Joseph H. Huston Jr. is a shareholder of Stevens
& Lee, P.C., and co-chair of the firm’s Bankruptcy
and Financial Restructuring Group. He is resident
in the firm’s Wilmington, Delaware, office. He has
represented virtually every constituency in the
reorganization process and related litigation, focusing
particularly on official and ad hoc committees of
creditors and interest holders. He can be reached
at 302-425-3310 or email@example.com.
20-day period moved for allowance
and immediate payment under section
503(b)( 9). The expense had not been
anticipated in the DIP budget. The
court therefore allowed the claim but
denied the request for immediate
payment, finding that the harm to the
debtor would be material and that so
holding would encourage other parties
to do the same, which could effectively
end the reorganization proceeding.
Since that time, virtually all courts have
agreed, relying on section 1129(a)( 9).
But that simply defers the problem.
In addition, in many “skinny” cases, there
will never be enough to pay all the 503(b)( 9)
claims and provide for meaningful, if
any, distributions to unsecured creditors.
In many of them, the 503(b)( 9) class
is approached to take something less
than 100 percent with the assurance of
fairly prompt payment. See S. Bernstein
& R. Rich, Claims for Goods Delivered
on the Eve of a Bankruptcy Filing: What
Every Business Lawyer Needs to Know,
14 N. Y Bus. L.J., No. 2, 26, 30 (2010).
This approach often succeeds because
otherwise, the case most likely would
be forced to convert to a Chapter 7, and
allowed pre-conversion administrative
claims: a) will be subordinated to
Chapter 7 administrative claims, e.g.,
In re Energy Coop., Inc. 55 B.R. 957,
969 (Bankr. N.D. Ill. 1985); b) will not be
paid until the Chapter 7 liquidation is
complete and distributions commence,
i.e., perhaps for years; and c) will
almost certainly yield materially less
and may never be paid at all due to
the cost of Chapter 7 administration.
See, e.g., First Amended Disclosure
Statement at 21-22, In re PPI Holdings,
Inc., Case No. 08-13289 (KG) ( Bkcy. D.
Del.)(Docket No. 1430; July 17, 2011).
A Second Look
Some commentators have suggested
tweaks (“a few minor changes”) to make
section 503(b)( 9) less painful; see, e.g.,
M. Wilson & H. Long, supra, suggesting
that the statute be changed to
provide that “the goods were in the
possession of the debtor on the date of
commencement of a case under this
title” and changing the burdens of proof.
Am. Bankr. Inst. Journal, Vol. XXX, No. 1,
February 2011, at 21, 57. Others have
suggested major surgery or outright
repeal, including codifying modifications
to “critical vendor” status or eliminating
it altogether, including services, adding
to 503(b)( 9) a scienter element or
rebuttable presumption for purchases
in anticipation of a filing to deal with
stockpiling, or returning to reliance on
some form of modified reclamation
rights. B. Gage, Student Note, Should
Congress Repeal Bankruptcy Code
Section 503(B)( 9)?, 19 Am. Bankr.
Inst. L. Rev. 215, 280-85 (2011).
The website of ABI’s Commission
to Study the Reform of Chapter 11
( commission.abi.org) contains links to
both articles, but the commission, so
far, has not taken a position on what
to do. While interesting, the proposed
fixes, apart from the suggestion to
include services (limited to operational
as opposed to, perhaps, professional
services), seem to add complexity
without necessarily being silver bullets.
It would appear clear, however, that the
answer to the question posed in the
title of this article is “yes,” that it is time
to revisit section 503(b)( 9). It is with
the next question—“Okay, precisely
how?”—where things bog down. One
view with the appeal of simplicity is
that there wasn’t a “503(b)( 9) problem”
before it was enacted. Perhaps a
return to those days is in order. J