Tips of the Trade - Quick Tidbits for Trade Creditors

By Hajar Jouglaf

Trade Tip #9: What is an “Adversary Proceeding”?

An adversary proceeding is essentially the bankruptcy court’s version of a civil action to recover money or property (other than a proceeding to compel the debtor to deliver property to the trustee) or a proceeding under section 554(b) or section 725 or Bankruptcy Rule 2017 or 6002.

An adversary proceeding is opened by filing a complaint asking the court to rule on an issue related to a bankruptcy case. The adversary proceeding is given a new case number that is separate from the number of the associated bankruptcy case.

Read Dealing with Corporate Distress 02: These Are the People in Our Neighborhood: An Overview of Parties in Chapter 11 to learn more.

Trade Tip #8: Critical Vendors

A debtor may seek authority to pay claims incurred prior to the bankruptcy filing owed to “critical vendors” that supply goods and services by filing motions early in the bankruptcy case. The debtor will argue that absent granting of these motions, these vendors will cease doing business with the debtor, and therefore jeopardize its ability to successfully reorganize.

This is an extraordinary measure the debtor must take to ensure its economic survival. But critical vendor treatment can be the answer to your prayers if you’re a creditor who finds itself owed a significant amount of money by a chapter 11 debtor.

Want to learn more? Read Dealing with Corporate Distress 08: Preventing Forest Fires with First Day Motions in Chapter 11 by Jonathan Friedland, Jack O’Connor and Hajar Jouglaf.

Trade Tip #7: What is a “Committee”?

In the majority (but not all) chapter 11 cases, the U.S. trustee may appoint an official committee of unsecured creditors (“Committee”), which hires attorneys (and occasionally other professionals) to monitor and challenge the debtor’s activities. The Committee is typically composed of the largest unsecured creditors, but it has a fiduciary duty to all creditors in the case.

The U.S. Trustee will solicit creditors to serve on the Committee by mailing out a questionnaire to creditors. If interested in serving on a Committee, a creditor should promptly mail back the questionnaire and attend the organizational meeting where the U.S. Trustee interviews and appoints committee members.

There are some advantages and disadvantages to serving on a Committee. Learn more about them in Dealing with Distress For Fun & Profit – Installment #14 – An Introduction to Chapter 11 for Unsecured Creditors: What Every Unsecured Creditor Should Know by Michael A. Brandess and Luke Smith.

Trade Tip #6: What are §503(b)(9) claims?

Section 503 of the Bankruptcy Code grants payment priority to “administrative expenses” with the intent of supporting debtor reorganization by encouraging claimants to do business with the debtor. Among them is a §503(B)(9) claim – an administrative expense claim for the value of any goods received by the debtor within 20 days of bankruptcy; and sold to the debtor in the ordinary course of business.

How does a creditor qualify for a §503(B)(9) claim? Creditor must show it: (a) sold goods – not services – to the debtor; (b) within 20 days of the bankruptcy filing; and (c) within the ordinary course of debtor’s business.

Bankruptcy courts frequently enter procedural orders governing the §503(B)(9) claims process in a case. These orders typically include an earlier deadline (than general bar date) to assert §503(B)(9) claim. Vendors who miss this deadline are forever barred from asserting a §503(B)(9) claim.

Learn more about how you can gain §503(B)(9) priority status in When are Goods ‘Received by the Debtor’ for Purposes of a Section 503(b)(9) Administrative Expense Claim? by Russell C. Silberglied and Christopher M. De Lillo.

Trade Tip #5: How do you assert your reclamation rights?

Section 546(c) of the Bankruptcy Code and the Uniform Commercial Code permit a creditor to make a timely written reclamation demand to the debtor to recover goods sold in the ordinary course of the creditor’s business and received by the debtor within 45 days of bankruptcy.

The written demand must be made within: (a) 45 days of the debtor’s receipt of the goods; or (b) 25 days from the petition date if debtor filed bankruptcy within 45 days of receiving the goods.

The reclamation process is quite onerous, and creditors may be better served if they qualify for a § 503(b)(9) claim.

Learn more about §503(b)(9) claims in Trade Tip #6.

Trade Tip #4: What is a § 341(a) meeting?

Section 341 of the Bankruptcy Code requires the U.S. trustee to hold a meeting of creditors (usually in the first 60 days after the petition date) to give creditors and the U.S. trustee the opportunity to ask the debtor questions about debtor’s conduct, assets, liabilities and any matter that may affect administration of the case. The debtor is required to attend and must answer these questions under penalty of perjury. While creditors are not required to attend §341 meetings, and they don’t waive any if they don’t attend, attendance is highly encouraged to get answers to their questions from the debtor.

Want to learn more? Read Dealing With Distress For Fun & Profit – Installment #6 – The Mundane Middle of A Bankruptcy Case by George Kuney and Jonathan Friedland.

Trade Tip #3

If your customer filed bankruptcy, first find out whether the bankruptcy is a chapter 11 or chapter 7. Generally, debtor continues to operate under chapter 11 and ceases operations under chapter 7.

Second, obtain copies of all documents filed in the case to understand the facts and circumstances and identify any upcoming deadlines. These documents can be retrieved from Public Access to Court Electronic Records (PACER) system.

Third, file a notice of appearance under Federal Rule of Bankruptcy Procedure 2002 to receive future pleadings and other documents filed in the case.

Finally, makes sure you attend the §341 meeting to examine the debtor under oath about its assets, liabilities, plans regarding reorganization.

You can learn more by reading What to Do In the Event of a Customer Bankruptcy by Michael A. Brandess.

Trade Tip #2

The filing of a bankruptcy petition automatically stays substantially all litigation, lien enforcement, or other activities that a creditor might undertake to enforce its claim against the debtor or its property. Section 362 of the Bankruptcy Code imposes the automatic stay; no court order is required. Moreover, the automatic stay applies in every bankruptcy case regardless of the chapter under which relief was sought and regardless of whether the case was voluntary or involuntary.

Want to learn more? Read Dealing With Distress For Fun & Profit – Installment #10 – About the Automatic Stay By George Kuney and Jonathan Friedland

Trade Tip #1

Section 501 of the Bankruptcy Code expressly authorizes a creditor to file a proof of claim. With limited exceptions, a prepetition creditor that wishes to be eligible to receive a distribution from a debtor’s bankruptcy estate must file such a proof of claim.

Want to learn more? Read File Early and Often: Filing and Amending Claims in a Bankruptcy Case by Michael Schwarzmann and David Gottlieb.

Editor’s Note: Many Tips of the Trade™ are based, in substantial part, on material reprinted from Commercial Bankruptcy Litigation 2d and Strategic Alternatives for and Against Distressed Businesses, with permission of Thomson Reuters. Quoted language are direct excerpts. Tips of the Trade™ is authored by business/bankruptcy/restructuring/creditors’ rights attorney, Hajar Jouglaf.