December 21, 2024
As a credit manager, navigating customer bankruptcies requires a careful balance of protecting your company's interests while maintaining valuable business relationships. Recent developments in bankruptcy law and practice offer both challenges and opportunities for creditors. Here's what you need to know to maximize your recovery and protect your interests.
One of the most common misconceptions in bankruptcy is that DIP (Debtor-in-Possession) financing guarantees payment for post-petition shipments. While DIP financing provides some security, it's not a blank check. Before continuing shipments, you should:
- Review the DIP financing or cash collateral order carefully
- Check the budget to verify your customer can pay you
- Confirm which budget line item covers your shipments
- Verify the term of DIP financing matches your invoice terms
When shipping to a bankrupt customer, remember:
1. Cash in Advance is King
- Require payment by wire transfer, not check
- This eliminates risk of non-payment
- Provides immediate access to funds
2. Alternative Protection Strategies
If cash in advance isn't possible, consider:
- Reduced credit terms with strict credit limits
- Letters of credit from creditworthy third parties
- Personal guarantees from principals (especially valuable in closely-held companies)
The "20-day" administrative claim under Section 503(b)(9) is one of your most powerful tools. Here's what makes it special:
1. Qualification Requirements:
- Goods (not services) delivered within 20 days before bankruptcy
- Sold in ordinary course of business
- Goods must be received by the debtor
2. Important Recent Developments:
- Courts now generally allow 503(b)(9) claims even when goods are part of a service contract
- Physical possession, not shipping terms, determines receipt
- Drop shipments may be covered (though courts are split)
3. Strategic Tips:
- File your claim promptly, even though it's self-perfecting
- Watch for local rules about filing procedures
- Document delivery dates carefully
- Separate goods from services in your invoicing
Be alert for these warning signs that might indicate an impending bankruptcy:
1. Unusual Ordering Patterns
- Sudden large orders beyond normal volumes
- Customer "bulking up" on inventory
- Compare notes with other vendors if possible
2. Payment Behavior Changes
- Irregular payment patterns
- Requests for extended terms
- Unusual financing proposals
Being designated a critical vendor can significantly improve your recovery, but comes with responsibilities:
Benefits:
- Potential full payment of pre-petition claims
- Continued business relationship
- Possible preference claim protection
Considerations:
- Usually requires continued credit extensions
- May need to sign a critical vendor agreement
- Risk of clawback if terms aren't met
Protection Tip:
Obtain personal guarantees when signing new customers. This can provide leverage for critical vendor status later, as the decision-maker may be personally liable.
1. When Bankruptcy is Filed:
- Immediately review your exposure
- Document all goods shipped within 20 days
- Consider reclamation demands
- Evaluate critical vendor potential
2. For Ongoing Business:
- Review and possibly modify credit terms
- Document all communications
- Monitor payment compliance
- Keep shipping and payment records organized
3. If Payments Are Late:
- Consider stopping shipments immediately
- File administrative expense claim promptly
- Request shortened terms for future shipments
Recent court decisions show a trend toward protecting creditor rights while maintaining the integrity of the bankruptcy process. Stay informed about:
- Local bankruptcy court rules and procedures
- Industry-specific bankruptcy trends
- Changes in preference defense strategies
- Updates to administrative claim requirements
Remember: while bankruptcy can be challenging, it doesn't have to mean losing your entire claim. By understanding your rights and acting promptly, you can often secure better outcomes than you might expect.
The key is to be proactive, document everything, and don't be afraid to assert your rights under the Bankruptcy Code. When in doubt, consult with bankruptcy counsel to ensure you're taking advantage of all available protections.
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