Goody's Family Clothing bankruptcy

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.

Below is a post from Michael Temin, senior counsel with Fox Rothschild.

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Bankruptcy Code § 365(d)(3) requires the trustee or the debtor in possession to “timely perform all the obligations of the debtor . . .arising from and after the order for relief under any unexpired lease of nonresidential real property, until such lease is assumed or rejected, notwithstanding section 503(b)(1).” In 2001 the Third Circuit construed this section to require the debtor to perform the lease in accordance with its terms. CenterPoint Properties v. Montgomery Ward Holding Corp. (In re Montgomery Ward Holding Corp.), 268 F.3d 205 (3d Cir. 2001).

Continue Reading Third Circuit Affirms Delaware Bankruptcy Court Stub Rent Decision

Introduction

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).

Background

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.

Analysis

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).

Conclusion

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.