In 2005, the U.S. Bankruptcy Code was amended by the Bankruptcy Abuse Prevention and Consumer Protection Act (BACPA). At that time, an important section (Section 503(b)(9)) was added with the presumed intention of improving protection for a certain class of creditors. Unfortunately, that protection has failed to materialize.

What is Section 503(b)(9)?

Section 503(b)(9) of U.S. Bankruptcy Code Title 11 reads:

"After notice and a hearing, there shall be allowed administrative expenses, other than claims allowed under section 502 (f) of this title, including— …. (9)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."

This provision created a new administrative class of creditors under Section 503. The claims of these creditors are prioritized below those of secured creditors and claims given “Superpriority Administrative Expense Status” (generally lenders providing post-petition financing), but above those of unsecured creditors. In essence, it converted a pre-petition, unsecured claim (paid pro rata), into an allowed administrative expense that must be paid in full. The Section applies both to Chapter 11 reorganizations and to Chapter 7 liquidations.

The addition of this section was heralded as a significant protection for sellers. However, due to the Section’s lack of specificity in important areas, it has turned out to provide little, if any, protection at all.

Complications Created by Section 503(b)(9)

Because 503(b)(9) claims have to be paid at 100% of their value, there is strong incentive for debtors and their attorneys to attack these claims, so that the Reorganization Plan remains viable and confirmation of the Plan is possible. The lack of specificity of the Section, along with the strong desire of debtors to have these claims barred, has resulted in quite a number of legal actions.

Definition of “Goods”

Section 503(b)(9) states that it is only applicable to the sale of "goods". That seems straightforward. However, "goods" is not defined in the Section, nor is it defined in the Bankruptcy Code. Therefore, the Bankruptcy Courts have looked to the definition found in Article 9 of the Uniform Commercial Code.

What about sales that include both "goods" and "services"? The Bankruptcy Courts have decided that, in cases involving the sale of goods and services, it must be possible to determine the separate value of each. Value of the "goods" is entitled to recognition as an administrative expense. The value of the services is relegated to unsecured, non-priority status.

In cases where the service is a component of the delivery of goods, it may be possible to claim all costs. For instance, if machinery (goods) is delivered and installed (service) for a single charge. However, the various jurisdictions look at this issue differently, so the assertion may draw an objection from the debtor, which may or may not be allowed by the Court.

Also missing from the Section is how the claim for goods should be calculated. Presumably, the allowable expense would be the invoice price of the goods, exclusive of interest, freight or other charges, as long as it represents the price that was ordinarily used between the parties. (Refer to the "ordinary course of business" requirement of Section 503(b)(9).)

Date of Payment

Other than "after notice and hearing", Section 503(b)(9) is silent about the time frame in which the claim is to be paid. Some interpreters of the Code, therefore, believe that a claim allowed under this Section can potentially be paid prior to the effective date of the Plan of Reorganization.

Some jurisdictions have held that determining when a bankruptcy estate should be ordered to pay an allowed administrative expense is completely at the court’s discretion. The Bankruptcy Code itself in Section 1129(a)(9)(A) states that such claims will be paid "on the effective date of the plan".

At least two decisions have declared that Section 503(b)(9) is a "rule of priority, not of payment", so the claimants are not entitled to immediate payment. Numerous court decisions have held that there is no requirement to make the payment prior to the general deadline for paying administrative claims at the end of the case.

Generally, the Plan of Reorganization sets out the timing for payment of administrative claims. It typically occurs (unless creditors agree otherwise) at or shortly after the effective date of the confirmed Plan. If the debtor is administratively insolvent (unable to pay all administrative claims in full), then administrative claims are either paid pro rata, or creditors agree to accept a reduced payment in order for the Plan to go forward.

Unsecured Creditor’s Committee

Prior to the enactment of the BAPCPA, the unsecured creditor’s committee was generally homogenous, comprised of all creditors holding unsecured claims.

The adoption of Section 503(b)(9), however, has resulted in a committee that is often comprised of two classes of creditors – those with unsecured claims only, and those with both unsecured and 503(b)(9) claims. As a result, the goals of the members are not consistent.

Pre-BAPCPA, the unsecured creditor's committee would seek to limit the amount of any kind of administrative claims, in order to maximize the possible return to unsecured creditors.

Post-BAPCPA, the question arises: To whom does the committee owe a fiduciary duty? Section 1103 outlines the powers and specific duties of the creditor's committee. It implicitly, and the courts specifically, require that the duty of the committee (and each member) is to maximize the return to the entire class [unsecured creditors], and not to any subset of the committee.

So, if Section 503(b)(9) claimants' interests are not and cannot be represented by the unsecured creditors committee, do those claimants have a right to form their own committee?

While 503(b)(9) committees are not specifically provided for under the U.S. Bankruptcy Code, the Trustee has discretion to appoint additional committees under Section 1102(a)(1). However, as authorizing such a committee will increase the administrative fees and costs of the bankruptcy, resources available to debtors to fund such expenses are usually scarce. Since the 503(b)(9) claimants are generally perceived to be able to protect themselves without the necessity of a committee, it is unlikely that the U.S. Trustee will appoint a committee solely for 503(b)(9) claimants.

Procedures for Entitlement under Section 503(a)(9)

Loss of the right to make claim may result from failure to assert claims under 503(b)(9) and to protect such claims.

However, although the right to an administrative claim is provided for, the Bankruptcy Code does not specify how a Section 503(b)(9) claim is to be asserted.

An article by Judy Thompson, entitled Free Money for Trade Creditors outlines "the right way" to assert such a claim.

Even though there is a column (#6) on Form B10 -- the official, revised Proof of Claim (PoC) form – for submitting Unsecured Priority Claims, do not list your claim there.
Include the $ amount of your 503(b)(9) claim as part of your total Unsecured claim under #4 (Total Amount of Claim at Time Case Filed) on the PoC. Then, attach to the PoC form a supplemental page indicating the portion of the total unsecured claim that is believed to be reimbursable under Section 503(b)(9) and state that, if the 503(b)(9) claim is paid, you will file an amended PoC.
In addition, file a Request for Payment. While 503(b)(9) does not create a special form or provide any specific instructions, Section 503(a) states that “An entity may timely file a request for payment of an administrative expense…” (Note that some jurisdictions may specify a form that is to be used.) The Request for Payment should include at least:
- Identification of creditor
- Outline of the transaction upon which 503(b)(9) claim is based
- Type of goods delivered
- Assertation and proof that goods were received by the debtor within 20 days prior to the bankruptcy filing (attach any proof of date of delivery)
- Amount being claimed (attach invoices, etc.)
File the Request for Payment with the appropriate Bankruptcy Court, with copies to the debtor, counsel for any appointed Committee, and any other parties filing Request for Notices under the Bankruptcy Rules.
The Code does not set any deadline for filing a 503(b)(9) claim. Some courts enter specific orders and set a deadline. If there is no specific order, submit as soon as possible but no later then the deadline for filing other administrative claims.

Ms. Thompson also states that, "since the 503(b)(9) claim must be submitted as a Request for Payment, this is technically a pleading which must be signed by counsel. It is therefore advisable to employ a knowledgeable bankruptcy counsel to protect your rights." It will also be necessary for the supplier to file a motion to have a court order entered that recognizes the amount you would like granted 503(b)(9) status.

Some local courts are enacting local rules for 503(b)(9) claims including a bar date before which such claims must be filed. Creditors having such claims should carefully read the notices they receive from the Bankruptcy Court to ensure they do not lose their right to assert the claim.

What can the Creditor Do to Protect their Right to a 503(b)(9) Claim?

Ensure that you are able to distinguish the sale of goods from the cost of services and, where possible, state both separately on all invoices. Yes, all invoices. You never know when a buyer/debtor is going to file for bankruptcy.
Ensure you file for the 503(b)(9) correctly. That means carefully reading all notices that are received from the Bankruptcy Court as local jurisdictions may have set up their own rules about how and when these claims must be filed.
When in doubt, contact a bankruptcy attorney with knowledge of the rules in the location of the bankruptcy filing.

Conclusion

Although represented as providing greater protection for the creditor, Section 503(b)(9) has not fulfilled that promise. And, unless the provisions are further amended to meet the needs of bankruptcy creditors, it probably won't.

*****

Subscribe to the Credit-to-Cash Advisor
Monthly e-Newsletter -- It's Free

Disclaimer: This information is provided by ABC-Amega Inc. for informational purposes only and is not intended to be legal advice and is not a substitute for competent legal advice on the referenced subject.

ABC-Amega Inc. provides 1st and 3rd party commercial collection services since 1929 and collects in more than 200 countries worldwide. For further information, contact info@abc-amega.com.