Customer Receipts- 503(b)(9): New Ruling in In re ADI Liquidation casts further doubt on ability to recover goods from bankrupt customer, by Molly Froschauer

If your company sells to a customer and delivers goods within 20 days of the customer filing for bankruptcy, one may believe that your company may have an administrative (highest priority) claim for the value of those goods. As many credit managers know, however, the claim under 503(b)(9) of the bankruptcy code has many problematic caveats with the way we do business today.

Many companies use intermediaries like fulfillment houses to deliver goods to customers. This issue has been taken up several times but the recent case presents an interesting twist on the same issue.

The Debtor in this instance, was a billing and servicing platform through which its customers would order items. The manufacturer and distributor would deliver directly to the Debtor’s customers and the Debtor would remit payment for those goods minus its fee, to the manufacturer. The question in front of the court was whether a third-party partner who never possesses the goods, but who possesses the payments for goods recently delivered, constitutes a receipt by the debtor. The court held it does not.

“With continuing complexity in billing and delivery systems in business today, it’s important to consider the implications of third-party partnerships when delivering goods to a party that does not directly owe your company money.”

Current case law requires physical possession of the goods by the Debtor. With third-parties being utilized for help in distribution, billing, customer service and many other aspects of business today, it’s important to understand the impact of everyone in your value chain. At any point, one part of the chain could file for bankruptcy and despite the spirit of 503(b)(9)’s intent to compensate recently-delivered goods, the fact that the end-user doesn’t pay your company directly creates greater risk.

These issues are circling the appellate courts currently and further clarity is sure to develop. One can hope that the spirit of the statute, fairness to trade creditors, is once again respected in light of the complicated supply and distribution chains existing in today’s business climate.

Molly Froschauer is the General Manager of CMA Adjustments. She received her J.D. cum laude from Pepperdine University and her Bachelors from Claremont McKenna College. Before joining CMA, her practice was centered around bankruptcy and other out-of-court debt issues. She’s a member of the Bankruptcy Inn of Court, Los Angeles Bankruptcy Forum, and the Turnaround Management Association.