‘Goods’ News for the Trade: Section 503(b)(9) Priority Applies to Sales of Goods Under Service Contracts

Section 503(b)(9) of the U.S. Bankruptcy Code has been a boon to creditors dealing with financially distressed customers that ultimately file for bankruptcy. Section 503(b)(9) grants trade creditors an administrative expense priority claim for the value of goods sold to and received by the debtor in the ordinary course of business within 20 days of the debtor’s bankruptcy filing. Therefore, trade creditors successfully invoking Section 503(b)(9)’s priority status have increased their recoveries because administrative expense priority claims must be paid ahead of lower priority unsecured claims and as a condition to confirmation of a Chapter 11 plan.

Section 503(b)(9)’s administrative expense priority status applies only to claims for the sale of goods—not services. While the distinction may seem clear on the surface, many transactions include both a sale of goods and provision of services. In these hybrid transactions, debtors, trustees and secured lenders may object to a creditor’s assertion of a Section 503(b)(9) priority claim on the basis that the claim is not actually for the sale of goods—particularly where the sale of goods was merely incidental to the provision of services.