Your client has been providing products to a customer for years. The client is not paid directly by its customer, but by the customer’s parent company as part of a cash-management system (CMS), what the customer describes as an enterprise-wide pooled account. After a couple of turbulent months with irregular payments, the customer files for bankruptcy.
When dealing with customers in financial distress, the time-tested advice of “always take the money” are words to live by if you are a vendor with an open account payable. It is widely understood that such payments may be “clawed back” as preferences under § 547 of the Bankruptcy Code if the customer declares bankruptcy within 90 days of payment.
Two years after the U.S. Court of Appeals for the Eleventh Circuit issued its decision in Senior Transeastern Lenders v. Official Committee of Unsecured Creditors (In re TOUSA Inc.), 680 F.3d 1298 (11th Cir. 2012), lenders may still unwittingly be at risk when making revolving loans to multiple borrowers that utilize a central cash-management system.
In November 2013, the Third Circuit decided In re KB Toys Inc.,[1] which has created a split of authority between Delaware and New York concerning the defenses of claims traders to preference liability. KB Toys may chill claims trading within that Circuit, while existing favorable treatment remains within the Southern District of New York.
The Fifth Circuit’s ruling on Nov. 11, 2013, in BP RE L.P. vs. RML Waxahachie Dodge L.L.C. et al..[1] extended what it had previously acknowledged was a “narrow ruling” by the U.S. Supreme Court in Stern vs. Marshall.[2] The panel essentially held that the authority granted to the bankruptcy court to enter final orders and judgments under 28 U.S.C. §157(c)(2) is unconstitutional, despite express consent.
Legal proceedings where courts have been required to determine the classification of electricity as either a “good” or a “service” under § 503(b)(9) of the Bankruptcy Code have been the subject of recent “charged” debates.
Numerous bankruptcy court decisions have considered whether electricity is a good under 11 U.S.C. § 503(b)(9).[1] One of the most recent decisions, In re NE Opco Inc.,[2] bucks a recent trend in cases that have held that electricity is a good under § 503(b)(9).[3] Moreover, in ruling that electricity is not a good for this purpose, the NE Opco court adopted a fresh approach to the issue based on the notion of meaningful delay between identification to the contract and consumption.
Section 503(b)[1] of the Bankruptcy Code sets out the nine types of administrative expenses in a bankruptcy proceeding that receive a priority distribution under § 507(a)(2). Section 503(b) derives from § 64a of the Bankruptcy Act of 1898, which entitled the costs and expenses of administration of a bankruptcy estate to priority over dividends paid to creditors.[2] Section 503(b)(9) grants a seller of goods an administrative expense for the value of any goods that the debtor received within 20 days before the petition date, if the goods were sold to the debtor in the ordinary course of the debtor’s business.[3]
Section 503(b)(9) of the Bankruptcy Code creates an administrative expense for “the value of any goods received by the debtor” within 20 days preceding bankruptcy. While there is little case law analyzing the appropriate measure of “value” under this section, courts that have addressed the question recognize that the purchase price reflected in the invoice or contract, pursuant to which the goods were delivered to the debtor, is prima facie evidence of value but that it can be rebutted by other evidence.
Determinations as to whether electricity is a “good” for purposes of § 503(b)(9) remains an intensely fact-driven exercise with a lack of consistency coming from the courts. This inconsistency was evidenced by four recent written decisions addressing the issue.
It’s the Facts? It’s the Facts!
