Recent Developments Regarding Section 503(b)(9) Of The Bankruptcy Code
By Ronald A. Clifford, Esq.
The following article appeared in the Fall 2011 issue Blakeley & Blakeley's Trade Creditor's Quarterly. The case law continues to develop regarding Section 503(b)(9) of the Bankruptcy Code. Issues such as the conditions under which a 503(b)(9) claim may be paid prior to the effective date of a plan, and what constitutes a "good" under 503(b)(9) have been at the forefront of case law in recent years. Many of these issues remain unresolved at the national level, and what vendors are left with are varying decisions from different jurisdictions around the country. One of the more interesting court decisions regarding 503(b)(9) was recently published by the Bankruptcy Court for the District of New Hampshire in a case titled In re Momenta, Inc.1 The Momenta case touches upon two critical questions regarding 503(b)(9), which are:
- may a vendor be allowed a 503(b)(9) claim when the goods are drop-shipped directly to the debtor's customer by the vendor; and
- may a 503(b)(9) claim be disallowed simply because a vendor received a preferential payment?
The Momenta court answered each of these questions in the negative. The caveat to the Momenta court's ruling is that the opinion is currently on appeal. Consequently, the jury is still out on what the ultimate holding of this case will be. However, these two questions are often sources of litigation, and the Momenta court's opinion, along with the ways in which other bankruptcy courts across the country have decided these issues, makes this a topic worth vendors' attention.
To set the table, the vendor at issue in the Momenta case was a manufacturer of paper products based in China. A portion of the goods delivered by the vendor within the twenty days prior to the petition date were drop shipped by the vendor directly to the debtor's customer. The court record shows no evidence that the debtor was ever in physical contact with the goods that were drop shipped. This fact is important because 503(b)(9) clearly reads, in part, that a vendor is allowed an administrative expense priority claim for "the value of goods received by the debtor within" twenty days of the petition date. Many vendors ship goods to a customer through a third party carrier or house them with a third party intermediary for later pick-up by the customer. Under what circumstances does the debtor actually "receive" the goods for 503(b)(9) purposes? Using the Uniform Commercial Code's definition of receipt under reclamation, bankruptcy courts have consistently held that "receipt" for 503(b)(9) purposes means physical receipt of the goods by the debtor. Placing the goods with a freight forwarder or warehouseman is not enough. Unless the debtor had the goods in hand within the twenty days preceding the petition date, there is no claim under 503(b)(9). This makes sense when one views the history of 503(b)(9). Congress crafted 503(b)(9) from the older reclamation statutes contained in the pre-2005 version of the bankruptcy code. Reclamation essentially allows a vendor to recapture goods that an insolvent customer is in possession of. Prior to an insolvent customer actually taking physical possession of a vendor's goods a vendor may be able to stop those goods in transit, refuse to ship the goods altogether or demand adequate assurance of performance. Following this logic, 503(b)(9), a reclamation based statute, deals with the point in time at which the goods have already reached the insolvent customer. So, it makes sense, following the aforementioned history of the statute, that 503(b)(9) only applies when a customer is in physical possession of the goods.
 Only time will tell as to whether the Momenta Court's discussion on constructive possession will spring into a new area of 503(B)(9) 
|
|
|
|
|
In the Momenta case, the debtor was never in possession of the goods that were drop shipped directly to the debtor's customers by the vendor, and so the vendor was denied a 503(b)(9) claim. A literal reading of 503(b)(9) and an understanding of its genesis would seem to justify this result. This is a crucial rule for those vendors that drop ship goods to third parties to understand. The bankruptcy court in the Momenta case did not stop there, however. The Momenta court also held that mere constructive possession of goods by a debtor qualifies as "receipt" for 503(b)(9) purposes. This is a departure from the popular rule requiring physical possession to have "receipt" under 503(b)(9). The Momenta court cited a non-bankruptcy case wherein a gasoline vendor was not allowed to stop delivery of gasoline that had already been delivered to a tank at a yard that the customer rented. The Momenta court enters dangerous waters here. As a starting point, if the gasoline vendor's customer rents the storage tank, or storage rights in the storage tank, then it is in possession of the tank, and so it is in possession of the gasoline pumped into the tank. But more importantly, the Momenta court's expansion of the definition of "receipt" greatly expands the pool of creditors that would now qualify for 503(b)(9) claims. Only time will tell as to whether the Momenta court's discussion on constructive possession will spring into a new area of 503(b)(9), but this could have a significant effect on 503(b)(9) were it adopted by other courts. We will all need to stay tuned on this issue. The Momenta court also tackles the topic of disallowance of a 503(b)(9) claim in the face of a preference action. The typical scenario is that a vendor obtains allowance of a 503(b)(9) claim early in the case. Pursuant to the bankruptcy code, 503(b)(9) claims must be paid in cash on the effective date of the plan. Ergo, a debtor may not exit chapter eleven without paying 503(b)(9) claims in full upon the effective date of the plan unless a 503(b)(9) claimant agrees to different treatment. What debtors have attempted to do is disallow a 503(b)(9) claim when a preference payment has been made under 502(d) of the bankruptcy code. Section 502(d), in part, disallows claims against a debtor's estate when there are preferential payments that must be returned to the estate. The majority view of bankruptcy courts around the country is that a 503(b)(9) claim cannot be disallowed simply because a vendor also received preferential payments. In a nutshell, these courts have held that 502(d) deals with claims, and 503(b)(9) is an administrative expense. These courts hold that 503(b)(9) claims must still be paid upon the effective date of the plan, even where a preference action may later be instituted against that vendor. There are a minority of bankruptcy courts that have allowed the temporary disallowance of 503(b)(9) claims when preferential transfers have been made. These courts have temporarily disallowed the 503(b)(9) claim of a vendor until the preferential transfer issues have been worked out, and payment made back to the estate. The Momenta court takes the majority approach. A 503(b)(9) claim in the district of New Hampshire cannot be disallowed simply because the vendor also received a preferential payment. The Momenta case touches on these two very important topics for vendors dealing with their customers. The Momenta decision is not yet set in stone. The appeal of the case could change the way vendors view receipt. The case could also further solidify the majority rule regarding the interplay between 503(b)(9) and 502(d). The Momenta case serves to highlight the fact that vendors want to ensure they stay in-formed when it comes to recent developments in bankruptcy law. Areas of bankruptcy law such as 503(b)(9) are ever-evolving. Vendors also need to understand the differences in the treatment of these topics by courts depending on region, and understand how courts will treat their claims depending on where their customer is located. An understanding of issues like those raised in Momenta will serve vendors well. Ron Clifford, Esq. can be reached at rclifford @ blakeleyllp.com. 1. 455 B.R. 353 (Dist. NH 2011).
| 
Webinars
