In In re SRC Liquidation, Case No. 15-10541 (BLS) (Del. Bankr. July 13), U.S. Bankruptcy Judge Brendan Shannon of the District of Delaware held that in order for a creditor who supplies goods to a debtor within 20 days before the bankruptcy petition is filed to recover the value of the goods as a priority administrative expense under Section 503(b)(9) of the Bankruptcy Code, the debtor must have had physical possession of the goods and not merely constructive receipt. Accordingly, where goods were delivered directly to the debtor's customers, even though at the debtor's direction and utilizing the debtor's account with the shipper, the goods will not qualify for administrative priority treatment. The decision has significance for a creditor that sells goods to a debtor soon before the debtor files a bankruptcy petition.

Section 503(b)(9) of the Bankruptcy Code accords administrative expense priority to a claim equal to the value of any goods sold to the debtor in the ordinary course of the debtor's business and received by the debtor within 20 days before the petition date. Administrative expense claims are exceptions to the general equality principle in bankruptcy and are strictly construed.

The facts in the case were not in dispute. IIMAK was a vendor to the debtor and its products were at times delivered directly to the debtor. These were “directly delivered goods.” At other times, its products were delivered to the debtor's customers at the debtor's direction and utilizing the debtor's account with United Parcel Service. These were “drop shipped goods.” IIMAK argued that the claim for the value of the drop shipped goods delivered to the debtor's customers in the 20-day period prior to the petition date should be treated as administrative expenses. The issue was whether the shipment of goods during the relevant 20-day period to the debtor's customers constituted receipt by the debtor for purposes of satisfying the “received by the debtor” requirement under Section 503(b)(9).