New Precedent Related To 503(B)(9) Changes Landscape For Creditors Seeking Administrative Expense Claims

• Published date: 23 December 2021
• Subject Matter: Insolvency/Bankruptcy/Re-structuring, Insolvency/Bankruptcy
• Law Firm: Armstrong Teasdale
• Author: Erin M. Edelman and Elizabeth L. Grube

When a debtor files for bankruptcy, its creditors are forced to line up to receive payment in order of priority, as established by the Bankruptcy Code. While the claims of vendors and trade creditors would typically be last in line as general unsecured creditors, often receiving pennies on the dollar, Congress provided special incentives for creditors who provide necessary goods and services to the debtor, within a specified timeframe, by giv'ing these creditors administrative expense claims. An administrative expense claim can be extremely valuable because it typically moves the creditor up in line in order of priority of payment and, for solvent bankruptcy estates, often entitles these claimholders to full payment of their claims.

A 503(b)(9) claim is a specific type of administrative claim awarded to a creditor 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." 11 U.S.C. ' 503(b) (9). To receive an administrative expense claim under Section 503(b)(9), a creditor must demonstrate that: (1) the goods in question were received by the debtor within 20 days before the filing of the bankruptcy (i.e., the petition date), (2) the goods were sold to the debtor, and (3) the goods were sold in the ordinary course of business. Recent cases interpreting the text of Section 503(b)(9) have clarified (and perhaps narrowed) the class of creditors that will qualify for this golden ticket claim.

Courts Clarify the Meaning of "Received by the Debtor"

In order to qualify for an administrative expense claim under Section 503(b)(9), the goods that a creditor sold

to the debtor must be received by the debtor within 20 days before the bankruptcy petition date. Under recent Third Circuit precedent, "received by the debtor" has a more stringent standard.

In In re World Imports, Ltd., the Third Circuit examined a case in which differing interpretations of the term "received" determined whether two vendors would receive administrative expense claims, or be relegated to the back of the priority line as general unsecured creditors.¹ In this case, two vendors shipped goods from China "free on board" (FOB) using a common carrier and the debtor accepted the goods about a month later in the United States. The debtor argued that the goods were "received" when the vendor delivered them to the common carrier for shipment because, under the United Nations Convention on Contracts for the International Sale of Goods (CISG) and its incorporated Incoterms², "FOB" meant that risk of loss passed to the debtor at that time. Under the debtor's interpretation, it "received" the goods pre-shipment, more than 20...