Bylined Articles

Section 503(b)(9) Claimants Wait in Line for Payment

By Rudolph J. Di Massa Jr. and Sommer L. Ross
February 2, 2007
The Legal Intelligencer

In In re Global Home Products, LLC, the U.S. Bankruptcy Court for the District of Delaware, in an opinion issued by Bankruptcy Judge Kevin Gross on Dec. 21, determined that it was within the discretion of the bankruptcy court to determine when an allowed Section 503(b)(9) claim should be paid. In making such a determination, the court considered the following factors: prejudice to the debtor; hardship to the claimant; and potential detriment to other creditors.


On April 10, Global Home Products and several related entities filed individual voluntary petitions for relief under Chapter 11 of the U.S. Bankruptcy Code with the U.S. Bankruptcy Court for the District of Delaware. The cases are being jointly administered by the court.

Both before and after the petition date, the debtors held a senior secured revolving line of credit with Wachovia Bank. The debtors also maintained a junior secured term loan and revolving line of credit with another entity by the name of Madeline LLC. As of the petition date, the debtors owed Wachovia approximately $115 million, which was secured by a lien on substantially all of the debtors' assets, including all of the stock of the debtors' domestic subsidiaries and 65 percent of the stock of the debtors' foreign subsidiaries. The debtors owed Madeline approximately $200 million as of the petition date, which was also secured by a lien on substantially all of the debtors' assets.

After the filing of the petition, Wachovia became the debtors' debtor-in-possession (DIP) lender. In the DIP order approving Wachovia as the debtors' DIP lender, the bankruptcy court also authorized the debtors' use of Madeline's cash collateral.

In the 20 days immediately preceding the petition date, the debtors purchased, in the ordinary course of their business, approximately 123,000 pounds of aluminum from Industria Mexicana del Aluminio, S.A. de C.V. (IMASA).

On May 25, IMASA filed a motion for the allowance and immediate payment of an administrative expense claim pursuant to 11 U.S.C. Section 503(b)(9) on account of the 123,000 pounds of aluminum delivered to the debtors. In its motion, IMASA specifically requested that the debtors make payment within three business days of the court's entry of an order granting the motion. IMASA argued that the aluminum it provided to the debtors enabled the debtors to manufacture multiple lines of goods, which generated significant post-petition revenues for the debtors, and that it would be inequitable to delay the payment of the administrative claim in light of the priority afforded to vendors under Section 503(b)(9) of the Bankruptcy Code.

Section 503(b)(9) provides: "After notice and hearing there shall be allowed, administrative expenses . . . including (9) the value of any goods received by the debtor within 20 days before the date of commencement of a case under this title in which the goods have been sold to the debtor in the ordinary course of such debtor's business."

IMASA also argued that it was entitled to adequate protection of its interest in cash collateral.

The debtors filed an objection to the motion asserting that IMASA did not carry its burden of proving the value of the aluminum, or that IMASA was entitled to allowance or payment of such a claim. The debtors argued that the DIP order and/or the DIP financing agreement prohibited the payment of IMASA's claim without Wachovia's consent, or without court approval. The debtors also argued that requiring immediate payment of a Section 503(b)(9) claim would expose the debtors to financial risk adversely affecting the debtors' borrowing ability, since the amount to which IMASA was entitled far exceeded the company's ability to borrow and would likely precipitate filings by other Section 503(b)(9) claimants seeking immediate payment as well.

Lastly, the debtors asserted that there was no need to deviate from the general rule that administrative claims are not payable until the effective date of a confirmed plan of reorganization. In further support of this assertion, the debtors pointed out that the Bankruptcy Code does not require immediate payment of Section 503(b)(9) claims and is silent on the issue of timing.

Wachovia, in its capacity as the DIP lender, also filed a limited objection to the motion, alleging that the debtors were not authorized to make payment to IMASA under the DIP order or the DIP financing agreement without Wachovia's consent.

On Aug. 8, at the hearing on IMASA's motion, the parties announced that they had resolved the issue regarding the value of the aluminum. Subsequently, the court issued an order allowing IMASA's claim as an administrative expense. Therefore, the only issue left for the court to decide was the timing of payment of the allowed administrative expense. The court concluded that the determination of when an allowed Section 503(b)(9) claim should be paid is within the discretion of the bankruptcy court. In making such a determination, the court explained that it should consider the following factors: prejudice to the debtor(s); hardship to the claimant; and potential detriment to other creditors.

The Court's Analysis

The court began its discussion with an overview of Section 503(b)(9), a newly created Bankruptcy Code provision included in the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), which became law on Oct. 17, 2005.

Under Section 507(a)(2) of the Bankruptcy Code, a creditor's Section 503(b)(9) claim is entitled to a second priority position. Section 503(b)(9) is silent as to the timing for payment of this type of claim. However, under Section 1129(a)(9), administrative expenses must be paid in full on the effective date of a debtor's plan of reorganization.

Next, the court reviewed the generally accepted standards for payment of administrative expenses under Section 503(a) of the Bankruptcy Code. The court explained that when a claimant timely files a request for payment of an administrative expense under Section 503(a) of the code, the timing of the payment of that administrative expense claim is left to the discretion of the court.

In making this determination, one of the chief factors courts consider is bankruptcy's goal of an orderly and equal distribution among creditors and the need to prevent a race to the debtor's assets. Distributions to administrative claimants are generally disallowed prior to confirmation if there is a showing that the bankruptcy estate may not be able to pay all of the administrative expenses in full. Courts will also consider the particular needs of each administrative claimant and the length and expense of the case's administration. To qualify for exceptional immediate payment, a creditor must show that there is a necessity to pay, and not merely that the debtor has the ability to pay.

Because Section 503(b)(9) is silent as to when payment must or should be made, the court relied on established Section 503(a) precedent. With respect to the first factor (prejudice to the debtors), the debtors' chief restructuring officer testified the following:

The payment of Section 503(b)(9) claims would adversely affect the debtors' borrowing ability under the DIP financing agreement because the aggregate Section 503(b)(9) claims far exceed the company's ability to borrow.

The debtors did not presently have the funds available to make payments for administrative claims.

The availability under the current financing arrangement, which was roughly $1.7 million, was needed to provide for the debtors' continuing operations, including operating costs, payroll costs and the purchase of inventory.

As of the hearing date, there were nine other Section 503(b)(9) claims valued, in the aggregate, at approximately $2.1 million, and the debtors expected others to be filed.

The debtors' chief restructuring officer also testified that if the debtor were forced to pay the administrative claims immediately and in full, he believed the debtors' reorganization efforts would fail.

With respect to the second factor (hardship to the claimant), IMASA testified that the prejudice to it as a result of non-payment of the administrative claim was "self-evident." IMASA argued that other priority claims had been paid and that making IMASA wait to receive payment of its administrative claim amounted to discriminatory treatment. (The court clarified that the "discrimination" in payment that IMASA referred to was the debtors' payment of the pre-petition claims of certain critical vendors, which payments the debtors were entitled to make under the DIP order.) IMASA offered no evidence that immediate payment of its claim was necessary to keep IMASA in business.

Relying on the testimony of the debtors' chief restructuring officer, which the court found to be "credible and decisively relevant to the issue of the relative hardships to the parties," and after balancing these hardships, the court denied the motion. The court found that IMASA would suffer little prejudice or hardship if payment of its allowed administrative claim were deferred until after plan confirmation. Conversely, the court found that in light of the debtors' tenuous financial position and the requirements of the DIP order as well as the DIP financing agreement, the debtors would suffer a hardship if they were forced to pay IMASA's Section 503(b)(9) claim immediately. The court also commented that such a ruling benefited the debtors' other creditors.


With respect to the timing of payment of Section 503(b)(9) claims, it is evident that the court took a pre-BAPCPA approach in concluding that it is within the court's discretion to determine when an allowed Section 503(b)(9) claim should be paid. And although one can only speculate as to whether or not the silence of Section 503(b)(9) regarding the timing of payment was intentional, it is apparent that it is in the best interest of all debtors and their unsecured creditor body for it to be left to the court's discretion so the timing of payment can be determined on a case-by-case basis.

Rudolph J. Di Massa, Jr., a partner at Duane Morris, is a member of the business reorganization and financial restructuring practice group. He concentrates his practice in the areas of commercial litigation and creditors' rights. He is a member of the American Bankruptcy Institute, the American Bar Association and its business law section, the Commercial Law League of America, the Pennsylvania Bar Association and the business law section of the Philadelphia Bar Association.

Sommer L. Ross practices in the area of business reorganization and financial restructuring. Admitted to practice in Delaware, Pennsylvania and New Jersey, Ross is a 2004 graduate of Rutgers University School of Law, where she was a member of the Rutgers Law Journal, and a graduate of the University of Delaware.

This article originally appeared in The Legal Intelligencer and is republished here with permission from