What remedies do you have to recover goods shipped to a company in the weeks leading up to its bankruptcy?  As to those goods shipped 45 days prior to a debtor’s filing, Section 546(c) of the Bankruptcy Code provides a reclamation right to creditors to recover such goods.  This may provide you with the ability to recover your goods directly from the debtor.

There are several requirements under Section 546(c).  The goods must have been sold in the “ordinary course” of the vendor’s business and the debtor must have received the goods while insolvent.  Also, the reclamation demand must be in writing and made within 45 days of the receipt of the goods by the customer (now the debtor in bankruptcy).

If the 45-day period expires after the bankruptcy case is filed, the vendor must make the reclamation demand within 20 days after the bankruptcy filing.  As with pre-bankruptcy demands under the UCC, the demand should identify the goods being reclaimed, include a general statement reclaiming all goods received by the debtor from the vendor during the 45-day period, and demand that the goods be segregated. Often times, vendors will file a notice of reclamation with the bankruptcy court.

Conclusion

If you or your company shipped goods to a debtor prior to its filing for bankruptcy, then you should act quickly to file a reclamation claim against the debtor.  It may provide you with the ability to recover your goods from the debtor.

Carl D. Neff is a bankruptcy attorney with the law firm of Fox Rothschild LLP.  Carl is admitted in Delaware and regularly practices before the United States Bankruptcy Court for the District of Delaware. You can reach Carl at (302) 622-4272 or at cneff@foxrothschild.com.

As discussed in the prior post, creditors may receive administrative-expense priority for “the value of goods received by the debtor within 20 days before” the debtor’s bankruptcy filing “in which the goods have been sold to the debtor in the ordinary course of business.”  11 U.S.C. § 503(b)(9).

The question then becomes what constitutes a “good” under Section 503(b)(9)?

Bankruptcy Courts have consistently held that the Uniform Commercial Code’s (UCC) definition of a good controls for purposes of Section 503(b)(9). Under the UCC, a good is anything that is moveable. As such, to qualify for priority treatment under this section, the good at issue must be something that is moveable.  For example, “services” provided fall outside of the scope of Section 503(b)(9) treatment.

At times, whether a product is a “good” or a “service” may not be readily apparent.  For example, in the case of In re Goody’s Family Clothing, Inc., 401 B.R. 131 (Bankr. D. Del. 2009), the creditor seeking Section 503(b)(9) administrative priority was an intermediate vendor that received textiles from a supplier, would unpack the textiles, inspect them, ticket and repack them before shipping the textiles to the debtor.  The Court found that the creditor in fact provided services but not “goods” to the debtor, and therefore was denied its Section 503(b)(9) claim.

Subsequent posts will address further issues relating to Section 503(b)(9) claims, such as  the timing of payment for allowed Section 503(b)(9) claims, and reclamation rights of a creditor within the 45 day period prior to a debtor’s filing.

Carl D. Neff is a bankruptcy attorney with the law firm of Fox Rothschild LLP.  Carl is admitted in Delaware and regularly practices before the United States Bankruptcy Court for the District of Delaware. You can reach Carl at (302) 622-4272 or at cneff@foxrothschild.com.

It is your worst nightmare.  You ship goods to a company, only to find out that shortly after shipment, it files for bankruptcy.  Now, instead of receiving payment for those goods, you are simply one of many creditors of the debtor’s estate.  What remedies do you have under the Bankruptcy Code to recover the amount of the shipped goods?

If the goods were shipped within 20 days of the debtor’s filing, then your claim may qualify for “administrative” status under Section 503(b)(9) of the Bankruptcy Code. The Section provides as follows:

(b) After notice and a hearing, there shall be allowed, administrative expenses, other than claims allowed under section 502(f) of this title, including –

(9) 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.

An administrative claim has higher priority, meaning that they get paid out before unsecured claims.   This is significant given that in many instances, a debtor lacks the assets to pay off all of its claims.  It can mean the difference between receiving 100% of your claim, or just pennies on the dollar.

Requirements of a Section 503(b)(9) Claim

To summarize, to be entitled to a 503(b)(9) claim,  a supplier must show four things:

(1) that it sold goods to the bankrupt customer;

(2) that these goods were received by debtor within 20 days prior to its bankruptcy filing;

(3) that goods were sold to debtor in ordinary course of the debtor’s business; and

(4) the value of the goods that were sold to the debtor.

Subsequent posts will discuss various aspects of this Section in greater detail, including what constitutes “goods”, the timing of payment for allowed Section 503(b)(9) claims, and reclamation rights of a creditor within the 45 day period prior to a debtor’s filing.

Carl D. Neff is a bankruptcy attorney with the law firm of Fox Rothschild LLP.  Carl is admitted in Delaware and regularly practices before the United States Bankruptcy Court for the District of Delaware. You can reach Carl at (302) 622-4272 or at cneff@foxrothschild.com.