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Tuesday, May 5, 2009 INSOLVENCY OR BANKRUPTCY OF A CUSTOMER: Things You Can Do as a Supplier to Protect Yourself By: Scott H. Hogan & Jean G. Schtokal |
Business & Corporate Group Leader Attorneys
Scott A. Chernich* Paralegals
Ida R. Farhat, ACP *Bankruptcy Attorney |
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There are several things a supplier can do to protect itself in the case of a customer's insolvency. Reclaim your company's goods. Under the Uniform Commercial Code ("UCC"), a supplier like your company can demand the reclamation of goods delivered to its insolvent customer if the goods were sold to the customer in the ordinary course of business, the goods were delivered when the customer was insolvent and the customer still has possession of the goods. This is true whether or not the customer has filed for bankruptcy. Is there a short time period for reclamation? Yes. The supplier must make a written demand for return of the goods within 10 days, or in some cases 20 days, after the goods were delivered. Will any demand suffice for reclamation? No. There are particularized requirements as to what must be contained in the written demand and advice of counsel should be sought. What if the customer has filed for bankruptcy? To the extent the customer has filed for bankruptcy (whether Chapter 11 reorganization cases or Chapter 7 liquidation cases), the reclamation demand must be made in writing within 45 days of receipt of the goods by the customer/debtor in bankruptcy. If the 45 days expires after the bankruptcy case is filed, then the supplier must make the reclamation demand within 20 days after the bankruptcy filing. What is insolvency? Insolvent means the customer has ceased to pay its debts in the ordinary course of business (other than in the case of a good faith dispute), is unable to pay debts as they become due, or has debts exceeding assets at fair market value. How does your business benefit by making a reclamation claim? The trustee or debtor in bankruptcy must return the goods to your company if the reclamation claim is valid and meets all legal requirements. The obligation to return the goods is subject to the claims of secured creditors of the customer. This usually means that the goods are seldom returned. Supplier may get better priority if customer is in bankruptcy. If the goods have been sold by the customer, or if your company fails to make a timely reclamation demand, you can file a claim for administrative priority for the value of the goods received by the customer/debtor in bankruptcy within 20 days prior to the bankruptcy filing. A properly made claim may get your company priority with respect to those goods that you would otherwise not have as an unsecured creditor of the customer. Can your company refuse to ship additional goods? Outside of bankruptcy, when the supplier discovers the customer is insolvent, the supplier may refuse delivery except for cash including payment for goods previously delivered. In a bankruptcy case, the supplier can refuse to sell goods to the bankruptcy debtor, or may demand cash on delivery or even cash in advance. The supplier may not, however, demand payment for debts that arose before the bankruptcy filing. Stay on top of receivables. A supplier insecure about a customer's ability to pay should raise the issue with the customer. Do not make oral deals over the phone, however. Offer to modify contract payment terms (for example, extended payment terms) only in exchange for adequate security. Although not always possible, consider negotiating for payment directly from the ultimate recipient of the goods with agreement of the customer. The customer may agree to this in exchange for future delivery of goods to it, notwithstanding its outstanding debts owed to you. Determine your potential liability for preferences. In the case of a federal bankruptcy, payments made by the customer to your company within 90 days prior to the bankruptcy filing (called "preferences") may have to be paid back by your company to the bankruptcy estate. If you receive a preference demand letter, you should promptly contact counsel. Your company may not have to return some or all of the funds demanded. |
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