lender, retains little—if any—proceeds
to pay Section 503(b)( 9) claims?
Unfortunately, the legislative history
on Section 503(b)( 9) is virtually
nonexistent, leaving the bankruptcy
bar to speculate on the congressional
intent behind its enactment. Some
believe that Section 503(b)( 9) was
designed to replace critical vendor
orders, i.e., “to rationalize and equalize
what had been this ad hoc, and,
really, unfair process of how people
were being converted into critical
vendors.” “Circuit City Unplugged:
Why Did Chapter 11 Fail to Save 34,000
Jobs?” Hearing Before the Subcomm.
on Commercial and Admin. Law
of the H. Comm. on the Judiciary,
111th Cong. 146 (2009) (testimony of
Todd J. Zywicki, Professor, George
Mason University School of Law).
Others suggest that Section 503(b)( 9)
“seeks to encourage trade creditors to
continue to extend credit to a debtor
potentially heading for bankruptcy.”
In re Arts Dairy, LLC, 414 B.R. 219, 220
(Bankr. N.D. Ohio 2009). Yet others
theorize that Congress passed
Section 503(b)( 9) “to prevent debtors
from stockpiling ‘goods’ in the days
leading up to their bankruptcy
filings” when they knew they would
be unable to pay for them. GFI Wis.,
Inc. v. Reedsburg Util. Comm’n, 440
B.R. 791, 797 (W.D. Wis. 2010). Finally,
many speculate that Section 503(b)( 9)
was intended to fortify vendors’
rights of reclamation under Section
546(c), the only BAPCPA-amended
Bankruptcy Code provision that
explicitly cross-references Section
503(b)( 9). See 11 U.S.C. § 546(c)( 2).
Lenders, for their part, have sought to
Conflicting Case Law
avoid paying Section 503(b)( 9) claims
from the proceeds of their collateral
by arguing that such prepetition
claims are not a cost of doing business
in Chapter 11 (i.e., are not “freight”)
because they were not incurred in
administering the bankruptcy estate,
nor are they for post-petition shipment
of goods that added value to the
estate. Before Family Christian, these
arguments met with mixed results.
For example, in In re Allen Family
Foods, Case No. 11-11764 (KJC) (Bankr.
D. Del.), Bankruptcy Judge Kevin J.
Carey approved the sale of the debtors’
assets despite there being no assurance
of full payment of allowed Section
503(b)( 9) claims. Although “troubled
by the fact that all 503(b)( 9) expenses
are not covered,” the court articulated
its justification for excluding them
from “freight”: “unlike other types of
administrative expenses, there’s no
ongoing contribution to the 11” by the
Section 503(b)( 9) claimants, and they
are not being “asked to do anything
more than that which they’ve already
done.” See id., Tr. of July 27, 2011 Hr’g
(Dkt. No. 225), at pp. 44: 23-24; 27: 5-11.
Similarly, in In re Real Mex Restaurants
Inc., Case No. 11-13122 (BLS) (Bankr.
D. Del.), Bankruptcy Judge Brendan
L. Shannon approved a Section 363
sale despite the fact that the case was
administratively insolvent, based on
his conclusion that “the circumstances
for all creditors would be much worse
without this sale.” See id., Tr. of Feb. 10,
2012 Hr’g (Dkt. No. 903), at p. 192: 23-24.
On the other hand, in In re Townsends,
Inc., Case No. 10-14092 (CSS) (Bankr.
D. Del.), and In re NEC Holdings Corp.,
Case No. 10-11890 (CSS) (Bankr. D.
Del.), Bankruptcy Judge Christopher
S. Sontchi prohibited the lenders
from treating Section 503(b)( 9) claims
differently than other administrative
priority claims. Sontchi stated that a
Section 363 sale “can’t be done on the
back of the 503(b)( 9) admin claims” 3
and that “the freight is certainly an
administratively solvent estate.” 4
These comments echo Bankruptcy
Judge Paul W. Bonapfel’s observation
that “I don’t see that Congress says we
can pay one administrative expense
and not another.” In re Altantis
Plastics, Inc., Case No. 08-75473
(PWB) (Bankr. N.D. Ga.), Tr. of Aug.
11, 2008 Hr’g on First Day Motions
(Dkt. No. 58), at p. 42: 7-9; see also
id., at p. 41: 10-12 (discussing motion
for DIP financing) (“we’re not going
to balance this case on the backs
of administrative expense claims”);
Order (Dkt. No. 165) (final financing
order requiring reserve for estimated
Section 503(b)( 9) claims pending
further court order), at p. 52, ¶ 36.c.
And although the court approved a
Section 363 sale over the objection of
the creditors’ committee in In re Blitz
USA, Inc., Case No. 11-13603 (PJW)
(Bankr. D. Del.), Bankruptcy Judge
Peter J. Walsh required the debtors to
establish a reserve for Section 503(b)( 9)
claimants from the sale proceeds
pending a determination of the
final outcome of the cases. See id.,
Order (Dkt. No. 364), at p. 23, ¶ 23;
see also In re AFA Investment Inc.,
Case No. 12-11127 (MFW) (Bankr.
D. Del.) (Walrath, J.), Tr. of July 12,
2012 Hr’g (Dkt. No. 485), at p. 46: 2-19
(requiring reserve from sale proceeds
for Section 503(b)( 9) claims pending
court’s determination of entitlement
vis-à-vis second lien lenders).
A couple of years after Townsends
and NEC, Sontchi faced the Section
503(b)( 9) issue again in In re NE Opco,
Inc., No. 13-11483 (CSS) (Bankr. D.
Certainly, the Blitz, Townsends, NEC, and
Family Christian decisions all suggest that
claimants, committees, and other parties in
interest should begin discussing payment of
Section 503(b)( 9) claims as soon as they see
that a Section 363 asset sale is in the offing.