Bankruptcy Court Decides When Trade Vendor Priority Claims Get Paid

In Bookbinders', creditor Blue Crab Plus Sfd. sold and delivered $33,021.74 in goods to Bookbinders' during the 20-day period prior to the bankruptcy petition. Pursuant to '503(b)(9), the court had allowed an administrative claim in favor of Blue Crab. Blue Crab then sought immediate payment of its allowed claim. Blue Crab argued that it was entitled to immediate payment for the following reasons:

• New '503(b)(9) required that its 20-day claim be treated similar to the debtor's post-petition operating expenses;
• Bookbinders' had been timely paying these post-petition obligations in the ordinary course of its business; and
• The debtor's operating reports evidenced cash reserves that were more than sufficient to cover Blue Crab's claim. The court disagreed and held that as with pre-BAPCPA administrative claims, the code does not require immediate payment and that any determination regarding payment timing for '503(b)(9) claims lies within the discretion of the bankruptcy court.

To begin its analysis, the court set forth the additional rights afforded to creditors under the newly minted '503(b)(9) and held that this section, 'effectively converted what previously was a pre-petition 'claim' into an allowable administrative expense.'

The court held that the chief benefit provided to creditors, such as Blue Crab, by '503(b)(9) is that a debtor cannot obtain confirmation of a plan of reorganization absent payment in full of allowed '20 day' claims. Prior to BAPCPA, such claims would be treated as mere 'unsecured' claims, which have less priority than administrative claims and need not be paid in full under the Bankruptcy Code.

The court noted, however, that Bankruptcy Code '503, even after BAPCPA, contains no guidance regarding when administrative claims are required to be paid. Given that the text of the code contains no timing requirements, the court reaffirmed the well-settled principle that the timing of payment on administrative claims is a determination that rests within the discretion of the bankruptcy court.

In exercising this discretion, a court will consider the following factors:

• Other provisions of the Bankruptcy Code bearing upon the type of claim at issue;
• The code's goal of promoting an orderly and equal distribution among a debtor's creditors and discouraging a race to the debtor's assets; and
• Potential prejudice to the debtor and other creditors resulting from immediate payment of a claim, as compared with the hardship to be suffered by the administrative claimant in having to wait for payment.

Thus, while the court recognized that '503(b)(9) gives rise to a new category of administrative claims, it held that this section does not require immediate payment. Immediate payment of an administrative claim is certainly permissible if the court finds the above factors militate in favor of the claimant. However, the court in Bookbinders' found that insufficient evidence had been provided.

Next, the court turned to Blue Crab's argument that since the debtor was satisfying its post-petition ordinary course obligations as they came due, Blue Crab's '503(b)(9) claim should also be immediately paid. The court was unconvinced by the argument that immediate payment of administrative claims is required solely because the debtor is transacting business (and making payments to vendors) in the ordinary course post-petition. The court noted that there was an absence of case law in support of such an argument, and that the position advocated by Blue Crab contravened the well-settled rule that the timing of such payments is within the court's discretion.

The court noted that there was an important distinction between a '363(c) payment and satisfying allowed '503(b) administrative claims. Particularly, while a debtor is permitted to enter into ordinary course transactions under '363(c) without a court order, a '503(b) claim does require such approval. It is true that, as noted above, if a debtor fails to meet its obligations under a '363(c) transaction, the aggrieved creditor could well be entitled to an administrative claim under '503(b)(1). In that situation, however, the timing of the payment of the '503(b)(1) claim would present the same issues as Blue Crab's '503(b)(9) claim.

The court concluded that the code contains no justification for treating a '503(b)(9) claim any differently than a '503(b)(1) claim. In both instances, a bankruptcy court, in its discretion, must weigh the competing interests of the claimant and the debtor's estate, and make a determination regarding timing of payment.

Therefore, in seeking administrative priority and immediate payment of amounts owed to a claimant, whether for post-petition transactions under '503(b)(1), or for 20-day claims under new '503(b)(9), one should present the court with evidence that the factors cited by the Bookbinders' court militate in favor of compelling immediate payment to the creditor-client. As this decision illustrates, BAPCPA has significantly altered, and in some cases improved, creditors' rights in bankruptcy proceedings. However, the bankruptcy courts will not depart from their traditional practices and historical legal principles 'absent a clear indication that Congress intended such a departure.'

This article originally appeared in The Legal Intelligencer, a sister publication of this newsletter.

The U.S. Bankruptcy Court for the Eastern District of Pennsylvania recently issued one of the first decisions in the Third U.S. Circuit Court of Appeals to interpret '503(b)(9), an important new Bankruptcy Code provision passed under the Bankruptcy Abuse Prevention and Consumer Protection Act ('BAPCPA'): In re Bookbinders' Restaurant Inc. '503(b)(9) is certain to impact the relationship between a debtor seeking to reorganize and the trade vendors that deal with it.

Under '503(b)(9), a vendor that sells goods to a debtor in the ordinary course of the debtor's business, which goods are delivered within 20 days before the petition date, is entitled to an allowed administrative expense priority claim. Prior to BAPCPA, goods delivered within this pre-petition time frame resulted in a non-priority unsecured claim for the seller. Thus, '503(b)(9) enhances the creditor's position and imposes additional costs upon the debtor.

Although the Bankruptcy Code provides that administrative claims (including those under '503(b)(9)) must be fully satisfied as a prerequisite to confirmation of any plan, the code does not specify when such claims must be paid. This was the question at issue in Bookbinders'.

In Bookbinders', creditor Blue Crab Plus Sfd. sold and delivered $33,021.74 in goods to Bookbinders' during the 20-day period prior to the bankruptcy petition. Pursuant to '503(b)(9), the court had allowed an administrative claim in favor of Blue Crab. Blue Crab then sought immediate payment of its allowed claim. Blue Crab argued that it was entitled to immediate payment for the following reasons:

• New '503(b)(9) required that its 20-day claim be treated similar to the debtor's post-petition operating expenses;
• Bookbinders' had been timely paying these post-petition obligations in the ordinary course of its business; and
• The debtor's operating reports evidenced cash reserves that were more than sufficient to cover Blue Crab's claim. The court disagreed and held that as with pre-BAPCPA administrative claims, the code does not require immediate payment and that any determination regarding payment timing for '503(b)(9) claims lies within the discretion of the bankruptcy court.

To begin its analysis, the court set forth the additional rights afforded to creditors under the newly minted '503(b)(9) and held that this section, 'effectively converted what previously was a pre-petition 'claim' into an allowable administrative expense.'

The court held that the chief benefit provided to creditors, such as Blue Crab, by '503(b)(9) is that a debtor cannot obtain confirmation of a plan of reorganization absent payment in full of allowed '20 day' claims. Prior to BAPCPA, such claims would be treated as mere 'unsecured' claims, which have less priority than administrative claims and need not be paid in full under the Bankruptcy Code.

The court noted, however, that Bankruptcy Code '503, even after BAPCPA, contains no guidance regarding when administrative claims are required to be paid. Given that the text of the code contains no timing requirements, the court reaffirmed the well-settled principle that the timing of payment on administrative claims is a determination that rests within the discretion of the bankruptcy court.

In exercising this discretion, a court will consider the following factors:

• Other provisions of the Bankruptcy Code bearing upon the type of claim at issue;
• The code's goal of promoting an orderly and equal distribution among a debtor's creditors and discouraging a race to the debtor's assets; and
• Potential prejudice to the debtor and other creditors resulting from immediate payment of a claim, as compared with the hardship to be suffered by the administrative claimant in having to wait for payment.

Thus, while the court recognized that '503(b)(9) gives rise to a new category of administrative claims, it held that this section does not require immediate payment. Immediate payment of an administrative claim is certainly permissible if the court finds the above factors militate in favor of the claimant. However, the court in Bookbinders' found that insufficient evidence had been provided.

Next, the court turned to Blue Crab's argument that since the debtor was satisfying its post-petition ordinary course obligations as they came due, Blue Crab's '503(b)(9) claim should also be immediately paid. The court was unconvinced by the argument that immediate payment of administrative claims is required solely because the debtor is transacting business (and making payments to vendors) in the ordinary course post-petition. The court noted that there was an absence of case law in support of such an argument, and that the position advocated by Blue Crab contravened the well-settled rule that the timing of such payments is within the court's discretion.

The court noted that there was an important distinction between a '363(c) payment and satisfying allowed '503(b) administrative claims. Particularly, while a debtor is permitted to enter into ordinary course transactions under '363(c) without a court order, a '503(b) claim does require such approval. It is true that, as noted above, if a debtor fails to meet its obligations under a '363(c) transaction, the aggrieved creditor could well be entitled to an administrative claim under '503(b)(1). In that situation, however, the timing of the payment of the '503(b)(1) claim would present the same issues as Blue Crab's '503(b)(9) claim.

The court concluded that the code contains no justification for treating a '503(b)(9) claim any differently than a '503(b)(1) claim. In both instances, a bankruptcy court, in its discretion, must weigh the competing interests of the claimant and the debtor's estate, and make a determination regarding timing of payment.

Therefore, in seeking administrative priority and immediate payment of amounts owed to a claimant, whether for post-petition transactions under '503(b)(1), or for 20-day claims under new '503(b)(9), one should present the court with evidence that the factors cited by the Bookbinders' court militate in favor of compelling immediate payment to the creditor-client. As this decision illustrates, BAPCPA has significantly altered, and in some cases improved, creditors' rights in bankruptcy proceedings. However, the bankruptcy courts will not depart from their traditional practices and historical legal principles 'absent a clear indication that Congress intended such a departure.'

This article originally appeared in The Legal Intelligencer, a sister publication of this newsletter.