On May 8, 2012, the U.S. Bankruptcy Court for the District of Delaware (the “Court”) entered its Order (the “Order”) Establishing Procedures to Assert Claims Arising under Section 503(b)(9) of the Bankruptcy Code (“503(b)(9) Claims”) in the chapter 11 cases of AFA Investment, Inc. and its affiliated debtors (collectively, the “Debtors”) (Bankr. D. Del. 12-11127 (MFW)). While unusual, it is not an extraordinary step taken by the Court; however, the claims procedures and timing established by the Order could seriously affect certain creditors’ rights in the Debtors’ cases.  A copy of the Order is available here .

Bankruptcy Code section 503(b)(9) provides creditors who delivered goods received by a debtor within 20 days from the bankruptcy petition date an administrative claim for those goods. This is significant because it allows for some pre-petition claims to move to the top of the bankruptcy priority list. Pursuant to Bankruptcy Code section 503 a creditor asserting an administrative claim must “file a request for payment of an administrative expense” then “after notice and a hearing, there shall be allowed administrative expenses . . .” 11 U.S.C. § 503(a) and (b). Generally, creditors file a motion requesting allowance of a 503(b)(9) Claim and after settling with the debtor or having a hearing on the motion are afforded the comfort and security of having a Bankruptcy Court order allowing the claim. In the Debtors’ case, the Court has allowed to Debtors to establish 503(b)(9) Claim procedures which require all 503(b)(9) creditors to file a modified proof of claim form and submit it, with all supporting documents, to the Debtors’ claims agent no later than 4:00 p.m. (EDT) on June 11, 2012. These procedures give all 503(b)(9) claimants only one month to review their records and submit their 503(b)(9) Claims.

In addition to the relatively short time to file a 503(b)(9) Claim, the Order does not provide a timeline for the Debtors to reconcile the 503(b)(9) Claims. Absent extraordinary circumstances 503(b)(9) Claims are not actually paid until a confirmed chapter 11 plan goes “effective”; however, having the order allowing a 503(b)(9) Claim affords a creditor comfort and certainty of amount and priority of their claim. In this case, creditors with administrative claims may very well be left with the uncertainty of creditors lower in the priority scheme and their claims may be subject to the uncertainty of objections/litigation. By entering the Order, the Court took away a 503(b)(9) Claims holder’s ability to control the process for the allowance of their claim and the comfort of having an order allowing that claim.

Based on the Court’s entry of the Order, any creditor that provided goods that were received or may have been received by the Debtors from March 13, 2012 through April 1, 2012 should carefully review the Order and the notice of the 503(b)(9) Claim bar date approved by the Court, and consult an experienced bankruptcy attorney. Please note that Fox Rothschild LLP has already filed papers on behalf of a 503(b)(9) creditor in the Debtors’ cases.