Unsecured creditors frequently find themselves in the lurch when a company files for bankruptcy. One of the few mechanisms for recovering the value of goods supplied to a debtor prior to a bankruptcy case is an administrative expense claim under Section 503(b)(9) of the Bankruptcy Code. In an administratively solvent bankruptcy case, an administrative expense claim will allow a creditor to obtain payment in full of the value of goods received by the debtor within the twenty-day period immediately preceding the bankruptcy petition date. The United States Court of Appeals for the Third Circuit recently provided clarification of a critical element of a Section 503(b)(9) administrative expense claim: receipt. While the concept appears simple at first blush, the terms of modern commercial contracts can be grounds for confusion. The Third Circuit eliminated some of this uncertainty in holding that a debtor receives goods under Section 503(b)(9) when it takes possession or custody of the goods.
In World Imports, two suppliers shipped furniture to the debtor in the ordinary course. The suppliers shipped the goods via common carrier from China to the United States FOB at the port of origin. The debtor took physical possession of the goods in the United States within twenty days of filing for bankruptcy. During the course of the bankruptcy case, the suppliers sought allowance and payment of the cost of the goods supplied to the debtor prior to the petition date as an administrative expense under Section 503(b)(9) of the Bankruptcy Code. The bankruptcy court denied the motions based on its finding that the goods were received by the debtor at the time that the goods were delivered to the common carrier. The common carrier received the goods more than twenty days prior to the petition date, thereby undermining the suppliers’ 503(b)(9) claims. The suppliers appealed the bankruptcy court’s order, and the district court affirmed. The suppliers then appealed to the Third Circuit.
Section 503(b)(9) of the Bankruptcy Code entitles a creditor to payment of the cost of goods sold to a debtor in the ordinary course of business that were received by the debtor no more than twenty days prior to the commencement of the bankruptcy case. The concept of receipt was the fundamental issue on appeal in World Imports. Since the Bankruptcy Code does not define the word “received,” the Third Circuit construed Section 503(b)(9) in accordance with its plain language meaning. The Third Circuit consulted secondary sources, like Black’s Dictionary and the Oxford English Dictionary, which generally defined “received” as taking delivery or coming into possession. While the secondary sources did not provide identical explanations of the term, the Third Circuit concluded that “they all require physical possession.” Accordingly, a Section 503(b)(9) administrative expense requires the debtor to “take goods into its ‘possession,’ ‘custody,’ or ‘hands’ in order to receive them.”
The debtor all but conceded the supplier’s statutory analysis, and instead argued that the goods were constructively received upon FOB delivery to its common carrier. The Third Circuit rejected this argument outright. First, FOB delivery to a common carrier does not constitute constructive receipt. While a buyer’s agent could qualify as having received goods upon taking physical possession, common carriers do not constitute agents. Thus, the debtor did not receive the furniture until it took physical possession of the goods in the United States. Second, actual receipt is different from the transfer of title and from the shifting of risk of loss under a commercial contract. Citing Article 2 of the Uniform Commercial Code, the Third Circuit explained that a seller possesses the right to stop delivery while goods are in the possession of a common carrier even though title has passed under the contractual terms. Thus, for purposes of a Section 503(b)(9) administrative expense claim, “receipt does not occur until after the seller’s ability to stop delivery ends—namely, upon the buyer’s physical possession.”
The Third Circuit’s decision is noteworthy in light of the value of an administrative expense claim in a bankruptcy case. Section 503(b)(9) of the Bankruptcy Code is intended to reward entities that supply goods to a struggling business, and unsecured creditors frequently seek relief under the statute as a means of mitigating their loss. Otherwise, unsecured creditors would be relegated to waiting at the back of the priority line for the loose change that the plan of reorganization left on the table. A Section 503(b)(9) administrative expense claim allows unsecured creditors to jump to the front of the line in certain circumstances and recover value for the goods supplied the debtor prior to the bankruptcy filing.
The above-referenced case is In re World Imports, Ltd, et al., No. 16-1357 (3d Cir. July 10, 2017).