August 9, 2010

You Can Have Your 503(b)(9) Cake And Shield Your Preference Too

By Christy A. Prince

Creditors may be able to use the same goods and services provided within twenty days prior to the bankruptcy both to shield against preference exposure and to make a claim for administrative expenses. Commissary Operations, Inc. v. Dot Foods, Inc. (In re Commissary Operations, Inc.), 421 B.R. 873 (Bankr. M.D. Tenn. 2010). Under 11 U.S.C. § 503(b)(9), creditors can make an administrative claim for goods and services supplied in the twenty days prior to the bankruptcy. On the other hand, under the 11 U.S.C. § 547(c)(4) “new value” defense, creditors can use goods and services supplied to the debtor during the preference period to shield payments received from the debtor from preference exposure. Now, creditors can make an administrative claim without having to waive the “new value” defense to preference exposure.

In a case of first impression, the Commissary Operations court ruled that creditors should not be forced to choose between asserting a § 503(b)(9) claim and preserving its right to assert a subsequent “new value” defense. Congress intended to give creditors the benefit of § 503(b)(9) without placing a corresponding detriment on creditors’ treatment in the preference sphere. The court went on to indicate that critical vendor payments are analogous to § 503(b)(9) claims and will similarly not reduce the amount of goods available for the “new value” defense.

The Commissary Operations decision is important because it gives creditors another tool to optimize their recovery when a customer files a bankruptcy. The case is particularly important for entities that regularly supply customers with new value in the form of goods or services.