Volume 35:1 (Summer 2011)

The New Landmines of Bankruptcy Law: Analyzing Recent Interpretations of § 503(b)(9)


Daniel J. Ruth


Introduction: Given the current state of the economy, bankruptcy law has been thrust to the forefront of the public conscious. From the onset, bankruptcy law, and specifically Chapter 11 of Title 11 of the United States Code, had the primary goal of giving financially distressed businesses an opportunity to reorganize and avoid liquidation. One court has stated that “[t]he fundamental purpose of reorganization is to prevent a debtor from going into liquidation, with an attendant loss of jobs and possible misuse of economic resources.” On April 20, 2005, after more than a decade of lobbying by the credit industry, President Bush signed the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), which is the most significant legislative amendment to the United States Bankruptcy Code since its inception in 1978. Prior to its enactment, creditors who had sold inventory to a Chapter 11 debtor were not given any priority claim to their goods. If the debtor had been unable to successfully reorganize, the secured creditor would often receive payments of pennies on the dollar. Section 503(b)(9) was added to give these creditors a priority claim but had detrimental effects on a debtor’s ability to successfully reorganize. This new administrative priority claim gave creditors “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.” Generally, this mandate can increase the cost of exiting bankruptcy, because the debtor cannot carry out a reorganization plan without paying such claims in full. For debtors that receive goods from numerous vendors, the number and scope of § 503(b)(9) claims can significantly influence their reorganization strategy. For many debtors, it is important to quickly determine the extent of these claims. Unfortunately, case law is still developing under this provision, and the Bankruptcy Code offers debtors no guidelines as to: how and when such claims must be asserted; whether such claims can be disallowed; whether the claims can be set off; or how to distinguish between “goods” and “services.” These issues can further constrict the ability of retailers to keep their operations running or to realize value by closing a location or liquidating entirely. While § 503(b)(9)’s requirements appear rather simple, debtors and trade creditors continue to litigate many of its seemingly basic terms. As such, the stakes for sellers of goods (creditors) and the subsequent buyers (debtors) could not be higher. This Note considers how courts interpret § 503(b)(9), and how this new section is shaping the bankruptcy experience and outcome for debtors in Chapter 11 reorganization. Although the gradually improving United States economy affords some relief to debtors, the recovery remains fragile and is only beginning to show signs of improvement.