Bankrupt retailer and manufacturer attacks on allowance of administrative expenses under Section 503(b)(9) of the Bankruptcy Code are increasing in frequency, breadth and ingenuity. One recent case in which pervasive attacks have been launched on supplier 503(b)(9) requests is the Grede Foundries bankruptcy where the debtor has sought to disallow more than 99% of suppliers’ $5,100,000 in 503(b)(9) expense requests. The following table summarizes the 8 objections made to 503(b)(9) requests in the Grede Foundries bankruptcy.
In this table, we have color coded the objections according to the level of concern these objections could pose to suppliers, not only in the Grede Foundries bankruptcy, but in bankruptcies to come.
|Grede Foundries’ Description of Objections and Text of Grede Foundries’ Objections to Suppliers’ Filed Administrative Expenses under Bankruptcy Code Section 503(b)(9)||Objection Data|
|Times Made||Objection Amount|
|% of Requests||% Request Amounts|
|“Filed After the 20 Day Bar Date” – The claim was filed after September 25, 2009, the 20 Day Claims Bar Date …,”||5||$16,238|
|“Goods Delivered to a Third Party” – The claim is for goods that were not delivered to Debtor, but were instead delivered to a third party …||24||$711,465|
|“Goods Not Received Within 20 Day Period” – The claim is for the value of goods that were not received by the Debtor within the 20 day period before the Petition date … .||83||$3,451,652|
|“Insufficient Documentation” – The claim is not supported with adequate documentation for Debtor or the Court to determine the validity of the Claim …||43||$2,115,231|
|“Services and/or Altered Good” – The claim is for the value of services, rather than goods … .||69||$2,748,152|
|“Pre-Paid Goods” – The value of goods received by the Debtor during the 20 days prior to the Petition date does not qualify as an administrative expense under §503(b)(9) because the Debtor prepaid (or made contemporaneous payments) for the goods.||44||$3,786,684|
|“§502(d) Offset or Stay Due to Pending Preference Action” – Even if the claim is determined to be an allowable administrative expense under §503(b)(9) of the Code, … the claimant is not entitled to receive payment for the claim until the claimant returns to the Debtor the voidable preferential payments it has received.||93||$4,852,953|
|“Goods Received Not in the Ordinary Course of Business” – The goods received by Debtor were not received in the ordinary course of business … .||42||$3,772,082|
This post addresses the first 3 of the above objections.
The “Filed After the 20 Day Bar Date” Objection
A supplier must expect the debtor’s objection to any request filed after the bar date. The issues raised by a “filed late” objection are almost always purely issues of fact. Bankruptcy courts have no difficulty in rejecting claims that are shown to have been filed after the bar date. Suppliers affected by this objection can request the court to allow a late claim based on Section 503(a) of the Bankruptcy Code. That section provides that “[a]n entity may timely file a request for payment of an administrative expense, or may tardily file such request if permitted by the court for cause.” Courts have held that the “broad term ’cause’ gives the presiding court wide discretion to allow such belated filings in the interest of justice.” In re Heartland Steel, Inc., 2003 WL 23100035 (S.D. Ind. 2003).
The most often used basis for a supplier request to be allowed to file an administrative expense claim late is “excusable neglect”. However, bankruptcy courts generally are not sympathetic to excuses. The “excusable neglect” standard is discussed in more detail below.
Another example of “cause” to be allowed to file late is where the supplier did not receive the bar date notice coupled with a debtor’s failure to follow the court mandated notice procedures. As discussed below, a supplier’s claim that the notice of bar date was not received probably will not be successful unless the supplier can also show some irregularity in the notice process.
There are many other factual situations in which “cause” to allow a late filing might be asserted. Recently, in the Circuit City bankruptcy, one creditor asked to be allowed to file a late 503(b)(9) based on an email communication between the debtor’s counsel and the creditor. The creditor sent an email to debtor’s counsel asking about the setting of bar dates. Debtor’s counsel responded that “[t]he general bar date for filing proofs of claim has not yet been established. ” The statement was accurate but omitted to mention that administrative claim bar date had been established. That controversy involves the creditor’s administrative expense request of more than $550,000. As of the date of this post, the bankruptcy court has not addressed whether that communication is “cause” to allow a late filing.
One example of a sizable Section 503(b)(9) request being time barred occurred during the Dana Corp bankruptcy pending in the Bankruptcy Court for the Southern District of New York . In that case, after the 503(b)(9) administrative expense bar date, Goodyear filed its 503(b)(9) administrative expense request. In that request, Goodyear asserted that it had an administrative expense of $1,401,053.85 for goods delivered to the customer within three weeks of the customer’s’ bankruptcy filing. Dana Corp. objected to the Goodyear request on the grounds it was filed late. Goodyear then filed a motion requesting that it be allowed to file its administrative expense request late.
The Bankruptcy Court refused to allow Goodyear’s late filing. The court said:
Only if the claimant can demonstrate excusable neglect may the court apply general principles of equity and permit a late-filed proof of claim, whether an administrative expense claim under section 503 or a general unsecured claim under Bankruptcy Rule 3003. The burden of proving excusable neglect is on the movant who is seeking to enlarge his time. As the Supreme Court noted in Pioneer, the determination as to granting permission to file a late claim is, at bottom, an equitable one, which takes into account all of the relevant circumstances surrounding the party’s failure to file timely. These factors include, (i) the danger of prejudice to the debtor; (ii) the length of the delay and its potential impact on judicial proceedings; (iii)the reason for the delay, including whether it was within the reasonable control of the movant and taking into account the movant’s sophistication; and (iv) whether the movant acted in good faith. [citations omitted]
In its motion, Goodyear argued that it had not received the bar date notice. Dana Corp. responded with affidavits stating that the notice of bar date had been mailed to Goodyear. The Bankruptcy Court noted that “Courts uniformly presume that an addressee receives a properly mailed item when the sender presents proof that it properly addressed, stamped, and deposited the item in the mail.” The Bankruptcy Court went on to find that Goodyear had not overcome the presumption of receipt.
In the Grede Foundries case, the late filed requests are not significant. The debtor objected to only 5 out of 139 requests on the grounds that the request was filed after the bar date. Those 5 suppliers asserted administrative expenses of only $16,238. In other recent bankruptcy cases, however, debtor objections based on late filings are far more numerous and substantial.
The lesson for suppliers is simple. No matter how big or how small the supplier, it should devote the resources necessary to make sure that bar dates are known and that all necessary action is taken before deadlines expire.
“Goods Not Received Within 20 Day Period”
The bankruptcy Code does not include a definition of the “received” or “receipt”. There are only a handful of cases that have interpreted “received” under Section 503(b)(9). These cases have applied the Uniform Commercial Code Section 2-103(c) definition, which states: “‘Receipt’ of goods means taking physical possession of them.”
For most suppliers, a strict application of the “physical possession” standard for determining “receipt” will prove beneficial. Consider a simple example. A supplier makes two shipments to its customer – one on the 21st day before and the other on the last day before the customer’s bankruptcy. The first shipment is delivered to the customer on the 19th day prior to the bankruptcy and the second shipment is delivered to the customer the day after the bankruptcy filing.
In the above example, if physical possession is the standard for “receipt”, the first shipment will qualify as an administrative expense under Section 503(b)(9) for goods received by the customer in the 20 day pre-petition period. The second shipment will qualify as an administrative expense for goods supplied post-petition pursuant to Section 503(b)(1)(A) . The Section 503(b)(1)(A) claim might even be paid by the debtor in the ordinary course (i.e. under pre-petition terms).
If shipment were used to define “receipt” – e.g. shipment was by a truck owned and operated by the customer – the result is much worse for the supplier. Now, using the same example, the first shipment was “received” by the customer on the 21st day before the petition filing and therefore creates only a general, unsecured claim. The second shipment was received one day before the filing and will qualify as an administrative expense under Section 503(b)(9), which the customer likely will wait to pay until an order directing payment is entered.
Undoubtedly, the reason why there are so few cases on “receipt” is that using the latest possible day to define “receipt” is good for most suppliers. Only in limited circumstances will a supplier not be happy to use an actual possession standard for “receipt”. One of the limited circumstances where an actual possession standard is not good for a supplier is the situation where the supplier delivers goods to a third party – e.g. the end customer or another supplier – and not the debtor. This situation is illustrated by the Grede Foundries’ “Goods Delivered to a Third Party” objection.
In the above summary table, we highlighted the “Goods Not Received Within 20 Day Period” objection in yellow. It is difficult to believe that 60 percent of the 503(b)(9) requests in Grede Foundries and almost 68% of the dollar amount of the requests were based on goods received outside of the 20 day period. The high incidence of this objection raises a concern about the rational used by the Debtor in making this objection.
“Goods Delivered to a Third Party” Objections
For suppliers who delivered goods to a third party and not to the debtor, the current authority is adverse. There is no reported decision holding that delivery of goods directly to a debtor’s customer or to another supplier of the debtor constitutes receipt by the debtor. There are two bankruptcy court decisions holding that direct delivery by a supplier to the debtor’s customer does not qualify as receipt by the debtor. Only one of these decisions is under 503(b)(9). The other decision is under section 546(c) of the Bankruptcy Code, which deals with the issue of “receipt of goods” for purposes of the exercise of a supplier’s reclamation rights.
It is still possible that, under the right circumstances, delivery to a third party would constitute receipt by the debtor. There is some favorable language in decisions interpreting receipt under Section 546(c). These decisions conclude that “receipt” by the debtor occurs at the point where the seller no longer has the right to stop delivery of the goods to the buyer. This position would be helpful in arguing that delivery to another supplier of the debtor constituted receipt by the debtor for purposes of 503(b)(9). Additionally, agency principles may provide a basis for arguing that the person to whom the goods were delivered was acting as the agent of the debtor in receiving the goods.
Finally, suppliers should always consider circumstances where delivery to a third party is a good thing. If the delivery is to another supplier who performs some operations and then delivers to goods to the debtor, the news should be good. By moving the date of receipt by the debtor to a later date, the goods may move into the 20 day pre-petition period or even to the post-petition period.
Beware the Administrative Expense Gap
Suppliers should be concerned about debtor efforts to create a “gap” in the administrative expense coverage provided by Section 503(b)(9) for 20 day pre-petition goods and Section 503(b)(1)(A) for post petition goods. Congress clearly intended that Section 503(b)(1)(A) and Section 503(b)(9) would work together seamlessly to provide administrative expense coverage to suppliers. However, debtors may try to argue that the receipt of goods post-petition occurred pursuant to a pre-petition payment obligation and therefore does not qualify for administrative expense treatment under either section. The problem for suppliers is the often sequential resolution of 503(b)(9) and 503(b)(1)(A) administrative expense requests. Accordingly, in resolving a 503(b)(9) request, the supplier needs to know what impact that resolution will have on the availability of 503(b)(1)(A).