The New 20-Day Administrative Claim in Favor of Goods Suppliers: Yes to Priority; No to Immediate Payment

By Nathan, Bruce | Business Credit, March 2007 | Go to article overview

The New 20-Day Administrative Claim in Favor of Goods Suppliers: Yes to Priority; No to Immediate Payment


Nathan, Bruce, Business Credit


Section 503(b)(9) of the Bankruptcy Code, added by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("BAPCPA"), creates a new class of administrative expense priority claims in favor of suppliers of goods. Goods suppliers can now assert an administrative claim for the value of all goods they had sold to the debtor in the ordinary course of the debtor's business and that the debtor had received within 20 days of its bankruptcy filing ("20-Day Goods"). This new category of administrative priority claims elevates a goods supplier's right to payment for 20-Day Goods to a higher priority status. As such, trade creditors have a greater chance of full and faster payment for 20-Day Goods.

SECTION 503(B)(9) 20-DAY ADMINISTRATIVE CLAIM COMPARED WITH RECLAMATION RIGHTS

The new administrative claim for 20-Day Goods amounts to a safety net for trade creditors who are unable to recover on their reclamation claims. In fact, trade creditors should find it is easier to satisfy the requirements of an allowed Section 503(b)(9) administrative claim for 20-Day Goods than the prerequisites of an allowed reclamation claim.

Section 546(c)(1), as enacted by the BAPCPA, grants a trade creditor the right to reclaim goods, sold to an insolvent debtor in the ordinary course of the creditor's business and received by the debtor within 45 days of the commencement of the debtor's bankruptcy case. A trade creditor seeking reclamation of its goods must send a written reclamation demand identifying the goods not more than 45 days after the debtor's receipt of such goods, or not later than 20 days after commencement of the bankruptcy case if the 45-day period expires after such commencement. Sounds like a huge expansion of reclamation rights compared to the 10- or 20-day window for sending a written reclamation demand in bankruptcy cases prior to the BAPCPA, but NOT SO FAST! Reclamation creditors continue to have difficulty obtaining relief under the BAPCPA for many of the same reasons that precluded relief in pre-BAPCPA cases.

First, under Section 546(c)(1), reclamation rights are subject to the prior rights of the holder of a security interest in the goods, such as the debtor's lender with an all asset security interest. That is consistent with pre-BAPCPA case law. Some courts have continued the pre-BAPCPA practice of many courts that denied relief to reclamation creditors where the debtor had substantial outstanding pre-petition indebtedness owing to its lender secured by, among other assets, the debtor's inventory. Reclamation rights might also be limited to the goods in the debtor's possession at the time of the reclamation demand. Finally, the only BAPCPA remedy for reclamation, return of the goods, might further limit a reclamation creditor's recovery on its reclamation claim.

The Section 503(b)(9) administrative claim for 20-Day Goods is not saddled with all of the issues that have made it costly and difficult to obtain recovery on a reclamation claim. That said, there is no assurance that a trade creditor with an allowed Section 503(b)(9) administrative claim will receive immediate full payment of its claim. Section 503(b)(9) is silent about the timing of payment of allowed administrative claims for 20-Day Goods. A trade creditor learned this the hard way in the Global Home Products case.

GLOBAL HOME PRODUCTS

Global Home Products, LLC is a Chapter 11 case pending in the United States Bankruptcy Court in Delaware. The court had recently denied the immediate payment of a trade creditor's allowed Section 503(b)(9) administrative expense claim for 20-Day Goods. The court concluded that the Debtors' payment of the trade creditor's allowed administrative claim posed a risk to the Debtors' business and reorganization efforts that warranted deferring payment of the claim until the effective date of a confirmed Chapter 11 plan.

This decision is disturbing because the court's grounds for denial of immediate payment of the creditor's section 503(b)(9) administrative claim exist in many Chapter 11 cases. …

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