If a creditor supplied both goods and services to a debtor within 20 days of bankruptcy, the creditor is entitled to a Section 503(b)(9) priority only for the value of the goods, even if the overall contract predominantly involved the sale of goods, according to Bankruptcy Judge Elizabeth E. Brown of Denver.
The creditor supplied services and chemicals to an oil and gas driller within 20 days of the driller’s bankruptcy. The creditor said that the chemicals were worth some $62,000 and represented the predominant purpose of the contract. The creditor claimed a Section 503(b)(9) priority for the entire value of the contract, not just the value of the chemicals.
Naturally, the debtor objected.
Section 503(b)(9) gives a creditor an administrative priority claim for “the value of any 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 such debtor’s business.” The section does not define “goods” or say whether a priority is accorded not at all, in part, or in whole if a contract covers both goods and services.
A similar question arises under the Uniform Commercial Code. If a contract involves both goods and services, a court will not apply both the UCC and contract law, Judge Brown said in her March 14 opinion.
When a court is confronted with a hybrid contract selling both goods and services, Judge Brown said that courts apply the “predominant purpose test” under the UCC. Were it applied to the case at hand, the predominant purpose of the contract evidently would be the sale of goods, turning the entire value of the contract into an administrative claim
However, Judge Brown said, “A majority of courts confronting hybrid contracts in the context of a § 503(b)(9) claim have held that the U.C.C.’s predominant purpose test should not apply.” Like the majority, she found “nothing in § 503(b)(9) that requires a claimant to prove its contract with the debtor falls within the ‘transaction in goods’ limitation found in § 2-102 of the U.C.C.”
“Indeed,” Judge Brown said, “§ 503(b)(9) does not contain the phrase ‘transaction in goods’ or even the word ‘transaction’ at all.” She held “that administrative priority is given only for ‘goods’ sold to a debtor, not for ‘services’ sold to a debtor.”
Ruling that the predominant purpose test does not apply, Judge Brown said that the court “separate[s] out the costs of each and give[s] priority only to the cost of goods sold.”
Judge Brown overruled the debtor’s objection and granted the creditor a $62,000 administrative priority for the value of the chemicals.
If a creditor supplied both goods and services to a debtor within 20 days of bankruptcy, the creditor is entitled to a Section 503(b)(9) priority only for the value of the goods, even if the overall contract predominantly involved the sale of goods, according to Bankruptcy Judge Elizabeth E. Brown of Denver.
The creditor supplied services and chemicals to an oil and gas driller within 20 days of the driller’s bankruptcy. The creditor said that the chemicals were worth some $62,000 and represented the predominant purpose of the contract. The creditor claimed a Section 503(b)(9) priority for the entire value of the contract, not just the value of the chemicals.
Naturally, the debtor objected.
Section 503(b)(9) gives a creditor an administrative priority claim for “the value of any 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 such debtor’s business.” The section does not define “goods” or say whether a priority is accorded not at all, in part, or in whole if a contract covers both goods and services.
A similar question arises under the Uniform Commercial Code. If a contract involves both goods and services, a court will not apply both the UCC and contract law, Judge Brown said in her March 14 opinion.