This time, however, the problem would go well beyond stretched-out terms. On September 9 Mae's filed for Chapter 11 bankruptcy, giving Sugar Treats just five days to seek reclamation under the Bankruptcy Law's 45-day rule.
Worse yet, Credit Manager Vic Blackburn, recently reduced to a staff of one, was on special assignment assessing a potential acquisition while all of this was going on. An AR clerk had been assigned to handle routine credit approvals in his absence. Anything beyond totally routine issues just piled up on Vic's desk.
"Oh, Lord," he muttered to himself when he returned on October 1 and came across the Mae's filing notice. "I think we just had 20 days to reclaim after the filing, and we've missed that too."
Is Vic right? And, if so, what recourse does he now have?
Administrative Priority Claims in Bankruptcy
Ann Morales Olazábal, MBA, JD
Vic has the right to file an administrative priority claim and a pretty good chance of recovering the value of the goods delivered.
There are two different creditors' rights in situations like this.
Reclamation entitles the creditor to demand--any time within 45 days after their delivery--return of goods sold on credit to an insolvent buyer. If the buyer files for bankruptcy protection within that 45 days, the deadline for making the reclamation demand is 20 days after the bankruptcy filing, which might extend the time frame for the reclamation demand. But even though Sugar Treats has missed out on this very short window to demand return of the cones, it may still have another option.
Where a seller has failed to reclaim the goods or not done so timely, the U.S. Bankruptcy Code also provides for as an administrative priority claim. Rather than a right to return of the goods, this is a special claim for "the value of any goods" received by the debtor during the applicable pre-petition period. This administrative priority claim gives the creditor's claim special status, above that of ordinary unsecured creditors, even the taxing authorities.
How does the administrative priority claim work? Section 503(b)(9) of the Bankruptcy Code states that to qualify for administrative priority treatment, the creditor's claim--similar to the right to reclaim goods-- must be:
- for goods,
- that are received by the debtor within the 20 days prior to case commencement, and
- that are sold to the debtor in the ordinary course of its business.
Each of these three necessary elements of the 503(b)(9) claim has its nuances worth exploring. First, the creditor must have sold the bankrupt debtor goods, as defined by the Uniform Commercial Code. These are "movable" things other than money and investment securities. Services do not qualify. (Nor does electricity; but water, oil, and gas do.) Sugar cones, cake cones, and waffle bowls are unquestionably goods, so all is good for Sugar Treats so far.
Next, were the goods "received by the debtor" within 20 days prior to the case commencement? It should come as no surprise that goods sold to the debtor but drop-shipped to a customer are not deemed "received by" the debtor even within the twenty days prior to the commencement of the bankruptcy case. What is interesting here is that goods that are delivered to a carrier pursuant to a contract of carriage utilizing familiar trade terms such as FOB or FCA, are considered delivered to and therefore "received by" the debtor at the time and place dictated by the trade term. So, goods shipped FCA are "received by" the debtor as of the date they are turned over to the first carrier and an appropriate contract for carriage made, and NOT when they are physically received in hand by the debtor at its place of business.
Here, we can assume that Sugar Treats' merchandise was delivered directly to Mae's. But there is still a remaining issue on this second legal requirement. How do we count the days in the prescribed prepetition period?
Federal Bankruptcy Rules require the creditor to count every day, including "intermediate Saturdays, Sundays, and legal holidays." If the last day of the period is a Saturday, Sunday, or holiday, the relevant period "continues to run until the end of the next day that is not a [weekend or holiday]." This means that the largest period a creditor could have would be twenty three days, and then only if the debtor filed for bankruptcy protection exactly twenty days after a long (legal holiday) weekend.
