Beware: how you bill goods and services may impact your right to priority payment under the Bankruptcy Code.(Case overview)

Section 503(b)(9) of the Bankruptcy Code provides that sellers of goods which were delivered during the final days prior to a bankruptcy petition date are entitled to priority. In manufacturing company Chapter 11 cases, these claims may involve millions of dollars which must be paid to creditors in full and at the time of confirmation of a plan. Thus, there is a huge incentive for debtors and their counsel to push back and reduce the total dollars asserted. In a recent attack asserted against priority claims, the Detroit Bankruptcy Court provided more insight into how a claim which involves part service and part sale of goods should be treated. The lesson of the Plastech case is that your company should know what portion of your invoice represents the sale of goods and what portion represents services. Being able to prove this may ultimately affect your right to receive payment under [section] 503(b)(9) of the Bankruptcy Code. (1)

Plastech Engineered Products, Inc.

Plastech Engineered Products, Inc., a one-time large Tier One supplier of parts to original equipment manufacturers General Motors and Chrysler, filed a Chapter 11 petition on February 1, 2008. After several months of attempting to reorganize, Plastech began selling off its major businesses in the spring and summer of 2008. As a just-in-time supplier to GM and Chrysler, it also received shipments of components and other inventory from its suppliers on a just-in-time basis. As a result of these deliveries, the [section] 503(b)(9) claims asserted against it were approximately $26 million. Plastech had reserved $17 million for the payment of [section] 503(b)(9) claims and intended to make objections to many of the asserted [section] 503(b)(9) claims in an effort to reduce the asserted administrative expense claims.

As a result of the large impact of the [section] 503(b)(9) claims for the goods delivered during the 20 days prior to the February 1, 2008 petition date, Plastech filed numerous objections to the [section] 503(b)(9) claims. Several of the reported decisions coming out of the Plastech case have previously been discussed in Business Credit.

Most recently, the Detroit Bankruptcy Court issued a decision involving yet another challenge to certain [section] 503(b)(9) administrative expense claims asserted by several suppliers. Each of the claims discussed in this article involved [section] 503(b)(9) claims objected to by the Debtor, Plastech, because Plastech said the claims were for services and not for goods.

What Are Goods?

The first issue the court addressed was what constituted "goods" under [section] 503(b)(9). The Bankruptcy Code does not define "goods" and the court was unable to find any cases interpreting the term "goods" in the context of [section] 503(b)(9). As a result, the court determined that the definition of goods found in the Uniform Commercial Code (UCC) was the best definition to use. The UCC defines goods as: