For suppliers and vendors Section 503(b)(9) of the bankruptcy code can mean the difference between receiving nothing and being paid 100% of the value of the goods delivered in the 20 day period before a customer’s bankruptcy.  This is a result of the new Bankruptcy Code priorities giving vendors a priority for goods delivered immediately before the filing of bankruptcy.  This administrative priority scheme places the holders of administrative expenses before the holders of general unsecured trade claims in receiving distributions.   In addition to increasing distributions, Section 503(b)(9) may also reduce exposure to preference claims.
Vendors and suppliers need to file their Section 503(b)(9) claim for the following reasons:

  • In cases where there is little recovery for any creditor except the secured creditor (banks), this may be the only chance for a recovery
  • An allowed 503(b)(9) administrative expense claim may enable the creditor to offset preference exposure with administrative claim strategies might be available to use administrative expenses to lessen bankruptcy preference exposure; and

Background of Section 503(b)(9)

Section 503 is entitled “Allowance of Administrative Expenses”.  Subsection 503(b) details nine types of expenses which are to be allowed as administrative expenses and therefore are entitled to priority under Section 507(a)(2).  Section 503(b)(9) provides administrative expense status 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 business.”

Section 503(b)(9) was added to the Bankruptcy Code as part of Section 1227 of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”).  The legislative history surrounding the adoption of Section 503(b)(9) is limited.

The requirements of Section 503(b)(9) are that the supplier 1) sold goods to the bankrupt customer 2) the goods were received by the debtor within 20 days prior to the bankruptcy filing and 3) goods were sold to the debtor in the ordinary course of business and 4)

The Sale of Goods (Not Services) to the Customer

Section 503(b)(9) only applies to the sale of “goods”.  The term “goods” is not defined in the Bankruptcy Code.  Courts that have addressed the definition of goods in interpreting Section 503(b)(9) generally have looked to the definition of “goods” in Section 2-105(1) of the Uniform Commercial Code (“UCC”) and the dictionary definition of “goods”.

The UCC defines “goods” as “all things (including specially manufactured goods) which are movable at the time of identification to the contract for sale other than the money in which the price is to be paid and things in action”   Neither this UCC definition nor the common dictionary definition provide practical guidance.  The decisions of the Bankruptcy Courts have done little to establish objective standards.

What happens when Goods and Services are provided under contract or provided on invoices together?

Goods Sold not Leased, Licensed or Consigned

Section 503(b)(9) of the bankruptcy code applies to goods “sold” by the creditor to the debtor.  The Bankruptcy Code does not define a sale but the Uniform Commercial Code includes the following definition:   “the passing of title from the seller to the buyer for a price” UCC § 2-106(1).  This “passing of title” standard increasingly is being used by debtors to object to 503(b)(9) claims in cases where the supplier did not have title or where the supplier did not pass title.

The importance of Receipt

“Received” is not defined in the Bankruptcy Code.  Bankruptcy Courts generally have looked to the definition of “receipt” in the UCC.  “Receipt” in the UCC is defined to mean taking physical possession.   Physical possession may be by the debtor itself or by the debtor’s agent.  For most suppliers, a strict application of the “physical possession” standard for determining “receipt” will prove beneficial.  Many suppliers overlook the practical impact of a delay in receipt” and miss an opportunity to improve their positions.

Value of Goods delivered

Courts have allowed the value of goods delivered in the normal course of business as an administrative expense claim.  Other items on invoices such as interest, delivery charges, taxes, and labor are typically not allowed in the claim reconciliation process in a bankruptcy case.

How does your company file a 503(b)(9) expense claim?

Deadlines for filing a bankruptcy claim are usually set by Court order.  The bad date order sets the deadline for filing claims.  Vendors and creditors lose millions of dollars by not filing their proofs of claim by the deadline.

Unfortunately, procedures and local court rules determine the process that vendors and creditors must employ to assert a valid 503b9 claim.  Not only will you have to follow the 503(b)(9) order, but you will have to look at the local rules for the bankruptcy court.

If the court did not enter any orders establishing procedures for filing of 503(b)(9) claims, then in most bankruptcy courts you will have to get a lawyer to file the 503(b)(9) claim for your company which will file a motion for allowance of a 503(b)(9) claim.

What does making a 503(b)(9) administrative expense mean in terms of payment?

If your company’s 503(b)(9) claim is allowed, it will get an “administrative expense priority” for the amount of the claim.  This status requires that your 503(b)(9) claim get paid before general unsecured creditor claims.   It does not mean that there will be money to pay your claim.

Secured creditors and creditors who have provided debtor in possession financing (“DIP Financing”) must get paid before the administrative expense claims.  Also, there can be other administrative expense claims that have to be paid along with yours.  In these hard times, we are seeing more and more often cases in which there is either no money to pay any administrative expense claims or there in not enough money to pay all the claims.  This situation is called “administrative insolvency.”