Section 503(b)(9) goods supplier priority--more recent developments.(credit column)

Section 503(b)(9) of the Bankruptcy Code grants an administrative priority claim for goods sold to and received by the debtor within 20 days of its bankruptcy filing (the "20-Day Goods"). The Section 503(b)(9) priority grants a trade creditor the opportunity to step up the priority of its pre-petition claim for 20-Day Goods and thereby increase the likelihood of full and faster payment of that claim. The Section 503(b)(9) priority claim is also not saddled with all of the issues and defenses that have made it costly and difficult to recover on a reclamation claim. As a result, a trade creditor's Section 503(b)(9) priority is not lost where the 20-Day Goods are no longer in the debtor's possession, are not identifiable and/or are subject to a prior perfected security interest in the debtor's inventory when the debtor files bankruptcy.

The courts are starting to grapple with many issues relating to Section 503(b)(9) priority claims. Prior articles have dealt with the timing of payment of, and the applicability of a pre-petition claims bar date to, Section 503(b)(9) priority claims. Well folks, two recent cases have addressed other Section 503(b)(9) priority claim issues. What a way to celebrate the New Year!

In Brown & Cole Stores, LLC, the United States Ninth Circuit Bankruptcy Appellate Panel, the equivalent of a United States District Court, recently ruled that a secured trade creditor can assert a Section 503(b)(9) priority claim, but that the claim is subject to reduction as a result of the debtor's setoff rights arising from its pre-petition breach of contract claim against the creditor. And the United States Bankruptcy Court for the Western District of New York, in the Empire Beef Co., Inc. Chapter 11, became the first court to approve the appointment of an official Section 503(b)(9) creditors' committee to represent the interests of all of Empire Beef's Section 503(b)(9) priority claimants. Read on for more juicy tidbits about these interesting Section 503(b)(9) cases.

Brown & Cole Stores, LLC

The debtor, Brown & Cole Stores, LLC ("Brown & Cole"), was a large, privately held grocery store chain consisting of 27 stores in Washington state. Brown & Cole employed about 1,500 people and had annual revenues of approximately $280 million.

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Associated Grocers, Inc. ("Associated") was Brown & Cole's principal supplier, selling approximately $2.5-$3 million per week to Brown & Cole. Associated is a cooperative and Brown & Cole was its largest shareholder, holding approximately 25% of Associated's outstanding stock. Associated's claim against Brown & Cole included a claim of $6,379,879.51 for 20-Day Goods that Associated had sold to Brown & Cole prior to the latter's bankruptcy filing. The claim was secured by a first priority security interest in Brown & Cole's Associated stock.