Measuring the Value of Goods under § 503(b)(9)

Section 503(b)(9) of the Bankruptcy Code creates an administrative expense for “the value of any goods received by the debtor” within 20 days preceding bankruptcy. While there is little case law analyzing the appropriate measure of “value” under this section, courts that have addressed the question recognize that the purchase price reflected in the invoice or contract, pursuant to which the goods were delivered to the debtor, is prima facie evidence of value but that it can be rebutted by other evidence. Courts have also addressed the issue of dividing value between goods delivered, which qualifies as an administrative expense under the section, and services performed, which do not.

Whose Burden Is It to Establish the Value Received?

Section 503 does not define value and in fact, “[t]he word ‘value’ is not defined in the Bankruptcy Code.”[1] As noted by one court, “Congress thus, pointedly, left to the courts determination of value to a debtor of goods received….”[2] In addition, the word “value” has different meanings throughout the Bankruptcy Code depending on the context.[3] One of the few decisions to have squarely addressed the question has held that “value” under § 503(b)(9) should be measured by “what it would have cost [the] Debtors to acquire similar goods.”[4]

In the context of § 503(b)(9), courts have held that the administrative-expense claimant “must prove the value of the goods for which it is entitled to an administrative-expense claim.”[5] Courts have addressed whether a claimant’s presentation of prima facie evidence of the validity and amount of the § 503(b)(9) administrative claim shifts the burden to those opposing priority status to disprove the prima facie evidence of value. This issue arises when the administrative-expense claimant presents evidence of the purchase price of the goods, as reflected in its invoice or contract for the goods with the debtor.

In SemCrude, the U.S. Bankruptcy Court for the District of Delaware held that there is a presumption that the purchase price reflected in an invoice or contract is the appropriate measure of “value.”[6] However, this presumption can “be rebutted by evidence indicating that under the facts and circumstances of a particular transaction, the purchase or invoice price is not an appropriate or relevant indicator of the ‘value’ obtained by [the] Debtors.”[7]

What Evidence of “Value” Overcomes the Presumption?

In In re Pilgrim’s Pride, the U.S. District Court for the Northern District of Texas determined that “value” under § 503(b)(9) should be measured by “what it would have cost [the] Debtors to acquire similar goods.”[8] The court heavily relied on the U.S. Supreme Court’s decision in Assocs. Commercial Corp. v. Rash,[9] which addressed the issue of valuing collateral to be retained by the debtor under the plan.[10] The court determined that the value of the collateral should be measured by its “replacement cost;” that is, what the debtor would pay to replace the asset.[11] In accepting this measure, the Pilgrim’s Pride court stated,

The definition of value found in the Rash case is suitable to guide the court in interpreting Code § 503(b)(9). It was crafted to address valuation of property a debtor intended to retain and use (as opposed to a valuation to determine a creditor’s realization at foreclosure…).[12]

Of course, replacement costs could be very different from the purchase price of the goods delivered, including for the simple reason that one of the parties made a bad bargain. Thus, it could be argued that the contract or invoice itself, without independent evidence or expert testimony supporting its value, does not prove that the purchase price is the same as the replacement value. Pilgrim’s Pride did not go so far; rather, the court stated that the “contract price for the goods [that were] delivered would provide a good starting place” for the inquiry.[13] This makes the inquiry fact-intensive, including one warranting the presentation of expert valuation testimony. The In re Southern Montana Electric Generation & Transmission Cooperative Inc.[14] case illustrates this point.

In Southern Montana, the U.S. Bankruptcy Court for the District of Montana, after determining the threshold issue that electricity was a good under § 503(b)(9), addressed whether the amount of the administrative claim for electricity that was sold to the debtor should be less than the purchase price in the parties’ agreement, which was also reflected in the claimant’s proof of claim.[15] In an effort to refute the value derived from the agreement, the trustee presented expert testimony using “historical pricing data and future price curves to ascertain the prices [that the] Debtor could have hypothetically paid for power in October of 2011.”[16]

The court rejected the expert testimony and allowed the full value of the administrative-expense claim. The court relied on the expert’s testimony on cross-examination that he did not know whether there was a seller that would have been willing to sell electricity to the debtor given the debtor’s financial condition during the 20 days preceding the bankruptcy filing.[17] The court also noted that the expert conceded that the debtor had to pre-pay for power that the trustee purchased post-petition.[18] While the court did not expressly state that the agreement created a presumption of the value of the administrative-expense claim, it implied the burden shifted to the trustee.[19]

Dividing Value Between Goods Delivered and Services Performed

The appropriate measure of value under § 503(b)(9) also arises when the invoice or contract with the debtor includes a mix of both goods and services. Because § 503(b)(9) only allows a pre-petition creditor an administrative claim for the value of any “goods” that were received during the 20-day pre-petition period, courts confront the question of determining value when services were provided with the delivery of goods.[20] For instance, in Pilgrim’s Pride, a municipality sought an administrative-expense claim under § 503(b)(9) for sewage and garbage removal, as well as for water and natural gas.[21] The court stated that “[i]rrespective of whether services were rendered in conjunction with the delivery of goods … an administrative claim under § 503(b)(9) covers only the value of the goods themselves.”[22]

Also, in Goody’s Family Clothing, the claimant sought an administrative-expense claim under § 503(b)(9) for the inspection, ticketing and repackaging of apparel that was purchased by the debtor from other vendors.[23] The claimant argued that it was entitled to an administrative claim “since the garments it inspected, tagged, assorted and repackaged were not saleable without those services, it contributed to the ‘value of goods.’”[24] The court rejected this argument, holding that “[i]t is the goods and not the value that must be received by the debtor to trigger § 503(b)(9)…. The statute does not say value received. Instead, it says goods received.”[25] In short, a claimant is not entitled to an administrative-expense claim for the value of services, even when rendered in conjunction with the goods delivered.

In conclusion, while there is an absence of caselaw analyzing the issue, the purchase price of the goods delivered to the debtor, as reflected in the invoice or contract, is prima facie evidence of “value” under § 503(b)(9). This presumption can be rebutted by other evidence, including by expert testimony, of the value received by the debtor.

[1] In re SemCrude LP,416 B.R. 399, 405 (Bankr. D. Del. 2009).

[2] In re Pilgrim’s Pride Corp., 421 B.R. 231, 243 (Bank. N.D. Tex. 2009).

[3] Id. (citing Assocs. Commercial Corp. v. Rash, 520 U.S. 953, 960 (1997)).

[4] Pilgrim’s Pride, 421 B.R. at 243.

[5] Pilgrim’s Pride, 421 B.R. at 243; In re Goody’s Family Clothing Inc., 401 B.R. 131, 136 (Bankr. D. Del. 2009).

[6] SemCrude, 416 B.R. at 405.

[7] Id.

[8] Pilgrim’s Pride, 421 B.R. at 243.

[9] 520 U.S. 953 (1997).

[10] Pilgrim’s Pride, 421 B.R. at 243.

[11] Id.

[12] Id.