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Bankruptcy Creditor Administrative Priority Claims Under Section 503(b)(9)

May 21, 2018/in Articles, Bankruptcy/by Ted Hamilton

So you are a vendor with unpaid invoices from a Client and receive the dreaded Notice of Commencement of Bankruptcy Case. You check your records and see that you have made a large product delivery (or series of deliveries) to the Client—now Debtor—within a short period of time prior to the filing of the bankruptcy case . Are you out of luck? Maybe not. Depending on what you delivered to the Debtor and when you made these deliveries, you may be able to assert what is called a 20-day administrative priority claim as to the portion of your claim that fits within the requirements of this section of the Bankruptcy Code. Why is this important? Well, you may be able to change a portion of your claim against the Debtor from a general unsecured claim (which are often paid pennies on the dollar in a bankruptcy case, if at all) to an administrative claim which has a higher level priority in the claim distribution process. In Chapter 11 cases, administrative priority claims are often paid in full upon confirmation of the Plan so there is a very obvious benefit for a vendor to hold a 20-day administrative priority claim.

Section 503(b)(9) of the Bankruptcy Code provides for an administrative expense status for “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 the ordinary course of such Debtor’s business.” Parsing apart this provision, a vendor must establish four elements to establish such a claim—the value of goods that were sold to the Debtor in the ordinary course of the Debtor’s business and received by the Debtor within 20 days of the bankruptcy filing. The specific circumstances of a transaction or series of transactions can determine whether a claim fits within this section and will be allowed as an administrative priority.

First, the vendor’s claim will only be allowed for goods sold to the Debtor. The Bankruptcy Code does not define what “goods” are, so the Courts have come up with various decisions as to what are or are not ‘goods” under this section. In some cases the determination is clear—for example tangible supplies provided to the Debtor such as machinery, equipment or parts are goods as determined in several cases. Likewise, Courts have found chemicals provided as fertilizer to a farming enterprise and produce delivered to a restaurant supplier to be goods meeting the requirements of this section. What has proved difficult for the Courts to determine is when a vendor supplies goods and services at the same time. Let’s say the chemicals delivered to the farming operation above are also loaded by the vendor into fertilizer sprayers at the time of delivery for the farm’s use. Should the value of the fertilizer loading be part of the administrative priority claim? The decisions in this area vary between the Courts so a vendor facing an issue of this sort will likely need to contact an attorney for guidance.

The second element of an administrative priority claim requires that the goods actually be sold to the Debtor in the ordinary course of the Debtor’s business operations. There is a dearth of case law on this aspect of a 503(b)(9) claim and the Bankruptcy Code does not define what the term “sold” entails, though it appears clear that goods that are leased to the Debtor would not fit within this section. A vendor should contact counsel when it confronts a situation in this regard as certain vendor-debtor relationships can be murky. Likewise, the Bankruptcy Code does not define what is “ordinary course” for a Debtor’s business operations. What is “ordinary course” is often not an issue in an administrative priority claim determination. However, as above, a vendor confronted with an unclear situation should consult with a bankruptcy creditor’s attorney for guidance in establishing its claim.

The third element requires that the Debtor have actually received the goods in the 20 day period prior to the filing of the bankruptcy case. Vendors are cautioned to understand the difference between invoicing and actual delivery and receipt by the Debtor. Invoicing can occur before, at the same time, or after delivery and receipt so a vendor should have a clear understanding of its course of dealings with the Debtor in order to determine when the Debtor came into physical possession of the goods. Oftentimes the vendor-debtor relationship can be murky in this regard requiring a very fact-dependent analysis in order to ascertain whether a vendor’s claim fits into an administrative priority status.

Finally, the administrative priority claim would be for the value of the goods that meet all of the above requirements. The Courts will often look to the invoice and consider the value of the goods to be the invoice price of such goods though this is not always the case, especially in a situation where, as set forth above, there is a combination of goods and services provided as part of a vendor’s delivery to a Debtor or a question as to whether the goods described on the invoice or invoices were what was actually delivered to the Debtor.

Can a vendor assert a 20-day administrative priority claim in any bankruptcy case? The answer is yes—administrative priority claims under §503(b)(9) can be asserted in regards to claims under any Chapter of the Bankruptcy Code, though, effectively, they are of significant value to Vendors only in Chapter 11 cases. The reason is that the highest level of priority in cases in other Chapters of the Bankruptcy Code (such as Chapter 7 cases ) are the expenses of the costs of administration, such as the Trustee’s fee, the attorneys for the Trustee’s fees and costs and so forth. Administrative priority claims under §503(b)(9), though they retain a priority status in these cases filed in other Chapters, are a lower-level of priority and are not paid unless the costs of administration are first paid in full.

What is the process for a vendor to assert an administrative priority claim under §503(b)(9)? The short answer is that it is dependent on the process used in the Court where the case is pending, the process that may have been ordered by the Court in a particular case or the terms of a Chapter 11 Debtor’s Plan of Reorganization. The Bankruptcy Code itself does not specify the process. There is a significant variability between the Bankruptcy Courts as to how and when a vendor must make its claim, so it is easy for a vendor to get tripped up and inadvertently fail to timely make such a claim or make the claim in the “wrong” way. Therefore it is important for a vendor to contact its creditor counsel to devise the strategy for making the claim timely and in the correct way.

Brad Hissing is a Bankruptcy Attorney with over 26 years of experience in representing creditors, Trustees and other parties in bankruptcy cases. He has extensive experience in Creditors Rights and Insolvency matters in both consumer and Chapter 11 commercial cases. He can be reached at BradH@whhlaw.com or by phone at (813) 676-9075.

“I Just Received a Bankruptcy Notice, What Should I Do Now?”

June 5, 2017/in Articles, Bankruptcy, Debt Collection/by Ted Hamilton

Bankruptcy filings in the Middle District of Florida (Tampa, Ft Myers, Orlando and Jacksonville) increased in 2016 and are on the rise in 2017 after declining for several years due to the improving local and national economy. This means that if someone (a person or company) owes you money then there is an increased chance that you might receive a Suggestion of Bankruptcy or Notice of Commencement of Bankruptcy Case advising you that a bankruptcy case has been filed.

Sometimes Creditors receive the dreaded notification or other documents pertaining to the bankruptcy filing and choose to do nothing because they are unsure of what the documents mean and what they need to do. This is understandable—bankruptcy law is often counterintuitive and complicated and certainly different from how things work in the “real world”. By doing nothing, however, you risk serious financial penalties including loss of your claim and the ability to enforce a lien against the Debtor.

So what should you do when one of these Notices arrives in the mail? The first and most important thing that I can tell you is to not give up hope! As a Creditor you have several options depending on the type of claim that you have against the Debtor. Claims are typically secured (common examples are lien on a car, a homeowner’s association/condominium association lien, or a mortgage lien) or unsecured (such as debts from credit cards, medical bills, signature loans, or deficiencies after repossession or foreclosure sales). If you hold a judgment against the Debtor they debt may be either secured or unsecured depending on what steps you have taken to collect on the judgment prior to the bankruptcy filing and whether your judgment has “attached” to the Debtor’s assets, including real estate. Regardless of the type of claim you have, you should reach out to your bankruptcy attorney to discuss what options you have in a particular case.

Here are some situations that often arise in bankruptcy cases and which require action on your behalf as Creditor. Please note that there are many other common situations which can occur in bankruptcy case. I will discuss these in future articles.

Proofs of Claim: You may receive a Notice from the bankruptcy court advising you that there are funds available to pay creditors in a case and alerting you to file a Proof of Claim. It is important to file a Proof of Claim when you receive notice to do so. The Proof of Claim is a specific form that you must file in order to be paid. The form is comprehensive and may require detailed attachments depending on the type of claim you have against the Debtor. You must file a claim to be paid. I’ve been a bankruptcy attorney for over 25 years and I’m aware of several situations where Creditors have left “money on the table” by not filing a claim in a bankruptcy case despite the Bankruptcy Trustees holding significant funds which are available to pay creditors. There is also a deadline imposed by the Court for the filing of such claims. The deadline is called the “bar date”. Claims filed after the bar date are not paid except in certain very limited situations and only if the bankruptcy court expressly permits them to be paid. Needless to say, a bankruptcy Proof of Claim is an important document that needs to be properly handled. Contact your attorney with your proof of claim questions.

Valuations of Property, Lien-Stripping and “Cramdowns”: If you hold a secured claim against the Debtor it is important to know that the Bankruptcy Code in certain circumstances allows a Debtor to seek to “value” your claim and reduce the amount of your secured claim or even eliminate your lien entirely. Typically the Debtor will seek such valuation in a motion filed with the bankruptcy court which will be served on you. In many instances the motion will be served by “negative notice” which requires you to affirmatively oppose the Motion within a very short period of time (usually 14 to 21 days) failing which the Motion will be granted without hearing and without further notice. I’ve seen large homeowners/condominium association liens and second mortgage liens removed this way and oftentimes the affected creditor—after the fact—recalls receiving the Motion but doing nothing since it was not aware of what the Debtor was trying to do and the ultimate impact on the claim. It’s usually too late to do anything about one of these Orders once it is entered so make sure to contact your attorney if you receive a Motion or Debtor’s Plan which seeks to “value” your secured claim or otherwise modify your secured claim in any way.

Fraud/Dishonesty of Debtor: A Creditor might hold a claim resulting from fraud, misrepresentation, or other types of dishonest acts by the Debtor. The Bankruptcy Code provides that certain types of these claims will not be discharged (eliminated) in the Debtor’s bankruptcy case. However, if it up to the Creditor to assert the non-dischargeable nature of the claim in the case and obtain a determination from the bankruptcy court that the debt is one of these types. If the Creditor fails to seek such a determination in these cases then the debt will be discharged regardless of the nature and severity of the fraud! Needless to say, if you believe that fraud, misrepresentation or some type of dishonesty is involved on the part of the Debtor in regards to the debt owed to you then you should contact your bankruptcy attorney to review the same and discuss the best course of action available to you.

This article is an overview of some aspects of the bankruptcy process. The bankruptcy laws are complicated and there are many nuances and exceptions to the general rules. Seek advice from your attorney when you receive a bankruptcy notice or other documents pertaining to a bankruptcy case.

The Doctrine of Accord and Satisfaction

May 9, 2016/in Articles, Debt Collection/by Ted Hamilton

Should you or should you not accept a payment for less that the full amount owed when it is indicated to be for full payment? It is always best to not accept a check for less that the full amount owed if there is any chance that it can be interpreted as being accepted as settlement in full. However, if you do, it may not mean that the debt is indeed settled in full by acceptance of the check.

The doctrine of accord and satisfaction is, “the substitution of a new agreement between the parties in satisfaction of a former one.” Such a compromise will effectively relieve a debtor from the remaining obligation only if a separate agreement has been established between the two parties to the effect that the payment of less than the full amount of the original debt satisfies the obligation.

Although the doctrine of accord and satisfaction is a common law doctrine of contract law, it has been statutorily codified in Florida. Two separate statutes govern the application of this doctrine, depending on whether the debt in question is either disputed and unliquidated (an unknown amount) or undisputed and liquidated (a known amount).

One statute deals with accord and satisfaction by use of an instrument (a check) when a debt is either unliquidated or disputed as to the amount or existence of a debt. The statute sets forth that, “the claim is discharged if the person against whom the claim is asserted (the debtor) proves that the instrument or an accompanying written communication contained a conspicuous statement to the effect that the instrument was tendered as full satisfaction of the claim.” F.S.A. § 673.3111(2). In contrast, the other statute deals with accord and satisfaction in the context of liquidated claims or claims that were not disputed by the parties. The statute provides that, “when the amount of any debt or obligation is liquidated (known), the parties may satisfy the debt by written instrument other than by endorsement on a check for less than the full amount due.” F.S.A. § 725.05. The plain language of the statute appears to prevent the satisfaction (full payment) of an undisputed debt by less than the amount due through a notation on an endorsed check stating that, “the check is payment in full.”

The key to determining whether partial payment of a debt acts as a satisfaction of the debt, is whether the tender of partial payment of the debt constitutes a binding contract that effectively supersedes the original debt obligation. The new contract can either be express or implied from the surrounding circumstances. With undisputed claims, a creditor’s act of depositing a check for less than the amount owed will not constitute an implied satisfaction of the original debt, even if, the check had been enclosed in a letter stating that it was tendered in full satisfaction of the debt, else to be returned, or if words of similar import had been written on the check. It has also been held that an endorsed check for less than the amount owed on the debt does not satisfy the obligation regardless of whether the endorsed check includes the condition that the amount, is a full and complete settlement, of the debt.

While there are protections in place for a creditor who accepts a check for less than the full amount without the intention that it is for settlement in full; it is risky as there may be an issue as to whether the debt is actually disputed or liquidated. Whenever you accept payment when it is indicated that it is for settlement or payment in full, you may have precluded your ability to recover the full amount owed. The attorneys at Wetherington Hamilton have experience representing creditors in many different situations. Please contact the author for more information.

Thomas K. Sciarrino, Esq.

Enforcing a Judgment Through Garnishment

September 11, 2015/in Articles, Debt Collection/by Ted Hamilton

Florida’s garnishment law contains detailed procedural requirements and specific deadlines within which a creditor, debtor and garnishee must file and serve specific pleadings and other documents. A judgment creditor must be aware and alert to these procedures in order to ensure that the creditor does not lose substantive rights, and in order to take prompt advantage of inaction by the debtor and/or garnishee.

A judgment creditor has a right to a writ of garnishment as to any debt due to the judgment debtor from a third person; and any of the debtor’s tangible or intangible personal property in the possession of a third person. In order to be subject to garnishment, a debt owed by a third person to the judgment debtor must be absolute and without contingency. A judgment creditor may successfully garnish a joint bank account to the extent of the judgment debtor’s interest in same, but may not garnish an account held by the debtor and his/her spouse as tenants by the entireties (unless the creditor has a judgment against both spouses).

Prior to October 1, 1993, the State, its agencies and subdivisions were immune from garnishment. Beginning October 1, 1993, however, a debtor’s status as an employee of the State or its agencies or political subdivisions does not preclude a judgment creditor’s right to garnish the debtor’s wages. The garnishment must arise, however, as a result of a contract, a loan, a transaction, a purchase, a sale, a transfer, or a conversion occurring on or after October 1, 1998.

A judgment creditor may obtain a continuing writ of garnishment as to a judgment debtor’s employer, providing for periodic payment to the creditor of a permissible portion of the debtor’s salary or wages as they become due.

The garnishee becomes liable to the judgment creditor for all debts due to the garnishee and any property of the debtor in the garnishee’s control from the time the writ is served to the time the garnishee serves its answer. The garnishee must report any such debt or property in its answer and must retain any deposit, account, or tangible or intangible personal property of the debtor. (Limitation: the garnishee cannot retain assets equal in value to more than twice the judgment amount and/or the amount stated in the judgment creditor’s writ of garnishment). Once a bank account has been garnished the bank must retain the depositor’s funds in compliance with the writ. The bank may not pay certain checks out of the garnished account, regardless of whether the checks predate the service of the writ of garnishment.

Dealing with a judgment and attempting to enforce it through garnishment is a complicated process that is best done with the consultation of an experienced attorney. Call Wetherington Hamilton today to schedule your consultation.

Thomas K. Sciarrino, Jr., Esq.