In 2005, Congress recognized the value that vendors that ship goods to debtors on the eve of bankruptcy provide to the estate. Specifically, Congress added § 503(b)(9) to the Bankruptcy Code, which provides that a creditor shall have an administrative-expense priority claim for “the value of 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 business.” In effect, this Code provision provides vendors that fall within this section a claim that enjoys priority in payment over general unsecured non-priority claimants. As in most areas of the law, the question then becomes how the courts will apply this Code section to any given set of facts.
One of the key issues is that only vendors that provide “goods” to a debtor are eligible for § 503(b)(9) treatment. The first step in fleshing out what is and is not considered a good is defining the term “good.” Courts have consistently held that when analyzing whether something qualifies as a good under § 503(b)(9), the Uniform Commercial Code’s (UCC) definition of a good controls. To that end, the UCC defines a good as anything that is moveable. As a result, no matter what is being analyzed under § 503(b)(9), to qualify for priority treatment under that section, it must be something that is moveable. By use of the term “goods,” Congress excluded those vendors providing services from § 503(b)(9) treatment. While it seems obvious that the providing of purely intangible services to a debtor fall outside of the scope of issues captured under § 503(b)(9), application of this concept is not always easy.
The Bankruptcy Court for the District of Delaware recently decided a case, In re Goody’s Family Clothing Inc., where the question of whether a “good” was provided to the debtor was litigated.[1] In Goody’s, a supplier of textiles to the debtor would first ship them to an intermediary vendor that would unpack the textiles, inspect them, ticket them and repack them before shipping them to their final destination (the debtors’ stores). The debtor requested that the court determine whether the intermediary vendor, by unpacking, inspecting, ticketing, repacking and shipping the textiles to the debtor had actually provided “goods” to the debtor within the meaning of § 503(b)(9).
The intermediary vendor appears to have a colorful argument. Essentially, the intermediary vendor is asking the court to recognize that it shipped goods to the debtor within the 20 days preceding the filing of the bankruptcy petition. The court, however, delved deeper into the facts of the case, which revealed that the intermediary vendor invoiced the debtor for the services they provided the debtor, inspecting and repackaging, separate from the supplier, which invoiced the debtor for the actual goods themselves. The court further held that the fact that the intermediary vendor did ship the goods to the debtor is of no consequence. The statute’s plain language provides a priority administrative-expense claim for those vendors that sell goods to the debtor within the 20 days prior to the filing of the petition. Merely shipping goods to a debtor does not meet the requirements of the statute. In the end, the court found that the services the intermediary vendor provided were indeed services, not goods, and so the intermediary vendor did not qualify for an administrative expense priority claim under § 503(b)(9).
One of the questions not answered in this case is whether the supplier of the goods to the intermediary vendor has a claim under § 503(b)(9). This is especially tricky where the goods were delivered to the intermediary vendor prior to the 20-day window. Presumably, if the debtor received the goods from the intermediary vendor within the 20 days prior to the petition filing, the supplier has a colorable claim under § 503(b)(9). However, this is where the underlying sales contract and each state’s UCC laws would come into play. The task would be to determine when possession passes to the debtor.
It is easy to realize the number of potential issues that can arise in the context of § 503(b)(9) when there is an intermediary providing services for a supplier of goods to a debtor. It is clear from Goody’s that the intermediary vendor is not going to receive a § 503(b)(9) claim for shipping goods to a debtor that it receives from a supplier when it simply performs services related to those goods, and when the supplier has invoiced those goods separately to the debtor from those services to be provided by the intermediary upon those goods.
1. 401 B.R. 131 (Bankr. D. Del. 2009).