Monday, April 14, 2008

Bankruptcy Code Section 503(b)(9)

Section 503(b)(9) was introduced to the Bankruptcy Code by BAPCPA and it provides that goods that are shipped and received by the Debtor within 20 days of the bankruptcy filing are deemed to be administrative claims. However, § 503(b)(9) is silent as to the timing of that payment. The introductory language to § 503 provides that “after notice and hearing,” a § 503(b)(9) claim may be allowed, therefor some commentators have indicated that Court approval may be required for the payment of an administrative claim. Other commentators have indicated that it’s unclear, and that in fact administrative claims may be paid by the Debtor without Court order.

Another issue raised in this area of the law regards reclamation letters. BAPCPA § 546(c) provides that a creditor may send a letter reclaiming goods shipped within 45 days of the bankruptcy filing. Generally, the goods are not returned by the Debtor to the vendor, however, the vendor would be given an administrative claim under § 503(b)(9) for the portion of the reclamation claim that was received by the Debtor within 20 days of the bankruptcy filing.

Another issue regarding reclamation demands or claims is that they may be impacted by DIP financing. Section 546(c) provides that reclamation claims are subject to the prior rights of a holder of a security interest in such goods or the proceeds thereof and case law indicates that there is something called a “Priority Lien Defense,” which provides that a DIP lender or other secure lender would have a higher priority to be paid than a reclamation creditor, and therefore if there is no carve-out in the DIP order for reclamation claims, reclamation creditors would not be able to be paid during the pendency of the case or receive their goods back and they would be paid pursuant to a confirmed Chapter 11 plan if monies were available, i.e. what this means is that if the business is liquidated and there are not sufficient monies to pay secured creditors and reclamation creditors, then secured creditors would take priority over reclamation creditors.

In fact, the commentators indicate that the § 503(b)(9) administrative claim therefore may be more valuable to a creditor than the reclamation claim. In this area of the law, it’s extremely important for counsel to a creditor to (i) review the DIP order to determine to whether monies are provided to pay administrative creditors and the treatment of reclamation claimants and (ii) the liens of other secured creditors.

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