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Vendors Receive Greater Protections Under Amendments to Bankruptcy Code

Winter 2006Cole Schotz DocketAttorney: Felice R. Yudkin

In the past, when an entity filed a petition for bankruptcy relief and had not paid for goods provided by its vendors, unless a particular vendor’s claim was substantial or the vendor’s continued supply of goods to the debtor was “critical”, the Bankruptcy Code provided few avenues of protection and incentive to actively seek recovery of the pre-petition claims.  In many instances, the vendor would fail to prosecute its rights, because the amount of the claim did not justify the expense of pursuing the claim.  Fortunately, the recent amendments to the Bankruptcy Code, effective for cases filed after October 16, 2005, provide new and expanded rights to suppliers of goods.  In short, vendors have been granted an expanded right to seek reclamation of the goods supplied to the debtor prior to the commencement of the bankruptcy case, and regardless of whether reclamation is sought, are entitled to an administrative expense priority claim for certain amounts due.

Reclamation is a right that is generally available under both state law and the Bankruptcy Code.  A demand for reclamation enables a vendor to recover goods delivered to a debtor while the debtor was insolvent.  Prior to the amendments, a vendor could assert its rights to reclaim goods sold to the debtor, provided that the demand was made within ten days of the debtor’s receipt of the goods and the debtor was insolvent at the time of the receipt of goods.  The short time frame made it difficult for vendors to respond in a timely and effective manner, and served to cut off vendors from asserting valuable rights.

The amendments expand a vendor’s rights to seek reclamation by providing an extended period in which demand for reclamation can be made.  Now, a vendor may reclaim goods if a demand is made not later than 45 days after delivery to the debtor.  If that 45-day period has not passed as of the commencement of the bankruptcy case, the vendor will have an additional 20 days following the commencement of the case to demand recovery of the goods. 

In addition, the amendments provide administrative expense status to all claims for goods supplied to a debtor within 20 days before the commencement of the bankruptcy case, provided that the goods were received in the ordinary course of the debtor’s business.  This provision does not require that the vendor provide any written notice to the debtor.  The practical effect will be to prefer vendors over other unsecured creditors and provide a better opportunity for vendors to receive full payment on their claims. 

Undeniably, vendors now have greater leverage in bankruptcies to ensure their claims are recognized and paid.  However, it remains vitally important for vendors to properly exercise their reclamation rights and protect their claims.  Upon receiving notice of filing of bankruptcy from a customer, the best practice is for a vendor to immediately contact counsel to make a proper written demand for reclamation, as well as to prosecute potential administrative expense claims and to file appropriate proofs of claim on the vendor’s behalf.

 

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