It is your worst nightmare.  You ship goods to a company, only to find out that shortly after shipment, it files for bankruptcy.  Now, instead of receiving payment for those goods, you are simply one of many creditors of the debtor’s estate.  What remedies do you have under the Bankruptcy Code to recover the amount of the shipped goods?

If the goods were shipped within 20 days of the debtor’s filing, then your claim may qualify for “administrative” status under Section 503(b)(9) of the Bankruptcy Code. The Section provides as follows:

(b) After notice and a hearing, there shall be allowed, administrative expenses, other than claims allowed under section 502(f) of this title, including –

(9) 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.

An administrative claim has higher priority, meaning that they get paid out before unsecured claims.   This is significant given that in many instances, a debtor lacks the assets to pay off all of its claims.  It can mean the difference between receiving 100% of your claim, or just pennies on the dollar.

Requirements of a Section 503(b)(9) Claim

To summarize, to be entitled to a 503(b)(9) claim,  a supplier must show four things:

(1) that it sold goods to the bankrupt customer;

(2) that these goods were received by debtor within 20 days prior to its bankruptcy filing;

(3) that goods were sold to debtor in ordinary course of the debtor’s business; and

(4) the value of the goods that were sold to the debtor.

Subsequent posts will discuss various aspects of this Section in greater detail, including what constitutes “goods”, the timing of payment for allowed Section 503(b)(9) claims, and reclamation rights of a creditor within the 45 day period prior to a debtor’s filing.