Section 503(b)[1] of the Bankruptcy Code sets out the nine types of administrative expenses in a bankruptcy proceeding that receive a priority distribution under § 507(a)(2). Section 503(b) derives from § 64a of the Bankruptcy Act of 1898, which entitled the costs and expenses of administration of a bankruptcy estate to priority over dividends paid to creditors.[2] Section 503(b)(9) grants a seller of goods an administrative expense for the value of any goods that the debtor received within 20 days before the petition date, if the goods were sold to the debtor in the ordinary course of the debtor’s business.[3] Thus, this subsection, added to the Code in 2005, provides an administrative expense for certain pre-petition debts, while the remaining majority of § 503(b) provides administrative priority for post-petition debts.[4] Vendors that are eligible for a § 503(b)(9) claim have priority ahead of claims for unpaid wages, taxes and all other unsecured claims that rank below administrative expenses.[5]
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) introduced amendments to § 503(b)(9).[6] Prior to § 503(b)(9)’s enactment, only a few pre-petition obligations qualified for administrative-expense priority.[7] In addition, before § 503(b)(9), the only remedy available for a vendor who provided goods to a debtor before the filing of a bankruptcy petition was governed by § 546(c),[8] which has strict noticing requirements. The BAPCPA amendments to § 546(c) and the addition of § 503(b)(9) provide better protection to vendors that provided goods to a debtor immediately before the petition date.
Before BAPCPA, § 546(c) provided a reclamation right to vendors that provided goods to an insolvent debtor only if the vendor demanded reclamation of such goods in writing either before 10 days after the debtor received the goods, or 20 days after receipt of such goods if the 10-day period expired after the debtor filed for bankruptcy.[9] Pre-BAPCPA, § 546(c) also allowed courts to deny a vendor’s reclamation claim if the court provided the vendor with an administrative-priority claim under § 503(b), or granted the vendor a lien to secure its claim.[10] BAPCPA amended § 546(c) to allow a vendor reclamation rights within 45 days after receipt of goods by the debtor, or 20 days after the date that the debtor filed for bankruptcy, if the 45-day period expired after the debtor filed for bankruptcy.[11] BAPCPA’s amendment to § 546(c) also removed the court’s power to provide a vendor with an administrative-priority claim or a security lien in lieu of the vendor’s reclamation rights.
Section 503(b)(9) compliments vendors’ reclamation rights under § 546(c).[12] The limited legislative history of § 503(b)(9) “suggests that it was aimed at providing relief to sellers of goods who fail to give the required notice under the reclamation provision of section 546(c).”[13] In fact, § 546(c)(2) specifically states that a vendor that has not met the requirements of § 546(c)(1)(A)-(B) may still assert rights contained in § 503(b)(9).[14] In addition, § 503(b)(9) does not require proof that the debtor received the goods while insolvent. Moreover, if a vendor cannot demonstrate that § 546(c)(1) applies because the goods cannot be identified due to commingling, for example, or are no longer in the debtor’s possession, then an ordinary-course vendor would be able to make an administrative-priority claim under § 503(b)(9). Thus, § 503(b)(9)’s enactment functions as an outgrowth of the policy that originally appeared in § 546(c).[15]
BAPCPA removed a court’s power to provide a vendor an administrative-priority claim under § 546(c)(2)(A), which required adherence to strict noticing requirements, and added § 503(b)(9) to provide vendors with an administrative-priority claim free of any noticing requirements. This demonstrates congressional intent to ensure that vendors who provide a debtor with goods in the 20 days before the petition date gain priority over other creditors.[16] Two issues commonly arise when courts apply this statute that lead to litigation.
First, because § 503(b)(9) only applies to sellers of goods, parties have litigated what constitutes “goods.” For example,, in one case, the debtor was a party to an “extended enterprise agreement” with a third party, which required the debtor to order goods and have them shipped to the third party.[17] The debtor ordered the goods from a vendor and the invoices reflected that the goods were billed and sold to the debtor but shipped to the third-party. The court held that although the debtor received a “value” from the goods delivered by the vendor within 20 days of the petition date, the debtor did not receive the actual goods, so § 503(b)(9) did not apply.[18]
The issue of whether electricity is considered a “good” for purposes of § 503(b)(9) has recently been contested in many bankruptcy courts. In a 2013 case, the U.S. Bankruptcy Court for the District of Montana concluded that electricity is a “good” because it meets the requirements to qualify as a “good” under the Uniform Commercial Code (UCC) since it is movable, tangible, consumable, and can be purchased and resold in a marketplace.[19] However, in another 2013 case, the U.S. Bankruptcy Court for the District of Delaware concluded that electricity is not a “good” for purposes of § 503(b)(9) because electricity traveled too fast to be identifiable and was not like other goods, such as water or natural gas.[20] The lack of consistency in bankruptcy courts means that this issue is likely to see continued litigation.
Second, parties have litigated when such goods are “received” for purposes of § 503(b)(9). For example, in a recent decision, the facts required the court to determine when a debtor received goods when its agreement with the vendor provided that the vendor retained title to the goods until the debtor actually used the goods.[21] If the debtor received the goods when they were delivered to its property, § 503(b)(9) applied, but if the debtor received the goods when it used them, as to strip the vendor of the property, the debtor received the goods outside of § 503(b)(9)’s 20-day window. The court turned to the UCC’s definition of “receipt,” which is taking physical possession of the goods, and noted that possession might be actual or constructive.[22] In noting that the key to determining when a debtor receives the goods is possession, the court held that the debtor possessed — and therefore received — the goods when they were delivered to its property, as the debtor had control over the goods, and thus § 503(b)(9) applied.[23]
A less-common issue that arises is the courts’ discretion on the timing of administrative-expense claims, in which the court considers three factors: (1) the prejudice to the debtors; (2) the hardship to the claimant; and (3) the potential detriment to other creditors.[24] For example, one court deferred payment of a § 503(b)(9) administrative-expense claim until after confirmation of a chapter 11 plan where immediate payment would expose the debtors to financial risk by adversely affecting their borrowing availability, since the aggregate § 503(b)(9) claims far exceeded the debtors’ availability to borrow.[25]
Conclusion
Section 503(b)(9) remains a relatively new statute and its conjunction with other Bankruptcy Code sections (e.g., §§ 502(d), 547, etc.) remain to be seen. Regardless, § 503(b)(9) remains a viable tool in conjunction with § 546(c)(1) for vendors to receive a higher priority distribution than otherwise available.
[1] 11 U.S.C. § 503(b); see also S. Polymer Inc. v. TI Acquisition LLC (In re TI Acquisition LLC), 410 B.R. 742, 745 (Bankr. N.D. Ga. 2009).
[2] See 4 Collier on Bankruptcy ¶ 503.LH (16th ed. 2013).
[3] See 11 U.S.C. § 503(b)(9); Pub. L. No. 109-8, § 1227(b), 199 Stat. 200 (2005); 4 Collier on Bankruptcy ¶ 503.16 (16th ed. 2013).
[4] 4 Collier on Bankruptcy ¶ 503.16 (16th ed. 2013).
[5] Id.
[6] Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub. L. No. 109-8, § 1227(b), 199 Stat. 200 (2005). See also In re Dana Corp., 367 B.R. 409, 416 n.6 (Bankr. S.D.N.Y. 2007); Brown & Cole Stores LLC v. Associated Grocers Inc. (In re Brown & Cole Stores LLC), 375 B.R. 873, 875 (B.A.P. 9th Cir. 2007).
[7] 4 Collier on Bankruptcy ¶ 503.16 (16th ed. 2013).
[8] 11 U.S.C. § 546(c).
[9] See, e.g., In re Dana Corp., 367 B.R. 409, 413 (Bankr. S.D.N.Y. 2007).
[10] See, e.g., id.
[11] See 11 U.S.C. § 546(c)(1)(A)-(B).
[12] 4 Collier on Bankruptcy ¶ 503.16 (16th ed. 2013).
[13] In re Brown & Cole Stores LLC, 375 B.R. 873, 875 n.3 (B.A.P. 9th Cir. 2007); see also Shirley S. Cho, “The Intersection of Critical Vendor Orders and Bankruptcy Code § 503(b)(9),” 29 Cal. Bankr. J. 7, 11 (2007).
[14] See 11 U.S.C. § 546(c)(2).
[15] See, e.g., In re Erving Indus. Inc., 432 B.R. 354, 373 (Bankr. D. Mass. 2010); S. Polymer Inc. v. TI Acquisition LLC (In re TI Acquisition LLC), 410 B.R. 742, 745 (Bankr. N.D. Ga. 2009).
[16] See, e.g., id.
[17] In re Plastech Eng’g Prods., 2008 Bankr. LEXIS 3130, at * 4 (Oct. 7, 2008).
[18] Id. at *9.
[19] In re S. Mont. Elec. Generation & Transmission Cooperative Inc.), No. 11-62031-11, 2013 WL 85162, at *5 (Bankr. D. Mont. Jan. 8, 2013).
[20] In re NE Opco Inc., 501 B.R. 233, 249-51 (Bankr. D. Del. 2013).
[21] In re Wezbra Dairy LLC, 493 B.R. 768 (Bankr. N.D. Ind. 2013).
[22] Id. at 770-71.
[23] Id. at 771.
[24] See, e.g., In re Global Home Prods., 2006 Bankr. LEXIS 3608, at *12 (Bankr. D. Del. Dec. 21, 2006).
[25] Id. at *15-16.