Section 503(b)(9) of the Bankruptcy Code, which was added to the Code pursuant to the Bankruptcy Abuse Prevention and Consumer Protection Ace of 2005 ("BAPCPA"), creates an administrative claim in favor of pre-petition suppliers of goods under certain circumstances. From the time of its enactment, courts and practitioners have sought clarity regarding the correct interpretation of key elements of this section of the Code. This article examines the concept of the date of "receipt" of goods for purposes of §503(b)(9).
I. A brief history of reclamation and §503(b)(9)
Prior to the enactment of BAPCPA, pre-petition suppliers of goods primarily relied on 11 U.S.C. §546(c) reclamation actions to recover goods supplied to debtors on the eve of bankruptcy. Section 546(c) did not specifically create a right of reclamation, but made reference to any state or common law rights that may exist in favor of sellers. Pre-BAPCPA, Courts often relied on what was then §546(c)(2) to grant an administrative claim to suppliers as an alternative to reclamation of the goods in question.
Section 503(b)(9) was added to the Bankruptcy Code pursuant to BAPCPA and creates an administrative priority claim in favor of suppliers of goods received by the debtor during the 20 day period prior to the petition date. Specifically, §503(b)(9) permits an administrative expense claim equal to "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."
Likewise, §546(c) was amended pursuant to BAPCPA to remove reference in that section to administrative expense claims as an alternative to reclamation as well as to replace the former reference to "any statutory or common law right of a seller of goods" with a specific acknowledgement of a seller's right of reclamation.
II. Distinctions between "receipt" and "ownership"
Of interest to suppliers and debtors alike is the concept of "receipt" of goods for purposes of §503(b)(9). While the §503(b)(9) fragment "received by the debtor" may seem fairly self-explanatory, the concept requires discussion when goods are delivered to a carrier pursuant to a "F.O.B. Shipping Point" agreement.
"F.O.B. Shipping Point" is commonly understood to mean that ownership of goods passes to the buyer when the designated public carrier accepts the goods from the seller. So, for purposes of determining ownership, a debtor can be said to have received title of goods purchased pursuant to an "F.O.B. Shipping Point" contract when the goods were delivered to the carrier.
The question, then, is what happens when delivery to the carrier happens 23 days before the petition date, but delivery at the debtor's place of business by the carrier doesn't happen until 19 days prior to the petition date? Were the goods "received" for purposes of §503(b)(9) during the 20 days prior to the commencement of the case?
Recent interpretations of other §503(b)(9) concepts may reveal the correct answer to the questions posed above.
III. Interpreting the language
Section 503(b)(9) has generated significant buzz among the legal community as parties seek to interpret the concepts such as "value" and "goods" referenced in that section. For instance, litigation related to the definition of "goods" has led to recent holdings like In re Circuit City Stores, Inc., 416 B.R. 531 (Bankr. E.D. Va. 2009) in which the Bankruptcy Court held that the definition of "goods" under §503(b)(9) should be interpreted using the Uniform Commercial Code (UCC) definition of "goods."
Namely, the Circuit City opinion explains that §503(b)(9) was apparently adopted as an "attempt by Congress to enhance certain types of reclamation claims" and that the right of reclamation "arises from the UCC." Id. at 536. Drawing from those findings as well as the belief that Congress intended a consistent approach to interpretation, the court held that the definition of "goods" for purposes of §503(b)(9) should be the definition found in the UCC. Id. at 537. See also In re Goody's Family Clothing, Inc., et al., 401 B.R. 131, 134-36 (Bankr. D. Del. 2009); In re Plastech Engineered Products, Inc., 2008 WL 5233014 (Bankr. E.D. Mich.).
The Circuit City holding is consistent with pre-BAPCPA case law interpreting former §546(c) using the UCC definition of "goods." In re Circuit City Stores, Inc., 416 B.R. at 536, (citing legislative history of §503(b)(9)); Also citing In re GIC Government Sec., 64 B.R. 161, 162 (Bankr. M.D. Fla. 1986), Estate of Cowart v. Nicklos Drilling Co., 505 U.S. 469, 479 (1992).
Turning to the question of receipt of goods, it should be noted that the Bankruptcy Code does not define "received." As with the concept of "goods", pre-BAPCPA cases interpreting the concept of "receipt" in reclamation cases look to the UCC for clarity. Specifically, according to the court in In re Maloney Enterprises, Inc., under the Uniform Commercial Code, receipt of goods "is not effectuated until such purchaser actually takes physical possession of such goods." Aventura Sportswear, LTC v. Maloney Enterprises, Inc., 37 B.R. 290, 293 (Bankr. E.D. Ky. 1983).
Based on pre-BAPCPA case law as well as the post-BAPCPA trend relying on the UCC for interpretation of the language of §503(b)(9), it is possible that Courts will interpret "receipt" of goods for purposes of §503(b)(9) using the UCC definition. In other words, even when title to goods – as is the case under an "F.O.B. Shipping Point" contract, transfers prior to delivery at debtor's location, receipt may be interpreted as the date of physical delivery to debtor. This distinction can mean the difference for suppliers between an unsecured claim and an administrative expense claim in a bankruptcy case.
Attorneys representing sellers of goods in bankruptcy cases should take a careful look at the date used when calculating the 20-day period for purposes of §503(b)(9). Given the developing case law using UCC definitions to interpret §503(b)(9) and drawing from pre-BAPCPA reclamation concepts, it is possible that the UCC will be used to determine the date of receipt of goods sent "F.O.B. Shipping Point" for purposes of §503(b)(9) and the date of receipt will be interpreted as the date of physical receipt rather than the date of title or ownership.