Business Strategies for Chapter 11 Creditors

Barry P. Caplan

503.320.9831 Cell 503.243.1627

Many businesses are confronted with customers or suppliers who have filed Chapter 11 bankruptcy. This article summarizes some possible steps to minimize the effect on you.

In large retail cases, bankruptcy courts have permitted payment to critical vendors. Such orders may even approve payment of pre-petition debt as part of the vendors' incentive to continue shipping to the debtor. Critical vendor programs are available in some cases, although recent decisions questioned or limited the court's authority to approve such programs.

Trade creditors often get little notice of the Chapter 11 filing. If you act quickly, you may be entitled to reclamation rights on recent sales under Article 2 of the Uniform Commercial Code. Generally, a seller may reclaim goods from the debtor if sold on credit, the debtor is insolvent, and a timely demand for return is made. Most states provide for reclamation upon demand within 10 days after receipt of the goods by the debtor. The Bankruptcy Code permits an additional 10 days for a reclamation demand if the original 10-day period had not run prior to the bankruptcy filing.

A reclamation claim normally provides a significantly higher recovery than simply being a general creditor.

Sellers also may stop delivery of goods in transit prior to their receipt by the buyer. Article 2 provides for such remedy if the goods are in the possession of a freight carrier. The key is to notify the carrier to stop delivery prior to the buyer's receipt of the goods. The law is silent on whether such notice must be in writing, but written confirmation should be sent to the carrier with a copy to the buyer.

With timely notice, sellers of goods can, perhaps, even eliminate being a creditor in bankruptcy and, instead, obtain the return of the goods in transit. Giving the notice could also provide the seller an opportunity to improve the payment terms if the debtor needs the goods.

If you are one of the largest creditors of the debtor, you may be invited to attend the formation meeting of the creditors' committee. (Logistics should not interfere; the U.S. Trustee often will permit participation by conference telephone.)

The Bankruptcy Code generally designates the committee as responsible to represent all unsecured creditors and assure fair treatment to them in the case. Serving on the committee provides members with knowledge of the business opportunities and risks regarding recovery and future business with the debtor. Committee members have a fiduciary duty on behalf of all creditors. The committee also has the right to review and challenge questionable prior actions by the debtor.

This is just a brief summary about some strategies available to unsecured creditors in a Chapter 11 bankruptcy; there are technicalities beyond the scope of this article. Since these filings have become a risk of doing business, you should consider strategies in this article as a means to lessen your credit loss and to improve your recovery in a Chapter 11.

Barry P. Caplan is a partner in Sussman Shank LLP's Bankruptcy Law Group.  You can reach Barry at (503) 227-1111 or barry@sussmanshank.com.

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