vWe are on pace to see a record number of business bankruptcies in 2009, with a notable amount of activity in the retail, manufacturing and automotive sectors. In light of the impact of today's bankruptcies on vendors of goods, it is worthwhile to revisit one of the protections afforded to trade creditors under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA).
A significant change under BAPCPA was the adoption of language that confers vendors with administrative priority for "the value of any goods [sold to the debtor in the ordinary course of business and] received by the debtor within 20 days before the date of commencement of a case...." The significance of having an administrative expense priority for goods delivered within 20 days of bankruptcy is that a vendor will be paid after secured creditors but before pre-petition unsecured claimholders. In other words, a vendor with a valid "20-day claim" should be paid on the same terms as the debtor's professionals and parties who provide a debtor with goods during the bankruptcy proceeding.
While the statutory language may, on its face, appear to be straightforward, when first enacted bankruptcy practitioners had a number of questions, a couple of which the courts have since endeavored to answer. First, there was a question as to when a creditor's allowed 20-day claim would be paid. Over the past few years, the courts have generally held that the statute does not create an immediate right to payment and that the court has discretion to determine when such claims should be paid. In exercising that discretion, the courts will consider the prejudice to the debtor, hardship to the claimant and the potential detriment to other creditors. Second, there were questions as to how the courts would interpret the terms "goods" and "received" as they are used in the statute. On one hand, courts have resorted to the Uniform Commercial Code (UCC) to resolve disputes over the term "goods" (e.g., finding that electricity was not goods based on the UCC definition). On the other hand, at least one court has shied away from the UCC definitions in a dispute over the word "received" by interpreting the term in the context of title passing rather than physical possession.
Because a creditor's ability to obtain priority for goods received by a debtor within 20 days often requires immediate attention, if you believe you may be entitled to a 20-day claim on account of goods delivered immediately prior to a bankruptcy, you should promptly consult with an attorney.