The enactment of 11 U.S.C. §503(b)(9) as part of BAPCPA was widely lauded as providing a great benefit to trade creditors. Under §503(b)(9), a creditor shall be allowed an administrative expense for “the value of any goods received by the debtor within 20 days before the date of the commencement of a case under [Title 11 of the U.S. Code (the Bankruptcy Code)] in which the goods have been sold to the debtor in the ordinary course of such debtor’s business.” Despite being on the books for over two years, there are few decisions of record interpreting the statute. The opinions thus far suggest two trends: (1) parties with allowed §503(b)(9) expenses cannot expect to receive immediate payment of their claims and (2) secured creditors may enjoy the benefit of §503(b)(9), but that claims against a debtor’s estate may be subject to the debtor’s right of setoff. A discussion of the cases exemplifying these trends will be followed by practice tips.
I. §503(b)(9) Claimants Are Not Receiving the Benefit of Immediate Payment of Their Administrative Expenses.
While §503(b)(9) undoubtedly is a boon for creditors who trade with a debtor in the days leading up to a bankruptcy filing, it does not appear that such creditors are receiving the benefit of immediate payment of §503(b)(9) administrative expenses, even while others entitled to administrative expenses under §503(b) frequently receive payments before the effective date of the plan.
Section 503(b) is silent as to when payment of an administrative expense allowed under that section must be made. Under §507(a)(2), an administrative expense under §503(b) is treated as a second priority expense.[1] In a case under chapter 11 of the Bankruptcy Code, a plan may only be confirmed if it provides for payment of §507(a)(2) priority claims no later than the effective date of the plan.[2] However, other than this lone temporal requirement, the timing of a payment under §503 is within the discretion of the court.[3]
The first written opinion on §503(b)(9) was by Judge Kevin Gross of the U.S. Bankruptcy Court for the District of Delaware in In re Global Home Prods. LLC, Case No. 06-10340 (KG), 2006 WL 3791955 (Bankr. D. Del. Dec. 21, 2006). In Global Home Products, Industria Mexicana del Aluminio, S.A. de C.V. (IMASA) a creditor of the debtors with an administrative expense claim for goods delivered to the debtors within the 20 days preceding the date of the debtors’ bankruptcy petitions, moved for allowance and immediate payment of its claim under §503(b)(9). The court denied the request for immediate payment, finding that the harm to the debtor of being required to make a payment that was not in its budget, and of a type that many other parties had sought, and might in the future seek, outweighed the hardship, if any, to the creditor.
Prior to the petition date, IMASA sold aluminum to the debtors for the debtor’s use in manufacturing their line of cookware products. Under the debtor’s various financing agreements, the debtors granted their lenders liens on substantially all of their assets. At the time that oral argument was heard with respect to the §503(b)(9) motion, the only issue left for the court to decide was whether payment should be made immediately to IMASA.
IMASA asserted that it was entitled to immediate payment of its approximately $200,000 §503(b)(9) expense because it would be inequitable to require it to wait, in view of the administrative expense status afforded its claim under §503(b)(9). The debtors argued they were prohibited from immediately paying IMASA because the debtor-in-possession (DIP) financing order entered in the case prohibited the payment of claims or expenses not authorized in their financing agreement or the DIP budget, absent court approval. Therefore, the debtors argued, making such a payment could constitute a default under the financing agreements. The debtors also argued that if they were required to make immediate payment to §503(b)(9) claimants, they would potentially be left unable to obtain the financing necessary to continue their operations. Because §503(b)(9) is silent as to the timing of payment, the court analyzed this question by considering (1) the prejudice to the debtors; (2) the hardship to the claimant and (3) potential detriment to other creditors.[4]
The court found that there would be prejudice to the debtors if they were required to pay IMASA’s administrative expense immediately because (1) making such payments would hurt the debtors’ ability to borrow; (2) the debtors did not have funds available to pay administrative expenses; (3) the funds available to the debtors were necessary to pay operating expenses and (4) there had been $2.1 million in such claims already filed, with others likely to follow. Also, the debtors did not know if their DIP lender had consented to payment of such expenses, and they were not included in the debtors’ budget.
IMASA claimed that it would be prejudiced if it did not receive payment immediately because some §503(b) claims were being paid. The court found this insufficient evidence of prejudice, and noted that the debtors had sought permission to pay the §503(b)(9) expenses of certain critical vendors from whom the debtors had obtained favorable post-petition trade terms. These decisions were left to the debtors’ business judgment. Also, it appeared that the approximately $200,000 at issue was relatively insignificant to IMASA, which had annual sales in excess of $400 million.
Accordingly, the court found that the prejudice to the debtors of requiring immediate payment to IMASA would far outweigh the prejudice, if any, to IMASA. The court also stated that other creditors would benefit by the ruling to the extent that the court would thereby preserve a later equitable distribution to other administrative expense claimants (presumably, in the event that the estate might become administratively insolvent).
Similarly, in In re Bookbinders’ Restaurant, Inc., No. 06-12302 (ELF), 2006 WL 3858020 (Bankr. E. D. Pa. Dec. 28, 2006), creditor Blue Crab Plus Sfd asserted that it was entitled to immediate payment of an allowed §503(b)(9) expense. Blue Crab’s rationale was that because the debtor was paying post-petition expenses as they came due, the debtor was likewise obligated to pay immediately the creditor’s §503(b)(9) expense. Blue Crab also argued that the debtor had the present ability to pay Blue Crab’s $33,021.74 expense.
The court rejected Blue Crab’s argument that §503(b)(9) required immediate payment, finding, as did the Global Homes Products court, that the timing of payment of such an expense is within the discretion of the court.[5] The court also rejected Blue Crab’s argument that §503(b)(9) expenses should be paid pari passu with ordinary course post-petition expenses that are required to be paid under §363(c)(1).[6] A fundamental difference between payment obligations under those two sections is that obligations to be paid under §363(c)(1) may be paid in the ordinary course, without the need to seek permission from the court. Section 503(a) expressly requires that a creditor seeking payment of an administrative expense file a request for payment.
The Bookbinder court also found support for its position by comparing §§365(d)(3) and 503(b)(9). Section 365(d)(3) requires that a debtor perform all its post-petition obligations under a lease of nonresidential real property, but permits the court, in its discretion to extend the time for the debtor to perform those obligations for a period not to exceed 60 days. While §365(d)(3) appears to embody an unconditional requirement to pay a landlord for post-petition rent, the court noted that some courts have held that such payments may be withheld if the court is not satisfied that that the debtor’s estate is administratively solvent.[7] That there are other courts that view §365(d)(3) as leaving no discretion to the court to permit a debtor to withhold such payments was evidence to the Bookbinders’ court that Congress would have made explicit that §503(b)(9) provides “some type of enhanced right to payment after allowance of the expense” had it wished to do so.[8]
II. The Ninth Circuit BAP Ruled that Secured Creditors may Enjoy the Benefit of §503(b)(9).
It appears that the only appellate court to have interpreted §503(b)(9) is the Bankruptcy Appellate Panel (BAP) of the U.S. Court of Appeals for the Ninth Circuit, in Brown & Cole Stores, LLC v. Assoc. Grocers, Inc. (In re Brown & Cole Stores, LLC), 375 B.R. 873 (9th Cir. BAP 2007).[9] In Brown & Cole, the BAP offered a mixed bag for §503(b)(9) claimants, holding that (1) a secured creditor who supplied goods to the debtor may assert a claim under §503(b)(9), but that (2) a §503(b)(9) claim is subject to the debtor’s right of setoff when the debtor possesses a prepetition claim against the claimant.
In allowing a secured creditor to assert a §503(b)(9) claim, the BAP departed from prior caselaw holding that secured claims were not eligible for treatment as administrative expenses. The BAP attributed this result to the “[un]ambiguous” language of the statute,[10] while further noting that where Congress has granted administrative priority status to a class of claims, it would be improper to reduce such claims to ones providing the claimants less leverage.[11]
While handing this victory to some §503(b)(9) claimants, the BAP noted a limitation on some such claimants. Whereas the bankruptcy court below held that the debtor could not setoff prepetition unsecured debts against an administrative expense, the BAP reversed, noting the unique nature of §503(b)(9) claims.[12] Section 503(b)(9) claims are the only §503(b) claims based on debts incurred by the debtor prepetition. Accordingly, the BAP concluded that §553(a), which allows for the setoff of mutual prepetition debts, applies to §503(b)(9) claims.[13] Thus, while a creditor might possess an allowed §503(b)(9) administrative expense, a debtor might be able to escape the obligation to pay that expense if the debtor can establish a right of setoff against its obligation to the creditor.
Conclusion
Considering the importance of §503(b)(9), it might be surprising that there are not more written decisions interpreting the statute. However, in practice, there are good reasons why the statute has not generated more litigation. First, it appears that many motions for allowance and immediate payment of administrative expenses under §503(b)(9) are resolved by stipulation as to the amount of the expense, with the expense being allowed and subject to later payment as a compromise.
Second, courts frequently are establishing claims procedures, including bar dates, for §503(b)(9) claimants to assert such claims. Under those procedures, the claimant typically must fill out a claim form, just as if the §503(b)(9) expense was pre-petition unsecured, secured or priority claim. See, e.g., In re Aegis Mortgage Corp., Case No. 07-11119 (BLS), D.I. 602 (Bankr. D. Del. Nov. 26, 2007) (order establishing §503(b)(9) claim bar date); In re Tweeter Home Ent. Group, Inc., Case No. 07-10787 (PJW), D.I. 104 (Bankr. D. Del. June 14, 2007) (same); In re Dura Automotive Sys., Case No. 06-11202 (KJC), D.I. 750 (Bankr. D. Del. Feb. 23, 2007) (same). These procedures deviate from the usual practice of filing a motion to request an order allowing and directing payment of an administrative expense, and having such request decided after notice and a hearing.[14]
Therefore, a party with an administrative expense under §503(b)(9) must be prepared not only to file a motion to seek allowance and payment, but also for the possibility that the court in which the debtor’s case is pending will establish procedures and a bar date for asserting such claims. For example, in the Tweeter case, the debtors sought entry of a §503(b)(9) claims procedures order and bar date on the first day of the case, and the order granting the motion was entered only three days after the debtor’s petition date. Accordingly, a §503(b)(9) claimant must recognize that despite the elevated treatment of what might have been a mere general unsecured claim before BAPCPA, in fact such a claim is more often going to be treated as simply a different species of pre-petition claim, with claims procedures and bar dates as potential pitfalls for claimants who do not act promptly and diligently.