Under Section 503(b)(9) of the Bankruptcy Code, 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 becomes: when are goods considered to be received” under Section 503(b)(9) of the Code?

The majority of Courts construing the word “received” have relied upon the Uniform Commercial Code (“UCC”). For example, in the decision of In re Circuit City Stores Inc., 432 B.B. 225 (Bankr. E.d. Va. 2010), the United States Bankruptcy Court for the Eastern District of Virginia ruled that “received” was the functional equivalent of “receipt” under the UCC, and indicated that the terms should be construed identically.

The Court ruled that “received” means “having taken into physical possession” the goods and should be applied as a “federal definition” for purposes of interpreting Section 503(b)(9). This analysis was subsequently applied by the U.S. Bankruptcy Court for the District of New Hampshire which also applied the UCC’s definition of “receipt” to the term “received” contained in Section 503(b)(9). See In re Momenta Inc., 455 B.R. 353, 358-59 (Bankr. D. N.H. 2011).

For creditors seeking to assert a Section 503(b)(9) claim, below are several additional articles on this topic:

Section 503(b)(9) Claims: Timing of Payments

What Constitutes “Goods” Under Bankruptcy Section 503(b)(9)?

Bankruptcy Code Section 503(b)(9): Goods Shipped Within 20 Days

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.

 

When will your company’s Section 503(b)(9) claim be paid?  Under normal circumstances, Section 503(b)(9) claims are paid when the debtor makes a final distribution to creditors.  However, a Section 503(b)(9) creditor can file a motion to demand immediate payment of its claim.  This article will address the standard employed by the Bankruptcy Court in determining whether to grant immediate payment of a Section 503(b)(9) claim.

Bankruptcy Courts have considered the issue of whether a Section 503(b)(9) claim can be paid immediately, before the distribution to other similarly-situated creditors.  In the case of In re Global Home Prods., LLC, 2006 WL 3791955 (Bankr. D. Del. Dec. 21, 2006), the Court considered  the following three factors in deciding whether to make payment immediately to the creditor:

  1. prejudice to the debtor;
  2. hardship to the claimant; and
  3. potential detriment to other creditors.

The Court in Global Home denied the claimant’s request for immediate payment of the Section 503(b)(9) claim because the creditor could not demonstrate that it would suffer prejudice or hardship if payment is deferred until after confirmation of the plan, while the debtor would suffer substantial hardship.

As indicated by Global Home, Section 503(b)(9) claims are generally not be paid out prior to a final distribution to other creditors, absent compelling circumstances warranting an early distribution.

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.