Collection From Bankrupt Purchaser: Potential For Recovery
Economic conditions have been less than ideal for the past several years. Although you may have weathered the economic storm and kept your business afloat to this point, there is no guarantee that your customers’ businesses will be as fortunate. I was recently involved in a case where our client, a parts manufacturer, received a notice that one of its largest customers had filed a Chapter 11 bankruptcy petition. To make matters worse from the manufacturer’s perspective, a large shipment of goods had been sent to the bankrupt client less than two weeks earlier. All told, our manufacturer client had shipped thousands of dollars worth of product over the two months leading up to the bankruptcy filing, and had not received payment for those goods.
When our client informed us of the situation, the president was fearful that the bankruptcy meant his corporation would not recover the funds it was owed, lose its product, and be left taking a major financial hit. What the client didn’t know was that the Bankruptcy Code provides protections and rights to creditors in situations similar to that facing our client.
Section 2-702 of the Uniform Commercial Code, along with Section 546(c) of the Bankruptcy Code provides that goods sold to a debtor within the 45 days prior to the date the bankruptcy petition is filed are subject to a reclamation claim, by which the creditor can seek to have the goods returned by court order. In addition, Section 503(b)(9) of the Code provides that goods sold within 20 days prior to the petition date are entitled to “priority” status. What this means is these types of claims have a higher priority when it comes time for the bankruptcy estate to make any sort of distribution to its creditors. In fact, these claims are generally paid first after any secured creditors. This means the creditor can file a motion with the bankruptcy court for a return of the goods, or file a request for accelerated payment, or in some cases, both. In fact, upon receiving notice from the creditor, a debtor holding goods purchased within the 45 day limit can be barred from using, selling or transferring the goods to anyone else. This form of relief can provide the creditor that sold the goods with a faster means of payment.
When our client was presented with this information, it chose to go a third route. There are companies that monitor large corporation bankruptcy filings for the purpose of analyzing and purchasing the potential claims of the corporate debtor’s creditors. One such third party claim dealer contacted our client with an offer to purchase the claim. However, these companies cannot make a profit if they offer creditors the full value of their claims. In our client’s case, the dealer offered one third of the value of the claim. Because we had already analyzed the claim, and determined that with time our client would receive nearly the full value of his claim, we were able to recommend the client reject the offer. With our assistance, our client was able to negotiate a new, higher purchase offer from the claims dealer. In the end, our client received nearly the full value of its claim from the dealer, and was also able to receive payment from the dealer several months earlier than would have been possible by proceeding through the bankruptcy process.
The lesson to be taken from all this? If you happen to receive a notice that one of your customers has filed a bankruptcy petition, don’t panic. You and your company may have multiple avenues to recover all or a portion of the amount owed. If you have any questions, please contact one of the bankruptcy attorneys at DiMonte & Lizak, LLC.