We all know that general unsecured creditors, like holders of trade debt, often receive little to no recovery on account of the debt they are owed when a customer files for bankruptcy. Luckily, Section 503 of the Bankruptcy Code provides some relief to creditors that provide goods to a debtor 20 days prior to the commencement of a bankruptcy case.
Section 503 governs the allowance of administrative expense claims. In bankruptcy, administrative expenses are expenses that are actual and necessary to help preserve the debtor's estate or that provide value to the estate.1 In a Chapter 11 bankruptcy case administrative claims must be paid in full and are paid after secured claims, but before general unsecured claims.
Section 503(b)(9) specifically provides relief to creditors that provide goods to a debtor within the 20 day period before the commencement of a bankruptcy case. Section 503(b)(9) states that, "[a]fter notice and a hearing, there shall be allowed administrative expenses [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."2
There are a few requirements that a creditor must meet to have a Section 503(b)(9) claim. First, the creditor must have sold the goods to the debtor. This means that a creditor who supplies the debtor with services will not qualify for a Section 503(b)(9) claim.3 Depending on the jurisdiction, creditors who supply a mixture of goods and services may qualify for Section 503(b)(9) treatment for the value of the goods provided, but not any services.
Second, the goods must have been received by the debtor 20 days before the bankruptcy filing. To satisfy this requirement, a creditor will have to prove that the goods were received by the debtor.4
Third, the goods must have been sold in the ordinary course of such debtor's business. In simple terms, this means that the goods must have been provided to the debtor in the normal course of business, and on typical terms, between the parties.
Although the requirements may seem daunting, undergoing an analysis to determine whether a creditor qualifies for a Section 503(b)(9) claim is crucial because qualifying creditors will get paid in full for the value of goods provided to the debtor when they normally may not. Although this is limited to the value of any goods provided 20 days before the bankruptcy filing, a creditor still stands to receive more than it would have for those qualifying goods proving Section 503(b)(9) status to be beneficial.
Footnotes
1. See Matter of Whistler Energy II, L.L.C., 931 F.3d 432, 440 (5th Cir. 2019).
2. 11 U.S.C. 503(b)(9).
3. Creditors who supply the debtor with services only, do not qualify See In re Pilgrim's Pride Corp., 421 B.R. 231, 238 (Bankr. N.D. Tex. 2009) ("If Congress had intended to include services within section 503(b)(9), it would have so specified").
4. See In re SRC Liquidation, LLC, 573 B.R. 537, 542 (Bankr. D. Del. 2017) (determining that for goods to be received by a debtor, the debtor or its agent need to physically possess the goods).
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