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The U.S. Bankruptcy Court for the Eastern District of Pennsylvania recently issued one of the first decisions in the 3rd U.S. Circuit Court of Appeals to interpret Section 503(b)(9), an important new Bankruptcy Code provision passed under the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA): In re Bookbinders’ Restaurant Inc. Section 503(b)(9) is certain to impact the relationship between a debtor seeking to reorganize and the trade vendors that deal with it. Under Section 503(b)(9), a vendor that sells goods to a debtor in the ordinary course of the debtor’s business, which goods are delivered within 20 days before the petition date, is entitled to an allowed administrative expense priority claim. Prior to BAPCPA, goods delivered within this pre-petition time frame resulted in a non-priority unsecured claim for the seller. Thus, Section 503(b)(9) enhances the creditor’s position and imposes additional costs upon the debtor. Although the Bankruptcy Code provides that administrative claims (including those under Section 503 (b)(9) must be fully satisfied as a prerequisite to confirmation of any plan, the code does not specify when such claims must be paid. This was the question at issue in Bookbinders’. In Bookbinders’, creditor Blue Crab Plus Sfd. sold and delivered $33,021.74 in goods to Bookbinders’ during the 20-day period prior to the bankruptcy petition. Pursuant to Section 503(b)(9), the court had allowed an administrative claim in favor of Blue Crab. Blue Crab then sought immediate payment of its allowed claim. Blue Crab argued that it was entitled to immediate payment for the following reasons: New Section 503(b)(9) required that its 20-day claim be treated similar to the debtor’s post-petition operating expenses; Bookbinders’ had been timely paying these post-petition obligations in the ordinary course of its business; and The debtor’s operating reports evidenced cash reserves that were more than sufficient to cover Blue Crab’s claim. The court disagreed and held that as with pre-BAPCPA administrative claims, the code does not require immediate payment and that any determination regarding payment timing for Section 503(b)(9) claims lies within the discretion of the bankruptcy court. To begin its analysis, the court set forth the additional rights afforded to creditors under the newly minted Section 503(b)(9), and held that this section, “effectively converted what previously was a pre-petition ‘claim’ into an allowable administrative expense.” The court held that the chief benefit provided to creditors, such as Blue Crab, by Section 503(b)(9) is that a debtor cannot obtain confirmation of a plan of reorganization absent payment in full of allowed “20 day” claims. Prior to BAPCPA, such claims would be treated as mere “unsecured” claims, which have less priority than administrative claims and need not be paid in full under the Bankruptcy Code. The court noted, however, that Bankruptcy Code Section 503, even after BAPCPA, contains no guidance regarding when administrative claims are required to be paid. Given that the text of the code contains no timing requirements, the court reaffirmed the well-settled principle that the timing of payment on administrative claims is a determination that rests within the discretion of the bankruptcy court. In exercising this discretion, a court will consider the following factors: Other provisions of the Bankruptcy Code bearing upon the type of claim at issue; The code’s goal of promoting an orderly and equal distribution among a debtor’s creditors and discouraging a race to the debtor’s assets; and Potential prejudice to the debtor and other creditors resulting from immediate payment of a claim, as compared to the hardship to be suffered by the administrative claimant in having to wait for payment. Thus, while the court recognized that Section 503(b)(9) gives rise to a new category of administrative claims, it held that this section does not require immediate payment. Immediate payment of an administrative claim is certainly permissible if the court finds the above factors militate in favor of the claimant. However, the court in Bookbinders’ found that insufficient evidence had been provided. Next, the court turned to Blue Crab’s argument that since the debtor was satisfying its post-petition ordinary course obligations as they came due, Blue Crab’s Section 503(b)(9) claim should also be immediately paid. The court was unconvinced by the argument that immediate payment of administrative claims is required solely because the debtor is transacting business (and making payments to vendors) in the ordinary course post-petition. The court noted that there was an absence of case law in support of such an argument, and that the position advocated by Blue Crab contravened the well-settled rule that the timing of such payments is within the court’s discretion. The court noted that there was an important distinction between a Section 363(c) payment and satisfying allowed Section 503(b) administrative claims. Particularly, while a debtor is permitted to enter into ordinary course transactions under Section 363(c) without a court order, a Section 503(b) claim does require such approval. It is true that, as noted above, if a debtor fails to meet its obligations under a Section 363(c) transaction, the aggrieved creditor could well be entitled to an administrative claim under Section 503(b)(1). In that situation, however, the timing of the payment of the Section 503(b)(1) claim would present the same issues as Blue Crab’s Section 503(b)(9) claim. The court concluded that the code contains no justification for treating a Section 503(b)(9) claim any differently than a Section 503(b)(1) claim. In both instances, a bankruptcy court, in its discretion, must weigh the competing interests of the claimant and the debtor’s estate, and make a determination regarding timing of payment. Therefore, in seeking administrative priority and immediate payment of amounts owed to a claimant, whether for post-petition transactions under Section 503(b)(1), or for 20-day claims under new Section 503(b)(9), one should present the court with evidence that the factors cited by the Bookbinders’ court militate in favor of compelling immediate payment to the creditor-client. As this decision illustrates, BAPCPA has significantly altered, and in some cases improved, creditors’ rights in bankruptcy proceedings. However, the bankruptcy courts will not depart from their traditional practices and historical legal principles “absent a clear indication that Congress intended such a departure.” FRANCIS J. LAWALL , a partner in the Philadelphia office of Pepper Hamilton, concentrates his practice in national bankruptcy and reorganization matters. He routinely lectures to various creditor groups concerning general bankruptcy issues, including preferences, reclamation, the role of creditors’ committees and related issues. JAMES C. CARIGNAN is an associate in the firm’s Wilmington, Del., office, where he concentrates his practice in national bankruptcy and reorganization matters.

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