US COLUMN

Rights of in the US

Dan Lowenthal explains the statutes concerning the rights of trade creditors in the US

trade who supplies goods to a Acompany that files for should seek to enforce certain rights in the Chapter 11 case. For instance, the Bankruptcy Code Section 546(c) preserves a creditor’s right of reclamation under state . The applicable state law statute concerning

DANIEL A. LOWENTHAL reclamation is Uniform Partner, Reorganisation Commercial Code Section 2-702. and Creditors’ Rights Group at Patterson Belknap Webb & Tyler The two statutes together permit LLP, New York a supplier of goods to reclaim goods provided to an insolvent in the ordinary course of the debtor’s business when such goods are identifiable. UCC Section 2-705. The to a debtor’s confidential BC Section 546(c) permits in BC Section 362 information and receive cash flow reclamation of goods supplied bars creditors from trying to forecasts, business plans, and within 45 days before the obtain from the ’ more. They learn more about the bankruptcy petition date or, if the estates. Even so, some courts have debtor’s reorganisation or 45-days period expires after the allowed creditors to invoke their goals than they would case begins, no later than 20 days delivery stoppage rights. The if they did not serve. after the start. The trade creditor theory is that the creditor is not Yet committee members are (or its counsel) should demand seeking to obtain property, for all unsecured reclamation right after the but rather suspending its creditors. Creditors want to Chapter 11 case is filed. performance while the debtor maximise recoveries on their But trade creditors cannot considers if it wants to assume or claims, but issues may arise in always reclaim goods they reject an executory with which an individual creditor’s own “ provided prepetition. The goods the creditor/supplier. differ from those of the A CARTON OF might be subject to a secured The BC also provides that the other members. Bondholders or creditor’s or might not be seven largest creditors by claim governmental agencies might SHOES MIGHT identifiable. A carton of shoes amount can serve on the official pressure a committee to pursue BE IDENTIFIABLE, might be identifiable, but oil committee of unsecured creditors, goals on issues that differ from flowing through a pipeline with which is formed by the US what trade creditors would want. BUT OIL FLOWING other suppliers’ oil might not be. ’s Office soon after a As fiduciaries for all creditors, THROUGH A BC Section 503(b)(9) gives bankruptcy case is filed. Although committee members must deal suppliers a priority administrative a seven-member committee is the with those tensions. PIPELINE claim for the value of goods they rule, the US Trustee has If a debtor has secured , WITH OTHER supply to debtors in the ordinary appointed committees with as few the creditors’ committee course of the debtors’ as three members and others with investigates whether the security SUPPLIERS’ OIL within 20 days before the filing 11 or more. The size of a interests were properly perfected MIGHT NOT BE date. Trade creditors that cannot committee is influenced by the and other related matters reclaim goods under Section number of creditors willing to concerning the validity of the 546(c) can benefit by filing a claim serve and the size of the case. ’s priority claims. under Section 503(b)(9). There are pros and cons to Committee members decide if A trade creditor might seek to serving on a creditors’ committee. litigation should be brought ” stop delivering goods under the Committee members gain access against the secured creditor. 38 SPRING 2015 US COLUMN

Debtors’ Options constitutes a material breach and in the ordinary course of its allows the creditor to file an business or financial affairs, made Retailers in bankruptcy might unsecured claim for damages as in the ordinary course or financial seek court permission to pay their of the petition date (BC § affairs of the debtor and the critical vendors pre-bankruptcy. 365(g)(1). Creditors whose transferee, or made according to “ THE SEVEN Debtors identify which creditors are assumed or assigned ordinary business terms. The they believe are critical to their recover more on their prepetition creditor must show a consistent LARGEST business. A Debtor’s Critical claims than do creditors whose history of invoices to and Vendor Motion includes the total contracts are rejected. payments by the debtor both CREDITORS BY amount the debtor wishes to pay A bankruptcy estate might during and before the 90-day CLAIM AMOUNT those creditors. The proposed also have claims to assert against prepetition period. order approving the motion might unsecured creditors. Debtors can The contemporaneous new CAN SERVE ON require vendors to keep supplying seek to claw back payments that value defence applies when a THE OFFICIAL a debtor according to certain were made to trade creditors in debtor makes a transfer to a specified business terms. Creditors the 90 days before the bankruptcy creditor, and at or about the same COMMITTEE OF that agree to the proposed supply case was filed. The estate will have time, the creditor supplies the UNSECURED terms are eligible to receive preferential transfer claims to debtor with new value. The prepetition-owed amounts for assert under BC Section 547. subsequent new value defence CREDITORS which they otherwise might be Payments are preferential if a applies when a debtor makes a paid a fraction on the dollar as debtor can satisfy a five-part test transfer to a creditor, and the unsecured claims in the examining if the payment (1) was creditor subsequently supplies to bankruptcy case. made to or for the benefit of a the debtor new value that remains Trade creditors must also file creditor; (2) was made on account unpaid. If a preferential transfer timely proofs of claim. Typically, a of an antecedent debt; (3) was claim is brought against the debtor files a motion to set a filing made while the debtor was creditor, the subsequent new value ” deadline. Claims should identify insolvent; (4) was made within 90 supplied would reduce the prepetition-owed amounts and days before the bankruptcy case amount the creditor would owe include supporting was filed; and (5) enabled the on the claim. documentation. A separate creditor to receive more than it deadline is set for creditors to file would in a Chapter 7 liquidation. Being Prepared administrative expense claims – The fifth element applies Trade creditors face many claims for goods and services when a trade creditor supplies challenges when dealing with provided to a retailer post- goods on an unsecured basis. retailers that might or do file for petition. Administrative expense Payment in full for those goods bankruptcy. Pre-bankruptcy, trade charges are the actual and would likely exceed what an creditors must monitor and necessary costs and expenses a would receive manage the risks and debtor incurs to preserve its in a Chapter 7 liquidation case. consider alternative business bankruptcy estate through Thus, this preferred creditor terms. Chapter 11. Creditors with valid would have received a greater If a retailer does file, then administrative expense claims are amount in the 90 days before trade creditors must consider paid before distributions are made bankruptcy than it and other possible remedies related to goods to unsecured creditors on trade creditors would receive as they delivered before the filing; prepetition-owed amounts. distributions on their prepetition protect and pursue recovery on Certain trade creditors have claims in the bankruptcy case. their prepetition claims; review contracts with debtors that qualify The BC provides creditors filings in the case to determine if as executory contracts. This with defences to preferential critical vendor status is an option means that both the creditor and transfer claims. The most and whether service on a the debtor still owe performance common defences are the creditors’ committee makes sense; to one another, such that failure ordinary course of business determine if their contracts are by either to perform would defence, the contemporaneous executory and, if feasible, pursue constitute a material breach. new value defence, and the assumption; and, assert A debtor can assume, reject, subsequent new value defence. administrative expense claims or assume and assign an executory These defences prevent or reduce when applicable. Finally, trade contract to another party clawbacks of transfers because the creditors must be aware that the (BC §365). creditors continued doing business Share your views! bankruptcy estate might have A debtor that assumes or with the debtor in the 90 days claims to assert against them for assigns a contract (or the assignee) before bankruptcy in a manner amounts they received prepetition must pay the creditor the that the BC says should be I and plan accordingly. prepetition-owed amounts and respected. give adequate assurance that the The ordinary course of A version of this article first appeared in the October debtor or assignee can keep 2014 issue of the Journal of Corporate Renewal, business defence applies when a published by Turnaround Management Association. performing the contract (BC § transfer was payment for an 365(b)(1). Rejection of a contract obligation incurred by the debtor

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