The Honorable Christopher S. Sontchi, presiding over the Goody’s bankruptcy in the United States Bankruptcy Court for the District of Delaware, issued a decision recently regarding the scope of administrative claims under 11 U.S.C. 503(b)(9). Section 503(b)(9) provides that after notice and a hearing, there shall be an allowed administrative expense claim for “the value of any goods received by the debtor within 20 days before the date of commencement of a case under this title in which the goods have been sold to the debtor in the ordinary course of such debtor’s business.” The issue presented to the Court in Goody’s was whether 503(b)(9)’s grant of administrative claim status extended to services provided to a debtor. (Read the Goody’s decision here).
Goody’s is a clothing retailer with 350 stores throughout the United States. One of Goody’s vendors, AVS, provided various services to Goody’s, including inspecting, ticketing and repackaging apparel Goody’s purchased from other vendors. During the twenty days prior to the commencement of Goody’s bankruptcy, AVS submitted invoices showing that it provided over $60,000 in services to Goody’s. After Goody’s filed its bankruptcy petition, AVS sought allowance of an administrative claim for its services and Goody’s objected, arguing that 503(b)(9) claims apply to goods, not services.
Citing In re Brown & Cole, LLC, 375 B.R. 873, 878 n.7 (9th Cir. B.A.P. 2007), the Court in Goody’s held that in order to be an allowed administrative claim under 503(b)(9), the creditor must have sold “goods” to the debtor, the goods must be received by the debtor prior to the petition date, and the creditor must have sold the goods to the debtor in the ordinary course of business. The Bankruptcy Code does not define “goods,” however, the Court noted that bankruptcy courts commonly defer to the U.C.C.’s definition of goods under section 2-105(1)(defining goods as “all things … moveable at the time of identification to the contract for sale …”)
The Court in Goody’s found that the services provided by AVS were just that – services, and therefore not goods as required under section 503(b)(9). The Court declined to find that AVS’s services fell within “goods”, reasoning that “the construction of the Bankruptcy Code itself excludes services from the meaning of the term ‘goods'”. The Court noted several examples of the Code’s disjunctive application of “goods” and “services”, such as 11 U.S.C. sec. 101(4A)(defining “bankruptcy assistance” as “any goods or services sold or otherwise provided”), and 101(49)(B)(vii)(providing that the term “‘security’ does not include – debt or evidence of indebtedness for goods sold and delivered or services rendered.”)(Emphasis added).
The last part of the Court’s decision addressed AVS’s argument that 503(b)(9) allows administrative claims for the “value of any goods received.” AVS argued that the services it provided (repackaging merchandise) contributed to the value of goods received by Goody’s. Citing to In re Plastech Engineered Prods, Inc., the Court rejected AVS’s argument, finding instead that it “is the goods and not the value that must be received by the debtor to trigger section 503(b)(9).” 2008 WL 5233014, at *2 (Bankr. E.D. Mich. 2008).
In the end, AVS failed to show show that it satisfied the requirements under 503(b)(9). Having not met its burden, the Court sustained Goody’s objection to the classification of the AVS claim.