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Free Money for Trade Creditors: How to Exercise Your Rights and Get Paid Under Section 503(b)(9)

The 2005 amendments to the Bankruptcy Code provided unique relief to unsecured trade creditors in the form of a post-petition administrative claim on unpaid pre-petition debt, thereby creating a right to payment ahead of many other creditors’ claims. The recovery is limited to those creditors who sell goods to debtors if those goods were received by the debtor within 20 days prior to the bankruptcy filing. The goal is to encourage trade creditors to continue to do business with shaky customers and possibly enable the debtor to avoid a bankruptcy filing.

Specifically, Section 503(b)(9) provides
…there shall be allowed administrative expenses,…including…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.

There has been controversy around several issues, particularly when and how the unsecured creditor asserts its claim for “20 Day Goods” and how and when the claim is paid. This article addresses these and other issues.
I. Asserting the Claim: The Wrong Way.

Unsecured creditors are generally familiar with the Proof of Claim form used to document pre-petition unsecured claims. That form has recently been revised and has caused some confusion. Form 10, the official Proof of Claim form, has a new column on the right side which allows for assertion of an administrative claim under Section 503(a). Some creditors are mistakenly listing their claim for “20 Day Goods” in this section of the Proof of Claim form. Using this section is incorrect and will not preserve your right to an administrative claim under Section 503(b)(9). Moreover, it will likely draw an objection, thus costing attorneys’ fees to defend.

II. Asserting the Claim: The Right Way.

Asserting the 20 Day Goods Claim the right way should involve two steps. The first step is to include the amount of the claim in the correct part of the Proof of Claim form as described below. However, including the amount in the Proof of Claim form alone is not sufficient. The second critical step is to file a Request for Payment with the Bankruptcy Court, the procedure for which is also described below.

A. Inclusion of 20 Day Goods Claim in Proof of Claim

The total unsecured claim owed to the creditor (inclusive of any right to payment for 20 Day Goods under Section 503(b)(9)) should be included as part of the unsecured claim under Number 1: “Amount of Claim as of Date Case Filed” on the official Proof of Claim form. The POC usually is due before the 503(b)(9) claim, so until it is asserted and granted administrative status, it is just part of the unsecured claim. It is good practice to attach a supplemental page to the Proof of Claim form indicating that a portion of that total unsecured claim is believed to be reimbursable as an administrative claim under Section 503(b)(9). On the supplemental page state that, if and when such reimbursement is received, the Proof of Claim will be amended to reflect the payment. At the time a creditor files the Proof of Claim, there is no way to be certain that the 503(b)(9) administrative claim will be paid or in what amount. Thus, it is necessary to include the total unsecured claim on the Proof of Claim, but you must still separately assert your 503(b)(9) claim.

B. Filing A Request for Payment

1. Contents of Request for Payment
The actual documentation asserting the creditor’s 503(b)(9) claim is called a “Request for Payment.” The authors of the Code revisions did not create a form for submitting the 503(b)(9) claim nor did they provide any specific instructions. However, Section 503(a) provides that administrative claims are to be asserted via a “Request for Payment.” They are not to be submitted on the standard Proof of Claim form. It should be noted here that some courts occasionally enter a specific order requiring a certain form to be used for submission of 503(b)(9) claims. In that event, the specific form should be followed.

The typical 503(b)(9) Request for Payment should do at least the following: 

  •  Identify the creditor.
  • Outline the transaction which gave rise to the 503(b)(9) claim.
  • Describe generally the type of goods which were delivered.
  • Assert that the goods were received by the debtor within 20 days prior to the bankruptcy filing. Attach either the invoices or, if lengthy, a summary of the invoices which comprise the claim under Section 503(b)(9).
  • Attach any evidence of delivery to, or receipt by, the debtor within the 20 day period.
  • Request that the debtor be granted and paid an administrative claim in the amount of $________ pursuant to Section 503(b)(9).

The claim should be filed with the Bankruptcy Court in which the case is pending (or such other location as is designated by a court order) with a copy served on the debtor, counsel for any Committee which has been appointed and all parties filing a Request for Notices under the Bankruptcy Rules.

2. Timing of Filing 503(b)(9) claim.
The revised Code did not set any deadline for filing a 503(b)(9) claim. Some courts enter specific orders to manage 503(b)(9) claims and set a deadline for filing same. In the absence of a specific order, a claim should be promptly asserted as soon as it can be determined. The absolute deadline for filing is any date specifically set by the court or the deadline for filing administrative claims. The administrative claim deadline is communicated to the creditor body but can be easily missed or overlooked. Be aware that notices to creditors of deadlines and other matters are sent to the address listed on the matrix unless the creditor has corrected the matrix address or filed a Request for Notices. If you have hired counsel to represent you in the case, be clear with counsel whether you expect counsel to assume responsibility for filing the 503(b)(9) claim.

3. What can be included in the 503(b)(9) claim?
The Code speaks to the value of “goods” to the debtor. If the value given by the creditor is in the form of services (such as accounting services, tax preparation, building maintenance, etc.), there is no basis for a 503(b)(9) claim. However, if services are a subcomponent of the delivery of goods it may be possible to submit a 503(b)(9) claim covering all costs. For instance, if machinery is delivered and installed for a single charge that can be submitted under Section 503(b)(9). It may or may not draw an objection. Various jurisdictions look at this issue differently, so it is better to assert the full claim and deal with it if and when an objection is filed. Another interesting variation arises when services are being provided but it is possible to identify a portion of the charge which relates to actual goods purchased and delivered. For example, an entity which provides housekeeping services in a corporate setting may charge the debtor for both the labor and the actual materials used. In that case, it is possible to submit a claim for the materials provided to the debtor as part of the housekeeping services.
4. The Choice Between 503(b)(9) and a Preference Defense.
Recently, we have seen objections to 503(b)(9) claims raised by debtors in circumstances where the debtor anticipates filing a preference action against the creditor holding the 503(b)(9) claim. In defending a preference, creditors most often look to the “subsequent extension of new value defense” in order to drive down or eliminate preference liability. This defense uses the unpaid invoices generated pre-petition to offset or reduce the preference liability. Those unpaid invoices which arise for goods delivered within 20 days of the bankruptcy case are also the same invoices which are submitted as part of the Request for Payment under Section 503(b)(9). Debtors assert – and courts tend to agree – that the invoices can be used for one or the other, but not both. Administrative claims under 503(b)(9) are paid in full (assuming the debtor’s estate is solvent post-petition) and an effective defense of preference liability serves to reduce the amount a creditor is forced to disgorge to the debtor. It is best to file the claim under 503(b)(9) promptly and then analyze how best to proceed if and when the debtor raises this “double dipping” issue. Many debtors’ counsel have not yet recognized this issue but it is frequently being asserted in the courts where the largest cases are regularly filed including bankruptcy courts in Delaware and the Southern District of New York.

5. Timing of 503(b)(9) Payments.
Assuming the debtor stays in Chapter 11 and is able to confirm either a reorganizing or liquidating plan, all administrative expenses must be paid. The debtor must therefore review all claims asserted under Section 503(b)(9) and either object to the claim or allow and pay the claim in full. Generally, the Plan of Reorganization sets out the timing for payment of administrative claims but it generally occurs (unless creditors agree otherwise) at or shortly after the effective date of the confirmed Plan. If the debtor is administratively insolvent (unable to pay all administrative claims in full), then administrative claims are either paid pro rata, or creditors agree to accept a reduced payment in order for the Plan to go forward, or the case converts to Chapter 7. In the case of a conversion, the Chapter 7 administrative claims are paid in full first and then the administrative claims of the defunct Chapter 11 case are paid to the extent funds are available.

Many creditors have tried to push to have their 503(b)(9) claim paid as soon as the Request for Payment is filed. Timing of payment has been a source of dispute because the amendments to the Bankruptcy Code say nothing about when a proper 503(b)(9) claim is to be paid. There are now numerous court decisions saying that there is no requirement to make the payment prior to the general deadline for paying administrative claims at the end of the case. Some creditors have gone to the extra expense of filing a motion to compel payment only to find themselves hauled into bankruptcy court to assert their position in the face of objections from the debtor….and most lose on the issue of early payment.

Conclusion - What’s a Creditor to do?
The variations among the districts, the lack of clarity in the Bankruptcy Code regarding Section 503(b)(9) and the continuing evolution of instructive case law make it advisable for creditors to confer with counsel with regard to the 503(b)(9) claim. Further, since the 503(b)(9) claim must be submitted as a Request for Payment, this is technically a pleading which must be signed by counsel. It is therefore advisable to employ knowledgeable bankruptcy counsel to protect your rights in this area.

© 2021 Poyner Spruill LLP. All rights reserved.National Law Review, Volume , Number 213

About this Author

Our clients include secured and unsecured creditors, including banks, factors, insurance companies, manufacturers, and other business clients in bankruptcy and workout matters. We represent creditors in business and consumer cases under Chapters 7, 11, 12, and 13, as well as business debtors in workouts and restructurings and in cases filed in Chapters 7 and 11; regularly appearing in the Bankruptcy Courts of each North Carolina district and in other states.

We are experienced in dealing with all bankruptcy appeals, workouts, and other creditor-oriented issues such as reclamation,...