United States: Recent Case Law Developments Impact Claims Of Unpaid Suppliers For Goods Delivered Immediately Prior To Customer Bankruptcy

Section 503(b)(9) of the Bankruptcy Code (11 U.S.C. §503(b)(9)) provides a special administrative priority claim for someone that supplies goods to a debtor in the 20 day period before the bankruptcy filing, but is unpaid as of the date of the filing. This is a meaningful priority. Administrative priority claims, which are on par with the claims of other post-petition service providers, like the debtor's professionals, must be paid in full at the time of the confirmation of a plan, in order for a plan to be confirmed. Reliance on the priority provided by Section 503(b)(9) of the Bankruptcy Code can serve as an important alternative to suppliers who might otherwise be forced to seek to exercise state law rights of reclamation under the Uniform Commercial Code after a customer receives their goods—claims which can clash, often unsuccessfully for the supplier, with the rights of secured lenders.

Claims arising under Section 503(b)(9), are, at their essence, relatively uncomplicated on first blush. An unpaid claim for "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" is entitled to the priority. Notwithstanding what looks to be pretty straightforward language, however, a recent set of decisions from the Third Circuit Court of Appeals, and from the Bankruptcy Court for the District of Delaware provide some detail on what it means for goods to be "received by the debtor" for purposes of Section 503(b)(9).

In In re World Imports, Ltd., 16-1357 (3rd. Circuit, July 10, 2017), two Chinese suppliers sold goods to the debtor which were loaded onto ships in China, "FOB at the port of origin". As a result, the risk of loss with respect to the goods passed to the debtor at the time the goods were transferred to the shipper for carriage to the United States. Although the debtor accepted the goods in the United States within 20 days of the date it filed its chapter 11 petition, the date the goods were transferred to the shipper in China was more than 20 days prior to the filing date. The debtor objected to the suppliers' subsequent 503(b)(9) claim, arguing that the goods were "received" when the risk of loss transferred—outside the 20 day period. The Bankruptcy Court agreed with the debtor and denied 503(b)(9) priority to the suppliers' claims. On appeal, the District Court affirmed. However, on appeal to the Third Circuit Court of Appeals the lower courts were reversed, as the Court of Appeals determined that the term "received by the debtor" as used in Section 503(b)(9) meant the time "the debtor or its agent takes physical possession of [the goods]." Because the goods were actually in the possession of the debtor within the 20 day period preceding the filing date, the suppliers were entitled to 503(b)(9) priority.

Shortly after the decision in World Imports, the Bankruptcy Court for the District of Delaware was faced with a slightly different problem in a Section 503(b)(9) context. In In re SRC Liquidation, LLC, No. 15-10541 (Bankr. D. Del. July 13, 2017), the debtor had arranged for one of its suppliers to "drop ship" certain goods ordered by the debtor so that they would be shipped by the supplier directly to the debtor's customers, with the debtor never taking actual physical possession of the goods. The supplier claimed that it was entitled to an administrative expense claim under Section 503(b)(9) for the value of the goods shipped directly to the debtor's customers, but in ruling on an objection to that claim the Bankruptcy Court disagreed. Relying in significant measure on the Third Circuit's determination in World Imports, the Court found that under the drop shipment arrangement, the goods were never "received by the debtor" because neither the debtor nor its agent (and, as the Court pointed out, a common carrier/shipper does not qualify as an "agent" of a debtor for these purposes) ever had physical possession of them. As a result, the supplier was not entitled to a priority claim under Section 503(b)(9).

In reaching their respective decisions, both courts above made specific reference to the provisions of Section 2-705 of the UCC to support the conclusion that goods are "received" by the buyer's physical possession of the goods or the buyer's "constructive receipt" of the goods, in each case as outlined in 2-705. Thus, the phrase "received by the debtor" in Section 503(b)(9) turns out to mean pretty much exactly what common sense would suggest it means—the goods must have been physically received by the debtor or its agent (such as a bailee who holds the goods for the debtor) within the 20 day period.

Finally, one other recent case suggests vitality for a supplier remedy under the UCC that has been somewhat overshadowed by 503(b)(9) and post-delivery reclamation demands—the right to seek to stop delivery of goods in transit.

In O2Cool, LLC v. TSA Stores, Inc., No. 16-10527 (Bankr. D. Del. March 1, 2017) a supplier found itself in a fight with a debtor's secured lenders over the value of goods that were shipped to the debtor pre-petition. Here, there was no dispute about the debtor's receipt of the goods. However, in this case, the supplier alleged that prior to the time the goods had been received by the debtor it had served a timely notice to stop delivery under Section 2-705 of the UCC upon the carrier of the goods. According to the supplier's complaint, that notice had been actually received by the carrier before the debtor took possession of the goods, but the debtors had instructed the carrier to disregard the notice. The debtor subsequently sold the goods, and turned over the proceeds of the sale to the secured lenders. The supplier sought a judicial determination that its rights to the value of the goods and their proceeds were senior to those of the secured lenders.

The lenders sought to dismiss the complaint, arguing that there was no timely reclamation demand made by the supplier, and that even if there had been, the supplier's claim would be junior to the lenders' liens. The supplier admittedly never made a reclamation demand of the debtor, and never filed a timely claim under 503(b)(9), notwithstanding the debtor's receipt of the goods. Instead, the supplier asserted that the effect of the stoppage notice was that the debtor never acquired any rights in the goods whatsoever—hence there was no need for any such claims. Rather, it argued, because the debtor never acquired rights in the goods, the debtor never had any right to sell the goods, and the liens of the secured lenders never attached to them at all. As a result, the supplier contended it was entitled to the full value of the goods.

This claim survived the lenders' motion to dismiss as the Bankruptcy Court found that if the allegations of the complaint were in fact true, no reclamation claim would have been required of the supplier, and the disputed goods would never have become property of the bankruptcy estate. Thus, the supplier had a colorable argument that any subsequent sale of the goods after the notice to stop delivery would have required full payment in cash to the supplier—which never occurred, as the proceeds were instead paid to the lenders.

While clearly at a preliminary stage of the proceeding, this case suggests an alternative for suppliers other than simply taking action after delivery of the goods to the debtor—the giving of notice to a carrier to stop delivery before delivery to the debtor, when permitted to do so under Section 2-705 of the UCC. Clearly, there are a great number of details associated with taking this sort of action in any particular case (for example, the supplier in O2Cool had utilized a freight forwarder, and initially gave the stop shipment order to the wrong entity), but if done timely, and correctly, and in compliance with 2-705 of the UCC, another arrow may reside in the quiver of the supplier.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Stoll Keenon Ogden PLLC
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Stoll Keenon Ogden PLLC
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions