By Sarah E. Wenrich, Esq.
Bankruptcy & Restructuring Associate
Keri P. Ebeck, Esq.
Bankruptcy & Restructuring Partner
On December 27, 2021, the Consolidated Appropriations Act (the “CAA”) made various temporary amendments to the Bankruptcy Code with the intention to assist various parties in overcoming some of the many challenges caused by the pandemic. One of the changes that the CAA made to the Bankruptcy Code is that entities paying a customs duty to the United States government for imported merchandise, such as customs brokers or sureties, will be subrogated to the priority status afforded under 11 U.S.C. § 507(a)(8)(f).
“Priority” in the Bankruptcy Code
Section 507 of the bankruptcy code provides that certain types of debts in a bankruptcy, such as domestic support obligations, have “priority” over other debts, such as taxes. All priority claims set forth in 11 U.S.C. § 507 have priority over general unsecured claims and will therefore receive payment in full before general unsecured creditors receive any payment. Further, priority unsecured debts are non-dischargeable so that if a debtor does not pay all allowed priority unsecured claims in the bankruptcy, the unpaid portion will remain outstanding and will not be discharged. The relevant section, 11 U.S.C. § 507(a)(8)(f), provides a priority status to allowed unsecured claims of governmental units for certain customs duties arising out of the importation of merchandise.
Licensed customs brokers often advance payment of estimated duties/taxes to the government and serve as a pass-through entity for collecting and paying the duties. The role that the customs brokers pay allows for uninterrupted trade and facilitates the timely payment of billions of dollars in duties to the government. However, as the plain language of the statute shows, the priority status related to customs duties is limited to governmental units only and custom brokers who paid the same customs duties did not receive the same priority treatment.
Because of the benefit that the customs brokers provide to the government, there has been a substantial effort from groups such as the National Customs Brokers and Forwarders Association of America to extend the priority provided to governmental units under § 507(a)(8)(f) to the customs brokers. The temporary change to the Bankruptcy Code clarifies that – at least until December 27, 2021 – custom brokers who pay custom taxes/duties on behalf of the brokers’ client companies can enjoy the same priority rights of the government under § 507(a)(8)(F) to the extent of the customs duties are paid by the broker prepetition if the broker’s client files for bankruptcy.
Prior to the CAA’s amendment, customs brokers’ claims were treated as general unsecured claims and brokers could receive pennies on the dollar for their claims, or even no payment at all, and still have their claims discharged in the bankruptcy. The CAA’s temporary subrogation of these claims to priority status prevents the discharge of customs brokers’ unpaid claims and allows for better treatment of their claims in the bankruptcy.
While the CAA provides that the change is only effective through December 27, 2021, it is possible that continued efforts from industry groups gain the support necessary to make this a permanent change in the Bankruptcy Code, particularly in light of the benefit that customs brokers provide to the government in advancing payment of the customs duties.
 See H.R. 133, 116th Cong., Div. FF, Title X, § 1001(i) [hereinafter, the “Consolidated Appropriations Act”].
 See The Customs Business Fairness Act (H.R. 2261), National Customs Brokers and Forwarders Association of America, Inc., https://guides.libraries.uc.edu/c.php?g=222561&p=1472886 (last visited March 15, 2021).
 See id.
 See 11 U.S.C. § 507(a)(8)(F).
 See Consolidated Appropriations Act.