Section 503(b)(9): An Underappreciated Avenue for Improved Recovery

All too often, vendors and suppliers are paralyzed by a customer’s bankruptcy filing (that is, if they are even aware of it in a timely manner). The lack of action, or awareness, could wind up costing these creditors valuable recovery. In this alert, we discuss administrative claims under Section 503(b)(9) of the Bankruptcy Code. Section 503(b)(9) was added to the Bankruptcy Code in connection with the comprehensive amendments of 2005 and provides a creditor with an administrative claim for the value of any goods sold in the ordinary course and received by the debtor within 20 days before the petition date (i.e., the filing date). The intent is to incentivize parties to continue to provide goods to their distressed customers, better preserving the opportunity to reorganize. As a result of this status, vendors are entitled to payment in full, in cash for the value of such goods (if the debtor ultimately confirms a plan of reorganization). Creditors must affirmatively assert this claim, providing copies of relevant invoices and evidence of the dates of receipt by their debtor counterparties, among other things. Those creditors that do not may be missing out on meaningful recoveries, instead settling for treatment of such amounts as general unsecured claims, sometimes entitled to only pennies on the dollar. Below we highlight a number of issues to consider in connection with Section 503(b)(9) claims.

1. Process.  Unfortunately, there is no uniform statutory process for submitting Section 503(b)(9) claims.  In many cases, the general bar date order (e., the order setting the process and deadline for submitting proofs of claim) will identify the deadline for submitting claims solely relating to this administrative priority. Importantly, while creditors whose claims are properly reflected on the debtor’s schedule of liabilities often do not have to file proofs of claim, any portion of that claim covered by Section 503(b)(9) must be filed.  Absent a court-mandated process, with the assistance of legal counsel, a creditor should file a motion seeking administrative treatment of its 503(b)(9) claim. Note that in some cases, the debtor may seek to pay some or all Section 503(b)(9) claims in full in the ordinary course, without those creditors having to file claims. In those cases where the debtor retains discretion, which is common, it is important for creditors to advocate as needed for this special status. 
2. Goods, Not Services.  Section 503(b)(9) applies only to goods, not services. The Uniform Commercial Code’s definition of “good” generally controls. Nonetheless, the distinction is not always obvious and has led to much litigation over the years. Electricity, for example, has been a commonly disputed item, with courts split on whether it constitutes a good or a service. 
3. Goods Must be Actually Received. Often, it is clear when a debtor came into receipt of goods. Other times, in connection with large overseas orders for example, the line is not as bright. Whether a debtor “took possession” of goods when they were delivered “free on board” at an overseas port, or later when physically delivered to the debtor’s warehouse, might be the difference in millions of dollars of recovery to the manufacturer. Following a recent Third Circuit ruling, the trend in cases seems to find the physical delivery to the debtor, rather than the date that “risk of loss” may transfer, is the crucial date for determining receipt. Continued advances in manufacturing and delivery are certain to create novel issues that will impact that the nature and timing of receipt for purposes of Section 503(b)(9).    
4. Reclamation.  The right of reclamation under Section 546(c) is similar to an administrative claim under Section 503(b)(9).  Section 546(c) provides a mechanism for a seller to recover certain goods sold to the debtor. Reclamation expands the scope of goods covered (from 20 days to 45 days prior to the petition date) but also requires that written demand be made, generally, within 20 days after the petition date. While more flexible in terms of timing, additional conditions are placed upon reclamation, including that the debtor have been insolvent at the time of receipt, and there is less certainty regarding further actions that must be taken to establish a reclamation right (g., commencement of an adversary proceeding). There are added challenges, including the ability to identify the seller’s goods (to the extent they even remain identifiable). As a result, many creditors instead rely on the ease and reliability of Section 503(b)(9).     

All vendors and suppliers are urged to pay close attention to their customer’s bankruptcy cases from their very beginnings. Notices of filings should not linger with the initial recipient but instead make their way quickly to in-house legal staffs. Identify potential claims early in the process, and focus on opportunities to pursue Section 503(b)(9) claims to avoid leaving valuable recovery on the table.  With appropriate documentation, 503(b)(9) claims also have an active secondary market, giving creditors an opportunity to monetize them rather than wait for payment (albeit in full) at some later undetermined date.