by Scott Schuster, Esq.

Unfortunately, the Code does not require that the administrative claim be paid in full immediately after the Court allows the claim. Instead, the Code only sets the relative priority of the claim.  In Chapter 11, a requirement for the confirmation of a Plan is that administrative expense claims be paid “in full and in cash.” If the case is ultimately declared “administratively insolvent” – i.e. the debtor does not generate sufficient cash to pay its administrative claims – then 503(b)(9) creditors will probably not receive the full amount of their claims.

While the court can order immediate payment of these claims, they often decline to do so. The courts have tended to be very debtor friendly on this issue. In two recent cases, In Re Bookbinders and In Re Global Home Products, LLC, creditors attempted to force immediate payment of 503(b)(9) claims. In both cases, creditors urged the court to order immediate payment of the claims, arguing that there may not be enough assets left at the end of the bankruptcy to pay the 503(b)(9) claims in full. In both cases, the courts’ reasoned that the Code did not explicitly provide for immediate payment. The courts in both cases denied the creditors’ request for immediate payment of their 503(b)(9) claims. Unfortunately, in the Global Home Products case, 503(b)(9) creditors ultimately received less than 50 percent of their claims under the debtor’s Plan.

While a 503(b)(9) creditor appears to face an uphill battle, it is not all bad news. In fact, section 503(b)(9) has greatly increased the potential for recovery for large numbers of unsecured creditors nationwide. Notwithstanding the difficulties of allowance and payment that 503(b)(9) creditors face, they stand in a better position than a general unsecured creditor. Section 503(b)(9) claims are given the same priority status as the debtors’ attorneys’ and other professionals’ fees. In the grand scheme of the bankruptcy system, this is about the best position in which a trade creditor can sit.

Since many 503(b)(9) motions are lightly contested, they can be handled by experienced creditors’ rights counsel at a modest price. In fact, a valid 503(b)(9) claim is often stipulated to by the debtor early in the case. Often the debtor will agree to allow the claim in full, if the creditor agrees to forego payment until a plan can be confirmed. This system benefits all parties because if all 503(b)(9) creditors demanded immediate payment in full, many debtors would not have sufficient cash flow to meet those demands, and would terminate operations shortly after entering bankruptcy. Since debtors rarely enter bankruptcy with significant cash reserves, such an outcome would likely result in 503(b)(9) creditors receiving far less than 100 percent of their claims.

If a creditor is willing to accept a reduced amount on its 503(b)(9) claim, then it should consider “claim traders” – companies that purchase bankruptcy claims from creditors. Claim traders are often very interested in 503(b)(9) claims and, depending on the circumstances of the particular debtor and its prospects for reorganizing, are often willing to pay a very large percentage of the claim.

by Scott Schuster, Esq.

Since clients ask about this all the time, I thought it would be a good time to give a quick refresher on 20-day claims and briefly discuss how creditors are faring in Bankruptcy cases when it comes to 20-day claims.

Under most state laws, a credit seller has the right to “reclaim” goods (get them back or get a lien for the value), from a defaulting buyer. Most state laws require a reclamation notice be given within 20 days of the delivery. Some require as few as 10 days. Recognizing the difficulty with these short timeframes, earlier changes to the Bankruptcy Code enabled creditors to give notice within 20 days after the bankruptcy filing. The right still only covered deliveries in the 10 days before the bankruptcy.

The 2005 amendments expanded the notice rights to provide that, when goods are sold to a debtor within 45 days of a bankruptcy filing, the seller has a right to reclaim those goods, so long as the seller gives notice within the first 20 days of the bankruptcy. Failure to provide this notice results in a waiver of the reclamation right. Sellers often miss this “notice deadline” and lose their right to reclaim their goods. Further, because the rights of a reclaiming seller are subject to the rights of a prior, properly perfected lienholder on the type of goods sold, this reclamation right is often illusory. Section 503(b)(9) was inserted into the Bankruptcy Code as a way of offering relief to sellers of goods whose reclamation right is rendered meaningless – either by failing to give the required notice or because of a prior lienholder’s rights.

Creditors have had mixed results in the first three years following the addition of section 503(b)(9) to the Code. For starters, obtaining an allowed administrative claim requires an upfront investment. The creditor must do one of two things: 1) get the debtor to agree to allow the 503(b)(9) claim; or, 2) if the debtor refuses to agree, file a motion with the court. This means that the creditor often has to hire an attorney and expend resources upfront.

More importantly, debtors will often challenge the 503(b)(9) claim in an attempt to get the creditor to negotiate the amount. Debtors will often claim that they received the goods outside of the required 20-day window. This forces the creditor to show evidence, through supporting documentation and testimony. Debtors sometimes take this position solely as a negotiation tactic. Debtors know that it will cost the creditor valuable time and money to litigate the case and that the creditor may be willing to settle for less in order to avoid litigation.

Be sure to check back for A Refresher on 503 (b)(9) “20-Day Claims” Part 2