CURRENT MONTH (March 2022)

Goods, Services and Bankruptcy Code Section 503(b)(9)

By Michael Enright

Section 503(b)(9) of the Bankruptcy Code, which provides for an administrative claim in favor of the seller of goods to a debtor equal in amount to the value of the goods the seller delivered in the 20 days prior to the bankruptcy petition, was added to the Code in 2005. It has spawned far-flung litigation ever since over what are goods (notably with regard to electricity), what are not goods, and what is the test to use for deciding that all-important question. The statute specifies that only the value of the goods qualifies for administrative claim status. Of course, commercial contracts that call for some delivery of goods by the seller often call for a mixed bag for the buyer, because services might be involved as well. Does the hybrid nature of the underlying contract that caused the vendor to deliver goods to the debtor in the 20 days pre-petition matter for determining the amount of the administrative claim? That question was recently answered by the court in In re Sklar Exploration Company, LLC, Case No. 20-12377 (Bankr. D. Colo. March 14, 2022).

In Sklar, a vendor to the debtor provided “acidizing services” on the debtor’s oil and gas wells, which necessitated the use of certain chemicals. In its invoices, the vendor listed the cost of its services separately from the cost of the chemicals. In the bankruptcy case, the vendor sought a Section 503(b)(9) claim for the cost of the chemicals. The debtor objected, arguing that no administrative claim should be allowed at all. The debtor argued that application of the “predominant purpose” test from Article 2 of the Uniform Commercial Code (which governs the sale of goods) showed that the vendor’s sale of services predominated in the prepetition transactions, and that the court thus should conclude that the transactions did not qualify for administrative claim status under Section 503(b)(9). The debtor cited a decision in Circuit City that supported its argument. The court carefully parsed the underlying facts, noted that the chemicals were separately listed and priced in the invoices, and quickly concluded that the chemicals were goods. The only question left, then, was whether the fact that the contract called for the provision of both goods and services somehow negated the availability of an administrative claim for the value of the goods, and not the services. The court held that the mixed nature of the contract had no such impact. Disagreeing with the Circuit City holding, the court in Sklar determined that the vendor was entitled to the value of the goods (and not the corresponding services) as an administrative claim, and that nothing about the “predominant purpose” test should cause a different result—after all, that test simply determines whether the provisions of Article 2 of the UCC apply to the transaction or not, and there is nothing in the Bankruptcy Code linking the standards for allowance of a Section 503(b)(9) claim to that test. Creative vendors seeking full payment of prepetition balances and resourceful debtors looking to lessen the burdens on the cash required to emerge at confirmation will continue to spar over these issues for the foreseeable future, and this is just one example of that epic tug of war over Section 503(b)(9) and its scope.

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