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Third Circuit Affirms District Court’s Denial of Administrative Expense

By Justin R. Alberto

On July 26, 2012, the Third Circuit Court of Appeals affirmed the Eastern District of Pennsylvania’s decision in In re Philadelphia Newspapers that certain defamation claims asserted by, amongst others, Charter School Management (together with its affiliated claimants, the “Claimants”), failed to give rise to an administrative expense under section 503 of the Bankruptcy Code. The Claimants in this appeal alleged that they were defamed by the Debtors’ postpetition publication of an article that linked to and endorsed a defamatory prepetition article. The Third Circuit recognized that tort claims may be entitled to administrative priority if they arise from postpetition acts related to the preservation of a debtor’s estate, yet agreed with the lower courts that the Claimants’ claims were speculative and that publication of the article postpetition provided no discernible benefit to the Debtors’ estates.

Despite affirming on the merits, the Third Circuit overruled the District Court’s reliance on the substantial consummation of the Debtors’ confirmed plan as a basis to conclude that the Claimants’ appeal was equitably moot. To the contrary, the Third Circuit determined that a ruling in favor of the claimants would not unravel the confirmed plan because allowed administrative expenses, according to the plan, were to be paid by the Debtors, not a third-party purchaser/investor. This circumstance was therefore unlike In re Continental Airlines, 91 F.3d 553 (3d Cir. 1996), and did not, according to the Court, justify application of the equitable mootness doctrine.

A copy of the Court’s opinion can be found here.

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