A vendor’s favored account files Chapter 11, leaving the vendor with a large open account balance. The debtor requests the vendor sell postpetition, to assist in the reorganization. Selling a debtor in possession has certain opportunities and protections to a vendor, including an administrative claim should the debtor default on a postpetition sale. However, for an overzealous vendor who views postpetition sales as an opportunity to mark-up postpetition invoices to “catch up” and reduce its prepetition claim, with the debtor’s consent, may spell trouble. A bankruptcy court, In re Centennial Textiles, Inc., 227 B.R. 606 (Bankr. S.D.N.Y. 1998), recently considered a vendor’s liability
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Playing Catch Up With Prepetition Claim Can Be Costly For VendorScott E. Blakeley, Esq.
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Must Trade Creditors Continue Doing Business With Delinquent Customers Who File Bankruptcy, And What Protections Are Available?Ronald A. Clifford, Esq.
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The scenario is a familiar one. A vendor has a supply contract with a customer who is already in default. Then the customer files bankruptcy. The vendor doesn’t want to face further exposure during the bankruptcy (“post-petition”), but is equally concerned about being sued for breaching the contract or violating the automatic stay. What are the vendor’s rights?
In answering this question, the first step is to examine the terms of the contract to determine whether it is “executory” under § 365 of the bankruptcy code. If not, then the vendor has no contractual obligations to the customer (now the debtor). However, if the contract is executory then a vendor needs to tread extremely carefully. While a vendor cannot refuse to comply with the terms of an executory contract post-petition, there are cases that suggest unsecured trade creditors are entitled to insist on some protection, including cash in advance, in their post-petition dealings with debtors who already owe them money.
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Helping the Sale’s Force Make the Sale to Your Customer Emerging from Chapter 11 – More Credit Risk Than the Score Reveals?Scott E. Blakeley, Esq.
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What if a your customer, after filing one Chapter 11 bankruptcy, fails to recover and is forced to file a second Chapter 11 bankruptcy. Is a company eligible to file a second Chapter 11, also referred as a Chapter 22? The most recent companies to make headlines with a second Chapter 11 filing are Filene’s Basement/Sym’s, Anchor Blue, Jackson Green LLC, and Constar International.
Many of these reorganized debtors forced to file a second Chapter 11 are mired in industries with strong competition, and could not meet their debt obligations and were forced into Chapter 11 again by their creditors.
These companies defaulted on their confirmed plan of reorganization, and post-confirmation debts, followed by the filing of a second bankruptcy petition to obtain the automatic stay (an injunction that arises automatically upon the filing of the petition that enjoins creditors from collecting on their pre-petition claims) and a second opportunity to pare down their debts, and a likely orderly liquidation of the debtor’s assets.
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Fear and Lothian Oil: Are Unsecured Creditors Under Greater Threat From Insider Loans?Johnny White, Esq.
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The controversial doctrine of recharacterization empowers bankruptcy courts to ignore the formal labels of a loan and, looking instead to a transaction’s substance, reclassify a lender’s claim as equity instead of debt. The primary goal of the doctrine is to stop shareholders retaining assets of a bankrupt estate at the expense of creditors simply by dressing up their capital investments as loans. Recharacterization can have a significant impact on the treatment of unsecured creditors in many bankruptcies. Its practical consequence is that the newly recharacterized loans fall down the ladder of priority (below the trade creditors) in the scheme of distribution at the end of the case.
A recent decision from a federal appeals court in Texas on the topic of recharacterization – Grossman v. Lothian Oil Inc. (In re Lothian Oil Inc.), 650 F.3d 539 (5th Cir. 2011) – piqued the interest of commentators for rejecting the rule that a lender must be an “insider” of the debtor before its debt can be recharacterized. The court in Lothian Oil determined that state, as opposed to federal, law governs whether a debt should be recharacterized.
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Does a Critical Vendor Lose Its New Value Defense to a Preference Action?Bradley D. Blakeley, Esq.
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If the vendor has a pre-petition claim and is selected as a critical vendor, does that vendor lose its new value defense for the invoices paid under the critical vendor order? B&B recently encountered the issue while defending a vendor in the Delaware bankruptcy court. Judge Sontchi decided the issue this week and the result is a big win for creditors.
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The Sole-Source Supplier: Working Through Your Key Customer’s Financial Difficulties While Bettering Your Position For Payment On The Delinquent AccountScott E. Blakeley, Esq.
December 30th, 2011
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The strategies considered below are consistent with conventional credit enhancements, such as letters of credit and deposits, which purpose is to reduce credit risk yet make the sale whether the customer is current or delinquent. But the strategies considered below take into account the unique co-dependency trade relationship where a vendor is a sole source supplier to the customer, and the customer is a source of significant revenues for the vendor. These strategies presuppose a team approach from the vendor: the credit function collaborating with the sale’s force along with senior management to target a revenue number while managing credit risk.
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Having the Tough Conversation with a New Preference Action Client And Some Initial Steps to TakePeter M. Sweeney, Esq.
December 22nd, 2011
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In my experience one of the toughest conversations a creditors’ rights attorney can have with a client is the first time the client experiences a preference demand. Readers may recall the first time they received that demand letter in the mail or were served with a preference action complaint. You had a great long term relationship with a customer, providing goods or services on a regular basis. The customer told you they were having some financial troubles, but you stood by them providing them with needed goods or services. You did not even change the customary terms of your relationship. (Well, some of you probably did, which could impact some of the defenses you may have.) Finally, the customer did not pay the last couple invoices you sent them. You even felt bad for your customer when it called to tell you it had filed for bankruptcy. You chalked it up to a bad experience and promptly concentrated on your other paying customers. You had work to do and employees to pay, so you forgot about your old customer.
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