Shumaker Manufacturing

A Legal & Industry Review


“Vendor Section 503(b)(9) Administrative Priority Claims: When Goods are Received is Critical”

Debtors in Chapter 11 proceedings rarely pay unsecured creditors a meaningful dividend on prepetition accounts receivable balances, much less pay them in full.  In an era of aggressive lending to place capital in the market, loan to value ratios are high.  When a company experiences financial distress or insolvency, unsecured creditors may be “out of the money” from the get-go.  To improve its outcome, a vendor must pursue available “vendor” remedies, including critical vendor status, the assumption of a sales contract, reclamation, exercise of setoff, or a priority administrative claim under Section 503(b)(9) of the Bankruptcy Code, known as a “20-day administrative priority.”

The 20-day administrative priority claim allows a vendor to effectively convert a portion of its prepetition accounts receivable balance to a post-petition administrative priority claim.  Since administrative priority claims are normally paid in full (absent “administrative insolvency”), this remedy significantly improves the outcome for the vendor.  To qualify, the vendor must establish the value of goods it delivered to the debtor that were received by the debtor within 20 days prior to the Chapter 11 filing.  Continue reading