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News Blog

Creditors Take Notice – Minimizing Bankruptcy Loses

Adrian C.

By Benjamin S. Seigel, of Counsel to Greenberg & Bass in the November issue of Fashion Manuscript

You just shipped a $250,000 order of men’s dress shirts to a 10-store chain of menswear stores and learned that your customer filed a Chapter 11 bankruptcy case. The bankruptcy code is a complex law with numerous rules of interpretation. Additionally case laws has also interpreted the code and different bankruptcy courts and appellate courts have issued inconsistent decisions. In all cases there are options that should be explored in an effort to maximize any possible recovery. A bankruptcy attorney should be consulted to review the options with you and determine a course of action. Here are some of the most significant options that might be available to you and should be considered as soon as you learn that a bankruptcy case has been filed.

Reclamation

You can file a claim up to 45 days after your customer rewceived the goods. However, various restrictions found in the bankruptcy code will apply. The sale of the goods must have been in the ordinary course of the seller’s business. The right to reclaim goods is limited to the goods remaining in the buyer’s possession. State law restrictions may also apply to the reclamation right. A careful analysis is required.

Priority Claim

You can file a priority claim regarding the goods if they were received by your customer within 20 days before the commencement of the case. Here again certain restrictions found in the bankruptcy code may apply. Different courts have established different procedures to assert a priority claim. Some courts require a hearing to determine the right to have the claim be treated as a priority.

Proof of Claim

File a proof of claim to be certain that your claim is included in any distrivution that may be made to unsecured creditors. Even though a reclamation claim that has been filed, a separate proof of claim must be filed as well. In the event that the invoice was factored it is a good idea for the factor to file a proof of claim as well.

Serve on the Creditors Committee

If your claim is one of the 20 largest claims you may be invited to serve on the Unsecured Creditor’s Committee. If you serve you will have a voice in the operation of the case. The committee members are entitled to be reimbursed for certain expenses incurred while serving on the committee.

Preferences and Fraudulent Transfers

The debtor (your customer) may conduct analysis to determine if you have received a preferential payment prior to the bankrupotcy or if you were the recipient of a fraudulent transfer. You should be prepared to defend any such action that might be brought forth. If you were paid for prior shipments withing the 90 days preceding the filing of the bankruptcy case you should be liable to return the amount paid as a preference. Certain defenses may apply and the court may require a hearing to determine your liability, if any.

Trademark Protection

If you sold the shirts pursuant to a distribution or license agreement that provided certain protections for your trademarks you should consider the debtor’s intentions regarding the sale of the inventory to raise money for operations. If the goods are to be sold as part of a liquidation of the value of the trademarks. It may be necessary to initiate court action in that regard.

Disclosure Statement and Plan of Reorganization

At some point in the case the debtor will submit a disclosure statement for court approval and a plan of reorganization. You will need to review the disclosure statement carefully together with the plan of reorganization to determine whether to vote for or against the plan. The court must approve the disclosure statement as having sufficient information to enable a creditor to determine where to vote in favor or against the plan.

With respect to all of the foregoing options none are as simple as may be indicated by the summaries listed above. Required forms must be timely completed and filed with the court. Frequently a bankruptcy attorney is required to appear before the court when a contested matter arises. However, just because your customer filed bankruptcy does not mean all is lost. All of these options should be explored.