Learning that a customer has filed bankruptcy and is seeking to discharge obligations is unsettling. But there are steps a creditor can take to protect its rights and
position itself in the bankruptcy process,
according to Andy Kight, shareholder/director of Sommer Barnard PC, who concentrates his practice on business workouts,
bankruptcy and creditors’ rights issues.
Smart Business spoke with Kight about
the bankruptcy process and how a creditor
can navigate through the process.
Is it worthwhile for a company to get involved
in a customer’s bankruptcy process?
Creditors often assume that participating in
the bankruptcy process is simply throwing
good money after bad. It is true that not every
case results in a distribution, but the failure to
confirm that a claim has been scheduled or to
file a proof of claim guarantees that the creditor will receive no distribution. In addition,
bankruptcy may actually provide the creditor
with an opportunity to obtain more favorable
credit terms by continuing to do business
with a reorganizing debtor. The cost to position oneself in the bankruptcy process is usually modest, so creditors are encouraged to
take these steps at the outset of every case.
What is the first step a creditor should take?
Once a customer files a Chapter 11 reorganization, an initial decision should be made
on how to treat the customer going forward.
Just because credit was extended before
bankruptcy does not mean the bankrupt
company has a right to continue operating
under the same terms. Ordinarily, nothing
requires a vendor to continue doing business
with a debtor. A vendor that shipped on credit pre-bankruptcy might consider converting
to prepay or C.O.D. terms post-petition, or it
may choose to stop shipping altogether.
However, new terms or stopping shipments
altogether cannot be imposed in every
instance, and a creditor may not coerce a
debtor to make payments on a prepetition
claim. If the creditor and the debtor were
operating under a supply contract or other
written agreement prior to bankruptcy, the
debtor may have the opportunity to assume
or reject that contract or agreement during the bankruptcy case. Until that decision has
been made, both the vendor and the debtor
should continue performing under the agreement. Before demanding such changes, the
vendor should assess its arrangement with
the bankrupt company and determine
whether it is operating under a contract
subject to assumption or rejection.
What is a proof of claim, and does a creditor
necessarily have to file one?
At the outset of a bankruptcy case, the
debtor is required to file certain documents
setting forth a summary of its financial condition and listing all claims that exist against
it at the time the case is commenced. In a
Chapter 11 reorganization, unless a claim is
listed as disputed, contingent or unliquidated,
a scheduled claim is deemed allowed. The
safe practice, however, is to always file a
proof of claim.
In a case under Bankruptcy Code
Chapters 7, 12 and 13, a proof of claim must
generally be filed within 90 days after the
first date set for the initial meeting of creditors. In a case under Chapters 9 and 11, a
proof of claim must be filed within the time
fixed by the court.
In calculating its claim, a creditor generally
should include all amounts provided for in its purchase orders or contract, such as interest,
late fees and attorneys’ fees. In addition,
copies of the documents upon which the
claim is based, such as the contract, agreement and even an account summary, should
be included with the proof of claim.
Are there any other rights creditors may be
able to assert?
One possibility creditors may consider is
pursuing a non-dischargeability action. In
certain instances, including when a debtor
obtains goods or services through fraud or
misrepresentation, a debt may be found to be
non-dischargeable. While creditors are
enjoined from seeking to collect claims that
have been discharged, the liability on a nondischargeable debt survives bankruptcy, and
may be pursued once the automatic stay terminates. A non-dischargeability action is
commenced by filing a complaint with the
bankruptcy court. Because the time to do so
is strictly enforced, and because the process
may be complicated, creditors are encouraged to consult with an attorney to determine
the feasibility of pursuing such an action.
In addition, the 2007 amendments to the
Bankruptcy Code provide creditors the ability to protect themselves with respect to
unpaid shipments made to a debtor in the
days leading up to bankruptcy. Upon proper
request, Section 503(b)(9) allows a creditor
to assert an administrative claim for the value
of any goods received by the debtor within 20
days before the date the case is commenced
if those goods were sold to the debtor in the
ordinary course of its business.
Bankruptcy priorities provide for payment
of allowed administrative expense claims
after satisfaction of secured claims but
before payment of priority and general unse-cured claims. To the extent secured claims
are not fully satisfied, 503(b)(9) administrative claimants run the risk of nonpayment.
The ability to assert this claim, however, is a
tool that should not be overlooked, regardless of the outlook of a bankruptcy case at filing. Creditors that deliver unpaid goods to a
debtor in the days before bankruptcy are
therefore urged to investigate and assert this
valuable right.
ANDY KIGHT is a shareholder/director of Sommer Barnard PC. Reach him at (317) 713-3572 or [email protected].