Claims for goods shipped directly from a seller to a debtor’s customers cannot qualify for administrative status under Section 503(b)(9), according to Bankruptcy Judge Brendan L. Shannon of Delaware, who rested his decision on a Third Circuit opinion handed down only three days before.
Judge Shannon’s July 13 opinion is important in an era of burgeoning ecommerce and failing retailers. The rule he laid down often will make suppliers’ claims ineligible for administrative status for goods supplied within 20 days of a retailer’s bankruptcy, an important reform that Congress enacted with BAPCPA in 2005.
In the case before Judge Shannon, the debtor purchased goods from a supplier but had the merchandise shipped directly from the seller to the debtor’s customers, using the debtor’s package delivery account. The seller sought administrative status under Section 503(b)(9) for goods that customers received within 20 days of the purchaser’s bankruptcy.
Based on the Third Circuit’s opinion in In re World Imports Ltd., 16-1357, 2017 BL 236421 (3d Cir. July 10, 2017), Judge Shannon had no alternative but to deny administrative status and relegate the claims to the general unsecured category.
Section 503(b)(9) grants an administrative priority for goods “received” within “20 days before the date of commencement” of bankruptcy. The seller argued to Judge Shannon that the goods were constructively received by the debtor when they were delivered directly to the debtor’s customers.
Although he surveyed the Bankruptcy Code, cases under the Uniform Commercial Code defining receipt, and caselaw, Judge Shannon said that World Imports bore “directly” on the outcome. In that case, the circuit court held that delivery to a vessel free on board was not receipt, because “receipt does not occur until after the seller’s ability to stop delivery ends – namely, upon the buyer’s physical possession.” The appeals court also held that the shipper was not the buyer’s agent.
Because the debtor never received “physical possession” of the goods, Judge Shannon held that delivery directly to a debtor’s customers did not qualify for administrative status. The result remains the same even when the seller uses the debtor’s package delivery account, because the Third Circuit also held that “common carriers do not qualify as agents.”
Question: Could a seller change the result by providing in its contract that the shipper shall be deemed the buyer’s agent? Can parties modify the UCC or bankruptcy law by contract?
To read ABI’s discussion of World Imports, click here.