When Are Goods 'Received' For Purposes Of Section 503(B)(9) Of The Bankruptcy Code?

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("BAPCPA") created section 503(b)(9) of the Bankruptcy Code (the "Code") to provide additional protection to trade creditors. Pre-BAPCPA, unpaid trade creditors relied on reclamation actions under 11 U.S.C. § 546(c) to recover goods supplied to debtors prior to a bankruptcy filing. Now, section 503(b)(9) of the Code allows a supplier of goods to assert an administrative expense claim for the value of goods received by a debtor in the ordinary course of business within 20 days of the debtor's bankruptcy filing. Granting administrative expense priority treatment to trade creditors increases their likelihood of receiving full payment of their claims.

Section 503(b)(9) provides that a creditor is entitled to an administrative claim for "the value of any goods received by the debtor within 20 days before the date of commencement of a case [under the Code] in which the goods have been sold to the debtor in the ordinary course of such debtor's business." Despite the apparently simplicity of section 503(b)(9), issues may arise in determining the meaning of "received" when goods are delivered to a carrier pursuant to a Free on Board ("FOB") Shipping Point agreement. In this situation, a trade creditor ships goods to a debtor with a FOB date and location indicating that title to the goods transfers when they are loaded onto the common carrier. Then, the debtor files for bankruptcy after the goods are shipped but before they arrive at the debtor's facility. Can the trade creditor assert a 503(b)(9) claim for the value of the shipped goods? The answer turns upon whether the goods are considered to be "received" at the point in time when title transfers or when the goods physically arrive at the debtor's facility.

The U.C.C.

"Received" is never defined by the Code. Since Congress borrowed from the Uniform Commercial Code ("U.C.C.") when enacting section 546(c), the Code section dealing with reclamation and a predecessor to section 503(b)(9), bankruptcy courts are directed to look to the U.C.C. for guidance on construing or defining the terms of section 503(b)(9). In re SemCrude, L.P., 416 B.R. 399, 405 (Bankr. D. Del. 2009). "Receipt" is defined in section 2-103 of the U.C.C. to mean "taking physical possession."

Domestic Shipments

The U.C.C. definition of "received" is controlling for domestic shipments of goods. Like "received," the term "goods" is similarly not defined by the Code...