Guidelines for Sellers Before a Debtor’s Bankruptcy Hits
Unpaid sellers of goods continue to be 100% stiffed in bankruptcy cases across this country. The equitable arguments can’t win the day under the Bankruptcy Code. Suppliers of goods sell the products to the debtor. The debtor uses them in the operations to create the enterprise value, the going concern value. The secured lender, usually now some kind of private money fund, has a blanket lien on everything including first born children if they might have any value. The lender sells off with the full going concern value in a sales process approved by the court.
In the olden days, before the 2005 BAPCPA, there were better arguments to be made. A recent decision out of the District Court in Nebraska is the best primer on how things changed, and how the rights of suppliers of goods became clearly inferior to UCC-1 lenders. Required reading for those who want to really understand how it works. In the Matter of Specialty Shops Holding Corp, 8:19CV405 ( D Neb. 7/24/2020).
Sellers beware. Protect yourself by keeping payment terms well within the 503(b)(9) time window, within 20 days of the debtor’s receipt of your product. If you choose to extend longer payment terms, then do so at your own risk. The only person you are helping by doing that is the secured lender. The secured lender doesn’t need your help because they will take full advantage of it all day every day.
A “reclamation demand” under state law is the right of a seller to recover possession of goods delivered to insolvent buyers, based on common law and rights under Article 2 of the Uniform Commercial Code. There are strict time requirements on making these demands. Once a bankruptcy intervenes, then 11 U.S.C. § 546(c) governs all things “reclamation” related.
Tips for Sellers to Protect their Assets
The Specialty Shops Court explained the “trade-off” for unpaid sellers: Section 503(b)(9) in exchange for lesser rights under Section 546. I’m usually surprised that many sellers of goods on credit aren’t intimately familiar with Section 503(b)(9), your best friend. Trust me when I tell you that you never, ever want to get involved in the exercise of attempting to “trace” proceeds. You also don’t want to get into evidentiary battles over exactly when a debtor received your goods, or what happens if it falls exactly on day 20.
Sellers: Keep all your shipping and receipt papers. Make sure you know not only when you shipped out, but when they were received. If possible, set up a process where your customer signs something or otherwise acknowledges in writing the exact day and time of receipt. Make sure your payment terms are well within 20 days of receipt. Have all this ready so that when one of your customers files bankruptcy, you are ready to go with your administrative claim. Without admin priority status, know that you are 99% likely to get something along the lines of a few pennies to a big fat zero. I want more for you.
About DelCotto Law Group
DelCotto Law Group is Kentucky’s asset protection law firm known for its commitment to the lifetime success of its clients. With offices located in Lexington, Louisville and Danville, DLG serves Kentuckians with complicated financial matters, especially in the areas of bankruptcy and complex litigation. For more information please call (859) 231-5800, email [email protected] or reach us on our contact page.