There are two provisions of the Bankruptcy Code that incentivize creditors to continue to work with financially distressed debtors — Sections 503(b)(9) and 546(c). These two sections apply to creditors who remain unpaid at the time of bankruptcy, and also give them options to take certain actions to increase their likelihood to be paid (§503(b)(9)) or to recover their goods (§546(c)).
Administrative Claim Rights Under Section 503(b)(9) of the Bankruptcy Code
Section 503(b)(9) of the Bankruptcy Code provides in pertinent part:
(b) After notice and a hearing, there shall be allowed administrative expenses, other than claims allowed under section 502(f) of this title, including–
(9) 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.
11 U.S.C. §503(b)(9).
So, a vendor who provides goods (not services) to a debtor within 20 days from the date the debtor files bankruptcy can be granted an "administrative claim," which is the highest priority under the Bankruptcy Code, with the exception of costs of administration under Chapter 7 of the Bankruptcy Code, which includes the fees and expenses of Chapter 7 Trustee and his professionals.
The purpose behind granting an administrative claim to those vendors is to encourage vendors to continue to provide goods to financially troubled customers who eventually file bankruptcy and hopefully confirm a plan of reorganization.
Generally speaking, the vendor is required to file a motion with supporting documentation requesting an administrative claim under Section 503(b)(9). There are instances where the notice of bankruptcy sent to creditors will provide for a bar date. Thus, it's important to review the bankruptcy notice or subsequent orders entered by the Bankruptcy Court and sent to creditors so that the motions are timely filed. Otherwise, Section 503(b)(9) relief may be barred.
Reclamation Rights Under Section 546(c) of the Bankruptcy Code
Section 546(c) of the Bankruptcy Code provides in permanent part:
(c)(1) Except as provided in subsection (d) of this section and in section 507(c), and subject to the prior rights of a holder of a security interest in such goods or the proceeds thereof, the rights and powers of the trustee under sections 544(a), 545, 547, and 549 are subject to the right of a seller of goods that has sold goods to the debtor, in the ordinary course of such seller's business, to reclaim such goods if the debtor has received such goods while insolvent, within 45 days before the date of the commencement of a case under this title, but such seller may not reclaim such goods unless such seller demands in writing reclamation of such goods–
(A) not later than 45 days
after the date of receipt of such goods by the debtor;
or
(B) not later than 20 days after the date of commencement of
the case, if the 45-day period expires after the commencement of
the case.
(2) If a seller of goods fails to provide notice in the manner described in paragraph (1), the seller still may assert the rights contained in section 503(b)(9).
11 U.S.C. §546(c).
The reclamation rights under Section 546(c) of the Bankruptcy Code permit creditors to reclaim their goods if the creditors provided the goods within 45 days from the date debtor filed bankruptcy and gave notice to the debtor no later than 45 days after receipt of such goods or 20 days after bankruptcy was filed if the 45-day period expired.
Though reclamation is an option to a vendor and certainly encourages vendors to work with financially troubled debtors, the right of reclamation is subject to the rights of existing lien holders and thus, is not always a viable option. Therefore, before filing a motion for reclamation, it is important to review the bankruptcy schedules to see if there are pre-existing lien holders on goods.
Conclusion
Although Section 503(b)(9) rights (grant an administrative claim for the goods that were delivered to the debtor within 20 days of bankruptcy) may be contingent on the debtor confirming a plan of reorganization, and though the reclamation rights may be subject to the rights of pre-existing lien holders — creditors/vendors of goods are encouraged to explore and exercise their rights and remedies under the Bankruptcy Code.
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.