Source: Dorsey & Whitney
Article Authors: Dorsey & Whitney Bankruptcy Team for Foreign Suppliers
Published: October 2020
This
Series Two will address questions relating to how suppliers and their supply
contracts are impacted by a bankruptcy filing and the benefits and concerns of
continuing to do business with a company in bankruptcy
1. Question: We supplied goods to the
debtor in the days or weeks leading up to the bankruptcy filing. Does that give
us any special rights in the bankruptcy case?
Yes. Bankruptcy Code § 546(c) preserves a
supplier’s right to reclaim goods supplied to a debtor within 45 days of the
bankruptcy filing, but only if the supplier has the right to do so under
applicable U.S. state or other non-bankruptcy law. Such applicable
non-bankruptcy law may include the United Nations Convention on Contracts for
the International Sale of Goods (CISG), which is a multilateral treaty that
establishes a uniform framework for international commerce and provides
suppliers with a right of restitution of goods under certain circumstances. As
of the date of this article, the CISG has been ratified by 94 countries,
representing a significant proportion of international commerce.
Notwithstanding whether a supplier has
non-bankruptcy law reclamation or restitution rights, Bankruptcy Code §
503(b)(9) gives administrative expense priority status to a supplier’s claim
for goods received by a debtor within 20 days before the date of commencement
of a bankruptcy case and within the ordinary course of business. This means
that suppliers of such goods are entitled to priority of payment in the
bankruptcy case.
2. Question: Can we offset the debt owed
against a cash deposit we are holding or suspend the debtor’s line of credit?
The automatic stay prohibits any act to
collect against a prepetition debt after the commencement of the bankruptcy
case and is broadly interpreted in favor of debtors. Applying a cash deposit to
a prepetition debt without prior court approval may constitute an act to
collect a prepetition debt in violation of the automatic stay. It would be
worthwhile to consult with a U.S. bankruptcy attorney to determine whether to
apply a cash deposit or suspend a line of credit to a debtor in bankruptcy.
3. Question: Can we terminate our
contract with the debtor or demand more favorable payment terms?
The Bankruptcy Code prohibits counter-parties
to contracts with the debtor from terminating or modifying their contracts
solely because a debtor has gone into bankruptcy. This limitation does not
apply to contracts to make a loan or extend financing; rather, the Bankruptcy
Code provides that a creditor cannot be compelled to continue advancing credit
to a debtor in bankruptcy. However, a U.S. bankruptcy attorney should be
consulted if you wish to modify credit terms.
4. Question: Should we continue to
supply goods and services to the debtor while it is in bankruptcy?
A Chapter 11 debtor is required to continue
performing contract obligations during its bankruptcy case. Claims on account
of goods supplied during a bankruptcy case are entitled to administrative
expense priority and will, in most instances, be paid in cash in the ordinary
course notwithstanding the bankruptcy filing. To the extent such claims are not
paid in the ordinary course, they must be paid in full in connection with a
plan in order to satisfy Chapter 11 plan confirmation requirements.
In some instances where the Chapter 11 case
does not successfully reorganize and the debtor does not have sufficient funds
to pay all administrative claims, even holders of administrative claims may not
be paid in full. Accordingly, as you continue to supply goods and services to
the debtor during its bankruptcy case, it is worthwhile to have a U.S.
bankruptcy attorney carefully monitor the bankruptcy case as it progresses.
5. Question: Does the bankruptcy filing
of an affiliate or parent company impact the contract a supplier has with a
non-debtor entity?
So long as no debtor is a party to or has
guaranteed the contract, the bankruptcy filing will generally not affect the
relationship of a non-debtor affiliate or subsidiary entity with its suppliers.
And, even if a debtor is a party to your supply contract, you have many rights
in the bankruptcy case, such as administrative expense claims for goods
supplied immediately before the filing and those supplied during the bankruptcy
case.
6. Question: Do we still need to file a
claim in the bankruptcy case if the debtor listed our debt in its bankruptcy
schedules?
That depends. In a Chapter 11 case, if the
debtor lists your debt in its schedules, does not designate such debt as
contingent, unliquidated, or disputed, and you agree with the amount of the debt
listed, then you do not need to file a claim. Rather, it will be recognized as
described on the debtor’s schedules. In any event, because filing a claim is a
relatively uncomplicated process, we recommend you file a claim even if so
recognized. If the debtor does designate your debt as contingent, unliquidated,
or disputed, or if you do not agree with the amount or classification of your
claim (such as secured, unsecured, or priority), then you need to file a proof
of claim in order to assert the amount that you believe is due.
If the debtor does not list you in its
schedules, but you have a claim against the debtor, you should file a claim in
the bankruptcy case.For any questions regarding this article, kindly contact: Catherine Pan Giordano (pan.catherine@dorsey.com)