In a recent order entered in In re SemCrude, L.P., Case No. 08-11525, the Delaware bankruptcy court (1) clarified the application of Bankruptcy Code section 503(b)(9) to creditors’ priority claims arising from the delivery of goods in the 20 days before a bankruptcy filing and (2) amended a previously entered procedures order to allow for the resolution of disputed “Twenty Day Claims” on their merits. The court’s order, entered on October 7, 2009 (the Order), applied to 234 claims against SemCrude with a face amount of $151 million, each of which was included in the pool of “Other Twenty Day Claims” in the debtors’ Fourth Amended Joint Plan. This order provides clarification of a “creditor friendly” provision added to the Bankruptcy Code in 2005 – section 503(b)(9) – which now provides administrative expense priority for pre-bankruptcy claims that were, previously, deemed general unsecured claims.
Section 503(b)(9) in General
Section 503(b)(9) of the Bankruptcy Code provides creditors with an allowed administrative expense priority claim for “the value of any goods received by the debtor within 20 days before the date of commencement of a [bankruptcy] case . . . in which goods have been sold to the debtor in the ordinary course of such debtor’s business.” Administrative expense claims must be paid in full prior to other lower priority claims, including general unsecured claims. In most chapter 11 cases, administrative expense claims are paid 100 cents on the dollar.
The 503(b)(9) Procedures
Although not required by the Bankruptcy Code, in SemCrude, the debtors sought and, on September 15, 2008, the bankruptcy court entered an order (the Procedures Order) providing detailed procedures (the Procedures) for the administration of 503(b)(9) (Twenty Day Claims). Such procedures provided for, among other things, (a) the SemCrude debtors to include in Schedule E of their Schedules of Assets and Liabilities a listing of estimated amounts, based on their books and records, owed to vendors who delivered goods within the 20 days prior to the date of the bankruptcy filing (the Petition Date); (b) the debtors to seek and the court to set a deadline for the filing of proofs of claim asserting section 503(b)(9) rights (the Bar Date); (c) any party in interest to have 30 days to file an objection to the debtors’ Schedule E as it related to Twenty Day Claims; (d) a deadline of 45 days after the Bar Date for the debtors to file a notice with the court disputing the amounts of asserted Twenty Day Claims (the Notice); and (e) interested parties to have 20 calendar days to object to the Notice. Certain settlement procedures were also included in the Procedures Order. “Value” Presumptively Means Purchase Price
In the Order, the court provided guidance on the determination of value within the context of section 503(b)(9). The court adopted the holdings of several other courts related to value analysis in other contexts and concluded that “invoice or contract price” is presumptively the best determination of value when considering Twenty Day Claims under section 503(b)(9). The court further found that purchase price could be rebutted by evidence indicating that, under the facts and circumstances of a particular transaction, the purchase price or invoice price is not the most relevant indicator of value.
UCC Definitions Adopted
The court also adopted the definitions for “received,” “sold” and “ordinary course of business” set forth in Article 2 of the Uniform Commercial Code. The court noted that “there is nothing in the [Bankruptcy] Code or in the legislative history accompanying the recent enactment of § 503(b)(9) suggesting that Congress intended that bankruptcy courts should look beyond the Uniform Commercial Code (“UCC”) to construe or define these terms as they apply to sales of goods.” Moreover, the court reasoned that, based upon the adoption of the UCC in all but one of the 50 states, applying UCC definitions would “thus be consistent with commercial expectations in the marketplace.”
The SemCrude order provides helpful insight for debtors and creditors in their analysis of the treatment of section 503(b)(9) claims and the payment for goods received by debtors in the 20 days prior to a bankruptcy filing. The Procedures Order offers guidance in the important Delaware venue for interpretation of key terms in section 503(b)(9) and also approves procedures for the efficient resolution of 503(b)(9) claims that will likely continue to serve as a model in Delaware and other jurisdictions.