held that Zurich failed to provide “any authority for its proposition that a claimant is entitled to administrative expense priority for claims that arise after the confirmation of a plan and after the estate ceases to exist.” The Bankruptcy Court also took issue with the pro- spective nature of the deductible obligations in that they require some degree of subjective determination: At this point, Zurich has provided nothing more than “its own statistical analysis of the likelihood such claims will occur” for the pur- pose of estimating its claim, and the court finds such analysis no more supportive of its claim than the Eli Witt court did. The court does not see how Zurich can ever provide anything more than a statistical analysis until the events that precipitate a claim for deductibles occur. These events, by necessity, will occur _post- confirmation. Further, the Bankruptcy Court was not even convinced that estimation is proper under the Bankruptcy Code in this case because estimation for the purpose adminis- trative expense claims typically occurs in the “post- petition, pre-confirmation period of estate administra- tion.” 23a Finally, the Bankruptcy Court took issue with Zu- rich’s failure to participate in the bankruptcy process until after the confirmation of the Plans. This failure, according to the Bankruptcy Court, “necessarily de- prived” the creditors and other parties in interest “of the opportunity t6 factor in a huge administrative ex- pense claim that would have had a major effect on the consideration of the feasibility of the Debtors’ proposed Plans.” Accordingly, the Bankruptcy Court concluded that “Zurich should have participated in the Debtors’ cases and requested an estimation of its administrative expense claim prior to the confirmation process” and, therefore, “Zurich’s request for estimation is neither appropriate nor timely under these circumstances.” Following the Bankruptcy Court’s denial of Zu- rich’s claim, Zurich filed a Notice of Appeal on June 9, 2006 (Bankr. Doc. # 7432). On June 16, 2006, Zurich filed its Statement of Issues and Designation of Items to be Included in the Record on Appeal (Bankr. Doc. # 7447). LCC subsequently filed its counter-designation of items to be included in the record on June 26, 2006 (Bankr. Doc. # 7460). The record from transferred from the Bankruptcy Court to the District Court, and the appeal was docketed, on July 11, 2006 (Bankr. Doc. # 7481). The Notice of Appeal was entered with this Court on July 12, 2006 (Doc. # 1). Ill. ANALYSIS At the outset, the Court recognizes that the only question which must be determined is how the prospec- tive deductible obligations are to be treated, not whether they are in fact “legal” obligations. In other words, it is undisputed that Zurich will be rightfully “owed” any deductible obligations advanced under the Zurich Policies (pursuant to the Deductible Agree- 24a menis) when they “arise,” but it is not patently clear if the obligations constitute expenses incurred in the ad- ministration of the bankruptcy estate or mere debt owed under contract to which Zurich could attempt to recover as a creditor of the dissolved estate. The very narrow issue, therefore, is whether the prospective de- ductible obligations claimed by Zurich should receive administrative expense treatment whereby Zurich would be given priority above that afforded to most creditors. The practical consequences of the legal distinction between administrative expenses and liability incurred outside the administration of the bankruptcy can prove significant in many cases. Should priority status be granted to Zurich in this matter, the requested claim amount would “come off the top” before the proceeds of the estate liquidation would be distributed among the unsecured creditors of the nowdefunct Debtors. Where, as here, a pool of funds has been previously set aside to satisfy administrative expense claims made against the estate, Zurich’s requested claim amount would be withdrawn from the “priority poo!” if priority status is granted.'* Any funds that remain in the pool, including part or all of the funds Zurich now requests 4 Although the nearly $20 million remaining in the “pool” is suificient to cover Zurich’s administrative expense claim, which currently stands at approximately $14.5 million, LCC maintains that the “excess” pool amount was set aside as part of an agree- ment with regulatory authorities for reclamation purposes. Con- sequently, according to LCC, because the large majority of the funds in the pool were not intended for traditional administrative expense Claims (other priority claims were already satisfied), the pool would fail in large measure to cover both Zurich’s claim and the “intended” reclamation costs. 25a should priority status be denied, may revert back to asset-purchaser LCC or be utilized for other means (e.g., reclamation) under the terms of the Plans and Confirmation Orders. A. Standard of Appellate Review On appeal from the Bankruptcy Court pursuant to 28 U.S.C. § 158(a)(1), this Court reviews the Bank- ruptcy Opinion de novo as to its conclusions of law. See In re Made in Detroit, 414 F.3d 576, 580 (6th Cir. 2005). Any findings of fact are upheld unless they are found to . be clearly erroneous. See id. However, the Bank- ruptcy Opinion is largely founded upon findings of fact based solely on voluntary stipulations by the parties as set out in the Agreed Stipulated Facts and List of Ex- hibits (Bankr. Doc. # 7180) (“Stipulated Facts”). To the extent the findings of fact within the Bankruptcy Opin- ion stem from the Stipulated Facts, those facts are binding on this Court. See Varga v. Rockwell Int'l Corp., 242 F.3d 693, 699 (6th Cir. 2001). B. Administrative Expense Priority Not Warranted 1. “Actual” and “Necessary” The United States Bankruptcy Code (the “Code”) defines administrative expense priority claims as the “actual, necessary costs and expenses of preserving the estate.” 11 U.S.C. § 503(b)(1)(A) (emphasis added). The Code’s definition of administrative expenses pro- vides the boundary for the aforementioned distinction between claims of general creditors and administrative expense claims, whereby the latter receive priority over the former.'’ The rationale behind the priority 14 ° ee ‘ In actuality, administrative expense status provides that, pursuant to 11 U.S.C. § 507(a)(1), the administrative claim is 26a provisions within the Code, at least in the liquidation context, is to facilitate the continued operation (i.e., go- ing concern) of debtors-in-possession “by encouraging third parties to provide those businesses with neces- sary goods and services” that enable the maximization of value for creditors of the estate upon liquidation. /n re United Trucking Serv., 851 F.2d 159, 161 (6th Cir. 1988). Importantly, because of the overarching goal to “keep administrative expenses at a minimum and thus preserve the estate for the benefit of all creditors,” it is well-established that “priority statutes are strictly con- strued.” In re Patch Graphics, 58 B.R. 743, 745 (Bankr. W.D. Wis. 1986) (emphasis added); In re Colortex In- dustries, Inc., 19 F.3d 1371, 1877 (11th Cir. 1994) (Ad- ministrative expenses under § 503 “should be narrowly construed in order to maximize the value of the estate preserved for the benefit of all creditors.”); see also Otte v. United States, 419 U.S. 48, 53, 95 S.Ct. 247, 42 L.Ed.2d 212 (1974); In re Kmart Corp., 290 B.R. 614, 621 (Bankr. N.D. Ill. 2003); In re The Eli Witt Co., 213 B.R. 396, 399 (Bankr. M.D. Fla. 1997); In re D’Lites of America, 108 B.R. 352, 355 (Bankr. N.D. Ga. 1989): (T]here must be a strict construction of the terms “actual” and “necessary” therefore requiring that the estate actually receives a real benefit from the transaction, before administrative priority will be granted on claims against the estate.... The focal point of the allowance of a priority is to prevent un- just enrichment of the estate, not to compensate —— treated as a first priority unsecured claim and is paid before all other unsecured creditors. See United States v. Ginley (In re Johnson), 901 F.2d 513, 517 (6th Cir. 1990). 27a the creditor for its loss.... Thus, a court looks to the actual benefit to the estate and not the loss sus- tained by a creditor. In re Globe Metallurgical, Inc., 312 B.R. 34, 40 (Bankr. S.D.N.Y. 2004) (internal citations omitted). To that effect, the narrow application of § 503(b)(1)(A) is rather unambiguous on its face: the claimed expense must have been an “actual” cost that is “necessary” to the “preservation” of the estate. See In re Patch Graphics, 58 B.R. at 745 (citing In re Club Dev. & Mgmt. Corp., 27 B.R. 610, 612 (9th Cir. BAP 1982)) (“An administrative expense may not be allowed absent a finding that the expense is necessary for pre- serving the estate.”). It is in this regard that Zurich’s claim fails as a simple matter of statutory interpreta- tion on both fronts: the claimed expenses are not “ac- tual” (i.e., not yet realized) and the payment thereof, when the obligations are realized, cannot act to pre- serve an estate that no longer exists. At the moment Zurich’s Claim was filed on the bar date for administra- tive expense claims, the ultimate loss projection for the deductible obligations was entirely speculative by na- ture and prospective by definition. Nevertheless, despite LCC’s subtle mention oth- erwise, there can be no question that Zurich will be forced to “advance” a substantial portion, if not all, of the deductible obligations in question.'° A key consid- ‘© At oral argument, Zurich was adamant that, regardless of whether its claim for administrative expense priority was granted, it would be required to continue advancing deductibles pursuant to the Deductible Agreements at risk of losing its insurance license even though the contracts themselves are presumably void follow- ing the bankruptcy confirmation that acted to discharge the Debt- 28a eration, however, is the reality that Zurich is only con- tractually obligated to pay the deductibles, and subse- quently seek reimbursement, once the claims actually “arise.” Zurich contends that “arise” in this context should be viewed from a more macro perspective, effec- tively arguing that, even though the legal obligation to pay the expenses will not accrue until sometime in the future, the underlying event giving rise to the future claim (e.g., an employee’s initial injury) necessarily oc- curred during the bankruptcy administration.'’ In other words, Zurich asserts that the accrual of the claims should essentially relate back to the underlying insurance coverage as part and parcel of the relevant insurance policies, which include the premium obliga- tions that were assigned administrative priority and satisfied accordingly. But Zurich does not, and cannot, provide any direct authority to support the contention ors’ liabilities generally and specific legal obligations under con- tract (notably, the Zurich Policies were not assumed by LCC). it is important to understand the practical realities of how these deductible obligations will inevitably arise, and in large number. In oversimplified terms, an employee of the Debtors would have been covered by workers’ compensation insurance through Zurich during the pendency of the bankruptcy via the debtor-in-possession’s assumption of the Zurich policies. There- fore, when an event occurs that is covered by the policy, such as the injury of an employee, that injury will inevitably give rise to medical bills and other expenses. Even though the injury occurred during the coverage period, the effects of the injury will often times be felt for many years subsequent in the form of additional health care costs and the like. Because the later expenses stem from the original injury during the coverage period, the expenses will still fall! under the domain of Zurich. And when dealing on such a large scale, these deductible expenses will reach well into the millions of dollars range; according to Zunch, the total de ductible outlay will likely near $50 million. 29a that expenses necessarily realized post-confirmation can legally be characterized as “actual” under the Code. Furthermore, even assuming that the claimed ex- penses can arguably constitute actual costs because they will inevitably occur to some significant degree and unquestionably stem from insurance coverage dur- ing bankruptcy, any argument that the payment of the claimed expenses is necessary to preserve the estate is unpersuasive. The bottom line remains that Zurich is not contractually obligated to pay any of the deductibie obligations in question until claims are filed, which will necessarily occur post-confirmation. The moment Zu- rich is contractually permitted to seek reimbursement from the Debtors for the advanced deductibles, the es- tate will have already dissolved and the Debtors will cease to exist. Consequently, payment of the claimed expenses will in no way act to preserve an estate when there is no estate to preserve. Administrative expense priority is granted only for the limited purpose of administrating, and thereby pre- serving, the bankruptcy estate. See Reading Co. v. Brown, 391 U.S. 471, 475, 88 S.Ct. 1759, 20 L.Ed.2d 751 (1968) (“(T]he words ‘preserving the estate’ include the larger objective, common to arrangements, of operating the debtor’s business with a view to rehabilitating it.” The Supreme Court acknowledged that, in the liquida- tion context, the parallel purpose is to preserve the es- tate as a going concern.). “Because there is no need to preserve an estate that has been terminated, costs that are incurred after that time are not administrative ex- penses of the estate.” Guy v. Terex Corp., No. 91-3687, 1992 WL 88978, at *4, 1992 U.S.App. LEXIS 10018, at *12 (6th Cir. 1992). Accordingly, Zurich’s administra- tive expense claim fails to satisfy the requirements of § 503(b)(1)(A) because the claimed expenses were nei- 30a ther actual at the time of filing nor will they be neces- sary to preserve the bankruptcy estate when the ex- penses are ultimately realized. 2. “Benefit to the Estate” Test In the Sixth Circuit, as well most sister circuits, a two-part test has arisen to aid in the determination of whether expenses that are the subject of an adminis- trative claim should receive priority treatment pursu- ant to § 503 of the Code. The aptly named “benefit to the estate” test asks whether the claimed expenses: (1) arose from a transaction with the bankruptcy estate, and (2) directly and substantially benefitted the estate. See In re Sunarhauserman, Inc., 126 F.3d 811, 816 (6th Cir. 1997) (citing Employee Transfer Corp. v. Grigsby (In re White Motor Corp.), 831 F.2d 106, 110 (6th Cir. 1987)). The burden of proof rests with the moving party, Zurich, to demonstrate by a preponderance of the evidence that the claimed expenses are entitled to administrative priority. See In re Kmart Corp., 290 B.R. at 621; see also In re Patch Graphics, 58 B.R. at 745 (citing Woods v. City Nat. Bank & Trust Co., 312 U.S. 262, 268, 61 S.Ct. 493, 85 L.Ed. 820 (1941)) (“The burden of proof is on the party seeking an administra- tive claim.”). Although the benefit to the estate test “limits ad- ministrative claims to those where the consideration for the claim was received during th [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386017_0382%3A1. Public record. Not legal advice.