Recovering Goods Sold Prior to Bankruptcy – Administrative Claim Status for Vendors

As potential recoveries for vendors in bankruptcy cases become smaller, it is important that vendors understand their rights to administrative expense claim status for goods received by the debtor within 20 days of the bankruptcy filing under Section 503(b)(9) of the Bankruptcy Code.

In October 2005, Section 503(b)(9) was added to the Code as part of the BAPCPA[1] amendments.  Section 503(b)(9) provides that an administrative expense claim is allowed 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.”[2]  This is of significance as administrative expense claims get paid before general unsecured claims and typically yield a higher recovery.[3]

When applying Section 503(b)(9) it is vital that vendors understand the specific ways in which bankruptcy courts interpret the terms “value”, “goods”,”received” and “ordinary course”.

Value

Bankruptcy Courts typically consider the invoice or purchase price as the applicable value for the goods.  The market or resale value of the goods may be appropriate in certain circumstances.

Goods

Bankruptcy Courts typically employ the Uniform Commercial Code’s (“UCC”) definition of goods for purposes of Section 503(b)(9).  The UCC defines goods as “all things (including specially manufactured goods) which are movable at the time of identification to the contract for sale . . .” Thus administrative expense claim status applies solely to goods sold.  Services rendered, even if they are a necessary component to and/or increase the value of the goods sold, are treated as general unsecured claims.  As such, in situations in which both goods and services are rendered, a vendor’s claim will typically need to be bifurcated.

In a minority of courts, the entire claim may be treated as an administrative claim if the “predominant purpose” of the transaction is the providing of goods. The entire claim is treated  as a general unsecured claim if the “predominant purpose” of the transaction is the providing of services.

Received

Similar to goods, Bankruptcy Courts have looked to the UCC for clarity as to when goods are deemed to be received by the debtor.  The UCC defines “receipt of goods” as “taking physical possession of goods.”  When applying Section 503(b)(9), courts have distinguished the taking of physical possession from the transfer of value, title, or ownership.

Ordinary Course

In general, a transaction is deemed to be in the ordinary course of the debtor’s business if it is made in good faith and conforms to previous transactions between the debtor and creditor or is in accord with common practices in the industry.

Therefore, vendors with an understanding of Section 503(b)(9) can improve their odds of elevating their claim to administrative status, as opposed to a general unsecured claim, thereby significantly increasing the likelihood of receiving some payment on account of their claim.

Have you received a recovery on a 503(b)9 claim in a retail bankruptcy?

[1] Bankruptcy Abuse Prevention and Consumer Protection Act of 2005
[2] Italicized for emphasis.
[3] Administrative claims, however, do not get paid before secured claims.


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