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Critical Vendors and Preferences in Chapter 11 Bankruptcy

by | Nov 1, 2021 | Bankruptcy, Bankruptcy, Debt, Business

By: Laura Day DelCotto

A recent case out of the Delaware Bankruptcy Court made clear that the exact wording of the standard “critical vendor” order is important. The case is a great reminder that even boiler-plate orders entered in conjunction with first day hearings require some close attention.

Why is this important?

It’s pretty much a given that most lawyers are scrambling on other bigger issues, so if you find yourself in a critical vendor setting, look closely at the terms of the process, and think about what payments you did receive in the preference period in addition to what you are still owed as a possible critical vendor. Work to insulate yourself on preference issues which will come way later in the case.

In the case of In re Insys Therapeutics, Inc, 2021 WL 3083325 (Bankr. D. Del. 2021), the Court parsed through the critical vendor order in reaching its conclusion that critical vendors were not protected from preference liability because of the fact of being a critical vendor.

First, the process in this case was permissive, not mandatory. This would cover most critical vendor programs, but you need to read the motion to be sure. Second, the Court noted that preferential payments that occur before the filing won’t be protected by a subsequent order, unless specifically provided in the order. So-you need to ask for it, or object to the motion without this included. Finally, in this case, the order expressly contained wording that all of the estates’ claims against critical vendors were being preserved.

Pay Close Attention to the Details!

I learned the hard way many years ago about the difference between orders that “authorize” and orders that “direct.” If you find yourself in a critical vendor situation of financial significance to you, it is worth it to hire a knowledgeable chapter 11 bankruptcy attorney to review the program with you in the very early days of the case, and determine if you can do anything to protect yourself from preference claims coming months or years down the road.

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.