Journal of
Corporate
Renewal
October
2014
RETAIL
Section 503(b)( 9) of the U.S. Bankruptcy Code is either loved or hated, and sometimes both
by the same constituency, depending
on who wins or loses regarding
administrative claims of suppliers whose
claims arose in the 20 days before a
bankruptcy filing. The section often
yields anomalous or inconsistent results
based on only slight variation in facts,
some of which are often just the result of
good or bad luck. Many commentators
have called for the provision’s
amendment or outright repeal.
Through a hypothetical scenario, this
article illustrates some curious outcomes
that section 503(b)( 9) can produce and
discusses why it might be time to give
section 503(b)( 9) a long, hard look.
Fashions, Inc., a U.S. retail clothing
chain, is having a tough time, has been
behind on hundreds of thousands, if
not millions, of dollars in payments
to suppliers and landlords during the
first five months of the year, and is
preparing to file Chapter 11 sometime
in July after the close of the second
quarter. The petition and supporting
documents and declarations are already
in the works. Fashions’ secured lender
has a blanket lien, is playing ball for
the time being, and has expressed a
cautious willingness to consider doing
the required post-petition lending.
The retailer has ordered imported
products from various suppliers whose
sources are in China and will deliver
them to Fashions’ freight consolidator
Kontainer in Hong Kong. Kontainer, in
turn, will assemble them with goods
going to a variety of purchasers, load
them into a container, and deliver
them to Fashions’ third-party shipping
company in the U.S., Quick Drop. On
Friday, June 13, Auspicious Jeans from
Shanghai ships to Kontainer 100 pairs of
its wildly popular jeans, invoice price $10
each, which are featured “door buster”
offerings at Fashions and draw much of
its traffic. The jeans arrive June 17 and are
to be shipped from port to be delivered
to Fashions’ warehouse by Wednesday,
July 2. They arrive in the U.S. on time, but
Quick Drop has not been paid on some
recent invoices. The shipping company
holds up delivery until it gets paid. It
delivers the jeans on Monday, July 7.
Acqua Pura delivers 100 bottles of
mineral water marked with the Fashions
logo to the retailer every day to be
handed out gratis to employees and
customers. There are almost never
any left at the end of a day. Having not
gotten paid for some time, however,
Acqua Pura is owed $1,000 and
stops delivering June 24. There are
no bottles left after a day or two.
Shopping bag supplier Sacco has a
standing order to deliver 10,000 bags to
Fashions every week on Fridays at a cost
of 10 cents a bag, or $1,000 per order.
It delivers 10,000 bags to its common
carrier on July 2 for that week’s order,
ordinarily to be delivered Friday, July 4.
The carrier gives its employees a day
off for the Fourth of July, however, so
the delivery isn’t made until Monday,
July 7. That week’s standing order of
10,000 bags is scheduled to go to the
carrier July 9 to be delivered Friday,
July 11. Sacco is owed $1,000.
Fashions’ point-of-sale computer
system crashes late afternoon on
Saturday, July 5, so with sales essentially
at a dead stop, the stores close early
and will most likely have to stay
closed until the system is fixed. Forza
Elettronica, a leading point-of-sale
tech and information recovery service,
is called out for a rescue and works
through the night Saturday and all day
Sunday, July 6, to repair the system.
The firm saves the day by getting the
system back up and running and by
identifying and fixing a defect in the
software, guaranteeing no more crashes
for the time being. Forza leaves its
bill for $1,000, but news of the crash
has hit the airways, and local media
question the already-shaky Fashions’
ability to open its doors any time soon.
Fashions calls its lawyers in a panic, and
it’s agreed that the company will file
for bankruptcy as soon as possible on
Monday once the papers are completed.
Fashions opens for business on Monday
and issues a series of press releases to
reassure the consuming public: “Don’t
believe everything you hear and only
half of what you see. It will be business
as usual, thanks to our loyal suppliers,
the heroic efforts of our tech support
staff, and especially the world-class
performance by Forza Elettronica.
Bravo, Forza, we couldn’t have done it
without you.” The Chapter 11 petition
is filed Monday afternoon. It turns out
that Fashions ordered a large volume
of inventory in anticipation of robust
July 4th weekend sales and had taken
delivery of merchandise invoiced at
several million dollars from mid-June
on, much of it within the 20 days
immediately preceding the filing.
Unequal Treatment
Section 503(b)( 9) of the Bankruptcy
Code, enacted in 2005 largely
under the radar as part of the long-
anticipated Bankruptcy Abuse
Prevention and Consumer Protection
Act (BAPCPA)[(Pub.L. 109–8, 119
Stat. 23, April 20, 2005]—which
was anything but—provides:
After notice and a hearing, there shall
be allowed administrative expenses,
other than claims allowed under
section 502(f) of this title, including—
......
....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) (emphasis added)
The section often yields anomalous or
inconsistent results based on only slight
variation in facts, some of which are
often just the result of good or bad luck.