Section 503(b)(9) Claims

Section 503(b)(9) was added to the Bankruptcy Code as part of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”), which took effect in October 2005. Section 503(b)(9) grants vendors an administrative priority claim for “the value of any goods received by the debtor within 20 days before” the date the bankruptcy petition was filed, as long as “the goods have been sold to the debtor in the ordinary course of such debtor’s business.” Section 503(b)(9) is intended to encourage suppliers to continue shipping goods to a customer even when a customer’s bankruptcy is imminent, which serves to preserve the value of the debtor’s business and enhances its prospects for reorganization.

For suppliers, a Section 503(b)(9) Claim can spell the difference between receiving no or minuscule repayment (on a general unsecured claim) and being paid 100% of the value of the goods delivered in the 20-day period before a customer’s bankruptcy (as an administrative expense claim). Section 503(b)(9) transforms this subset of the supplier’s claim into an administrative expense claim, to be paid at the same priority as the debtor’s professionals and all providers of goods and services to the debtor during the bankruptcy case.  To be confirmed, a chapter 11 plan of reorganization (or liquidation) must pay administrative expense claims in full.  Potential issues: (a) did vendor deliver the goods within the 20 days?; (b) is the vendor’s claim for goods or for services?; and (c) what is the value of the goods?  Also, if the chapter 11 case is converted to a case under chapter 7 of the Bankruptcy Code, there is no requirement that chapter 11 administrative claims be paid in full.  If the chapter 11 case is dismissed, the Section 503(b)(9) Claims also cease to exist.