In the Netherlands, estate claims are immediately and directly enforceable against the bankrupt estate and are paid before ordinary unsecured claims. Until recently, the door to estate claims stood wide open. But after an April decision by the Dutch Supreme Court, this door remains open merely a crack.
Establishment of the “action criterion”
Estate claims are an exception to the general rule that claims arising after 00.00 hours of the day of the bankruptcy order receive no distribution from the estate. A Supreme Court decision from 2004, Circle Plastics, suggested that estate claims include all claims that satisfy the “action criterion”, i.e., that result from actions performed by the bankruptcy trustee. Thus, when the bankruptcy trustee took the “action” of terminating a lease, the trustee’s obligation to vacate the premises — and any related damages for failure to do so — qualified as an estate claim. The fact that this obligation also arose from the pre-bankruptcy legal relationship between the parties was irrelevant.
This judgement opened the door to all kinds of estate claims. Under the action criterion, any claim resulting from a legal act by the trustee could be considered an estate claim. Easy acceptance of estate claims would seriously prejudice the ordinary creditors, who already drew the short straw in bankruptcy distribution. Not surprisingly, Circle Plastics was heavily criticized.
“Action criterion” abandoned
In April’s Koot Beheer/Mr. Tideman q.q. decision, the Dutch Supreme Court took note of the criticisms surrounding the Circle Plastics case and reneged on the action-criterion. As in Circle Plastics, a lessor asserted a claim for damages resulting from the trustee’s action of terminating the lease agreement. The lessor had argued that — in line with Circle Plastics —its claim for damages must be an estate claim.
The Supreme Court did not agree. It held that that the obligation to pay damages, which became due when the lease was terminated during the bankruptcy, was not an estate claim. Rather, it was an ordinary claim against the debtor which ensued from the lease agreement itself. The mere presence of a legal act by the bankruptcy trustee was insufficient to give rise to an estate claim and a priority in distribution. Rather, the act of termination by itself—which, like other defaults by the trustee under reciprocal agreements, is authorized by the Dutch Bankruptcy Code — could lead only to an ordinary damages claim. Any other outcome, the Court said, would be contrary to the principle of equality of creditors and would simply not fit in the system of the law.
In practice
The Supreme Court’s abandonment of the “action criterion” means that today, estate claims will arise only when:
- A statutory provision so provides (e.g., limited periods for lease, agency and employment contracts that are rightfully terminated by the trustee);
- The trustee has willingly taken on debts in his capacity as bankruptcy trustee (e.g., costs of an appraiser engaged by the trustee); or
- The trustee has taken actions contrary to obligations or commitments that he has in his formal capacity as bankruptcy trustee (e.g., claims that arise from unauthorised termination by the trustee).
Claims that ensue from pre-bankruptcy legal relationships with the debtor and that are not estate claims under one of these three grounds are ordinary claims against the debtor, regardless of whether they arise prior to or during the bankruptcy.
Some lower courts have given an extensive reach to the “action criterion” as it was announced in Circle Plastics. We expect that, with the Supreme Court’s abandonment of the action criterion, fewer claims will qualify as estate claims. In many bankruptcies, this will mean that would-be estate creditors will find the door to payment firmly shut. This legal development emphasizes the importance for creditors of contractually securing themselves to the extent possible from the very start of the contractual relationship and of taking of timely action when counterparties show the first signs of financial distress.
Contributed by Marjon Lok.
